Looking back at 2019
The Economy
2019 was the year of Royal Commissions in Australia. Since 1998, there has been less than one Royal Commission per year but in 2019, three major Commissions dominated the headlines. The three Commissions investigated issues of misconduct related to Aged Care, People with Disabilities and Banking, Superannuation and Financial Services. The former two Commissions are still ongoing but the final report for the banking royal commission was delivered on 1 February 2019.
The effects of the Banking and Financial Services royal commission was most sharply felt in the economy through significantly restricted lending by Australia’s major banks, leading to rapid growth in the lesser regulated non-bank lending sector. According to the Reserve Bank of Australia non-bank residential mortgages grew at 15% as compared to 1-2% at the major banks. (link)
Another major bank was hit by serious anti-money laundering issues, with more institutions now taking a more careful look at themselves. It’s fair to say, spending in this sector has been heavily dominated by the regulatory agenda. More broadly many major Australian financial institutions have been in the regulatory spotlight over the past 2 years and this has led to a slew of divestments of both businesses and executives in the sector.
These issues have been revealed amongst an already tumultuous economic climate. The International Monetary Fund downgraded the economic outlook for Australia for 2019 to a growth rate of just 1.7%, putting Australian economic growth behind that of Greece (link). Australia has seen 29 years of solid economic growth and 2019 was one of those rare years afflicted by a fear of recession. Given that China, is Australia’s largest trading partner, the ongoing trade war between China and the US has put significant pressure on the Australian economy.
RBA Cash Rate 1990 to 2019
This has put the Reserve Bank of Australia (RBA) in a tough spot, with the need to balance an overheated property market in many major cities as well as needing to stimulate business activity and employment. Interest rates have been historically low across all developed economy markets for years and whilst Australia has managed to buck this trend for some time, the RBA halved the cash rate from an already low 1.5% to 0.75%, the lowest in Australia’s history.
ASX200 13 December 2018 to 13 December 2019
Despite weaker overall earnings, the ASX 200 has delivered strong performance, up close over 20% over the past 12 months, reflecting investor demand for dividend yielding financial assets in a low interest rate environment.
Reflecting the current government’s commitment, the 2019/2020 federal budget is forecast to deliver a small surplus, however economists have pointed out that this means there will be little chance of any additional stimulus measures in the short term.
Fintech sector
Overall, we saw significantly less fintech investment in 2019. The total volume of investment by year’s end is likely to be as low as half or even a third of investment in 2018, based on the trajectory of investment volumes to date (link).
Despite low levels of domestic investment, four neo-banks, Volt, Xinja, 86400 and Judo, were granted full banking licenses and two established fintechs, Prospa, a non-bank lender to SMEs, and Afterpay, which operates in the lay-by space, successfully completed their initial public offering.
In foreign exchange, the UK challenger bank, Revolut (link), entered the Australian market and Transferwise launched their borderless debit card (link).
Ripple, the blockchain-based challenger to the SWIFT network for cross-border payments, announced they have surpassed 300 customers as well as 10x year-over-year growth in transactions on RippleNet, the global network of banks, financial institutions and payment providers that sends money globally (link). Australia was also added to the RippleNet On-Demand Liquidity capability, FlashFX will initially cover payments to the Philippines without pre-funding requirements, with other destinations to be rolled out overtime (link)
Across the pacific, we saw Facebook’s cryptocurrency Libra, run into congressional scrutiny, with many key backers such as Visa, Mastercard, eBay, Stripe, and Mercado Pago pulling out.
Legislative & Regulatory impacts
Australia’s Parliament followed in the footsteps of UK legislation and passed the Consumer Data Right (CDR) Bill in 2019. This bill marks the start of Open Banking and the first step towards an open data future for the country, starting in banking with telecommunications and energy sectors to follow.
The ACCC’s digital platforms review which focused on the market power and dominance of Australia’s online attention by Google and Facebook, called for reforms, particularly to privacy laws that will support the Government’s apparent aim to increase control of data back to consumers hands.
