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Regulatory Demands: Fintechs Caught in the Crossfire?

Regulation | Jun 5, 2024

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Podcast Insights: Hester Peirce on SEC Rule-making and Regulatory Demands

In a recent podcast interview hosted by Compliance Week titled "Regulatory Demands," SEC commissioner Hester Peirce, often known as "Crypto mom," is blunt in her criticism of the SEC's rule-making process. However, what does this signify for investors, innovators, and fintechs—the main participants in the game?

Transparency Concerns

"We've seen a flood of rulemaking come out of the SEC in the last year or two... I have some concerns that the Commission hasn't been as engaged in public outreach as it could be, and the best way to write rules is to get input from the people who are actually going to be complying with them...If we start treating it as a burden rather than a privilege to get the input of the public, then our rules just won’t be as good, and they won’t stand the test of time."

Peirce focuses her critique on the SEC's lack of public outreach. "We've seen a flood of rulemaking come out of the SEC in the last year or two," according to her, "I have some concerns that the Commission hasn't been as engaged in public outreach as it could be."

See:  Peirce Laments, SEC ‘Squandered A Decade’

Fintech companies, which are renowned for their agility and capacity for rapid adaptation, face difficulties as a result of this lack of transparency. According to Peirce, "the best way to write rules is to get input from the people who are actually going to be complying with them," therefore without clear communication and participation in the rule-making process, these restrictions may inhibit innovation and impair their capacity to benefit investors.

Protecting Investors, Not Stifling Innovation

"If a compliance officer is afraid to speak up... The focus should be on what the compliance officer did, not just on the outcome...Innovation is something that the SEC should be encouraging, not stifling."

Peirce goes one step further, emphasizing how these fintech companies may have a chilling effect on compliance officials. "If a compliance officer is afraid to speak up because they're worried about being blamed if something goes wrong," she contends, "The focus should be on what the compliance officer did, not just on the outcome." As Peirce notes, these officers may be reluctant to alert investors to any risks connected to novel financial products out of fear of incurring excessive responsibility, "leaving investors exposed." In the long run, this might make investors less protected.

See:  Balancing Fintech Innovation and Regulation

Perhaps Peirce's most important quote is "Innovation is something that the SEC should be encouraging, not stifling," which is a direct call to action for the agency. This is a clear message for entrepreneurs and fintech companies alike. Peirce contends that in addition to safeguarding investors, the SEC should promote an atmosphere that welcomes novel concepts and technological advancements.

Striking the Balance

"We need to be mindful of the costs of regulation, and not just the benefits. When we write rules, we should try to write them in a clear and concise way."

Peirce does concede that rules are necessary. "We need to be mindful of the costs of regulation, and not just the benefits," she asserts. "When we write rules, we should try to write them in a clear and concise way." As Peirce notes, laws that are unduly onerous and complicated can "put a strain on smaller fintechs and innovators," restricting their capacity to compete. They can prosper as long as laws are reasonable and clear, safeguarding investors in the process.

See:  Insights from the UK’s Pro-Innovation Regulation Review

Peirce is aware of the difficult balancing act. "The SEC needs to take a thoughtful approach to writing rules for this new and innovative area," she warns. Encouraging innovation while safeguarding investors must be balanced if the financial system is to remain healthy in the long run.

Closing Thought

The interview with Hester Peirce provides an insightful viewpoint on the difficulties faced by financial industry players. Her emphasis on encouraging innovation, emphasizing results over blame, and encouraging open communication are all in line with the goals of NCFA Canada and its members. The SEC can promote responsible innovation in the financial sector and eventually help all investors by pushing for a more balanced approach to regulation.


NCFA Jan 2018 resize - Regulatory Demands: Fintechs Caught in the Crossfire?The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, artificial intelligence, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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Fintech Fridays EP62: The Future of Investment Crowdfunding: Innovations, Data, and Opportunities

About NCFA Canada | Craig Asano | Apr 5, 2024

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EP62 Sherwood 'Woodie' Neiss

Apr 5, 2024: NCFA's Fintech Fridays podcast episode 62

The Future of Investment Crowdfunding: Innovations, Data, and Opportunities

Featured Guest: 

SHERWOOD 'WOODIE' NEISS, Principal, Crowdfund Capital Advisors (LinkedIn)

Mr. Neiss, based in the US, is at the forefront of the investment crowdfunding industry, from issuance to data analysis, to secondary trading and liquidity.  He co-authored the "Crowdfunding Exemption Framework," which became the basis of Title III of the U.S. JOBS Act to legalize equity and lending-based crowdfunding.  He co-founded Crowdfund Capital Advisors ("CCA"), a consulting firm serving certain governments and multi-lateral organizations, including the Inter-American Development Bank, the World Bank, governments of Chile, Malaysia, Israel, and the UAE.  He is also a co-founder of GUARDD, the EDGAR of financial disclosures for private companies, and is a General Partner of D3VC; a Venture firm focused on diversified investing among investment crowdfunding issuers.  He is the chief architect of the CCLEAR Regulation Crowdfunding Database, which tracks and monitors online security transactions for investors, regulators, platforms, and the media.  Before crowdfunding, Mr. Neiss co-founded FLAVORx, Inc., acted as its chief financial officer, and won Ernst & Young's Entrepreneur of the Year award, as well as the Inc. 500 award three years in a row.  He's also a long standing advisor at NCFA.

About Crowdfund Capital Advisors

Crowdfund Capital Advisors (CCA) is a crowdfunding advisory, implementation and education firm founded by Jason Best and Sherwood Neiss, the leaders of the securities-based crowdfunding movement. CCA provides comprehensive advisory solutions to both public and private institutions.

Links

About this episode

In this enlightening episode of Fintech Fridays, Season 4, Episode 62, host Craig Asano, founder and CEO of NCFA Canada, sits down with the distinguished Sherwood 'Woodie' Neiss, a pioneer in the investment crowdfunding industry and an advisor to NCFA. Together, they delve into the evolution of investment crowdfunding, its impact on startups and investors alike, and the potential for future growth. Woodie shares his journey, from the inception of crowdfunding regulations to leading the charge with data-driven insights and AI technology in investment strategies. Listeners will gain an insider's perspective on the latest developments, the significance of data in shaping the industry, and the role of technology in advancing investment opportunities. Whether you're an investor, entrepreneur, or fintech enthusiast, this episode offers a comprehensive look into the dynamic world of investment crowdfunding, revealing how it's reshaping the landscape of finance and opening new doors for innovation and growth. Enjoy!!

Duration:  45 mins

 

Episode Jump Links:

00:00 Episode introduction

03:22 Meet Sherwood 'Woodie' Neiss

04:55 Investment crowdfunding and its evolution

06:34 Genesis of D3VC.ai, AI driven venture fund, and GUARDD

11:40 RegCF data access, reports, algorithms

13:47 Current state of U.S. Regulation Crowdfunding 2024

15:00 Impact of Crowdunding, innovation, job creation, economic stimulus ($6.8 billion)

16:15 Value creation, circular impact and velocity

18:50 JOBS Act 4.0, RegCF regulatory improvements

21:25 Investment Crowdfunding vs Angel-VC-seed/pitchbook

22:00 RegCF attracting more mature issuers and investors, removing FUD

23:38 RegCF diverse and inclusive, 41.7% offerings from women or minority

26:00 RegCF is scaling towards $1 billion annually

29:18 Platform dynamics and opportunities

31:28 Global expansion and tokenization

35:30 AI and technology's impact on RegCF markets

37:12 How to get started in industry, job insights and opportunities

40:05 Rapid fire questions

42:25 How to get in touch with Woodie

43:41 Episode close

 

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Fintech Friday Transcript of Episode 62:

SHERWOOD 'WOODIE' NEISS, Principal, Crowdfund Capital Advisors

Intro: Welcome to fintech Friday's a weekly podcast brought to you by the National Crowdfunding and Fintech Association of Canada and partners. Covering all things fintech, blockchain, AI and alternative finance.

 

Craig Asano: Hello everyone. My name is Craig Asano, the founder and CEO of NCFA Canada, welcoming you to another episode of Fintech Fridays. This is season four, episode 62 of NCFA's weekly podcast together with partners, where we uncover the latest and greatest and sit down with fintech founders, investors and talk about innovations, the developments, news and in today's instance, the latest and greatest in Investment Crowdfunding in 2024. Today we have an incredible guest. He's been on here before, so don't be shocked if you recognize Mr. Sherwood Neiss, aka 'Woodie'. So I'm going to from this point on, refer to him as Woodie. It's a very affectionate, nickname, but he's based in the US, he's also an NCFA Advisor, but I cannot think of someone better who's at the forefront of investment crowdfunding industry and has been so since its inception. So they're involved, and Woodie particularly, with data analysis right from Stem to stern of all aspects of crowdfunding. And they specialize in investment crowdfunding, secondary trading, liquidity, all the latest, topics. So, a long time ago, uh, we even had, for those of you who might actually have been there, Woodie, we flew him up. He came out to Vanfunding conference in Vancouver, talked about, uh, what he was doing at that time. Fast forward many years into the future, we have the privilege of looking at the data.  Everything's data driven, a lot more insightful. There was a lot of unknowns, I wouldn't say, looking back, a tremendous amount of risk. But we're very excited to dig in to the latest data of what's happening in investment crowdfunding and also cover off the future. So, just very quickly, because, we do have a hard stop at 45 minutes for this podcast today. And I just want to say that Woodie has been an author. He's been a global speaker. He's launched a variety of crowdfunding related brands, and we're going to give him an opportunity to talk a little bit about, Crowdfund Capital Advisors. What's going on there? He's the co-founder of a company called GUARDD. So we'll let him talk about that later. He's got CCClear or all the regulation crowdfunding data project on the go and all the data pipelines and partnerships with all the various data sources, as well as his background. He was always, even pre-crowdfunding, he had won awards. He's Ernst and Young's entrepreneur of the year award. I bet you you don't hear that as as often as you do crowdfunding these days, Woodie. But he was a triple (3 years in a row) Inc 500 recipient as well. So, Woodie, I just want to welcome you back to the show. Thanks for agreeing to sit down to share your knowledge and experience with us.

 

Sherwood 'Woodie' Neiss: Hey, it's great to be here, Craig. It's just funny story, if you remember, I was late for the event in Vancouver because I had told the immigration people that I was here in Canada to legalize crowdfunding, and so they detained me. And then they they wanted to know everything that I was doing. And I was just like, maybe I used the wrong word, and so I, showed up to your event like ten minutes late but it made for a funny story when I got on stage.

 

Craig Asano: Yeah, it was very uncomfortable. I remember I was sitting there at the podium. You were the keynote speaker, and I just had to cover off ten minutes. That's okay. We've been there and done that. but, as just someone who's so involved with the space, very few OGs I guess we can say, that can sit down. Actually, both you and I and reminisce about old times. We always say it that we'd like to do sort of an episode that's just storytelling What it was like and more shoot from whatever is on the mind but today we're a little bit more focused because we want to cover off the report. We want to dig into the data, find out what's going on. But to kick things off, like we always do with with the format of the podcast here, we just give the speakers an opportunity to talk about, how you got involved with the sector that we're covering.   Today it's all about investment crowdfunding. What was that journey for you? What were the motivations? And maybe you can kick it off with a very high level definition from your perspective, the guru, what is investment crowdfunding and what are you doing with all these other projects you got on the go?

 

Sherwood 'Woodie' Neiss:  Investment crowdfunding is really Kickstarter, Indiegogo, but with securities regulations attached to it. So instead of people giving money to people with good ideas, people are investing money in people that have great business ideas. And in exchange for that, you're getting either an equity instrument or you're loaning money, so it's a debt instrument. This industry really started in 2016 here in the United States. It was something that, of course, accredited investors could be doing prior to this. It couldn't happen online but what we did in the Jobs Act of 2012 was to open the door to both retail investors as well as general solicitation. So now we enable these funding platforms that look like Kickstarter and Indiegogo, but are now regulated by the SEC and overseen by FINRA here in the United States to actually be a matching service. And so people with great ideas can list their businesses up there to raise capital. Investors can look at these deals. There's all these disclosures related to it. That's what we sort of capture information on 125 data points on every single company, and we've been doing that since 2016. We write this annual state of the investment crowdfunding industry report. It's only 150 pages long this year. So you could see, like in the first year when it was eight pages long, the industry's only grown just a tiny bit since then. No, it's grown tremendously and I think actually one of the things that might be helpful in this conversation is maybe if I share some of the slides, related to that as well.

 

Craig Asano: Yeah, absolutely. Did you want to talk about what you're doing I'm kind of interested to hear a little bit about the D3VC and the definition that I got for that project. It's all around AI venture and it's on top of the investment crowdfunding industry. So what's going on there?

 

Sherwood 'Woodie' Neiss: So, we wrote the law. We wrote the dummies guide to investment crowdfunding. We wrote the world Bank report. We traveled to 43 countries around the world. When the industry launched in 2016, we launched the database that we call CClear, and that collects the information on every company that's raising money online. That data in the beginning, was just so we could track what was happening in the industry, with all these offerings, because there's only a certain amount of information that the SEC collects and so we wanted to expand upon that. Have things like what industry are you in, what valuation are you does the company have if they're doing multiple rounds of financing online, that really becomes a valuable information. As this data set grew, we realized a few things. So we were just sitting in front of our computers every day looking at the new companies coming in, and we're thinking, wow, you know, fascinating company. You know, team that's got great experience. They've clearly done this before. They've raised VC capital. I would invest in them. with 8000 companies that are doing this, it gets to be a little overwhelming. So which ones do you decide to invest in? And with the beauty about machine learning and artificial intelligence and these large language models that we're seeing today is you can take data and you can feed it into these algorithms, and you can train these algorithms to look for signals depending on what you're doing.  In our case, I sat down with three PhDs that are in data science, and I said, listen, I want you to take the data that we have, and I want to develop an algorithm that compares the companies in the data set that have graduated either out of it or gone on for follow on rounds of financing at a higher valuation to companies that are coming into the data set. So when they come in, I want to look at all the data that we have on them to see if there's signals that match those companies that have gone on for great things and if there are those signals there, then we want to have that, algorithm feed us up a weekly report that tells us which companies we should apply a human layer of diligence to. Because algorithms are great when they're looking at data, but that's very quantitative. It's very black and white. What we are trying to do is use take the data, let's take the human element out of that.  A machine can do all that. You tell us which ones we should look at, and then we'll do our own human layer of diligence around it. So D3VC is an AI driven venture fund where we've taken all our data and we use it to look for deals on a weekly basis that we should be doing diligencing. And it's really fascinating. I mean, the companies that are in the data set are not startups that are unproven. These are early stage companies that have proven business models. They've got patents pending on a lot of their technology. A lot of them are at first revenue and so they're looking for money now to scale. And this is a great place to sort of play in and invest in because, if you're in this early stage investment arena, you know that early stage investment far outperforms late stage investment. I think it's 19.1% to 11.7% or something like that. So there's a there's a great delta there to get in at an early stage. So we're trying to apply AI to what we're doing with this investment thesis. That's D3VC. So the other flip side of this is, is when do I get out of these investments. You know, do I have to sit on this investment until the company has an exit, a sale, a merger, an IPO? And within the regulation that we have here in the United States, we put a 12 month holding period on these securities, after which they can be freely transferable.  Now, the problem at that point is you just can't sell it to anyone. You actually have to go through a process, and you usually list it on what we call an alternative trading system. But in order for these securities to trade on an ATS, they have to comply with state securities laws as opposed to federal securities laws. And the state securities laws require that companies do ongoing disclosures so that investors, when they're looking at a company to buy or sell that stock, they have all the information, the most recent information on them. And so GUARDD is a company, a fintech company that we built to actually collect current information on companies that want to sell their securities on these ATS's so that they can comply with state securities laws that freely allow these securities to trade in all 50 states here in the United States. So we're at this sort of, you know, convergence of data, liquidity and venture capital. And all three of them coalesce under Crowdfund Capital Advisors.

 

Craig Asano: That's awesome. So if any of our listeners like investing in investment crowdfunding companies, can they access the intelligence that's coming out of the D3VC fund, and do they just get in contact with you there?

 

Sherwood 'Woodie' Neiss: Yeah. So it's a venture fund, so like any venture fund people are investing into the fund as an LP, and so that's a typical fund structure. So you know, we talk to people all the time that are interested in that. But people can also access the information that we produce through CCLEAR through a lot of what you're seeing behind me, which are reports that we publish, we have a daily, uh, a weekly tear sheet, which is free for anyone to get that shows percentage changes and what's happening in the marketplace. We have the biweekly report that really digs into what what's happening over a two week period and compares that. You can see what's happening in terms of investors investment sentiment, deal flow. So it's high level and then we've got a monthly report that really digs into like the top ten offerings. You've got an industry breakout there where we dig into software industry and show the trends over the past 12 months in that industry or sector and we've done that for restaurants. We've done it for beverages, we've done it for health care. So that's another report that people can subscribe to. And then I think the coolest thing that we have, which is a direct correlation to D3VC is our capital pulse ratings report, and so each week that comes out with the top 15 offerings that our algorithm says that we should look at, it's not necessarily the ones that we will be investing in because like I said, we do our human layer of diligence. But it's a great tool for people that are interested in just seeing, you know, you've got an algorithm that's already looking at this. Maybe I can use that to help my investment decision.

 

Craig Asano: Fantastic. Well, I think this is a perfect segue to actually crack open that report in terms of slides and have a look at what kind of data we're tracking and, you know, get some insights in the trends. And if we have a specific question, we'll maybe just pause you here and there, but we'll spend a little time going through at a high level what your, your take on some of the key slides and where you think it's headed.

