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Things worth reading: 22nd May 2015

Things we’re reading today include …

This week’s Economist:

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The wifi payments world of the very near future

I was talking about the internet of things again today, and realised that I have a grand vision of the not too distant future where everything communicates with everything.  We have chips as tiny as nanodots inside every brick, pavement slab, tyre, wall, ceiling … you name it.  We have more intelligent chips inside car engines, visual entertainment systems (the TV is no more), wearable devices from rings to necklaces to bags to shoes.  Everything is communicating with everything and our devices are all attached to us through the blockchain.

The result is that my Star Trek vision of no one paying for anything becomes a reality.  I drive to the big city and park.  My car tells the metering system it’s my car and it’s parked here until I come back.  When I come back it asks the system how much it owes and pays.  I do nothing.

My car then drives me to the gas station – I don’t drive anymore as it’s self-driving – and it asks the station robot for $30 of LPG.  The robot pump system delivers and I just sit, working and enjoying the entertainment and world around me.  The car drives off and all of the transaction is seamlessly in the background.

I’ve asked my Tesla to take me downtown to a decent bar – I haven’t been in this town before – and it delivers me to Joes 99er.  I have no idea who Joe is or why he’s talking 99 and I don’t care, I just want a drink.  Joe – or the guy behind the bar – gives me a large Whisky and Bud.  It’s my usual tipple and my shoe just told his stock management system that’s what I’d want.  I felt a little vibration from my shoe that confirmed this would be ordered and just let it go.  It was too much trouble to shake my left foot for a Gin & Tonic.

After three Buds and Whisky combos, I jump back in the car and am ready to hit the casino.  The car asks me three times if I really want to do this – it knows what happened last time – and I just say yea.  I’m cool and mellow and a little bit drunk, something I’m ultra-aware of as I’m supposed to be sober in charge of a self-driving car.  Why that law still exists, I have no idea.

So the car drops me at Caesar’s Shed, it’s kinda five steps down from the Palace, and I start shooting some Blackjack.  My shoe vibrates again, as I’ve just lost $2,000 in the first five minutes and my budgeting balance for the month for gambling has been reached.  But it’s only June 2nd for heaven’s sake.  I stamp my foot and the balance is lifted, along with a healthy top-up of $10,000 moved from my savings account in real-time.

By the end of the evening, my savings are gone and the bank’s given me a loan of $15,000.  I hate it when I click my shoes together and say there’s no place like home.  After all, that’s the trigger for my biometric check to ensure it really is me saying that I want an extra line of credit.  No-one notices the heartbeat check and the touch of my finger to the side of my glasses.  Works every time.

Unfortunately, it works and makes sure that I lose every last dime of my money but then I have this lady who seems to have joined the ride home, and the car is asking where to go.  I say home with an S (for seduction), and the car heads to my destination of choice.

As we arrive, the nest is bathed in purple light.  Ed Sheeran schmoozes Thinking out Loud from the wireless speakers and we’re soon enjoying an intimate moment.  As our bodies touch, something in my ring tells me a transaction just happened.  It is only then, with the combination of my gambling losses and Bud combos, that I realise this is no ordinary woman as I gather she’s not here for a long-term relationship.

In fact, the following morning, as my red eyes open and realise she’s gone, that the sun rises on my virtual walls and my infomediary assistant tells me my account has been frozen.   It just goes to show that the shoes I brought last month really are a bad influence.  Next time, I should stick to the watch.

Ah well, a good night was had by all and not a payment or authentication was visible to all.  Just wireless credits and debits from the stamp of a shoe to the touch of an eyebrow. 

The world has changed a lot in the last ten years.  I remember in 2010, I used to keep lots of pocket change in my car to pay parking metres, and got frustrated with the endless stops at toll booths to swipe my credit card.  By 2015, things had improved immensely.   Now I just had NFC payments, prepaid apps and one time passwords.  No longer would I jiggle around trying to find the right change.  My tech would help me to sort out the detail.  Now, my tech just does it all for me.  I just try to work out : was it all worth it?

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What do narrow banks mean for wide banks?