Social Trends
On the social front, we are not witnessing not only an emerging voice for millennials, but a voice that is starting to gain more traction in moving social and political agendas. The most visible example this year was 16-year-old Greta Thunberg’s work on climate change leading to her address at the UN climate change conferring leading to her being named Time Magazine’s person of the year. (link)
What’s in store for 2020?
As we head into the 3rd decade of the 21st century; we will start to see considerable shifts in the global social, political and economy order; we point to two macro observations.
The term digital economy has gained traction in political spheres globally. The effects of automation on current jobs within the context of a 4th industrial revolution will continue to upset disrupt established political and economic models.
The IPO of Aramco, the state oil company that pumps 10% of the world’s oil, at a historic $2 trillion valuation is a sign the world is at an inflection point in diversifying out of its dependence on fossil fuels.
In 2020, firstly the re-election of the conservative party in the UK will almost certainly / finally cement the country’s long journey to exit the European Union. The region will spend a significant effort administering BREXIT and adjusting to its aftereffects.
The presidential election in the US, as always will have a significant impact on the global economy that will be experienced through the ongoing negotiations in trade terms as well as additional reforms tax. What is key to the world in which we operate, is current debate on what the best approach to regulation of the technology giants (link)? Options such as a breakup of the tech giants, increased taxes, or increased regulation on content, comparable to what traditional media publishers are subjected to, are being discussed across the board.
By contrast, China is clearly still strongly committed to investing in Technology and AI as part of its “Made in China 2025” plan, though Chinese organisations have has suffered momentary setbacks as a result of the trade war with the US. Global telecommunications giant Huwawei, a high profile victim of the US’ trade blacklist (of 140 chinese firms) will be looking at how it can continue to operate under these challenging difficult circumstances through an increased focus on its domestic market.
The future of work & automation
Globally, the future of work and automation will be an important trend to follow. With Australia’s shortage of digital skills, the gig economy will continue to grow supported by platforms such as Expert360.
Although WeWork had a spectacularly failed IPO attempt, we strongly believe in the future of co-working in delivering positive benefits towards Australia’s ability to cultivate a dynamic and innovative workforce.
The boom in consumer in-home smart devices coupled with open source AI initiatives will result in smooth-talking AI assistants that can respond to a far greater range of human interactions. Adding to that, the continued adoption of robotic process automation will contribute to the slowing rate of offshoring.
Data Commercialisation vs Privacy
Many organisations will continue to create or mature the role of the “Chief Data Officer” within their organisations. CDO’s who have traditionally been focused on data governance or analytics will need to shift focus into becoming a drivers business value specifically through AI/ML (machine learning) driven automation to capture the benefits resulting from rapid advancements in cloud-based AI and engeineering platforms.
Data commercialisation will be high on agenda of CDO’s, however following the ACCC’s digital platforms review, they will have to contend with the introduction EU / GDPR-styled privacy legislation in Australia.
Share of time spent online vs revenue & market cap
Source: Neilsen & Cognitivo Research
Whether increased privacy laws will serve to steps will promote the interests of local media organisations against global digital giants or pose as further regulatory burdens for an already strugling industry is yet to be seen.
Within data-sharing arrangements, the OAIC will start to pay more attention in enforcing breaches of privacy through re-identification of data (especially within marketing-technology platforms). Organisations will need to start investing in capabilities that will allow them to quantify re-identification risk such as Data61’s R4 tool. (link)
Practical Blockchain
2020 will see a resurgence in practical blockchain applications. Given Australia’s current growth in non-bank or disintermediated financial services, features offered by blockchain based distrubted ledger applications offer significant potential for the development of applications within lending, securitisation & payments.
As a funding model the industry will move away from ICO’s (initial coin offerings that fuled the 2017-2018 cryto boom-bust cycle and transition towards STO's or security token offerings, that issue regulated securities over blockchain. (According to the cryto tracking website Hacked.com it is estimated that crica $14b USD flowed into blockchain projects between 2017 and 2018)
In closing
We believe Australia will still face a tough business environment in 2020. This means doing more with less, but importnatly investing in the capabilities your company will need when we exit the current downturn.
@Cognitivo, along with our partners we will certainly continue to be investing in our capabilities in AI, Blockchain & Privacy.
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