 

Sherwood 'Woodie' Neiss: Okay. Um, I think you see the whole slide thing right now. Yeah.

 

Craig Asano: Got the whole slide and, yeah.

 

Sherwood 'Woodie' Neiss: All right. So again this um, this trends report, it was it's 200 slides long. Anyone can download it. Um, that QR code will take you right to where you can download those 200 slides related to the 150 page report. It's completely free. This is an abbreviated version of it. I am just going to quickly fly through a few things on it that are of, I think, of interest, Just the highlights and this is as of December 31st, 2023, there were 6800 issuers that ran 8000 plus offerings. So that means issuers are running multiple rounds online. We're seeing that more and more, which means that people are finding investment crowdfunding to be a viable means to access capital. And right now, of course, you know, we're almost the end of March. We're over 7000 issuers. We've got 8300 deals taking place. So you can see that that compounded annual growth rate at the bottom there, that 59% is really what's happening. This industry is not slowing down. It is just getting traction. Whether you're looking at it from the number of deals, the capital that's flowing in or the number of checks that are being written. Now, again, we only focus on what's happening in the United States. So the data that you're looking at really just shows you how this is democratizing access across the United States. With 1800 cities that have been funded, we've had 2.2 billion. It's over 2.3 billion now as of March, invested into these companies that have been successful with investment crowdfunding. There's been over 2 million investors that have written checks and these companies are creating jobs and they're pumping money into local economies all across the nation. Those are two critical things that governments, local governments, state governments, federal governments should be focused on. Because if you're looking at how you can stimulate not just entrepreneurship, innovation, but jobs and economic stimulus, this is a great way to do it by promoting, investment into startups and small businesses. These companies, for the most part, when they raise capital, hire people, okay. A lot of it goes into hiring people. A lot of it goes into scaling a business. That's why so many jobs have been created. But it's not just direct jobs. It's indirect jobs that companies use because they have to have service providers come in and help them with their business. These companies are, you know, they take in money, but they've got a whole expense expense lines on their PNL statement. And those expense lines are really money that's being pumped back into these local communities, and that's really important because that money circulates in these local communities. Right now, it's about $6.8 billion annually. So you can see we're having a sizable impact on what's happening. We think, granted, our economy's tremendously huge, but $6.8 billion is nothing to sneeze at.  The other final thing on this slide that's really important to point out is these companies start at an early valuation, a very low valuation typically, and then they grow and as they hit their milestones, they can raise money at a higher valuation. So the latest valuation related to these companies that are raising money online is $75.6 billion. So what does that mean? It means that when these companies do have their exits, someone's going to get rich because that $75.6 billion is tied up, but it will be returned to investors. So we love that sort of part of the story. The other thing about this is the industry started here in 2016. So we're in our seventh year of it. If you look at venture investing, they have a 7 to 10 year horizon because that's usually when the exits start to happen. That's what we're seeing here in the United States. And so we're starting to see these companies being acquired, go public. And that's where these returns are starting to happen for investors. So we've got the 2016 vintage starting to have their exits. We're going to start seeing the 2017 and 2018 coming up. And remember I told you there's more deals happening. You know, we started with just a few deals in 2016. So you can see the velocity of the exits will be rapidly increasing over the next few years as well.

 

Craig Asano: That's fantastic. Before you go on to the next slide, just go back for a second. How supportive has the US government been to investment crowdfunding and what are they doing? Are they funding education? Are the economic development agencies involved with promoting investment crowdfunding as a source of job creation, everybody. Just looking at these numbers, I'm just interested to hear your perspective on in 2024 or maybe 2023-24, in current times, how involved is the government in promoting crowdfunding?

 

Sherwood 'Woodie' Neiss:  Not at all.

 

Craig Asano: Not at all. Okay, so that's an interesting response because through the media we've seen the original Jobs Act and we've seen an evolution of sorts. And we catch wind of the Jobs act is evolving. They're constantly tweaking the rules. And now we got a Jobs Act I think it's called 4.0 Can you provide your perspective on how that might impact investment crowdfunding markets, maybe not the, or are they more around the laws?

 

Sherwood 'Woodie' Neiss:  So currently in front of Congress, there's a bill that passed the House called H.R. 2977. And a part of it is includes improvements to regulated investment crowdfunding that would increase the cap from 5 million up to 10 million. Also have fixed some things in there that, were part of that created problems like funding portals could be liable for material misstatements but in fact, if, you know, funding portal is just a listing agent, they're not doing diligence on the details of an offering that's really for the investors or the crowd to do. So there were fixes like that in there, but the reality of things here in the United States is quite dismal when it comes to policy happening. We've got such a divided Congress. No one wants to have the other side look like they're getting a win and so this passed the House on strict party line votes, essentially. And the House is Republican controlled right now, so all the Republicans voted in favor of that, and currently the Senate is controlled by Democrats. So we are trying to get the message out there that this is good for our economy. But again, I don't think any Democrats want to show Republicans that they can have a win and so I don't think this is much opportunity for anything happening in the Senate until something changes here in the United States.

 

Craig Asano: Well, caps of issuer caps of 5 million and potentially 10 million are staggering numbers when you compare them to the Canadian, uh, investment crowdfunding landscape. So that was just one of the points that I wanted to flesh out there but okay, back to you, to the slides. Okay.

 

Sherwood 'Woodie' Neiss: All right. So let's just hit on a couple of these things. This shows you the deal flow over time. I told you in 2016, that's when the industry started, you could see that there was less than 250. It's steadily grown in 2023 was a tough year here in the United States for investing, whether you're in venture capital or in investment crowdfunding. I think a lot of these issuers saw that as well and decided to hold back on their offerings. So they're waiting to see and probably time the market. We're already seeing an uptick in 2024. So I think that issuer sentiments coming back where they'll be coming into the marketplace, more so than they did in 2023. But the industry is still growing, and we are just in inning two of this and you will see thousands of these companies raising money online. I guarantee you, within the next five years.  This slide shows you what to happen in the VC world in comparison to investment crowdfunding. The yellow line is venture capital, early stage investments as tracked by PitchBook. The blue line is deal flow activity through a regulated investment crowdfunding. So what got a little crazy in 2022 and 2023 but there's this general upward trend that we're seeing here. So VCs pulled back, but the crowd didn't in terms of wanting to invest in these deals or issuers coming into the marketplace.  These slides that I'm going to hit on next really go to prove that there was a lot of fear, uncertainty and doubt when the industry got started. And Craig, you mentioned that as well in terms of what kind of companies are people investing in? These are really risky. Maybe you shouldn't be investing in them. And then when the industry launched, we had a lot of young companies two years, less than two years old, but now we're seven years into it and the average age of a company is four years old. So the risk profile that I'm going to show you over the next few slides is changed dramatically, which means that it's a better pool for fishing in because it's less risky investments. So you can put your money in and maybe not worry so much, particularly if the companies, you know, established and they're post revenue and generating revenues. This slide just shows you how the established revenues has grown. The startup where 73%, 73.4% in 2016. That's dwindled down to 52%. You can see the established companies has grown dramatically, up to 47% in 2023. And to my point, average revenues in the beginning, these companies barely had any revenues. In 2023, they have over $1 million in revenue. That's what you want to see. You want to see a company that's proven that there's a customer that is willing to buy your product or service, and you want to invest in it. And a company that needs capital to scale and so that's what we're seeing come into this pool. These post revenue issuers in the beginning were not the majority, it was 63% Pre-revenue now it's 63% post revenue. I love pointing this stuff out. Again, less risk, less risk. Here we track in our data set, women and minority founders, 41.7% of all the offerings in 2023 had at least one woman or minority founder. I mean, that blows past what happens in Silicon Valley, where only about 2% of women are minority founders get funded. So granted, the dollar amounts are much, much smaller, and you know what VCs can do, particularly with this, the few that they invest in far eclipses what we're doing right now. But if we stay on this trend, we're just going to see a lot more capital getting into the hands of women and minorities. And we also can look at those companies and we see that they run pretty solid companies, you know, stronger revenues, less losses as well. We track annual reports for the companies that raise money online and through tracking annual reports, we can see how the revenues changed from the year in which they were funded to the following year. And what we've seen by looking at that is these companies that have been successful in their investment crowdfunding offering have seen a 284.5% increase in revenues from the year in which they raised capital to the year afterwards. So something's happening. Is it the crowd marketing for the company that's bringing more customers in that's helping increase the revenue? Is it the money that was brought in helps the company pour more into marketing and sales? Maybe it's a combination of all of that, but I don't care. All I care is to prove that investment crowdfunding leads to better results for these companies. Not only that, but these companies are sustainable. If you look at what the Bureau of Labor and Statistics says, they estimate that 50% of all new businesses fail within five years. But within investment crowdfunding, it's 17.8%. So we ran a study to look at all 6800 companies last year to see who was out of business, and we found that 17.8% of them were. So what does that mean? You're going to be most likely investing in companies that are going to stick around longer. So again, less risky. So we love these sort of data points.

 

Craig Asano: That longevity in the stronger companies that have come through, the crowdfunding, had successfully closed crowdfunding rounds. Why do you think that that is the case? Is it because they have more access to capital, or is the extra exposure and other benefits from crowdfunding?

 

Sherwood 'Woodie' Neiss: I think it's access to capital. and I'm sure there's many variables, but I think you hit the nail on the head. If you look at companies when they're trying to get a message to Washington about what they fear, and it's a lot of the times the number one thing is access to capital. So because regulation crowdfunding exists and these companies can go online and raise money from people that believe in them, we've solved that problem. And so by solving for that problem, you're not solving for it  once, these companies go on and do multiple rounds of financing online. So you're continually feeding them capital as long as they hit milestones. People don't invest in companies if they're not hitting their milestones. And all that data is there to show them. But I think to your point, yeah, it's access to capital that's keeping them going. Right?

 

Craig Asano: Okay.

 

Sherwood 'Woodie' Neiss: All right. So just a couple other slides and then we can pop out of this because I could probably talk for years. This slide just shows you how capital has been flowing dramatically into the industry. It took us five years to get to the first billion dollars invested, and then it took 18 months to get to the next billion dollars invested. It won't be long before we have $1 billion invested in one year. That might be 2024. It might be 2025 but I think we're at the cusp of doing that now. What is interesting is if you look at this slide here, this one looks at the number of checks that are written. So it really was on a high growth rate through 2021. And then we what do we have in 2022. Well we had hyperinflation. We had the Fed come in and try and fix things with the interest rate. We had supply chain issues. All of that causes concerns with investors. And so investors pulled back and we saw that in the numbers here in terms of the checks that are written. And 2023, it was it was a little better than 2022, but everyone was waiting for the markets to sort of get their footing. And we've seen that here in the United States with what's happened in our public markets. There's a delay period between what happens at a public markets and what happens in the private capital markets. So I think we're now at that point where everyone's sort of comfortable with the soft landing that we're going to have, and we'll have more checks written. But what was interesting between these two charts is even though there were fewer investors, they were writing bigger checks. And that's why we saw the dollar amounts hit all time records in 2023. So the investors that stayed in the marketplace saw companies, great companies that I'm telling you are like, these post revenue companies that have great ideas and they're placing bigger bets on it. So, you know, I'm just going to take it out of that for now just so that we can talk about things. Because I know that was a lot that I just sort of shared.

 

Craig Asano: I think it's fantastic. I mean, you have investment crowdfunding as a whole, attracting stronger companies who are getting used to this cycle of having more access to capital than they had before in the past. Simultaneously, you have more mature investors writing larger checks. And it was interesting to see I'm not sure which one of the charts, but maybe five years in to see things really ramp up. And as the as the risk profile for these types of investments have changed. And kudos to you for setting up the CCLEAR database and tracking it, and now being able to with AI on top of that. So, you know, I want to dig into a little bit that we have about 15 minutes. So let's talk I guess a little bit about the platforms. I mean, you've seen all the data. What is going on? Is it that there's a concentration of a few platforms that are handling most of those deals? Are there opportunities for new entrants in terms of a portal operator to go get licensed? What do you see happening on the platform side?

 

Sherwood 'Woodie' Neiss: So since the industry launched, there were, I think, 119 companies that have registered with FINRA to run one of these funding platforms. It's not cheap. It's I'm sure the compliance related to it can be upwards of $1 million or more a year to run one of them. So you have to think, do I have the not just the ability to put one of these funding portals together, but to sustain the cost of managing and running it? Because you're going to you're going to operate on success fees. At least here in the United States, there are 80 platforms that are still active. Out of that 119.  On a monthly basis, I would say that there's probably about 35 that are actively doing deals. But of that, 90% of the deals are happening on the top 4 or 5 platforms. And on the equity side, you're seeing that in Wefunder, Republic, and StartEngine We've got new broker dealers that are coming into the space, Dalmore and DealMaker. DealMaker is Canadian but they're making a huge presence here in the US. And then on the debt side, we've got platforms like Honeycomb and Mainvest and SMBX that are really leading the way in debt offerings for this industry. So is there a place for people to come in? Yeah, 100%. If you can capture a vertical, maybe you want to focus on veterans, maybe you want to focus on women or minorities. I think there's the ability to launch a platform and build a niche in that space that allows you to own it. But right now, we really are seeing the Wefunders, the Republics and the StartEngines owning a lot of the space in the industry.

 

Craig Asano: And some of those big players like Republic have expanded their models beyond the more traditional equity and debt. And they've gone global. Can you talk about you know us one of those portals and what is their experience from what you know, as as they enter global markets and start to compete globally.

 

Sherwood 'Woodie' Neiss: Yeah. Because, you know, so one of the things that we realized about the internet is the ability to cross, um, you know, nation, you don't have to be anywhere to get a message across. And what we're finding with these businesses is businesses solve solutions that have opportunities globally, but they also have solutions for which there's investors that are interested in investing in them globally. And so how do you deal with that when you've got securities laws that are, provincial? So what Republic and some of these other platforms are trying to do is either partner or buy platforms in other countries so that they could prepare to allow for cross investing that so they could allow for deal flow to happen from one country to another. And I think that's what Republic is trying to do. They are also expanding like you said. There is securities tokens is a big focus of what they're talking about because they see they see a lot of liquidity opportunity down the road. But the way in which you can really have easy liquidity is through tokens, because you can put it on the blockchain. And with that, you've got the distributed ledger that can sort of track what's happening, particularly when it comes to international transactions. That'll reduce the friction and the time in which you conduct these transactions. And I think that's where Republic's been focused but we're seeing a lot of these platforms trying to figure out how they can partner or expand overseas.

 

Craig Asano: Do you think that the tokenization of real world assets, which is separate from private companies and the digital securities is an area that like I just read a report this morning from, CoinGecko that provides data services in that space and it's been booming since, 2023, mostly in 2024 because the crypto investment has taken off. But do you see those tokenized models and the global liquidity and crypto as the future for investment crowdfunding, or is it going to be just a separate, stream or there'll be full integration? What do you envision say, three years out, five years out?

 

Sherwood 'Woodie' Neiss: I see investment crowdfunding as, in a way leading the charge for a lot of what will happen. It's very hard for one of these huge multinational corporations to decide to do things on the blockchain and tokenize things. I mean, where do they even start? But when you've got these startup companies that are showing promise, if you can issue securities on the blockchain and you can have them as tokens, down the road, as these companies grow and scale, you're really enabling that that mechanism under which they can raise capital and trade their securities to really grow and scale. So I think a lot of what we're seeing here in this space, and interestingly enough, in 2024, I've seen multiple token offerings happen in the investment crowdfunding space. But I see these companies strategically deciding to do that because they see what you are talking about as the future and they're preparing for that. But again, when you've got these small companies doing their initial rounds of financing, this is the time to think about that. Because later on, it's just going to be very, very challenging for these companies to do things on the blockchain and tokenize things. You know, when you've got just these cap tables that are huge and you've got a whole system and structure in place to handle it right now that is very different from what we're doing with tokenization.

 

Craig Asano: Absolutely. Each rabbit hole has its own challenges. What about the technologies? I mean, ten years back, five years back, it was pretty simple. It seemed, more advanced at the time but since then AI has exploded. There's just been a shift. What new technologies are being applied in investment crowdfunding markets? I mean, obviously from your fund perspective, the AI due diligence and almost private company stock picker, if you will. Uh, what technology? What? Let's talk a little bit about the technologies. What's happening?

 

Sherwood 'Woodie' Neiss: I mean, I think what we're doing with the venture fund is leading that charge because we see the opportunity. On how do you take these tools that are currently being developed and leverage them for better outcomes? But even within the platforms themselves, there's a lot of compliance that is that goes with these offerings, and so you've got companies like KoreConx out there that are developing solutions that so once you do your raise, you can manage your cap table. You can communicate with your investors. So I've seen a lot of technology development happen in that arena, which I think is great because it doesn't just apply to companies raising money through investment crowdfunding. You know, if you have investors and you need to communicate with them, any of these technology tools will help. But, you know, that's really where I've seen the majority of it. I mean, were there other areas that you were seeing things?

 

Craig Asano:  Not specifically. I We just want to get your perspective while we have this time on where it's going. We're really talking about the future. We've got data to provide answers to almost all the questions that have popped up over the last ten years. So we're in a pretty good situation, I would say, uh, in particular, well the projects that you're involved with. One question. often we get calls from new grads, from innovators. They are always looking for new opportunities. And do you think in the investment crowdfunding space, there's specific set of skills or what sort of advice would you give for, the job opportunity. Folks are looking for for jobs. So where do you see do you see that as something that will continue to grow? Is it is it an area of focus? What sort of advice can you provide to someone looking to get into the market and get a job and get their start?