In this world of choice that emerges from the integration of new technology models and old financial models, we see hybrid systems emerging that bring together the best-of-the-best.  A great example was announced today, as Metro Bank and Zopa join forces.  The deal allows deposits from Metro Bank retail customers to use P2P lending as an asset class for their deposits, with the expectation that this will provide higher returns on their savings.  It’s an innovative deal in that P2P lending surely cannibalises that other asset class: credit.  But it’s all about choice and if customers know that they can place money in Zopa, then why not allow them to do so through the intermediation of the bank to assure its viability?

This is where it gets interesting as I’ve seen innovative deals like this before.  Fidor Bank (Germany) has been offering Smava’s P2P lending for some time through its operations whilst Caja Navarro (Spain), a non-profitable foundation, offered its own version of P2P some years ago.  They called this Civic Banking and gave every customer the right to know the profit they made from each transaction and account.  Through Civic Banking you could also invest in friends and family businesses and loan requests, with the bank ensuring the loan was repaid.

This is the point I am making when talking about aggregating the customer experience.   If a customer has so much choice these days, do they really want to be opening accounts here there and everywhere with eToro, Circle, PayPal, Zopa, Friendsurance etc, or do they want to have an aggregator on top?  I think the new emergent form of retail bank will be that aggregator.  Like a Trip Advisor for travel, we will see front-end services that integrate many back end providers for finance.  Some may say that this is just what the comparison websites do, but the comparison websites are not integrating and aggregating.  They are just providing a rate choice and then you have to jump out to the provider’s own website to complete the transaction.

What I mean by the new component-based bank is that they will find the best providers of alternative finance and offer these services through their own portfolio of access.  A one-time sign-on to get access to choice all in one window.  That’s what Fidor are offering and, through the deal between Metro and Zopa, it’s another step in the right direction.

Meanwhile, a rock to throw.

I was pretty surprised to read these two headlines side-by-side the other day:

The reason I was surprised is that SMEs (Small to Medium Enterprises) are being commonly rejected for credit by banks, because they don’t meet their risk criteria.  They are too small, too young, too untested, too unproven, too risky to lend to.  So banks are recommending they go to Funding Circle and similar alternative finance houses.  These alternative finance houses (AFH’s) opened a lifeline for businesses in the UK in the last year.  For example, here’s Funding Circle’s homepage today:

Funding Circle 200515

And 13 months ago (yes, this was 20 April 2014):

Funding Circle 200414.png

Note the statistics: £225 million of lending enabled by Funding Circle a year ago climbing to £625 million today.  A tripling in enabled funding in just over a year.  

Meanwhile, the number of businesses borrowing through Funding Circle has almost doubled in that time, as has the awareness of this alternative financing marketplace.  A lot of the funding of Lending Club comes from the UK Government, and it’s interesting to note that almost 98% of P2P Lending funds in the USA come from institutional investors.

So you have two key things happening here.  First, the large banks are turning small businesses away to AFHs whilst de-risking their own portfolios by funding the AFHs.  So the AFH becomes the risk manager.

That’s all well and good, but then take the other headline: SMEs stung by £425 million in hidden fees.  This is where the Christensen disruptive innovation does start to hit as the AFH market looks like nothing today but, when I attended an Alternative Financing conference the other day, they didn’t call it alternative finance (which was a bit strange, as that was the name of the conference).  They called it narrow banking.  Narrow banking takes a part of the bank – a component – and squeezes that component to make it as efficient as can be for the process of its usage.

Here, in lending, it is a narrow bank focus on SME and consumer credit.  A Funding Circle or Zopa squeeze the process of getting funds to those who need them to the max.  And their customers love it.  77% of Funding Circle users say that after their first loan, they would return to Funding Circle first next time, rather than a bank.

So, on the one hand, banks are de-risking their credit portfolios by both funding narrow banks and encouraging their higher risk customers to use them.  On the other, they are stinging their higher risk customers – small business customers – with higher hidden fees.  And, on the third hand (yes, doing well here with my artificial limbs business), their customers now love their narrow bank and would not return to their old bank in the future.

That’s a broken model if you ask me.  Broke for the bank that is, unless it really does not want any SME or consumer credit market operations in the future.

What banks should be doing is the Metro, Fidor and Caja Navarra approach of integrating the narrow bank offers into their customer aggregated experience.  Instead, what RBS and Santander who partner with Funding Circle appear to be doing is saying that we would rather offload you to the narrow bank, than keep you with our bank.

That may be just my misperception, but it’s one that sits uncomfortably if true.

