RiskSave Compliance

FinTech Interviews

A series of interviews with the leading lights in FinTech

Stephen Upton at KernelWealth New Zealand


Tell us about yourself.

 I’ve been working in financial services for 12 years, taking a break to undertake an MBA at the University of Cambridge. When I returned home to New Zealand 4 years ago to raise a family, I worked as COO for the only local ETF provider.

Prior to travelling overseas, I had been an entrepreneur growing and selling my own successful hospitality and events business. I realised I had an itch I needed to scratch again: the joy and adrenalin that comes from the creation, germination, and growing of a delicate seedling that is a startup. The dream of it becoming an established tree. My original passion and strongest interest area is Social Psychology (my first degree) which has expanded into Behavioural Economics. At its core, that fundamentally we are human – not 100% rational or information seeking, and have many significant behavioural biases.  So when Dean Anderson a former colleague told me about his plans and progress in obtaining a fund manager license, I decided to join him and Kernel was born.  


Tell us about KernelWealth
Kernel aims to give New Zealanders more choice and control over their investments with a digital wealth solution for engaging and rewarding investing. Through the smart use of modern technology, we provide a unique customer experience which delivers the information, tools, and products necessary for investors to reach their long-term investment goals. We develop innovative investment products including new index-tracking funds providing more diverse market exposure. Our unique funds are distributed direct to retail through the Kernel investor dashboard. The funds are also made available to a nationwide network of advisers and wholesale investors.

 Tell us about FinTech down under

New Zealand is a small market, but able to benefit from its open market by providing an attractive environment to develop new products. It makes a great pilot market. There is a natural resourcefulness, competitiveness and can-do attitude that means New Zealand punches above its weight, both on the sports field and in business. However, there is comparatively low financial literacy, and the average kiwi is obsessed with residential property as an investment class. This actually creates a “too big, too fail” problem that previous governments created through fiscal policy, incentives and supply barriers and the current government is trying to address in a multi-departmental approach. With a small stock market and a cultural reluctance to publicly list, flipping houses following minor renovation and amateur landlordship has been the path the wealth of many and realistically the only leveraged asset available. That creates some structural problems, which Fintech companies are also starting to nibble at.


You are focussed on your home market right now - do you think that your model will transfer internationally?

That’s obviously the plan. We have our eyes on 4-5 markets and how attitudes, product availability, and the regulatory environment evolves, but one step at a time, we want to demonstrate clear product/market fit and build local traction first.

 What are your favourite FinTech innovations?

Really liking what our Australian owned supervisor Sargon are doing. There is so much possibility for Regtech to reduce the hours wasted in report compiling and audit preparation. Allowing those responsible for oversight (boards, auditors, trustees, regulators) to have direct access to the data and processes they need to satisfy their responsibilities, saves form over substance issues, interpretation debates and brightline tests. It also allow them to spend time on assessing conduct and culture, which are at the heart of their obligations. Otherwise, loving watching some digital banks gain traction and credibility in the UK and Europe. Finally it is funny to reflect how we now expect instant payment visibility and clearing between financial institutions whereas not so long ago, the cheque was in the mail – maybe.

How have you used technology to create value?
Starting with the user experience and focus on accessibility and building knowledge. That’s where we want to expend our human resource. Financial Services and product offerings are so daunting for the layman, written by lawyers, full of disclaimers and small print, and driven by misaligned sales incentives. Building product ourselves under new legislation rather than having legacy issues from now-outdated old systems and problems. Knowing that in a digital environment, transparency is a core element of trust, and therefore developing straight-through processing, publishing and automation wherever possible in the value chain.

How has the sector changed since you started?
New Zealand since 2007 has a Government endorsed and sponsored ($500 a year incentive for each saver) retirement savings scheme called KiwiSaver. Many of those balances are now at meaningful amounts and therefore attracting general attention. Most are still too conservatively invested for the horizon and accessibility, but as the majority is invested in capital markets, there is a burgeoning awareness. More broadly, the disintermediation of financial services has been slow, but is visible, and new distribution channels are emerging.


Is FinTech actually different? We've always been consumers and developers of technology in financial services.
So true, it’s just a label. And technology is much broader than ICT, which is where our minds naturally jump. Technological change can be as simple as changing of a process or using a new tool and is literally the new application of scientific knowledge for practical purposes. But the depersonalisation and disintermediation of financial services, is new. Even 10 years ago, you needed to meet bank branch staff or an adviser to do almost anything and mail order services had a certain pedigree. Now we place our trust in ways other than personal connection and ornamented meeting rooms.


How do you see AI and Machine Learning impacting processes?
I see it quite simplistically, that AI and Machine Learning are just increasing, albeit rapidly, the number of permutations of complex information that can be processed without human intervention. Our company is called Kernel for three appropriate denotations, a botanical, a linguistic, and a mathematical one. Mathematically, to kernel or the Kernel Method, means to gain efficiency through recognising patterns, and many machine learning algorithms are based on this. As with most technology there is an adoption curve, and user acceptance is viral. One interesting observation locally, where chatbots have been an area of Fintech emphasis and AI development, is that the response from the algorithms has needed to be delayed by a second or two to give the perception of “thinking time”, as the instant comprehensive responsiveness was disconcerting for many customers!


How do you see Digital processes changing the asset management and pensions industry?

There is an expectation now, rightly or wrongly, of instant transaction processing. Our early feedback has been that waiting 24 hours for initial deposits to appear for invest is too slow, despite regulatory and compliance requirements. For the asset management and pensions industries, there will be increasing pressure for realtime digital reporting and daily application/contribution posting. The days of quarterly valuations and mailed statements and month investment cycles are numbered. While those may not be critical to the retention of business which can be sticky and apathetic, I feel they will influence the acquisition. One challenge to this is the information bias: that more information creates more behaviour. Investment strategies are ideally only reviewed quarterly and adjusted annually. The corresponding risk is the creation of pension traders, those who destroy their returns through transaction costs, rather than being long term wealth creators with good financial literacy.


Can regulation keep up?
Never if the approach is to be reactive. The first horse will always have bolted and the gate can be only shut for others to follow. Regulators here are commendably focussing more on conduct and culture. If the incentives are perverse, or the conduct unprofessional, not to the standard of care of a fiduciary, or lacking integrity and honesty, then then there should be an expectation of increased attention, investigation, and disciplinary action. The Financial Markets Authority, New Zealand’s regulator, is promoting “good customer outcomes” as their yardstick. Back to that form over substance fallacy I mentioned earlier, if the outcome or substance is poor, does it matter if you ticked the right boxes and produced the correct reports?  


Is the FinTech machine losing steam?

Not here, but we are at the end of the world! I do wonder if the next correction to markets, will be the death of the unicorns. There are many pre-revenue or pre-profit companies, which have obscene valuations, based on Private Equity FOMO, the bullwhip effect, and a supposition of enormous future free cashflows. But I question whether there is sufficient sustainable competitive advantage to justify.

Daniel Tammas-Hastings