 

Sherwood 'Woodie' Neiss: I mean, there's so many different areas to look at it. I told you about the 310,000 jobs that have been created through this industry. So you could just look on these platforms to see which of the companies that are raising $1 million, and start looking up their email addresses and seeing who they're hiring, I think that might be the quickest way to a job. Just because they've got the capital to now hire employees. But all of these platforms themselves to have teams that work for them. So, if you just Google any of the, you know, 120 platforms that are out there, you can start going through that roster, particularly for in the tech side of things, this is this whole industry is tech-enabled. So you could reach out to the platforms themselves and look for jobs too. And then there's just so much opportunity in the compliance side. When you and when you put these offerings together, in many cases you will need a CPA review. So, oddly enough, and I don't know how many accountants are listening to this, but you can make a ton of money through regulated investment crowdfunding.  At least here in the United States because if they require CPA reviewed financials, it's not a full audit, but they're charging $3,000 a pop to do that. And you can do hundreds of those, and make a lot of money just by doing those. If you're a lawyer, you can work with either the issuers themselves or the platforms themselves. I know we've seen individual lawyers make a name for themselves as the crowdfunding lawyers. So that's an important thing. And then there's just experts in the field, like people want to know what are best practices. How do I launch a campaign or an offering that's going to attract people's attention and raise the most money? That's where you can work with us on the data, and become a partner that way. And go out there and then market your services, as someone that can help people succeed with their offerings.

 

Craig Asano: Yeah. No. It's fantastic. Well, I see we've only got about five minutes, 4 or 5 minutes left. I want to move to our favourite part of the show. We do the rapid. one answer responses. We're sort of expecting quick questions. I think we got a good sense that it's good to be in in investment crowdfunding. It's growing. There's a ton of opportunities in the U.S. Canada's got a long way to to go. Maybe it's a whole another show on how we we ramp things up here. But in terms of rapid fire questions, are you ready for a handful of quick questions and expecting some quick answers? So let's do it here. So in in a word, how would you describe the future of investment crowdfunding?

 

Sherwood 'Woodie' Neiss:  Optimistic.

 

Craig Asano: Optimistic. What is your go to financial app? One that you use all the time?

 

Sherwood 'Woodie' Neiss:  Probably my bank app.

 

Craig Asano: That's not a fintech, a bank app. Okay. If you got good bank apps.

 

Sherwood 'Woodie' Neiss: I think I'm on it every day.

 

Craig Asano: Okay. Fair enough. So you got to count all the money. So, In a word, what drives you every morning? What helps you get out of bed?

 

Sherwood 'Woodie' Neiss:  Honestly, do what you love type of thing. It helps that we wrote the law. It helps that we were there from the beginning. I find this whole industry fascinating. I'm very passionate about it and so it's the desire to see this industry scale grow and succeed.  That keeps me going.

 

Craig Asano: I love the fact that you stuck with it. You made the law, and here you are today.   Both of us in some capacity for a decade. More than a decade on. You know, it's incredible. Last rapid fire question. Can you recommend  a hot book, a favourite movie? Something for for our listeners. They might want to check it out.

 

Sherwood 'Woodie' Neiss: I mean, everyone should read Crowdfund Investing for dummies.

 

Craig Asano: Did they update it? I mean, you wrote that a decade ago.

 

Sherwood 'Woodie' Neiss: I know, I know.  You know what? They didn't update it only because when they told us they wanted they wanted us to write it in 2013.  We said, well, the industry hasn't gone live yet, so we're going to be writing a book for which there is no industry yet. Maybe we should wait until the industry goes live. And our publisher said, no, the way we work is we get the book out now. And so the book came out and people weren't buying it because the industry hadn't launched. And so when the industry launched, we're like, we need to update it with the new rules and everything like, but nobody bought the book and I was just like, oh God.

 

Craig Asano: It's time to hit the Publisher again.

 

Sherwood 'Woodie' Neiss: And so if anybody wants to write the second version of the dummies guide with us, please let me know.

 

Craig Asano: Well, on behalf of our listeners before we let you go, you got to tell everyone how to get in touch with you, Woodie. If they've got questions or they're interested in getting involved, investing in the fund. How do they get in touch?

 

Sherwood 'Woodie' Neiss:  So for the venture fund D3VC.ai is where you can learn about that. For Crowdfund Capital Advisors, it's crowdfundcapitaladvisors.com. And if you want any of these reports or any of the data associated with it, go to CCLEAR.ai  and on all those websites you can find information about ordering reaching out to us or getting in touch.

 

Craig Asano: Fantastic. Yeah. I'll be sure to include these in the show notes. I want to thank you on behalf of all our listeners here at Fintech Fridays for your time and your insights, Woodie, as usual. kKeep killing it out there. It's amazing to follow and support where we can. So, you're obviously welcome back anytime. Thanks a lot for being, an advisor at NCFA for many, many years, and I'm sure for many more years to come. So, with that, I think that's a wrap for this episode. so thanks again for coming.

 

Sherwood 'Woodie' Neiss: Thanks, Craig. Thanks, everyone.

 

Craig Asano: No, absolutely. So, before we close, I just want to say, if you're new to Fintech Fridays, please check out any of the past incredible episodes. They're all on the website. I think you'll be surprised with what you find. We're always bringing on, fintech founders or investors talking about a topic of the day that is going to help you grow and deeply understand a particular sector or maybe your business. So thanks for listening. We'll tune in next Friday for another episode of Fintech Fridays. Thanks a lot, Woodie. Have a good day. Thank you.

 

Outro : you've been listening to Fintech Fridays brought to you by NCFA and partners. Tune in weekly for the latest fintech Friday podcast by subscribing to this channel. The National crowdfunding and Fintech Association of Canada is a non-profit actively engaged with social and investment fintech sectors around the globe and provide education research industry stewardship services and networking opportunities to thousands of members and subscribers. For more information please visit ncfacanada.org.

 

End of Podcast

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NCFA Jan 2018 resize - Fintech Fridays EP62:  The Future of Investment Crowdfunding: Innovations, Data, and OpportunitiesThe National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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Climate Inflation Discussion for a Sustainable Future

Climate Inflation | Feb 6, 2024

Freepik climate change - Climate Inflation Discussion for a Sustainable Future

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In a recent podcast, Anna Dean and Stephen Jacobi feature the pressing issue of Climate Inflation and key takeaways

The podcast highlighted a critical warning from economist Paul Conway, Chief Economist at the Reserve Bank of New Zealand, about the emerging challenge of climate inflation.

He stated that climate change is in part responsible for recent inflation and the cost of living crisis - the rising cost of food, spiralling insurance premiums, the escalating cost of construction (as a result of additional demand created in cyclone/flood-damaged areas) pose a threat to economic stability and personal finance.

The insights shared in the podcast underscore the urgency of integrating climate considerations into financial planning and investment strategies, emphasizing the need for the financial sector to adapt to and mitigate the effects of climate change.

See:  Harnessing Decentralized Finance to Combat Climate Change: A New Era of Sustainable Finance

The mention of rising home insurance bills due to climate change highlights the broader implications for the insurance industry and financial markets. As risks increase, there could be significant shifts in how risks are assessed and priced, affecting homeowners, businesses, and insurers.

Policy Implications

The realization that climate change is affecting people's financial well-being could catalyze political action. Historically, the lack of immediate economic impact has made it challenging to mobilize political will and public support for significant climate policies. However, as the economic consequences become more apparent, there may be increased pressure on governments to take decisive action on climate change, potentially leading to more aggressive environmental policies and investments in sustainable infrastructure.

Climate Inflation Discussion

The discussion suggests a growing awareness among the public and businesses about the tangible effects of climate change on their daily lives and financial health. This awareness could lead to changes in consumer behavior, such as increased demand for sustainable products and services, as well as changes in business practices towards more sustainable operations.

See:  Biden’s Clean Energy Plan vs. Banking Regulations

The presence of climate change skeptics and deniers in the discussion, as well as references to "climate scams," indicates ongoing challenges in achieving consensus on climate action. Overcoming misinformation and skepticism remains a significant hurdle for mobilizing collective action on climate change.

Comments

Kevin Brady criticizes the reliance on economists for leadership on climate change, arguing that they lack understanding of what is crucial for ecosystem resilience and human survival. This comment is insightful because it suggests a broader, more holistic view of addressing climate change, emphasizing the importance of integrating ecological sustainability into economic decision-making.

Iain Climie discusses the immense benefits of reducing food waste, citing the IMECHE's "Waste Not Want Not" report, which notes that at least 30% of global food production is wasted. This comment is insightful because it implicitly critiques the inefficiency of current food systems and suggests a potential area for impactful change.

See:  Canadian Banks Face Scrutiny Over Sustainability Claims

Colin Grant argues that the last hope for addressing climate change lies in massive-scale ecosystem regeneration, a solution that is not prioritized by most governments. This comment is insightful because it goes beyond merely reducing emissions and emphasizes the importance of restoring natural habitats and biodiversity as a way to sequester carbon, regulate climate, and support life on Earth.

Nathan Simmonds questions how long it will be until the systems supporting human civilization collapse under their own weight, critiquing the encouragement of over-consumption and pollution by businesses and institutions. This comment is insightful because it highlights the unsustainable nature of current consumption patterns and the blame placed on individuals for systemic issues.

Conclusion

As we live the adverse affects of climate inflation, let's commit to fostering sustainable economic growth through education, innovation, and collaboration. By doing so, we can ensure a resilient financial future that benefits all Canadians and sets a global standard for sustainability in finance.


NCFA Jan 2018 resize - Climate Inflation Discussion for a Sustainable FutureThe National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, artificial intelligence, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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Fintech Fridays EP61: Making Markets and Investing in Crypto with the Phoenix App

About NCFA Canada | Craig Asano | Jan 26, 2024

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FF EP61 Kay Khemani, Phoenix App

Jan 26, 2024: NCFA's Fintech Fridays podcast episode 61

Making Markets and Investing in Crypto with the Phoenix App

About Featured Guest

KAY KHEMANI, Co-Founder and Advisor, Phoenix App and Managing Director, Hatchworks

(LinkedIn)

Based in London, England, Kay Khemani is a seasoned professional in the finance and investment sector.  He’s currently the Co-Founder and Advisor of the Phoenix App and also the Managing Director of Hatchworks, a venture firm with an in-house incubator who vets and invests across a wide range of sectors from gaming to fintech, renewables, AI, healthtech and crypto.  Prior to his current roles, Kay held the position of Executive Director at Goldman Sachs and Analyst at J.P. Morgan Cazenove.  He was responsible for researching and investing in approximately 100 pan-European cross-sector listed companies. His focus was on bottom-up valuation, stock picking, and contributing to Goldman's internal fund.  Kay is an advisor and product expert for a variety of portfolio companies.  Combined with his entrepreneurial spirit and advisory roles in cutting-edge sectors, makes him a distinguished figure in the financial and investment landscape.

About Phoenix App

Phoenix App is a cutting-edge platform designed to transform the landscape of passive cryptocurrency investing. At its core, the app empowers users to engage in market making, a practice traditionally reserved for financial institutions, now accessible to individual investors. By leveraging smart contract technology, Phoenix App simplifies the process of providing liquidity in the global trading of top cryptocurrencies, offering investors the opportunity to earn real-time yield in USDC.  The platform stands out for its user-friendly interface and its emphasis on democratizing financial strategies once limited to high-level investment firms. Whether you're a seasoned investor or new to the cryptocurrency space, Phoenix App offers a unique opportunity to participate actively in the market, earn yields, and gain exposure to the burgeoning world of decentralized finance (DeFi).

Links

About this episode

In this enlightening episode 61 of Fintech Fridays, NCFA Founder, Craig Asano, sits down with Kay Khemani, an investment professional based in London, UK, the Co-Founder of the Phoenix App, and Managing Director of Hatchworks.  Kay shares his journey from high finance at Goldman Sachs to the forefront of fintech innovation.  Explore the revolutionary Phoenix app, a platform that simplifies market making in the crypto world, allowing users to become liquidity providers and earn from transaction fees, all simplified through smart contract technology. Learn about the risks and rewards of DeFi, the impact of ETFs on crypto markets, and gather essential insights for both new and seasoned investors.  Enjoy!!  (Full Transcript and Video)

Duration:  62mins

 

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Fintech Friday Transcript of Episode 61:

KAY KHEMANI, Co-Founder and Advisor, Phoenix App and Managing Director, Hatchworks

Intro: Welcome to fintech Friday's a weekly podcast brought to you by the National Crowdfunding and Fintech Association of Canada and partners. Covering all things fintech, blockchain, AI and alternative finance.

 

Craig Asano: Good afternoon everyone. My name is Craig Asano, the founder and CEO of NCFA Canada. Welcoming you to Season 4 of Fintech Fridays today is Episode 61, a weekly podcast brought to you by NCFA and partners, where we sit down with the incredible Fintech and Funding community to talk all about new launches, trends, product innovations, developments and challenges as well. So today we have a fantastic guest with us. We have Mr. Kay Khemani, who's based in London, England. Mr. Khemani is a seasoned professional in the finance and investment sector. He's currently the Managing Director of Hatchworks, a venture firm with an in-house incubator who vets and invests across a broad a wide range of sectors from gaming to fintech, renewables, AI, healthtech and crypto. Kay is also the Managing Director of a company called Neuchatel, who's involved with the investment committee at Hatchworks. And he's the Co-founder, Advisor and Speaking Rep for the Phoenixapp.io, which is what this podcast is going to focus on today. Prior. Well, the Phoenix app, I'll just say a couple words. It's a cutting edge platform designed to transform the way individuals engage in passive investing. The Phoenix app enables users to become market makers in global trading of top cryptocurrencies, offering investors the opportunity to earn real time yields in USDC. Prior to these engagements, Kay was the Executive Director at Goldman Sachs. He had a two year post there from 2009 to 2011. In his role, he was responsible for researching and investing approximately 100 pan European cross sector listed companies. His focus was on valuation, stock picking and generally contributing to the internal investment fund at Goldman. Kay is an advisor and an active product expert with a variety of portfolio companies. So combined really with his entrepreneurial spirit and his advisory roles, he's a distinguished figure in the financial investment landscape. So Kay, thanks so much for joining us today to share your knowledge and experience.

 

Kay Khemani: Thank you. It's a pleasure. And thank you for having me.

 

Craig Asano: Yeah, welcome to the show. So, uh, episode 61 cannot believe we've already reached this milestone. We're really excited to get into the discussion to talk all about the Phoenix app and what you've been up to, and here are the latest and greatest. So to kick things off, let's just talk a little bit about your professional background, sort of your journey, what you've been doing and your road to getting involved with, uh, launching and uh, involved with the Phoenix app.

 

Kay Khemani: Sure. Thank you Craig. So basically, as you rightly said before, I was doing all of this and we've been doing this for almost 12 years now. Um, I was working in high finance. I did a few years at Goldman Sachs, traditionally in equities, working in equity research. And then I um, before that I was actually at JP Morgan for four years, learning the ropes, uh, of research as well. Investment research. Studied a lot of sectors. Um, and then I got into entrepreneurship around 2012, and it was a very exciting time. You know, the the whole advent of web 2.0, it was in its swing and we got heavily into it. We created a few financial technologies over the years. We had a fair share of failures as well, and small successes, but more failures. Um, and then we start to become a bit more seasoned as entrepreneurs rather than pure corporate people. We understood what it takes to actually bring a business to profitability, which is very difficult, um, as you probably know, uh, and to sustain it as well, what happened around 2015, 2016 is as blockchain technology emerged kind of out of the crevices, slightly more into the mainstream, Ethereum allowed, smart contracts basically to be used in a range of applications in blockchain, it wasn't just about hodling Bitcoin and hoping for the best, it was actually about how you can use smart contracts and get rid of bad actors. For example, it is now possible for you as a trader to trade directly and buy Ethereum and Bitcoin and a range of digital currencies against a non-entity, a smart contract, basically. Historically, if you were to buy any asset, a stock or a bond or anything, you would have to go through your broker. Now, Robinhood and all of these brokerages, they have allowed you to to make this process pretty seamless. When you enter, you log in to your terminal. You are effectively trading, but you're also basically the other side of the trade is either another trader, but the intermediary is always a broker. So it's smart contracts. You can get rid of this. And that also means you could get rid of broker fraud. And that was our mission basically in 2016, 2017 is to use smart contracts to allow traders around the world to trade financial assets against other traders, but using an autonomous entity as a middleman rather than a broker. And the reason behind this is brokers would steal your deposits. This was a big problem in binary options, also in foreign exchange trading. And this allowed us to kind of crack that code, if you will. Now, what happened, of course, is you may know this or some of your viewers may know this is that CFD (Contract For Differences) trading typically 85%. The figure can be a bit higher depending on which country you're in. 85% of traders lose money over time. It can be even as much as 95%-97% if you go to retail. Institutional, approximately 70% of institutions on CFDs don't make money. So it's pretty bad. So although we were able to address the problem of removing the broker from the equation, allowing traders to trade, without any intervention. The main problem of traders not being able to make money that remained unaddressed. That's where Phoenix came into the mix. So what has happened is it's possible now for you to actually become, to take the other side of the trade, to actually become the market maker using smart contracts. The company that started all of this, it's actually a New York based. It's US based. It's called Uniswap. They are the world's largest decentralized exchange. Billions of liquidity is flowing through there every day. But the beauty is they have democratized this. And they allow you to actually become a liquidity provider so that traders around the world can buy Bitcoin and Ethereum and USDC directly from you. But you don't know they're buying it from you. You're literally interacting with a smart contract.  The process is complex. What I've described to you, I've summarized it. But for you to actually do this, to get to grips with what it means to actually contributing liquidity, setting ranges, deciding if it's going to be asymmetric or non symmetric, all of these things. That's what Phoenix takes care of. So for the retail retail investor, we are basically simplifying the whole process. What does that mean? Basically, the retail investor does not have to work anymore to speculate, to do market research, to do fundamental analysis, technical analysis, learn about companies, you know, learn about the underlying currencies, if they're trading currencies or bonds. It's a good thing to know, for example, we do have that knowledge on board given our backgrounds, but it's not something we expect investors to know, who are, who just want to make money on the side as a passive income. And so this is as you were we were discussing before the podcast started. You mentioned, you know, how are the users doing? The good news is we launched this last year in April or May after two years of research and development, of course, and all the users that have joined, they've made money. They are market makers. They are not buying, for example, Tesla shares or they're not buying the euro versus the US dollar with the view to sell it later at a higher gain. That onus to to get that research and get it right is not on them anymore.  All they do is they provide liquidity for other traders to buy and sell and for doing that, for providing that liquidity. They basically get a small fee. And from that fee, Phoenix takes a cut. The rest goes to them effectively. So basically we're democratizing, through smart contracts, the ability for users to make passive income by becoming market makers. And that technology hasn't existed so far. Now, obviously we'll get into a bit more in detail, but it's not like one is earning sort of, treasury yield type of returns 2%, 3%, 4%. If it was that we wouldn't be doing it. It wouldn't be exciting, right? Although it is a new source of, new revenue source of investors to make money passively. What makes this exciting is the rate of return you can earn adjusted for risk. So if you look at this from a risk adjusted return standpoint, That's where Phoenix really stands out relative to other ways of making money in blockchain, but also tradfi (traditional finance). We can talk a little bit more about the returns later and the risk if you'd like, but I can also go over them now.