 

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Things worth reading: 20th May 2015

Things we’re reading today include …

 

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Why banks (and PayPal) don't simplify

As the internet reinvents commerce on this planet, it’s interesting to see the two things that enter the innovation mix: simplicity combined with connectivity.  When you think about the Uber, Airbnb, Facebook, Google, Amazon and more, you realise that they have all simplified some complex things from sharing to finding.  Google’s home page has stayed pretty much the same since day one.

Google

Clear, clean and simple, it’s a SEARCH engine.  It helps you find stuff.  It’s easy.

You don’t think about the complexity of the thousands of servers that are indexing everything non-stop.  That’s the complex stuff that sits behind the simple home page.  You don’t think about the connectivity needed to do this.  The fact that Google is linked into every server on the planet to index the internet.  You just assume the homepage is there and will find stuff. 

It’s all simplified through global connectivity.

The same is true with Facebook.  You share your life with your friends, from links to funny videos of cats and babies to pictures of your own cats and babies.  You don’t think about the complexity of the thousands of algorithms required to tag, link, upload, organise, store and manage all your stuff.  You just want to share stuff.  You don’t realise how Facebook is getting smarter and smarter.  You just want to connect with your friends and family.

Amazon is the same.  Again, you’re just buying things you like.  It’s simple and easy.  You don’t think about how Amazon has created a global store of everything through connectivity to every sales outlet.  You just buy things.  You don’t think about how Amazon can read your mind and predict the next things you want to buy through indexing all purchases through meta-tags.  You just enjoy the fact that it has suggested that you might want that next book by Anna North.  You just like the fact that it can read your mind and your tastes.

Uber and Airbnb are doing something different however.  Rather than simplifying how you find, share and buy things, they have simplified marketplaces.  The taxi market was fragmented and disorganised.  Uber organised it.  In this case, the simplification is through connectivity rather than complexity.  Uber’s purely connecting people with cars through an app with people who need driving.

Airbnb saw a similar opportunity to sell spare space by connecting people with rooms to people who need rooms.  It’s the P2P connectivity that provides the simplification of markets (transport, lodging), rather than purely simplifying activities (finding, sharing, buying).

Which brings us around to banking.  What activities can we simplify in banking and which marketplaces could be simplified through connectivity?

These questions have already been answered in some areas.  PayPal and Alipay simplified the activity of paying by providing a layer over the traditional complexity, called an email.  Prosper and Lending Club have simplified the credit markets by providing connectivity between those who have money and those who need it.

Paying and enabling credit are the narrow areas of finance being attacked by simplification, but what else could be flattened by connectivity.  I must admit that when I look at this chart from CB Insights (doubleclick image to see a larger version):

Unbundling of a Bank

It really makes me take note, as any financial activity can be levelled by technology.  Any financial activity can be simplified.  Any financial marketplace can be flattened by connectivity, peer-to-peer, person-to-person.

This is why banks must change tack, and become integrators and aggregators of components of finance.  A bank cannot compete with a specialist who is simplifying a marketplace or financial activity.  Instead, they need to work with the simplifiers and incorporate their best practices into their own.  This is why the likes of Moven and Fidor are being brought into bank operations as partners.   This is why the likes of Venmo and Braintree are brought by PayPal.

Any incumbent player who tries to resist the onslaught of the simplifiers is going to fail, because the simplifiers are reinventing activities and markets overnight.  My favourite current example in fact, is Venmo.

If you don’t know the story, Venmo was invented by two mates during a long weekend.   The whole story is here, but the gist of the story goes like this:

One of the weekends we were getting together to work on this idea, Iqram was visiting me in NYC and left his wallet in Philly. I covered him for the whole weekend, and he ended up writing me a check to pay me back. It was annoying for him to have to find a checkbook to do this, and annoying for me to have to go to the bank if I wanted to cash it (I never did). We thought, “Why are we still doing this? We do everything else with our phones. We should definitely be using PayPal to pay each other back. But we don’t, and none of our friends do.”  So we decided, let’s just try to solve this problem, and build a way to pay each other back that feels consistent with all of the other experiences we have in apps we use with our friends.

After four years, Venmo is now processing almost $4 billion in social payments a year and was acquired first by Braintree in 2012 (for $26 million) who were then, subsequently, acquired by PayPal.

Venmo

Could PayPal invent Venmo?

Sure.

Did PayPal invest Venmo?