 

Craig Asano: That's totally up to you. I was just looking at the outline. I think we've got the next 45 minutes is all dedicated right to this conversation and the Phoenix app. Yeah, maybe it's a good time. Let's talk a little bit about the risk and the reward and how it compares for the benefit of let's say retail investor that may not have had that much exposure to crypto investing, and maybe as you sort of alluded to earlier, that they're used to more trading. They might not even want to be involved with Self-custody. They may might be trading on an exchange. So how does how do the yields compare? And the word complexity. Let's try to simplify it for anyone that might want to learn what it's about and what it really will mean to them in their own portfolio.

 

Kay Khemani: Okay good question. So firstly, in terms of the returns, we have three classes of pools. Basically when you join the Phoenix app, which of course is free, I mean you don't get charged for sign up, you just sign up and we ask you to read all the information in the app. But of course, our team can also advise you. Now you have three pools. One is for the very low risk investors. For the category you just mentioned, the people that are completely new to the blockchain, for example. And let's say they have $100 to invest, right? Because that's the minimum amount that one can get in with. And basically at that point we would say, okay, you should go for the lowest risk option. That pool is called buffer. And that's called buffer because it's there to buffer the movements in the prices of the currencies that you provide liquidity in. So if you're providing liquidity as a market maker in Phoenix, you're not doing anything. It's all Phoenix is taking care of that for you. But what we're basically doing is that the bulk of your capital, the $100 that you put on the liquidity curve by using Phoenix, almost 80% of that is in US dollars. So the bulk of that is in a fixed, stable currency, and then 10%, for example, would be in Bitcoin and the rest would be in Ethereum. That's just an example. What that means for you as a liquidity provider is that because the bulk of your allocation. Is in a stable coin, a US dollar, if you will, the fluctuation, the value of your inventory.  As a liquidity provider is going to be very minimal. If 80% of your capital is not in those coins, you'll still make money because you'll be selling Bitcoin and Ethereum to people that want to buy it from you. So you get a small cut, but you'll also be selling some of your dollars for people that want to buy dollars from you. And in the blockchain world, dollars are represented by very regulated stablecoins known as USDC. You may have heard of them. They're planning an IPO soon as well. They're based in the US as well regulated billion dollar project. So what makes this exciting is this low risk pool you'll only earn around 7 to 10. Right now it's doing around 11%. 7% to 11% a year in yields. Now when I say a year that's the annual percentage yield. That's not compounded. You can of course compound that at the frequency you like. But that's approximately the yield you earn. And that tends to beat. It's approximately in line with what stock markets will earn you over time. That kind of traditional 8 to 10% a year in over time. And it's well ahead of real estate and certain other traditional investments. And it also beats inflation now as well. Considering inflation has come down, that's 7% to 11%. But it's not that exciting. But of course it's also very low risk. What I mean by this. Just to give you an example, if Bitcoin, for example, fell by 20%, which can happen, the value of your portfolio will drop by approximately 2%.  So that's a kind of acceptable risk, I would say, for someone who is new. Now if you want to move up the risk curve. So let's say you spent six months in Phoenix. You had $100 invested in the system and you said, okay, I like what I see. I want to expand my position a little bit. Then you can upgrade or you can move your position to the Cruise or the Ignite pools, which are medium and high risk, respectively. And all that means is that we have changed the allocation of how we're parking your capital on the liquidity curve. So instead of 80% in USD, it'll just be 50% or 40%, and the rest will be in the other top decentralized currencies. You as a result, will earn more as a liquidity provider. The fees there range for for the medium risk. They're approximately 12% to, I would say 15%, 16% for the medium pool, and for the high risk pool, it's approximately 20% to 30%. So that's you're really beating the markets there. And this is of course a real time. So that's two really important points I'd like to make is regardless of which pool you go inside, your capital is never tied up. You know, that's something we really want to stress is you're not investing in a hedge fund. You're not investing in a project that will yield, let's say, over five years you'll get your capital back and you're tied in. You have lock ups - no. Your capital is literally parked on the decentralized liquidity curve, and anytime you want to withdraw it, you just click the withdraw button, it gets withdrawn, it's sent back to your address.  That's the most important thing. The same thing is with your fees. Your fees collect in real time every second or approximately every 5s-10s someone is buying or selling a digital asset on major exchanges like Uniswap. You're just getting a part of that action. And when that happens, you see your fee increase in your app. So it's all very transparent. It's all backed with on chain data. And that's basically the risk, if you will, in the system. There is there are no existential risks. So to put it, for example, if you are trading with a, I won't say a bucket shop unless you're trading at a broker and that broker goes under for whatever reason. We saw that with some bankruptcies, historically as well.  You're only protected by the amount that by law is insured. So typically that's $75,000 in the US. It can be up to 100K in Europe, similar amounts if the broker is regulated. Here there is no broker but your money is lying on a decentralized smart contract that has had literally close to $30-$40 billion flow through it in the last 2 or 3 years, extremely heavily audited and never hacked, and one of the top industry teams behind it, the Uniswap team. So it's it's very, very, very industrial strength when it comes to security in that respect. So, we there are risks but they're limited broadly speaking to to price action basically and which pool you get into if that makes sense.

 

Craig Asano: Yeah, absolutely. I mean, as an investor, you want to understand where your money's going and you want to understand what those risks are. And you know, I'm going to be the devil's advocate here and try to be a retail investor that has some questions. I mean, one of the obvious questions would be is cases like LUNA. Or in the news we've had a lot of unusual risks for investors depending on their appetite.  Market crashes and this extreme volatility and how the ecosystem has managed to rally back has been quite remarkable. But there's a lot of lessons there. I mean, maybe you can talk about your perspective and how that might impact or what are your thoughts with the LUNA crash and the fallout and what its impact might have been to investors then and you know, what's happening today and maybe let's take it a little...what do you envision how that's going to play out.

 

Kay Khemani: Fantastic question. So LUNA, basically changed the game for the worse. Luna happened in the first, approximately, if I remember from memory, early 2022.  Maybe a few months before that but Do Kwon, who was the founder, who's currently a fugitive, and he's going to be tried by the SEC soon. You had a bunch of kids from higher education places who raised a lot of capital in the previous bull run. And this guy was was one of them. And he he was a fast talker, and he created an algorithmic stablecoin. All that is, is you're you may have heard of USDC, you may have heard of USDT. They are the two biggest stablecoin multi-billion projects. And if people want to move out of bitcoin, out of Ethereum into stable currencies, they basically sell the former and they get into the latter. It's been a mainstay of crypto for for a long time. And right now the market leader is USDC. This kid basically he created the Terra organization, and Terra had a bit of a run, he raised money and they basically created this narrative that algorithmic stablecoins is the way forward. You don't need to have a fiat currency. For example, fiat currency used to be backed by gold until it was depegged. They basically said that stablecoins and crypto do not need to be backed by anything but a very smart algorithm, basically. So no treasury. And that was the first red flag, but because they showed fancy math papers and, you know, people got a bit excited and it was the bubble, right? It was we were in the middle of the 2021, the second bull run pandemic had happened. A lot of helicopter money going around. People were really excited. They said, you know what? This stablecoin is offering us 20% a year yield 20%. I'm earning in cash, and I can withdraw at any time, and there's no risk to my capital. So in Phoenix, for example, I told you, in the highest risk pool, 20% to 30% a year is what you can earn. But there is risk to your your capital. The inventory value will fluctuate. What Terra said was there's no risk to the capital, and this peg will always remain because our algorithms are smart, and if there's ever a slight depegging to the dollar will go back up. Now, the fact of the matter is, on that narrative, they raised a billion plus or something. A lot of investors from Asia as well went in there. They raised a billion plus. I think it was even 2 billion, and they had all this liquidity to throw at the coin, if there ever was a depegging incident. Lo and behold, that depegging incident happened. And although they could defend that for a certain bit, once you get a depeg, when you get a stablecoin that depegs to the dollar, a lot of fear percolates in the market and they weren't able to manage that. And then people started dumping too much. And then the Ponzi just just completely exploded. Now here's the thing in answer to your question. What was the problem with with Terra? The red flags were there for the reasons I mentioned, but the biggest problem was there was no real source of revenue. How were they generated? They told you, Craig, come and put your capital with us. Buy this, this LUNA coin, the stablecoin, and you will get 20% a year and you get paid in a stablecoin. That sounds great to you, especially if you can withdraw your capital but you have to ask yourself this. How are they making that 20%? It turns out that 20% your money was being parked in other circular DeFi. You know, decentralized finance. There was a lot of DeFi schemes at that point, offering 100% return, 150% return by WizKids, quote unquote WizKids, who are all now in jail or disappeared. And so your money was basically being recycled in other ponzis.  And it was horrible. It was really horrible because it worked for a bit, so people got excited. They overgeared, you know, at one point our firm had put in almost $70K - $80K into it. We lost $30K on the Terra collapse. We pulled out the moment the depeg happened. Other people lost their life savings because they thought the algorithm would save them. The problem is there was never a clearly defined source of revenue. Here, and by the way, that's not just just Terra Luna. This is almost all staking programs and crypto. The source of revenue isn't there. It just isn't there. It's just hopium. More money coming in to buy the project. So the project can use some of that treasury to pay you. It's robbing Paul to pay Peter. And this still continues. And projects like this will lure in investors and say, oh, you're earning this much in traditional finance, 5% to 10%. We can earn you 60%, 70% a year or 100%. So you put your capital there. You know, we're like moths to a fire, to a light. We  get excited by these returns, but they never last. With Phoenix, it's a completely different story because we've told you the source of revenue. They are audited. There are billions of buying and selling happening every day on Uniswap, on some of the leading decentralized exchanges and centralized exchanges. In a centralized exchange like Kraken or Gemini or Coinbase. You can't become a market maker readily, but you can in the decentralized markets, and that's what Phoenix does. And and you can see how your revenues are generated trade by trade. So it's a completely different ball game. But in answer to your final question on that, what it did to investors.  It made investors much more distrusting, which I think is good in a way because they're much more protective of their capital. Like you saw the ETFs being approved. The Bitcoin hasn't gone up that much, you know, and it's actually gone down. And that was much to the chagrin of many people and also surprise.  And I think it's that's good because I think now you will start to see more stable programs coming through. And by the way, it wasn't just Terra Luna, it was also Celsius. They were offering you 5%, 6%, 7%, 8% on your money. You put down $10,000 or $50,000, you get a bit more. They were investing in stuff like Terra, they were investing in other stuff. So it was all circular. There was no real source of of revenue, no tangible source of revenue.

 

Craig Asano: So what I mean, as an investor, what advice would you provide retail investors or anyone who's dabbling in crypto and some of these yield farming staking programs. How do they identify red flag. What are the top red flags to look out for? And on top of that, if we can dig in a little bit in terms of the Phoenix app and how they're mitigating some of the overall risk and the overall risk portfolio. I think that would go a long way to, building that confidence and understanding. It's really about education.

 

Kay Khemani: Absolutely. So the. And that some of the main pitfalls, the way you can spot a scam pretty quickly is firstly, just go to the team section. I know this is this sounds so bare bones, but it actually is one of the best way to weed out a scam or a potential disaster. It doesn't necessarily have to be a scam in the traditional sense. The founders can be well-meaning, but the question is where is the culpability? Right? Where are they appearing with Craig on camera, showing their faces, their location, their CV on LinkedIn and stuff? You won't find this in 90% of DeFi projects today. Yeah, they may offer you 50% or 100% yields, but you don't see the team. You don't see the team because most of the teams are breaking securities laws by offering these type of things without accreditation. They're not doing accreditation checks, they're not doing KYC, they're doing nothing right. And most of them are in America or China. It's it's one of the two. And so they're basically on the run because they know eventually when the party stops, they're sitting with their treasury, they're going to rug and take that money or they're just going to abandon the project which ultimately for you, the investor results in a loss, total loss of project value. So that's the first sign. Please make sure that if you are getting very excited by a project and you see that they don't have a team or you have guys called Big Flipper, if that's the name of the founder or,iPhone Red is the name of the co-founder, then only invest 1% of your capital. Enjoy. Hope that that does 100 x but never ever bet your house on it or anything like that. The second thing, of course, is it should be a very easy question to be answered but you'll be surprised that once you enter DeFi, how complex it becomes. Like I've explained to you, basically how Phoenix makes money for you today. And I understand that some of the terms were probably new, but if your users rewatch this, it'll make sense. There's market makers that make a market for traders. Market makers make a lot of the money. Traders generally lose money. If you become the market maker, you have way less risk and you make money. That's what Phoenix does for you. So along with those two checks, basically first to find out who the team is. The second of all, to find out what the source of revenue is. Once you've done that, you're already dealing with a good project, right? If you have the answers you need, then it's all about capital allocation. And that's, that's just common sense advice that you can you can avoid most pitfalls by doing that. The final one that I would alert investors about is the level of returns that the project is promising. So typically if you go to Phoenix, the website today, you will see mention of the type of returns in terms of qualitative statements like double digit and all that. But you will never see crazy statements like make 50% a week or 20% a month, or 100% a year or anything, which sounds too good to be true. It's very easy, especially in today's cost of living crisis. We live in a very difficult period, especially for the younger generation. So you you have a bit of money, you're like, okay, let me bet the house on it. Maybe this is my one shot thing. It's not. Your money, you're going to lose money. You're 99% of the time you're going to lose money. So make sure that the returns make sense to you. So when you're entering the blockchain space, you are taking on the risk of leaving traditional finance and the protections that that part of the financial sector affords you. When you move into blockchain, it's a bit of a black box. And so these, these sort of checks that I've, I've told you today, if you do those, you'll fare well.  And just note that when you're entering this higher risk space, you should demand higher returns. If there's some project in the blockchain that's saying you can earn 5% - 6% a year. No, that's not interesting because you can earn that in traditional finance. Right. With lower risk. So approximately the returns that Phoenix provides are realistic as long as you can verify the source of revenues.

 

Craig Asano: Perfect. So, you know, you were talking about as one of the strategies and 90% of the companies offering similar services or sort of investing orientated services in crypto who don't have their team, up on their website, who...it's very difficult to ascertain any information on them. So maybe you can just tell us a little bit about who's involved with the Phoenix app and how it was built.  As far as I can tell, it was incubated out of Hatchworks where you're full time there.

 

Kay Khemani: Yeah. No, it's good. So Hatchworks is a technical advisor. We absolutely contributed manpower to it. The Phoenix Company itself is not part of Hatchworks.  It's not in the Hatchworks group. It's a separate entity, separate shareholder structure, board structure. And in terms of the team, if you go to the team section, you will see the tech technical leads there. We have a testing team as well. Who does the user assisted testing on top. And of course, we have a legal advisor that takes care of the licenses and all those things. We have a roadmap on the regulation side as well. So the whole team can be found on the Phoenix website. I'm of course, there as well. If you also look at each member of the team, very important, you also see their career history. It's on LinkedIn. You be able to verify all those statements. We've been around in blockchain for six years now. So if you just Google us, you'll find out information about us.

 

Craig Asano: Yeah, well, no, it's just good to to know. And as you're saying, when folks like yourself are showing up and doing podcasts, you're living and breathing, you've been fascinated with this space and building this. Really, it's a new opportunity for for investors. One of the things since we're talking about all about investing in crypto. This is sort of a news related item that took the entire industry by storm and grabbed their attention. This is about the approvals in the US with the BTC ETFs. Can you, which have now since been been approved and it's had some impact on the market. And if you can just provide your thoughts on, what you think that will do for the market and that sort of use case and sort of where do you see it? How will that impact the Phoenix app and what you're doing, if anything at all?

 

Kay Khemani: Yeah, no, that's a great question. So the approval of the ETFs is of the ETFs is a very important. It's a seminal moment in crypto history and the blockchain industry because it legitimizes to a large extent an asset class so far that has been associated, as you know, with criminals, drugs, money laundering, racketeering and all that stuff. Cash has as well over time but Bitcoin gets a negative rap. So the fact that Blackrock, Fidelity and some of the biggest financial powerhouses in this world are now have backed it and I won't say twisted the SEC's arms to go ahead and approve it. You saw the SEC chairperson's statement as well. He basically wrote that although I have approved the ETFs, I don't actually condone Bitcoin yet myself. That just goes to show how much friction there was to get these out there because the younger generation absolutely wants to get into the blockchain. Kids today are not going to be like, oh, can I can you please find me a retirement account earning me 4%? I really want to get into real estate earning me 2% in Nevada or something like that. The world has changed. It's all about digital currencies, and that's why these big powerhouses know that in order to retain their competitive edge, they have to offer those products both to retail investors, but also to institutions and family offices and what have you. So, they did that and a lot of lobbying happened, and the world's most powerful banks were behind it. I know that Goldman Sachs and JP Morgan have applied to be APs, Authorized Placement agents. And what the ETF basically does is so let's say Vanguard or let's say Fidelity or Goldman or whatever, they launch an ETF. That's just the technical side of things. What that ETF allows to do is to raise funds by big money, and some of the marketing that goes behind this, some of the funds on the asset management fees they collect that is spent on marketing and spreading the word around the world. And these organizations have huge networks to informing the public that it is actually okay. Yes, it's a high volatility asset class, but it is safe if you invest through it in the right way. And that's the ETF vehicle that allows the common person.  They're not forced to go to some crypto exchange in China or something or wherever. Give their KYC details, buy Bitcoin and hold it in some, self-custody wallet and lose the keys to them. If you do it through an ETF, you have protections in place. So in answer to your question, it's very good because it basically increases the perceived safety of investing in that asset and also the sector, as a whole. What it means for Phoenix is more flows. So the good news is, and I didn't mention this too much, but as a market maker in Phoenix, what you want is volumes. You want news. You you're earning fees but the markets are rising or falling, which is very unique. But what you want is you want basically, more news. The more news, the more volumes. With the ETFs, volumes have gone through the roof. So going into the ETF. So I would say the months of July, August, September, October, November of last year, the volumes were picking up because we were coming out of the bear market. But generally speaking, the annual percentage yield you were earning on the highest pool was around around 16%, 17%. On some good days, maybe 20%-23%. Now it's moved up structurally to 30% on the weekends. That's another thing, is the Phoenix app you earn on the weekends as well. Because blockchain markets don't close on Fridays. They continue to make money on Saturdays and Sundays. Traders around the world can trade. They're not dependent on brokers. So when you see a tick up in these APYs in the system, you know that there's something happening, and now it's just the volumes have gone through the roof after the ETFs. And we will structurally continue to climb as well because we're just at the at the tipping point.

 

Craig Asano: So getting getting back into the the model and how the Phoenix app can work for investors. One of the things you mentioned earlier in the podcast is they have full access to their own invested capital. Is it possible this is just a general question that popped into my head here to take risk off the table in part, so not the full amount, but have a program say, I'd like to take off, 5% of the gains every month as we go forward through this passive investing program. Is that a feature that if it's not there today, is it something that you think will be introduced at Phoenix?

 

Kay Khemani: We so we listen to to users and if users tell us that we would love to have either an auto-compounding, we received that request a lot auto-compounding at a specific frequency. So as you said, every 5% every month, maybe reinvest it back, take the rest out or take it out, send it back to my wallet, de-risk. We don't have these features, coded into Phoenix code at the moment, but the auto-compounding is something we definitely have to implement because so many users have requested it. So the answer is yes. It's not a feature that currently exists. What we do, however, urge users to do is to withdraw their fees every week. Just, collects at the end of the week. It's collecting in real time, and then on Sunday, whenever you have 20 minutes, hit the withdrawal, take your fees out, and pay yourself. Right. And so, the answer is yes. We want to code that in. We definitely want to build that auto-compounding feature in. One small thing to note is when you are moving capital to the liquidity pool, to the, to the wider decentralized smart contract,there are gas fees. I won't get too much into it, but in blockchain, the whole blockchain is maintained...the integrity of the blockchain, whether it's the Bitcoin blockchain, whether it's the Ethereum blockchain, is maintained by miners around the world. You they're called node runners. And you can run a miner, a server as well, which helps people process transactions. And you get paid in Ethereum, for example. Or if you're a Bitcoin miner, you get paid in Bitcoin. That's an entire industry by itself. Now the system has to compensate you, the miners fee, as a thank you for providing your server infrastructure to help process transactions. What that basically means is every time we are committing your capital on the curve, or when you're de-installing the capital, when you're saying, okay, I'm done with the program, I want to take my money out. There's a gas fee to pay. Right. So that gas fee is something Phoenix pays for you. We don't charge you that. Just let you know that. So that's something that we take from our management fees. We pay that. But it is worth noting that this whole process gas fees can vary within the day, and sometimes they can skyrocket when the network is busy. And so this is why we advise users to do this, not every single day, but to maybe do it every week or something like that. So even the compounding, you're going back to your 5%. We would say that it should happen at a frequency of maybe a week or two weeks or a month or something like that, rather than real time compounding. Because the system, the underlying system, is strong, the integrity of these chains is very strong. The very decentralized. Now having been there for almost a decade. But they are still somewhat clunky when it comes to gas fees.

 

Craig Asano: Yeah, absolutely. I've I've often read a story about those gas fees and it's a lot more than a coffee. So you're you're...

 

Kay Khemani: You can pay. You can end up paying. I mean, it's crazy if you're not careful, if you're trying to send $100 to somebody or receive, you can actually end up paying $100 to send $100 if you're not careful. But you can also end up paying just a dollar or even less. You just have to time that, right?

 

Craig Asano: Absolutely. So, you know, you bring up a good point about sort of the differentiation. How how does the Phoenix app, sort of compare and contrast with other staking platforms, maybe it's something to do on the product feature side or it's how it's structured. Like this example, you're covering the gas fees, which I think can be quite significant. It's this is one less fee that can compound and grow and get you over time. So how are you different? How is the Phoenix app different from other staking platforms?

 

Kay Khemani: Yeah that's a good good point. So another thing is that when you go to a traditional staking app and I won't get into the whole, you know, we're doxed people know who we are and all those things that we don't have those red flags. I mean, that's a given that Phoenix operates in a much more aboveboard way but from a feature standpoint, yes, the fees thing is one thing that you mentioned. And the second thing is when you're trying to stick and you go to another platform that claims to give you staking-based revenues, what do you do then? You have to connect your MetaMask or your decentralized wallet to that specific network. Hope that you don't get hacked. And that's a serious risk. These days. Your own web browser can be compromised. And then after that, you have to monitor the pools, how much volume is going through certain pools, and that typically these other programs have hundreds of pools to choose from. So it's information overload. Funny enough, the APYs, what you can earn and the risk is lower than Phoenix. So we actually have industry leading APYs as well. That's after management fees. So that's after the fees that the system takes. So we there's that and then once you decide on a pool you have to decide what ranges you as a liquidity provider want to provide liquidity in. If you want to provide liquidity across the entire spectrum. So for Ethereum prices of up to 10,000 all the way down to $100, you can do that, but you're not going to make much fees. If you go to concentric. If you go to concentrated, you're going to get stopped out, right? So you have to have fundamental analysis knowledge. If you understand what the sector is going, you have to also understand technical analysis. And given our backgrounds, we are all traders. We are all traders with backgrounds in high finance. We understand these things really well and so that you don't have to. So if you go to these competing platforms, you'll get lost. That's what we're effectively saying. We also urge users to do that. If you're entering the space, look at some of the platforms. We can actually if you ask us for tips, I'll be happy to tell your users which are competing platforms to go and test those out, and you'll see it's a it's a complete nightmare once you're in there. You don't know what's actually going on. With Phoenix you're sending money to the Phoenix app. The app money spent is immediately located on the on the liquidity curve, and you start earning and you can withdraw your capital. So we really dumb things down.

 

Craig Asano: So it's immediate once, once the capital is there and into the Phoenix app. The program will algorithmically, participate that portion as a market maker and one one thing I saw on the website was around the ability to reduce risk through hedging or hedging capital risk. Can you just explain how that would work for an investor in a simple way.  Considering that let's say they might be a retail investor, they they don't want to be overwhelmed with all the pools but they want to make sure that the team is there, they have confidence in the technology, they they understand the fee structure, how they can get their money in and and out. What about the the hedging or other ways that they can reduce their risk through through the Phoenix app?

 

Kay Khemani: Okay. So the the risk that you have as a user in Phoenix is that the prices of Bitcoin and Ethereum tank. So they fall by 50% - 60%. Okay. And the market enters a bear. And although that risk is reducing now after ETFs because the products are becoming more and more institutionalized. And so you have checks and balances in place to stop those type of gyrations. But let's say that happens. You want to make sure that you have the least exposure to those currencies when that drop happens. So the simplest way to do it is to go into buffer, which is the lowest risk pool. I gave you an example of Bitcoin fell by 20%. Your capital would drop by 1% to 2%. So it's already very low risk if you if you want to have completely like no downside risk at all, that's trickier. That's a bit more trickier and it's not something we would advise to a retail investor because that involves shorting. Specifically that involves taking out a put option contract and basically paying the premiums to the option underwriter but then your downside risk is a liquidity providers is completely hedged. And also if the price shoots up, you don't lose out on that. If you if you did a naked short on Ethereum or Bitcoin, the problem with you then is okay if Ethereum Bitcoin fall great. You made you make money on that short but you will you will take a big hit if they rise, right. There's no way to hedge out a horizon. So although I don't want to get into put option and option underwriting here for the more institutional sophisticated investors, those instruments do do exist but for the retail investor, it's not something we would advise. What we would basically say is go into buffer, which is a very, very low risk pool, an extremely low risk pool, although you don't earn much money, you know, 7% to 10%, maybe 11% a year. Your your downside is extremely limited.

 

Craig Asano: Yeah. Okay. Great. Thanks. Thanks for illuminating on that. What about leverage? Often in the crypto investing space, you see advertisements, you know, 200 x leverage, 500%, in all of these things could look like opportunities, but what what are your thoughts? And do you offer leverage at the Phoenix app?

 

Kay Khemani: Very good question. No, we we hate leverage. So we're we're low risk. We don't like leverage. Uh, you. If you are an accredited investor, you understand leverage and you have access to credit facilities and you want to go in big on Phoenix and we can get our legal team in touch with yours, and we can have a discussion about how such a pool would look for you, so that your capital is safe and generates and pays off your interest on the on the leverage. But no way would we ever recommend leverage or for anyone to take out a loan to participate in Phoenix. Although the Phoenix is a safely engineered product, the downsides are pretty well protected, loans and crypto don't mesh. I would never recommend that. Now, if I personally, because I'm an accredited investor, I'm a quote unquote, I fall under the category of sophisticated investor. I do like where Bitcoin is headed and I wish I had more capital. And I have.  Our company has thought about it accessing leverage to go long Bitcoin like Michael Saylor did. Right. And his bet has paid off fantastically for MicroStrategy. So but for Phoenix no, the answer is no. In general, leverage is bad in the space because, you know, we discussed that quotient 85% 90% of traders lose money. Those that are using leverage, 98% of traders blow their accounts. So I would not advise taking out leverage. For Phoenix, you don't need leverage. You really don't need leverage. You don't.  On that point, I'd like to like to say that the good news is we have reduced the minimums.  Because we want to also bring Phoenix to emerging markets. It used to be $1,000 to get into these pools. Now it's $100.

 

Craig Asano: Minimum $100 investment for.

 

Kay Khemani: Yes, exactly.

 

Craig Asano: Got it. Okay. Well, that's good to know. Let's switch gears a little bit about, maybe the industry level on regulation. And, you know, the DeFi space is, has been a hot sector. An area of great interest for a lot of investors, as well as all the builders and innovators. It's really about, well there's many facets to it but I see that direct to consumer investments and disintermediating some of the brokers that are involved in the process. But from a regulatory perspective what are your thoughts as governments, securities regulators try to wrap their head around striking the balance? I'll use that word, for on the innovation side and ensure that there's not a flow out of capital from their country. They're still providing investors in their countries these great opportunities. But we're living in a global, world where investors can come from all walks of life, all around the globe. What do you envision? You know, well, maybe you can talk about the current state of regulation for DeFi today. And where do you see it maybe moving, in the near future?

 

Kay Khemani: It's a good question. It's a fantastic question. The thing is in DeFi, DeFi is a niche inside crypto. It's a specific niche and DeFi, as you rightly said, is disintermediating the powers that be effectively. In theory, in a world that was run purely on DeFi, you would not need your broker. You know, you would not need JPMorgan Chase to buy shares of Tesla. That's the truth. So it challenges the very essence of what the big banks are built on. They're trading revenues. So you're basically taking them on. So to regulate DeFi in my opinion, is going to be a very, very, very big hurdle. If there's going to be any sort of DeFi, it'll be happening between banks, if you ask me, because they want to protect what's theirs. And so I think ultimately like it or hate it, regulators are very much influenced by big bankers and lobbies, as you see in the US, right? Washington, DC is pretty much a very well financed by banks and all this thing. You saw how much pressure Blackrock and these big guns put on the SEC to approve the ETF. So it's very unlikely that these regulatory agencies and in answer to question today they haven't sided with Joe Public over the banks. So and that's how I think it will continue. I don't think I'm not actually a DeFi enthusiast myself. I know the industry pretty well. I can tell you for the reasons I mentioned now, but also the quality of DeFi projects are so bad that it gives regulators a lot of ammunition to basically say, oh, well, look at look at LUNA, right? Look at this company. Look at this. We can't the only way we can regulate this is try and shut it down, because it's just garbage. So there are good concepts in DeFi. Phoenix is an example of DeFi. Uniswap is an example. Defi where you can become a liquidity provider. You don't have to go to or trade against a broker. You can make money in a new way. But these kind of dark projects, black box projects where like Luna, where you don't know what you're earning from where and stuff they end up collapsing. It's difficult to regulate those. Traditional regulation, just to end on a more positive note when it comes it is moving forward. So there's regulatory arbitrage. It's a great point that you brought up because what's happening is if you're in the US and this ETF approval didn't go through, capital would flow out. It would go out to other jurisdictions that allow that are more accommodative for blockchain regulation, like Singapore, like Switzerland, like even the UK. Now after the ETF approval, the Americans have kind of gotten the upper hand. Again. You know, almost 50%, 60% of capital flows for blockchain are still in the US. If they lose that to other countries that's a massive competitive disadvantage. So right now regulation is moving forward. Everyone's looking forward to see what America i going to do next. And slowly you start to see the right moves also in Europe. For example, Germany is quite pro bitcoin which which may surprise you. The UK claims to want to be the market leader, but they've been quite slow in approving ETFs and all these things. But Switzerland has been ahead of the curve. So it's it's moving forward. Hong Kong is moving forward as well. China is a bit more draconian on that front. So it's a bit of a I would say it's a pop mark progress.

 

Craig Asano: Yeah, it seems we're hitting a tipping point with more institutional adoption and regulators and governments worldwide, whether they are on this side of the fence or that side of the fence, they're recognizing the value of the technologies. That's a good segue into more of the innovation type question. I know on a lot of our podcasts, a popular question is around the impact of artificial intelligence and what that type of intelligence combined with, say, a retail investor or any type of investor. Do you see AI having a big impact into sort of your business and DeFi and in particular from an investing perspective?

 

Kay Khemani: I would say, AI is very exciting from a trader's perspective because we all in an ideal world, we don't want to put the effort to learn to trade the markets. We'd ideally like to have a little robot that can trade the markets more efficiently and make money for us, ideally on a monthly basis for life. Right? That's what we want but it's very difficult to get that right. And I think in answer to your question now with ChatGPT, we need to see the capabilities of how well I can ingest the myriad of data that it needs to do both qualitative and quantitative data that the internet spews out, in order to make qualified investment decisions that can actually make us sustainable return. We don't know right now how successful it is. I can tell you there is no retail AI robot that makes money. Even after ChatGPT, you know it's been out for almost one a year and a half. There is no retail robot that makes money that's truly sentient. There might be neuro, what you say, NLP models that are repurposed by major investment banks and hedge funds, quant funds that can make these guys money but we retail people, we don't have access to that technology. So I think, long story short, in order for brokers to exist, traders need to lose money, unfortunately. That is how the markets are kind of structured, wired right now. With Phoenix it's different because there you are the market. You are the broker. Effectively you're just making you're selling Bitcoin and Ethereum, passively but with your traditional model, I think AI challenges that as well, and I don't think the big banks would want to see you or me get our hands on that. But that's just my view.

 

Craig Asano: Yeah. It's such an exciting time around the world. I mean AI is really hungry for for data, and that is a processing and ingesting that data is allowing the personalization of our lives. You know, who wouldn't want an investing robot with the guards and rails to protect us but certainly envision these types of market making programs and investment models that continue to evolve through innovation in the crypto space to continue forward. So, I guess, as we sort of move towards the end of the podcast, we'd love to hear your thoughts. What do you think the, the whole crypto investing space, the DeFi space, the model and the area that you're focused on with the Phoenix app will look like in in five years, and coupled with that, what sort of... Are we missing anything in the discussion? We'd love to give you an opportunity to share a story or something that you feel would would appeal to investors or anyone that might have concerns. It's really, you know, the ball's in your court to help wrap this up.