No way.

Why didn’t PayPal invent Venmo?

Because simplification comes from kids and complexity comes from incumbents.

The incumbents are too dogged in their own complexity to see simplicity in too many cases.  That’s why banks spend all their time talking about regulations, regulations, regulations, whist Fintech start-ups talk about innovations, innovations, innovations.

The startup has the excitement of simplifying complexity; the incumbent has the weariness of dealing with complexity.

That’s why Fintech is so hot – because it’s reinventing financial activities and simplifying markets.  Watch this space for more.

 

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Things worth reading: 19th May 2015

Things we’re reading today include …

 

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Fintech is hot, hot, hot

I was flicking through the Economist this week and was surprised to see a big quarterly special all about Fintech.  Wow, this stuff is hot, hot, hot.  That’s what the magazine makes clear:

From payments to wealth management, from peer-to-peer lending to crowdfunding, a new generation of startups is taking aim at the heart of the industry—and a pot of revenues that Goldman Sachs estimates is worth $4.7 trillion. Like other disrupters from Silicon Valley, “fintech” firms are growing fast. They attracted $12 billion of investment in 2014, up from $4 billion the year before.  

The magazine probes these areas in depth, citing Lending Club, Venmo and others on my list as disruptors and concludes that: “the bigger effect from the fintech revolution will be to force flabby incumbents to cut costs and improve the quality of their service. That will change finance as profoundly as any regulator has”.

In other words, the industry does not disappear, just the big, fat, lazy players.  I agree.

By coincidence, this article hit my radar the same day as the great guys over at Finovate were running their annual West Coast bash.  In preparation for this, Jim Bruene posted a list of Unicorns – start-up firms founded since 2000 that have achieved over $1 billion valuations – and notes that the list has tripled over the preceding year, from just 11 companies in 2014 to 35 in 2015.  Simlar to other lists, a third of these are in lending and credit markets and a third in payments – that’s where the action si ffolks.

With a big thank you to Jim for compiling this, here’s the names of the biggest Fintech firms around:

1. Lufax (Lending)

2. LendingClub (Lending)

3. Square (Payments)

4. Zillow (Real estate)

5. Zenefits (Insurance)

6. Stripe (Payments)

7. Powa Technologies (Payments)

8. Klarna (Payments)

9. Xero (Accounting)

10. CommonBond (Lending)

10. CreditKarma (Credit Reports)

10. Oscar (Insurance)

10. One97 (Payments)

14. Prosper (Lending)

15. Dataminr (Analytics)

16. Zuora (Payments)

16. FinancialForce (Accounting)

16. LifeLock (Credit Reports)

16. Adyen (Payments)

20. iZettle (Payments)

21. SoFI (Lending)

21. Housing.com (Real estate)

21. Qufenqi (Lending)

21. Revel Systems (Payments)

25. On Deck (Lending)

26. FundingCircle (Lending)

26. Jimubox (Lending)

26. Kofax (Doc mgmt)

26. TransferWise (Payments)

26. Trusteer (Security)

26. Mozido (Payments)

32. Avant (Lending)

32. IEX Group (Investing)

32. RenRenDai (Lending)

32. Coinbase (Bitcoin)

32. ClimateCorp (Insurance)

 

Semi-unicorns

Wonga (Lending)
Wealthfront (Investing)
Rong360 (Lending)
Betterment (Investing)
Braintree (Payments)
Q2 (Banking)
WorldRemit (Payments)
Taulia (Payments)
Radius (Marketing)
Oportun (Progreso Financiero) (Lending)
Circle Internet Finance (Bitcoin)
AnJuke (Real estate)
Kabbage (Lending)
EzBob (Lending)
FangDD (Real estate)
VivaReal (Real estate)
Motif Investing (Investing)
Snowball Finance (Investing)
PolicyBazaar (Insurance)
Credorax (Payments)
Cardlytics (Marketing)
Zopa (Lending)
CAN Capital (Lending)
Receivables Exchange (Lending)
Affirm (Lending)
Ayadsi (Analytics)
21 Inc (Bitcoin)
Bill.com (Payments)
FreeCharge (Payments)
U51 (Lending)
Financial Software Systems (Risk Mgmt)
Strategic Funding Source (Lending)
Ping Identity (Security)
 

————
Source: Compiled by Finovate, 8 May 2015

 

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