 

Kay Khemani: No. Sure. Thanks, Craig. So I would say in answer to your question, if you take a five year view on where the space is headed after the ETFs have been approved, this, as I said, was a seminal moment. It will allow more information, more correct information and safeguards for new investors to be put into place so they can access blockchain technology safely and make money. More importantly, make money. And AI right now is broadly used in blockchain as a buzzword by projects to lure you in basically.  AI based staking and all that. It's all nonsense. It's another red flag for me. Five years from now, I think DeFi would have progressed, I think would have been more regulated. I think the returns would drop as well as more realness enters in, which is important. And I think it'll be it'll be like any other asset class eventually.  All the various cryptos and stuff. What I would do right now would urge all your users that have not done so is whether they like to join Phoenix or not. That's totally, you know, their prerogative. We're very happy to to receive them. But more importantly, we're sitting at a very important time in the history of investing. You look back 20 years ago, you look at what Microsoft did, sorry, 40 years ago, 30, 40 years ago. Apple. What those stocks were trading at back in the late 70s, the late 80s, as you know. And you look at that amazing chart and you're like, wow, had I invested back then. Right. How have we not all done that? And what I would ask people to do is to spend some time, like we did in 2016, which was life changingly important for us as a project to enter the blockchain with the smart contract to get rid of brokers. And that was a very big project for us. That kind of gave us the wings to create future projects. I would ask all of your users who have not done that already to really get clued up on what is happening with Bitcoin and blockchain. Specifically, what this what the ETFs mean for the access by the public to this technology. In short, I mean, again, I don't like to give investment advice, but you see what's happening to your cash in the bank. Inflation risks of bank failures, all these things. And then you see of course, a potential competing mechanism for cash, the one that does not deflate, one that is truly that you can own, as yours cannot be confiscated by governments. It's important to see what these ETFs mean for the space and also prices for Bitcoin price Ethereum over the next 5 to 10 years. When planning your your investments because these opportunities may not come back. So that's what I would say. And once you once you look at bitcoin Ethereum you learn about those. Only then I would say is you can kind of graduate to the other more kind of riskier niches in blockchain like DeFi, like NFTs and all of that.

 

Craig Asano: Well, you heard it folks. Not advice. Not investment advice, but from a seasoned, high finance, investor, who's been involved with incubating lots of projects and dedicated to the Phoenix app. I think it's exciting times, especially with the approval of the ETFs, potentially Ethereum ETFs. All these new technologies in the market today and they're only going to continue, as Kay was talking about on the ground floor. If you get involved, get educated, ask questions. But by all means you should, get in touch with with Kay. On that one, we would just say, how do users sign up and maybe how can they they find if anyone has any follow up questions with you, how do they get involved? How do they get in touch with you.

 

Kay Khemani: Absolutely. So obviously they can contact you, Craig, but if they want to come directly, just go to www.Phoenixapp.io. And there's a range of contact buttons there. Email.  Also our telegram community where I'm there as well. Our users.  You can chat to our users as well, ask them about their experiences. And you can also sign up to the app. We have a mac approved downloadable app, also PC approved downloadable app, but if you don't like downloading stuff, you can just click on Launch app on our website and you can sign up there as well. What I would advise you is actually, do that and get to know us, get to know the project, monitor the performance for a few months and don't invest now. Just monitor learn what Phoenix is because automated marketing market making is so unique. It's a it's a great source of revenue. But get educated first on it. And when you're ready to take the dive then you can always do that in the future.

 

Craig Asano: That's good information. Before we really wrap up the podcast, we can't finish it without a rapid fire questions. It's my favourite part of the show. We're just expecting, quick responses and just, you know, everyone. It feels it keeps it personal and interesting. So we're going to close this out with a rapid fire questions. You ready for that?

 

Kay Khemani: Yeah. Go. Let's go.

 

Craig Asano: Okay. So um, in a word, how would you describe the future of crypto?

 

Kay Khemani: Booming.

 

Craig Asano: What was that?

 

Kay Khemani: Booming. Booming.

 

Craig Asano: Booming. That's right. That fair enough. Moving on. What is the number one risk investors should be aware of in DeFi?

 

Kay Khemani: I would say non-doxxed teams. So teams that don't want to show their faces, that's a number one risk.

 

Craig Asano: Anyone...No transparency. Basically. No transparency. Hiding under the covers. Okay. Good answer. Next question. What's your personal mantra when it comes to investing in crypto?

 

Kay Khemani: My personal mantra is don't invest. The first thing to do is you're not going to miss out. The space is headed up in asset prices over time. Do not worry about that. Take your time to research the project, and you can make a lot of money, but you can lose a lot of money as well. So I would say just take that time, that one week or so, of really getting to a project. And very importantly, when you're ready, look at the world if you lost that money, how would that affect you personally? How would that affect your dependents? Your co-dependents? Your future? Your kids? Everything. If you believe that would really put you in a bad place, don't touch this investment. Always only invest money that you can afford to truly lose. And I know people say that, but it's only when they lose the money do they really feel that pinch. So be very, very careful.

 

Craig Asano: Yup, that's great advice. Don't bet the bank and don't take a second mortgage out. Yeah.

 

Kay Khemani: No, definitely don't take out second mortgages.

 

Craig Asano: Next question. Name a recent favorite book or movie that you would recommend to our listeners?

 

Kay Khemani: A favorite book or movie I've been watching entourage. I don't know if you guys know that watching the re-runs. There's so it's so entertaining. It's a great show. Sure. A lot of you already know it. Uh, my wife keeps up with the more latest Netflix movies and things. I just don't get time but that's what came to mind right now. I've been watching that, so that's great. You would love that.

 

Craig Asano: That's why you need the robot investor so we can all have more time.

 

Kay Khemani: Yeah, exactly.

 

Craig Asano: To watch. I don't know it, but I got Netflix. I'll have to search it.

 

Kay Khemani: Oh, you love it. You love it. It's really addictive. It's good.

 

Craig Asano: Perfect.

 

Craig Asano: So last question before we wrap up officially is what's your favourite go to financial tool or app?

 

Kay Khemani: Oh, trading view by far. I love trading view. I'm sure you guys all know it. It's just fantastic. It's so well designed. I met the founder a few years ago just on Skype. Very accessible and there was nobody. No one was using it, and today they're a global company. They pretty much I think they have 80% market share. Retail. Really great. Great app for free as well. Of course there's a premium version as well. But it's you can get so much data about charts, analysis, trading strategies, news. Great. It's like a Bloomberg terminal for the retail.

 

Craig Asano: Yeah. Trading. Trading is good. It's not. Not that expensive. Maybe it's a couple hundred bucks for the pro version and all sorts of bells and whistles and integrations as well. So, with that folks, you heard it. We really want to thank Kay Khemani who has shared his knowledge and expertise. He's involved with incredibly exciting project at the Phoenix app. And, his advice or non advice to investors has been wonderful. Just take it slow, get educated, watch and learn. And if you have questions, connect with folks that are transparent and willing to show their face and be along for this incredible journey. So once again Kay, I want to thank you. You're welcome back anytime. It's been awesome having you here.

 

Kay Khemani: Thank you for having me. Appreciate it.

 

Craig Asano: Yeah. Well, you know, come back in a couple of years. We'd love to hear where the Phoenix App is. And if anything interesting comes out of Hatchworks. Get get in touch for us for sure. Other than that, this is the conclusion of episode 61. And I would like to say, if you're new to Fintech Fridays, please check out some of our incredible past episodes. We think you'll be surprised with what you'll find. Uh, we look forward to seeing you next Friday for another episode of Fintech Fridays. Have a good weekend, everyone. Thank you.

 

Kay Khemani: Thank you.

 

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Open Banking: Revolutionizing Financial Data Sharing

Open Finance | Jan 17, 2024

Freepik stockgiu Open Banking - Open Banking: Revolutionizing Financial Data Sharing

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Open Banking 101: An Explainer on the Future of Financial Services

Today we're sharing a great measured and informative 101 Open Banking piece based on a recent Q&A interview between Mark McQueen, Founder at Wellington Growth Partners (Interviewer) and Fintech VC Christian Lassonde, Founder and Managing Partner of Impression Ventures (Interviewee) called 'What is Open Banking and Why Should I Care?'.  While readers should definitely delve into the entire interview, below is a summary along with an update on a few global open banking trends.

What is Open Banking?

At its core, Open Banking is a digital tool that allows individuals to access and share their bank statements securely. It represents a shift from the insecure practice of sharing online banking credentials to a more secure method of data sharing. This innovation is not just about "improving the plumbing" of financial services but revolutionizing how consumers and businesses interact with financial data.

See:  Canada’s Open Banking Journey: Interview with Abe Karar, Chief Product Officer, Fintech Galaxy

Open Banking finds its utility in various domains.  To provide just a few examples:

  • Identity Verification: Services like Wealthsimple use Open Banking for confirming user identities.
  • Credit Monitoring: Platforms such as Borrowell and Credit Karma utilize it for analyzing bank statements.
  • Lending Decisions: Lenders use transaction history for underwriting models.
  • Small Business Accounting: Tools like Freshbooks and Quickbooks access banking data for daily reconciliation.

Countries like the UK, which have embraced Open Banking and report significant benefits

If embraced by North American governments, consumers could see benefits similar to those in the UK, including better financial management and access to competitive financial products. Small businesses, in particular, could see substantial gains from tailored financial tools.

  • Increased Service Adoption: More consumers are using Open Banking services.
  • Enhanced Financial Management: Users report better budget management and expenditure reduction.
  • Savings and Expenditures: Open Banking has helped users save more and build financial cushions.
  • Trust in Services: High levels of satisfaction and trust have been noted among users.

Top Positive and Negative Comments from the Interview

+ Open Banking is a significant step towards empowering consumers with control over their financial data.

+ It promises to bring innovation and competition to the financial services sector, benefiting consumers and small businesses alike.

+ Enhanced security measures in Open Banking could reduce the risks associated with traditional banking methods.

See:  FCAC Survey Results: Understanding the Canadian Consumer’s Perspective on Open Banking

- The need for robust protections and security standards against data breaches and fraud is paramount.

- Establishing clear governance and liability guidelines is crucial.

- The shift to Open Banking could disrupt established financial institutions (impact on TradFi)

Implementation Steps in Canada

The framework for Open Banking in Canada is almost ready, but the choice of an oversight body remains a key issue.

In the November 2023 Fall Economic Statement, the Canadian government committed to introduce open banking legislation in the 2024 budget. This legislation will allow consumers to securely share their financial data with trusted third-party providers. It aims to increase consumer control over financial data, boost competition, and encourage the development of innovative financial solutions, signaling a shift towards a more consumer-focused financial environment in Canada.

The government also announced the expansion of Payments Canada eligibility (membership). This expansion will enable a broader range of financial institutions, including payment service providers to participate in Payments Canada. This organization is leading the development of a new Real-Time Rail payment system. The change is expected to lower transaction costs and speed up the transition to faster, more secure payment systems, thereby improving the efficiency and inclusivity of Canada's financial infrastructure.

Global Perspectives on Open Banking

United Kingdom

The UK is a pioneer in Open Banking, having mandated data sharing among banks. This has led to increased service adoption, enhanced financial management, and high user satisfaction reaching a new milesstone 11.4 million payments as of July 2023. The UK's approach, regulatory-driven, contrasts with the consumer-driven momentum in the U.S. and Canada. However, questions remain about the long-term impact on traditional banking institutions and the balance between innovation and regulation.  The UK government has published recommendations for the next phase in open banking here.

United States

In the U.S., the momentum for open banking is largely driven by consumer demand (not regulators), particularly from younger, digitally native customers. This contrasts with the approach in the UK and Europe, where open banking has been more regulatory-driven. Open banking in the U.S. is seen as a way to provide valuable insights to financial institutions, leading to new products and marketing innovations. Data aggregation is particularly useful for offering personalized services.  Some of the largest U.S. banks have historically resisted open banking, especially when mandated by regulation. Concerns include protecting customer data relationships and the complexities and security risks associated with sharing customer data through open APIs.

See:  Visa Survey: Insights into Consumer Preferences for Open Banking

Without a clear regulatory framework, there is uncertainty among American banks about potential liabilities. However, the open banking ecosystem in the U.S. has evolved with financial players often partnering with fintech companies like Plaid, Akoya, and Fiserv.

In fall 2023, the CFPB proposed a rule focusing on consumer control of personal financial data. This rule aims to boost competition by preventing financial institutions from hoarding data and requiring them to share it at the consumer's direction.  The response from the industry, including the American Bankers Association and digital banks like Chime, has been mixed. While there is support for the idea of establishing clear rules, concerns remain about operational expenses, liability, and the scope of the rule.

There are industry calls for the CFPB's proposal to go beyond open banking and be more inclusive, covering different types of financial products like payroll data, Buy Now, Pay Later services, and digital wallets, which are crucial for many consumers.

Australia

Australia's journey in Open Banking is noteworthy for its Consumer Data Right (CDR) legislation, which empowers consumers to control their data. This approach has spurred innovation and competition in the financial sector. However, challenges around data security, consumer awareness, and participation of smaller financial institutions remain areas of concern.  Learn about NatWest Group's vision for moving forward with Open Banking.

You can watch an episode of NCFAs Fintech Fridays podcast to learn more CDR here:  Canada’s Open Banking Journey: Taking inspiration from Australia’s Consumer Data Right with Kate O’Rourke, Treasury’s First Assistant Secretary for the CDR

Outlook

Open Banking stands at the forefront of financial innovation, offering a plethora of benefits for consumers and businesses. However, its successful implementation hinges on addressing security, governance, and regulatory challenges.  Stay tuned to NCFA Canada for more updates and insights on Open Banking and other fintech innovations.


NCFA Jan 2018 resize - Open Banking: Revolutionizing Financial Data SharingThe National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, artificial intelligence, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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OMFIF Podcast: Smart Contracts and Retail CBDCs

Podcast | Dec 18, 2023

OMFIF podcast 2 - OMFIF Podcast:  Smart Contracts and Retail CBDCs

Image: OMFIF Podcast

On demand OMFIF podcast available, titled "Unlocking the benefits of smart contracts for retail CBDCs"

Speakers

  • Katie-Ann Wilson, Managing director of OMFIF’s Digital Monetary Institute
  • Peter Faykiss, Director of digitalisation at Magyar Nemzeti Bank
  • Imre Kocsis and László Gönczy, Associate professors at Budapest University of Technology
  • Chris Ostrowski, CEO of SODA

See:  BoC: Redefining Financial Inclusion for CBDCs

The discussion centers around the concept of programmable money and its potential impacts on the use of money in society. Key topics include:

  1. The Bank for International Settlements’ Project Rosalind and its significance in the development of central bank digital currencies (CBDCs).
  2. Real-life use cases for CBDCs utilizing smart contracts.
  3. The technical models employed in this context.

Transformative Potential for Retail Sector

CBDCs could transform the retail sector, emphasizing customer experience, loyalty programs, smarter service contracts, and micropayments. CBDCs, being digital, simplify international transfers and reduce transaction fees, potentially leading to significant financial savings for retailers and consumers. The use of smart contracts in CBDCs can automate processes, especially for big-ticket items.

See:  Autonomous IoT Transactions and Micropayments

Additionally, CBDCs could enable micropayments by bypassing high transaction fees, impacting business models like publishers charging for individual articles.

  • Enhanced customer experience and reduced transaction fees
  • Transformative potential for loyalty schemes
  • Efficient automated processes through smart contracts
  • Micropayments becoming more feasible

Consideration for CBDCs on Businesses

The potential impacts of retail and wholesale CBDCs on businesses. Apart from the much discussed privacy related issues, considerations for using retail CBDCs in practice, including the handling of disputes in transactions without intermediaries. Central banks might require customers to pay for private sector insurance to cover disputes, which could make CBDCs more expensive than traditional payment methods.

See:  Bank of Canada Publishes Staff Paper on ‘Unmet Payment Needs and CBDCs

The uptake of CBDCs, as seen in China's pilot project with the e-Yuan (Also see:  China’s CBDC: Offline Digital Yuan Payments via Super SIM Cards), has been underwhelming, prompting central banks to consider how to compete with commercial payment processors.

  • Retail CBDCs may involve complex dispute resolution processes
  • Potential for higher costs due to insurance for dispute coverage
  • Competition with existing private-sector payment processors

Conclusion

This comprehensive discussion on the OMFIF podcast offers valuable insights into the future of money, highlighting the transformative role of CBDCs and smart contracts in both retail and business contexts.


NCFA Jan 2018 resize - OMFIF Podcast:  Smart Contracts and Retail CBDCsThe National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, artificial intelligence, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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Fintech Fridays EP60: Revolutionizing Small Business Lending and Empowering Entrepreneurs

About NCFA Canada | Craig Asano | Dec 8, 2023

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FF EP60 David Souaid, OnDeck Canada

Dec 8, 2023: NCFA's Fintech Fridays podcast episode 60

Revolutionizing Small Business Lending and Empowering Entrepreneurs

 

Featured Guest:

DAVID SOUAID, Chief Revenue Officer at OnDeck Canada (LinkedIn)

Co-Founder and President of Evolocity Financial Group (now OnDeck Canada), David brings over 20 years of experience in the FinTech industry and is a driving force behind platform solutions, distribution, and product marketing initiatives.  Before OnDeck Canada, David was Senior-Vice President of Sales and Marketing at Optimal Payments Inc.  He later became the Co-Founder and President of Sterling Card Payment Solutions, before starting Evolocity Financial Group.  He has been recognized for his thought leadership as a Top 25 Executive Leader in Lending by the Canadian Lenders Association.  David's passion for FinTech extends beyond his professional career, as he actively supports the startup community and empowers women in business through his work with StartUp Canada and the Women Founder's Fund.  David also serves as Chair of the Miss Edgars School Foundation, where his daughters attend.  His passion for FinTech's future and its impact on entrepreneurship is evident through his involvement in various initiatives that support innovation and growth in the industry.

About OnDeck Canada

OnDeck launched in Canada in 2015 to solve a major issue facing small businesses: efficient access to capital. We use cutting-edge technology to evaluate businesses based on their actual performance, not solely business owners’ personal credit scores. Ultimately, this makes it possible for us to responsibly expand access to credit. This allows businesses to spend their time where it provides the most benefit—on their customers and on growing, rather than looking for a small business loan.

In April 2019, OnDeck combined its Canadian operations with Evolocity Financial Group (Evolocity), a Montréal-based online small business leader, to offer small businesses in all provinces and territories of Canada a broader array of innovative financing options and a superior customer experience.  OnDeck offers flexible terms and rates based on your business’ performance. Given approvals are not solely based on personal credit history, an OnDeck loan could be an attractive option when compared to a traditional bank loan. Additionally, we offer a quick response to loan applications. We qualify and evaluate business performance based upon a variety of important performance metrics. Moreover, if approved, it is possible to be funded in as fast as one business day.

Since 2007, OnDeck Group has issued over US$13 billion in loans in the US, Canada and Australia for many business needs. These include inventory purchase, equipment acquisition, hiring and general corporate purposes. OnDeck has been trusted by over 100,000 small businesses across the US, Canada and Australia by providing them with a loan to help them build a growing and thriving enterprise.

Links:

About this episode

In this insightful episode of "Fintech Fridays," we dive into the evolving landscape of small business financing with David Souaid, the Chief Revenue Officer of OnDeck Canada. David brings over two decades of experience in the fintech industry and shares his journey from co-founding Evolocity Financial Group to its merger with OnDeck Canada, illustrating his role in transforming small business lending. The discussion delves into the challenges and innovations in the industry, highlighting OnDeck's customer-centric approach, technological advancements, and future trends. David's insights reveal how OnDeck Canada is not just financing businesses but also empowering them to thrive in a dynamic economic environment.  This episode provides a valuable perspective on the transformative world of fintech, especially in the realm of small business lending, and is a must-listen for entrepreneurs and industry enthusiasts seeking to understand the future of financial services. Enjoy!!

Duration:  45mins

 

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Fintech Friday Transcript of Episode 60:

David Souaid, CRO, OnDeck Canada

Intro: Welcome to fintech Friday's a weekly podcast brought to you by the National Crowdfunding and Fintech Association of Canada and partners. Covering all things fintech, blockchain, AI and alternative finance.

 

Craig Asano: Good afternoon everyone. It's Craig Asano, the Founder and CEO of NCFA Canada, welcoming you to season four of Fintech Fridays, episode 60. It's a weekly podcast brought to you by NCFA and partners, where we sit down with the incredible people in the fintech and funding community and talk about the trends, the product innovations, developments, what's happening and all the challenges too, of course. So today, we're thrilled to have our guest, David Souaid. He's the CRO of OnDeck Canada with us today. David is the Co-founder and President of Evolocity Financial Group, which is now OnDeck Canada. He brings over 20 years of experience in the fintech industry, and he's really the driving force behind the platform solutions, the distribution and all the marketing initiatives at OnDeck Canada. And prior to that, he was the SVP at Optimal Payments. So he's also got a payments background. He was before that, the Co-founder and President of Sterling Card Payment Solutions. He's a thought leader and active supporter of entrepreneurship and innovation in the startup community, and he's involved with lots of different organizations. I see he was awarded from the Canadian Lenders Association, a Top 25 executive leader, and he's actively working with Startup Canada and doing some really wonderful initiatives. So we're really happy to have you here. David, thanks so much for joining us today.

 

David Souaid: Craig, thanks for having me and looking forward to the conversation.

 

Craig Asano: Yeah, absolutely. I think we're going to just get into kick things off, just to learn a little bit more about who David is, the professional.  If you can just share with our listeners a little bit about your journey, your background, and sort of how you became part of OnDeck Canada and all of that.

 

David Souaid: Yeah. So I think we'll try to keep it brief. But really this journey started back in 2008. I was an executive for a company called Optimal Payments, and we were really looking at different businesses in the US and Canada that were achieving scale and success, and we came across a small business lending business, the ability to access working capital digitally online in an easy, fast and seamless way and basically had the opportunity to incubate that business in Canada and really start to try to build it and introduce it to the Canadian market. So I see myself very much as an entrepreneur. I saw an entrepreneurial opportunity to start a business like OnDeck, which originally was called Mercantile Advance and really build it with my partner Harley Greenspoon over many years. So we had Sterling Payments, we incubated Mercantile inside of it, and we began to introduce the small business financing products to Canadian retailers Those that were underserved by the banks. Banks typically didn't service industries like restaurants and retail sizes that were smaller in nature, and it was in the middle of the credit crisis of 2008, where banks were restricting capital and making it really challenging for those types of businesses to get working capital.  So we built the platform over the next 3 or 4 years, I would say we, bootstrapped it really tried to figure our way. And then in 2011, we brought on some investors, really, you know, employees began to scale that growth. Then in 2015, we brought on a senior lender, the Bank of Montreal. We had proven track record. We started to scale the business, and from there we merged with OnDeck Canada in 2019. So OnDeck wanted to come to the Canadian market in a bigger way, and we merged the Evolocity Financial Group business with OnDeck Canada and became the new OnDeck Canada. So that's a brief history of our journey, and we'll get into more of each step along the way but at a high level I think I view myself as an entrepreneur who's been able to identify and see opportunities and bring it to the Canadian market and continue to try to improve small business ecosystem for finance, for those customers.

 

Craig Asano: I love the entrepreneurial story. You know, why did you why did you go after the small business lending side of the business, given your payments background? Is that something that you saw as a just an enormous opportunity or was it was ripe for picking? You sort of mentioned earlier that the banks weren't going after some of those loans in some sectors. So what was really the catalyst for small business as an entrepreneur? And then you sort of went after the opportunity and you've been driving it ever since.

 

David Souaid: Yeah, I think it was that we were talking to customers and we were in the payments business and you saw that it was a fairly commoditized industry, and when we'd asked them what do you need for your business? What do you need to grow? Vast majority of them would say working capital, and when you talk to them about their challenges, it was I have to go into the into the branches. It's complicated. It's long. And you could just see as the internet was emerging and as things were moving online and frankly, companies like OnDeck in the U.S., the original main OnDeck in the U.S. Were solving that problem, right? How do we make it simpler and easier for these small business customers to be treated like small business customers and not retail customers, which the banks typically were dealing with. Where it wass about your FICO score, but really looking at your business, the cash flow of your business, the success of your business and basing it on that. So it really came out of those conversations with those customers, then came across that business in the US and said, there's a void in Canada for this type of business. And that's where the entrepreneurial side, I think kicked in, which is how can we bring this to the small business customers in Canada who are struggling to get working capital in a meaningful way? And and there was an open market for that at the time. And I think we've really tried to fill that void and fulfill that mission over the last 15 years.

 

Craig Asano: Yeah, it's always a journey, right? It's fantastic. So did you know as an entrepreneur again, since there's so many entrepreneurs and would be entrepreneurs to looking to get into fintech or either scale their business and have a look at these opportunities. Someone with your experience and your background and you're living and breathing it right on the front line every day. What would you say the biggest challenge was, and do you have any advice to those entrepreneurs that might be where you were ten years ago, sort of thing?

 

David Souaid: Yeah, I would say the first thing is really do believe in your mission. And we believed in our mission of providing the widest possible access to credit products to small business. So and making it fast and flexible and secure. So really focusing on that customer journey, that mission. So number one is really focused on mission and solving the problem. The second thing would be really try to be well capitalized. You know I think we bootstrapped for a while and that's good and that's important. Prove out the concept, show that you're solving a problem. But then at a certain point in time, raise the capital necessary to go execute and scale the business. And then the third thing would be continue to build your team, your culture, your expertise. At the beginning, I was doing a lot of things myself. You know, my partner Harley, doing a lot of things himself, him more risk finance, me more sales and marketing. And then over time, as you're building the business, you're bringing on professional people, people who can help build and grow the business and building that culture. So the combination of people, the culture, capitalize the business properly, and then really being laser focused on the customer experience and solving that problem and your mission, those would be probably the three things that I feel like, you know, we've I've learned the most as an entrepreneur.

 

Craig Asano: That's amazing to hear. Explained so succinctly. Thank you for sharing that. So I think it goes a long way to inspiring, you know, quite frankly, a lot of those that are sitting on the sidelines for whatever reason, perhaps the market is not ideal timing, but it makes perfect sense to me. So taking those sorts of opportunities that drove you into the business about the culture and being laser focused on the customer and solving a problem and staying true to your mission. Let's shift over a little bit about OnDeck. How did those sorts of ideas resonate in OnDeck's business, and you know what is ultimately the mission of OnDeck, and let's get in a little bit more about your customers and how they're matched up to products and how OnDeck Canada is helping them.

 

David Souaid:  Our mission is to provide the widest possible access to working capital solutions for the small and medium sized businesses in Canada,and part of that is about the customer journey, right? The ability to go online, apply minimal friction, data, accessing data so that customers have, you know, they're busy, they're stressed, and they have a lot on their plate, and so we want to make it as easy as possible for them to be able to apply for working capital. And then I think the next part of that is making sure that the credit box is wide enough to be able to finance those customers. And thirdly, that we have the widest array of products. So we have, you know, a flex product which works for seasonal merchants. We have a term loan product, which is a traditional amortization product with a fixed term that works really well for consistent merchants. We have a line of credit product which works well for those who want to draw the necessary times for unsure when they might need it. And then we have a what we call our dual financing, which is a combination of our line of credit and a term loan or a line of credit and a flex fund. So I think that wide array of products, that wider credit box, that real understanding of small business and their journey and their expectations, I think is really what allows us to solve this mission that we're on. And really now it's about taking it to the next leve and what do we do next for these customers?

 

Craig Asano: Has technology been a significant part of the growth story and streamlining the efficiencies at OnDeck Canada? I mean, I love the idea of reducing friction or frictionless finance or all the different buzzwords that come out of the industry but how much does technology play a big part of the the underwriting and the whole business?

 

David Souaid: Yeah, technology is a big piece. And it's funny that you mentioned streamlining because we have a product called streamline, which basically allows existing customers to renew their loan in a more automated way. So we'll actually make what we call a push offer to that customer and say, look, we know your history. We know you're in good standing. We know you're a lot of data about you. So rather than you have to apply to us, let's use the data we already have and customize an offer back to you and put that in your customer portal and say, hey, you've been approved for $25,000 over six months and really make it easy for you. So yeah, data and technology is at the heart of what we do. The more data, you know, we talk a lot about open data and the sooner we can get to that, the better it is to make custom offers for customers so that they don't have to upload bank statements. We've got direct bank connection feeds to those customers. We have integrations to the various registration platforms. So anything we can do to really simplify the process for that small business customer is really at the heart of what we do. We have something called online checkout. So when you come in and you apply and we approve you for an offer, when you're ready to be funded, you log into your portal, you fill out some additional information, and then you can check out and get funded within a matter of hours or days. So technology really plays a huge role in the application process, the underwriting process. And then I'll call it the boarding and post boarding support, really trying to make it digital end-to-end and an experience that is just easy.

 

Craig Asano:  It's interesting you were saying that the onboarding, the whole experience, if you were to look at it even five years ago, eight years ago, ten years ago, walking into a bank, a small business, how long would that process be and how different is it? It sounds vastly different. I mean, you're pre-approving based on data and AI it sounds like so.

 

David Souaid: Yeah, I mean, back five, eight years ago, first of all, you know, when we started calling on customers, you know, the notion of calling offering financing was quite foreign and I think a lot of customers weren't certain about it but fast forward 8 or 10 years later, it's much more mainstream. It's much easier to have a conversation and they're seeing it online. But yeah, five, eight years ago they'd have to go into the branch, again, they were treated as more of a retail customer. What's your personal credit score? We're going to base this decision on financing you off your personal credit. And I think fast forward eight years we're making decisions based on their commercial credit score, their cash flow, their social media reviews, a whole host. Yeah, personal credit's part of it but your bank statement data. So, I think it's so much simpler for them to be able to go in online after hours when it's convenient for them. A lot of small business customers come to us after 6 p.m. after they've closed their day, they're doing their books. It's not when the banks are open.  It's when are you the customer looking to to obtain that financing. So being able to go online, make it fast and easy, use data sources so they don't have to provide us with as much we can pull it ourselves. Fast forward many years later, it's all about that. It's all about customizing that experience for them so that it takes work off their plate. They're already busy. They already have a lot to deal with. Let's make this as easy as we can for them as we move forward.

 

Craig Asano: Yeah, I think it's great. Is there one differentiator between what OnDeck Canada is doing and the competitors here in the Canadian landscape that makes you stand above and beyond?  What is that one secret sauce? Is it the customer centric approach? Is it the tech? What is it?

 

David Souaid: I would say it's a combination of two things. I mean, customer experience. Yes, I think I think we're you know, we have far and away the best customer experience. But I think as we have a platform that will allow us to scale, but we also treat the customer in a more personalized custom way. So, not every customer is the same. We have many different industries of small businesses. There's many different models and experiences. Some are very seasonal merchants, and we have an approach with them. Some are very consistent merchants and we have a different approach with them. So I think that's really what sets us apart. I like to say we're boutique style lender in the sense of we're large enough that we can scale and automate but we really do try to treat the individual customer like every customer as an example has an account manager. Once they've been funded, that account manager will work with them on their needs, understanding their business and really guide them through the process with us. So I think that combination of good technology solutions and the human experience is what sets us apart.

 

Craig Asano: Excellent. How big is the footprint you mentioned just before in your previous response about your big enough, like how big is OnDeck Canada?

 

David Souaid: Yeah. So I mean, I would say that OnDeck Canada's funded over $1 billion over the last 15 years, we have several thousand customers coast to coast from B.C. to Nova Scotia and North to the to the Northwest Territories. So coast to coast also in Quebec, so fully bilingual and we've we've been in this business 15 years. So we really understand the market. We understand the needs of small business, and I think our size is we're large enough to provide a wide range of products and services but small enough to give you that unique and personalized service.

 

Craig Asano: You got that sweet spot. I know we're talking about the customer, being customer-centric and having personalized experiences, having dedicated account executives. One thing I noticed when I was doing a little bit of research for the interview questions was OnDeck Canada's got an incredible 4.9 Trustpilot rating, and I've seen a lot of Trustpilot ratings that are not quite as high as 4.9, so I think that's an outstanding achievement. Is it something that consciously the staff's working on, or how does one go about getting a 4.9 rating, and maybe let's talk about a case study of one that OnDeck Canada's really proud of as a sort of best practice example of a small business loan experience, and from a customer-centric approach, if that makes sense.

 

David Souaid: Sure. I mean, I do think we are very focused on our customer and and doing what it takes to have a happy customer. I think that's core to any business but we think when you operate with integrity and professionalism and empathy and understanding for your customers and how to best help them, that's at the core of who we are. Be authentic, have integrity, do things the right way and treat your customers right, and I think that resonates. I think that's how we have these high Trustpilot scores. I think our team is always asking our customers, what could we do better? What could we have done differently? If you're happy, please give us those good reviews and we have many customers who, frankly, were unable to help because they don't fit our credit box and you're always sort of concerned that maybe those could lead to negative reviews and I think we manage that well. We explain the rationale of why we couldn't work with the customer. So I think, we're very focused on making sure that we're taking care of the customer as best we can. I think in terms of your second question about working with customers and a customer-centric approach, my favourite story, and sort of two examples of where we've worked with a customer that wouldn't have been an obvious choice for some additional financing.  So restaurant in Ontario had a great 30 seat location, busy every night, but couldn't expand beyond that and I think struggling a little bit to grow The location next door opens up. The landlord approaches them. They don't have the working capital to take on additional lease and the workhold improvements, etcetera. They were pretty much maxed out with us, but we built a really good history. We saw their plan for the future. We believed in them as operators.  We saw their social media reviews, and I think we went out of our comfort zone a little bit out of our box a little bit. That personalized touch allowed them. We financed them. We allowed them to take over the space. They doubled capacity, and they took off and they've had a successful relationship with us for years. So it's sometimes those examples of relationships that I think help our customers. And so it's not just about the numbers and the online application and the automated risk decision. That's all there. If you want to just come in, apply, get approved and get funded, we'll try to we'll try to service you that way. But if you need that personal touch because it's a little out of the box, we're there for that too. And I would say lastly, and I know this is getting a bit long, we had a customer who was a wholesale business. They did a little bit of e-com, but it was really just adding to their wholesale business.  Wholesale furniture, and they realized that, e-commerce was the way to go. Again, needed to make an investment in building out their e-commerce platform. Didn't have the funds for it. We were able to finance them and work with them, and whenever you're mixing sort of traditional businesses with sort of new, business models like moving into E-com, it's not an obvious thing, but again, worked with them and they transitioned from their wholesale sort of legacy business where you look at catalogs and go to their location and visit to an e-comm business. And they too took off and really transformed their business. So those would be the two examples where I think working to understand different business models, different approaches helped us with with customer experience.

 

Craig Asano: Great. That's fantastic. So let's dig in a little to some of the news and programs that are happening at OnDeck Canada. I noticed one that was a post on the OnDeck Canada website about the CEBA refinancing program. We all remember Covid and it's just thankfully not part of our vocabulary anymore, but CEBA was and it still is for a lot of businesses. I know that times were tough and there were a lot of programs available and it sounds like OnDeck Canada had a role and now there's a refinancing program. Can you tell us about it? How it's going? What it's about?

 

David Souaid: Yeah, absolutely. So and I would say, another example of the customer experience during Covid, we were one of the lenders that didn't stop funding. We continued to fund even though it was challenging in a difficult environment for those of our regular customers where they were open, we were able to finance them. So we took a lot of pride in continuing to finance during Covid when a lot of our competitors really did mostly shut down, and I would say as it relates to CEBA, we have been tracking the CEBA program for quite some time. A lot of our customers, the vast majority of our customers took it, and there's almost 900,000 small businesses that that did take CEBA in Canada. And as we were getting closer to the repayment deadline, we felt a program put together for those customers to benefit from the repayment discount was warranted. And I think we came up with an application process, something a little more integrated to be able to track customer CEBA status and offer some incentives to get in early so that it wasn't all at the last minute. It was originally a December 31st deadline. Governments kind of extended it to January 18th with a little bit of latitude beyond that but rather than you waiting till the last second, come in, let's underwrite you. Let's offer you some promotional incentives to get you in early and take advantage of the discount. So if you took $40,000 and you want to benefit from that $10,000 and we can help finance you, that's really what we were trying to achieve with that program. And I think to date, we've really started to see a lot of merchants as we're getting closer to that deadline, really come in and start to have conversations with us and think they'd like to find ways, if they can, to remove that off their balance sheet and work with us on a shorter term, and then clear it out.

 

Craig Asano: And just for the benefit of some listeners, in particular the international listeners who might not know about the CEBA and the ten grand,  as part of a $50,000 loan, as an example. Can you just break that down quickly just so they can pick up on what the program was about and why there's a refinancing need because I know that from what I know that the deadline has come and gone, and now it's pushed out a year. Is that correct? Maybe just if you could talk about the current status as well?

 

David Souaid: Yeah. The one, the thing and the government really it's been very confusing on this front but the extension really is on the back end, so the government has extended by one year the need to repay CEBA in its entirety to 2026. It's not on the extension around the forgiveness of the CEBA program. So just for your listeners, the government had two programs. You could borrow $40,000 interest free until December 31st, 2023, and if you repaid that amount by December 31st, you would get $10,000 loan forgiveness on a $40,000 loan, and if you'd qualified for a $60,000 loan, you'd get a $20,000 forgiveness. So it provided an incentive for small businesses to take that financing when they needed it during Covid and when they repaid it, they got some forgiveness on it. So that's sort of the impetus behind us developing the program. Now, if you're a small business customer and you can't or don't want to take care of the benefit from the forgiveness, the government is allowing you to pay it 5% interest a year for the next 2 or 3 years until the end of 2026, when it has to be paid off in its entirety. So that's the program and we just felt that there was a benefit to these customers to benefit from the from the loan forgiveness program if they if they can.

 

Craig Asano:  Okay thanks for providing a little bit more colour around the background because surely there were bound to be some questions coming out In this market and economy right now. I mean, all over the news, all over the media, it's all about inflation and the prices across the board and small businesses, individuals but let's focus on the small businesses. People are feeling the pinch and interest rates and people are holding their breath every time there's the prospect of an increase. What do you think's going to happen and play out over the next little while in terms of interest rates, I know this wasn't a question we had talked about beforehand, so by all means you can pass on that one but I think with someone with your expertise and willingness to share and how it applies to small businesses and maybe some of the pain they're feeling. Just love to get your expert perspective on it.

 

David Souaid: Yeah, I would say, look, interest rates have gone up and gone up rapidly and so everyone's forced to adjust including us. You know, our costs have gone up in that regard. So everyone's adapting to to a rapidly rising interest rate situation and I think it's hard to predict as we move forward but what I can say is our small business customers have been pretty resilient. They've found ways to cut costs, to raise prices where they can, to sort of weather this. And I think as we move forward, the challenge, and they faced a lot of challenges Wage increases have gone up. Cost of supplies have gone up. All of their costs have gone up, and so, managing that, weathering that, getting through that to maintain enough cash flow to keep the business going and continue to invest in their business has been their challenge. But to date, they've done a really, really good job. And again we're there with them, trying to work with them, help them understand it. You know, sometimes it's conversations around, take less funds. Maybe this is an opportunity right now just given your cash flow situation to limit now and come back at a later date. So, really working with those small businesses to understand sort of their cash flow needs and their capabilities at this time as they weather this challenging environment, and then see what, what 24 and beyond brings.

 

Craig Asano: Yeah, well, let's hope we get one of these softer landings or, can remain as competitive as we can be. I mean, at NCFA here we're always positive advocates for any sort of increase in competition and supporting of small business who are really the backbone of jobs and a lot of the economy. So it's near and dear to our heart for sure. So thanks for sharing that. Let's talk a little bit about the industry. There's obviously all sorts of tech advancements and innovations happening that are shaping fintech across the gamut. There's so many sectors. I liken it to a pinwheel and there's so much happening but specifically in the lending space inside of fintech, what sort of innovations excite you and where do you sort of see things evolving and what sort of impact that might have on the future, as well as OnDeck Canada.

 

David Souaid: I think the cherries would be embedded finance and obviously artificial intelligence. Those are going to be the two areas that I think over the next 3 to 5 years are really going to impact lending. And and I would say by embedded finance I also mean sort of the ability to build out,  you'll hear terms like super app or ecosystem, this notion that small business customers are looking for comprehensive solutions around banking, lending, payments, accounting, inventory, platforms like the full suite. And you're starting to see various groups really trying to put together these super apps that encompass a comprehensive solution for small business. I think we're still relatively early days. Call it the first inning, second inning. But this notion of embedding our our lending solution into complementary partners to create that super app ecosystem is where I get very excited and I see a lot of opportunity. So, we're talking as an example to a lot of digital banks or neobanks who are doing banking, whose customers are asking for lending and who don't necessarily want to or are able to offer lending themselves, and so they're going to embed our offering into their banking platforms and continue to maybe embed others to create this integrated, seamless solution for that small business customer so that you get a kind of 360 view of the business in one platform. Now, there's a long way to go in that regard but I really I'm excited by that opportunity, and I think it's one area where small business customers have said to us, I've got all these different It would be nice to have sort of one solution that encompasses everything. So think we're early days, but I think that's something we're very focused on, making sure that we have the APIs necessary to embed into various platforms, be it banking, payments or otherwise. And then obviously the second is around data and machine learning, artificial intelligence. The more open data is and obviously open banking and the ability to access data, the more personalized and customized those offers can be without the customer having to apply for it. Right. And we often talk about pull and push. If you're looking for financing, you're going out and finding financing but if, for example, you're with Shopify as an example, you're with Shopify today, you're doing your payments with them, you're doing your inventory with them, they offer capital product, and it is going to be, hey, by the way, we've had 24 months of history with you. We think you qualify for X dollars based on your history, and if you click here and accept, money can be in your account in hours. So that kind of convenience, that personalization, that customization is where this is all going, and I think getting access to that data, being able to make those offers using the predictive capabilities of AI and machine learning to do that is another going to be transformative. And I know, I know, I say a lot of buzzwords, but I really do believe it's going to be transformative in lending as it is going to be in almost every industry.

 

Craig Asano: This show's all about buzzwords. You're speaking our buzzword language. The neobanks, and open banking, which may not be the best term for what eventually is in the market, but certainly a future like you were describing with embedded financial services and non-bank platforms or omnichannel all over, but it's going to trigger the conversation around the regulatory requirements or challenges that may be upon us, or some are structural challenges or market challenges. So maybe it's just more of a general question or you can make it specific to open banking if you have a very specific view on open banking in Canada as an example, but how do you see the regulatory environment here in Canada today and what's needed in the future if there are gaps to remain as competitive as possible in 2024 and beyond?

 

David Souaid: Yeah. So I think look the government and the in the last budget really tried to make its focus on small business and really assisting small business, and I think that's had an impact but I think from a regulatory perspective where we would obviously like to see more progress is things like open banking. I think that will widen and open up the market for financing for small business, which is something that they're all looking for. Things like real time rails is another area around payments where a project that's underway that's had delays Things like real time debits, real time credits. More instant funding. Getting money that a small business customer or merchant will process for credit cards that can be instantly funded as opposed to waiting 24 or 48 hours. That affects cash flow. So I think from a regulatory environment, making sure there's protections, but really seeing some progress around open banking, real time rails, I think would go a long way for our business. I'll just use one example. So for our line of credit, again want to make it easy for our customers, so we allow you to draw when you need to draw funds, and then you have two choices. You can either be sent EFT within 24 or 48 hours to receive your money, or you can use Interac E-transfer real time and have your money in 2 or 3 minutes. And I'm supposed to say ten minutes or less is the answer to be safe. But really within minutes and, I think 35% of our customers are electing to take Interac E-transfer. The challenge is it's only $25,000 limit that they can withdraw at any one time. So, things like real time rails would go a long way to helping improve the speed of those types of transactions. Interac E-transfer is good but it's only good for a certain size, and so I think those would be the two things thatI would love to see progress in from a regulatory environment perspective.

 

Craig Asano:  Without wanting to go too much into open banking, but did you have a message that for the government folks and economic development agencies tuning in to the podcast, what would you say to them about open banking and the lack of progress from your perspective and OnDeck Canada's perspective?

 

David Souaid: Yeah, I would say to them that this is the trend around the world, this type of democratizing of data. Again, another buzzword, the ability of a of a small business customer to port their data wherever they see fit because it is their information, at the end of the day, to facilitate better credit is only going to help small businesses get access to more financing that they need to grow their business and grow the economy. So by opening that up and frankly, making it more secure, I mean, today, there's all kinds of aggregators who are integrating to banks. We can make this standardized. We can make it portable and seamless. If open banking were to come to the market. Right now, you have groups that are integrating one off to each of the different banks, and it's cumbersome, it's costly, and there's a better way. And we see it in other countries like Europe, the UK, even the US is starting to make real progress on it. So I think if we want to stay ahead as a modern, financial G7 country, it's important that we make progress in regards to open banking for the growth of our small business customers.

 

Craig Asano: We got to follow fast. We've got to follow fast. So always playing catch up here David. But we let's plug forward here. Got some more questions. Very interesting outlook here as we move to the next section. But before we get into the future I have a question here. I'd like to talk a little bit about the strategic partnerships. How can any of our listeners that might be working in a sector that they might want to become a collaborator or what sort of opportunities and how do you work with strategic partners? Is it a big part of OnDeck Canada's business? It's just something that I think, at least at NCFA, strategic partnerships are have been crucial at times and really evolve the business and or in our case, the organization in new and exciting ways. And so do you look for those sort of win win partnerships and if so, what what do they look like and how can they work work within OnDeck Canada.

 

David Souaid: Yeah. No, it's a big part of our business. And I would say about a third of our business comes from strategic partnership relationships. And they and they vary and they range. So we have, as an example, a strategic partnership with Global Payments, which is one of the largest credit card processors in Canada. And I think the value proposition to someone like that was we offer payment processing. Lending is an additional value add for those customers who are looking for financing, and they're looking to offer more and more products right to their customers, both for value for increased retention, and I think that's true of many of our different types of partnerships. We have partnerships with, as an example, leasing companies. They're walking into restaurants or locations, equipment financing, but customers looking for working capital solutions, and they want to be able to offer both. They'll refer customers to us for that. So I think anybody who is dealing with a small business customer who's looking to bring additional value to that customer, and where financing might play a role, I mentioned earlier, Neobanks, and know their desire to offer financing to to their small business customers. So anyone who has relationships with small businesses that wants to add value, some bring some incremental revenue and retention, I think are people that we love to have conversations with.

 

Craig Asano: Fantastic. So if any of the listeners check any of those buckets, you're going to have to get in touch with David Souaid here. He's got a super app written all over it. Well, the future is here at least as part of the podcast. And I think the question that I'm noodling in my head is what is small business lending with AI happening today? With the progress that OnDeck Canada's had coast to coast doing over a billion (dollar of) loans, where do you see OnDeck Canada and the lending markets in the next 5 to 10 years? What vision could you paint here in Canada? It may be beyond, but really it's an open question for you. Let's take a look at the future 5 to 10 years out.

 

David Souaid: Again, really futuristically you could envision a world assuming that data becomes more easily available, because I think that's at the core of things like artificial intelligence is access to data. Then then you look at machine learning and AI and the ability to take in that data and make very custom and personal offers at the right time to small business customers so that they have those offers available. And then the third piece of that is making sure that they have the widest array of products. So depending on their needs, like I mentioned earlier, some customers have a very clear fixed need for their for their products. Some of our customers, as an example, who take dual financing, it's have a fixed project but might need a little extra, and so I'm going to combine your line of credit with, with a term loan. So I think data the ability again to learn from that data and predict and make customized offers and then having the right offer to that customer is where lending is going to go in the next five years. Ten is a bit longer, but certainly five. And I think when you're able to do that in combination as part of an overall ecosystem or platform where you can combine multiple things like payments and bookkeeping and just in its entirety, I think that brings tremendous value to the customer and makes their lives better and easier, and allows them to grow because many of these small business customers, that's what they want to do. They want to just continue to build and grow their business. And these are the tools and things I think they need and want to do that. So that's big picture where I sort of see things in five years.

 

Craig Asano: And in the short, more near term future for OnDeck Canada. Are you working on any exciting innovations or programs right now? Things that excite you? You know you're not losing sleep over it. I'm talking about these things are they're keeping you up for a reason. They're great opportunities. Is there anything they're happening?

 

David Souaid: Yeah. My problem is, is I have too many exciting things that I want to work on. And I have a team here who tries to keep me in check a little bit. But there are a few things that we're working on that I would say, innovation is always challenging, especially in this environment where there is such a relentless focus on profitability, profitable growth. The world's changed a lot in the last 12 to 15 months from grow at all costs to profitable growth. So I think we're going to be more strategic. We're going to be more targeted. We're much more narrow and focused on that small business customer and their needs. But there's certainly a lot of innovations that I think we can bring to market around things like, I would say loyalty, and customer experience and areas around the edges that I think in the near term are really going to show customers how much we value them. And, like I mentioned, loyalty and and ease of access to capital are areas where I think we're going to develop some things in the short term that will really make our small business customers happy.

 

Craig Asano: Yeah, it's exciting times. I think OnDeck Canada has done tremendously well. And to get to this point and the future's bright, let's just hope the economy can stay in tact. And we'll be certainly tracking the story. So I think that for me wraps up most of the questions I had around the future. It's sort of everything else beyond that, because we're living in a practical world here is probably a little bit even too far. So we're at the point of the show where we get to do my favourite. It's the rapid just quick questions, one answer, short answer. So I'm just going to fire out a quick question. And I'm expecting a short answer just to keep you on your toes. So if you're ready for that (I'm ready). Let's let's get into some rapid fire questions. So in a word, how would you describe the future of fintech?

 

David Souaid: Wide open.

 

Craig Asano: Well that your visionary, David. Your visionary. You had to choose one core value that defines OnDeck Canada. What would it be?

 

David Souaid: Integrity.

 

Craig Asano: That's a great answer. One word, or maybe one thing that drives you every morning.

 

David Souaid: One thing that drives me every morning. Building.

 

Craig Asano: Yeah. Like the motivation building your developer development. It's good. Name a recent book or movie that you can recommend for our listeners here on Fintech Fridays.

 

David Souaid: Yeah, I watched the Netflix documentary Nyad, and it's the story of perseverance of a woman who swam from Cuba to the United States and just tremendous tenacity, perseverance. It was a great, great movie.

 

Craig Asano: That was called Nyad.

 

David Souaid: Nyad? Yeah, Nyad. It was the name, the last name of the swimmer who swam it. Incredible story.

 

Craig Asano: I'll have to include that in the show notes here. Fantastic. Okay, and last question. What's your favorite go to financial tool or app that you use all the time?

 

David Souaid: I love my Wealthsimple app. I find it, it's a great, great app.

 

Craig Asano: Wealthsimple app. Well, you heard it here first. David's waited OnDeck Canada. Well that's it. I want to just ask one last question so people know how they can get in touch with you, David, if they have any questions or like to learn more or explore one of these strategic partnerships, or take a look at the products and small businesses, contact you directly. How do they get in touch?

 

David Souaid: Yeah, they can find us on ondeck.ca or on our Instagram, Facebook or LinkedIn pages. We're accessible in any of those areas.

 

Craig Asano: That's fantastic. Well, David, you're welcome anytime. Thanks so much for sharing your expertise and knowledge here. This is David Souaid, the CRO of OnDeck Canada. Thanks so much for coming on to the show today, David.

 

David Souaid: Okay. Thank you. It was a lot of fun. Appreciate it. Great.

 

Craig Asano: So for everyone else, thank you so much. Just want to say if you're new to Fintech Fridays please check out some of the incredible past episodes. They're all on the website. We think you'll be surprised with what you find. We look forward to seeing you next Friday for another episode of Fintech Fridays, so have a good weekend, everybody. Take care.

 

Outro : you've been listening to Fintech Fridays brought to you by NCFA and partners. Tune in weekly for the latest fintech Friday podcast by subscribing to this channel. The National crowdfunding and Fintech Association of Canada is a non-profit actively engaged with social and investment fintech sectors around the globe and provide education research industry stewardship services and networking opportunities to thousands of members and subscribers. For more information please visit ncfacanada.org.

 

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NCFA Jan 2018 resize - Fintech Fridays EP60:  Revolutionizing Small Business Lending and Empowering EntrepreneursThe National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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