Is the Fintech bubble about to burst?

I recently recorded a video for Meniga to show at their conference in London for Next Bank Europe.  We had to do this as I was in New York on the day of the conference, and the organisers wanted me to present so badly they agreed to come to my house to do record my presentation. A bit unusual but, there you go.

So, to my house.  I recently moved into a museum.  Seriously.  I spend every night in the museum (beats Ben Stiller any day). 

The museum is the Royal Historic Dockyard Museum in Chatham, Kent. This was one of the first dockyards built specifically to make warships under Henry VIII and dates back to the 16th century.

The real growth in naval warfare occurred during the 18th century however, and George III specifically invested in the Dockyard, which is why so many buildings here date from the late 1700s. 

The Dockyard built the HMS Victory (Battle of Trafalgar) and we have a lot of history here.  For example, my house dates to 1830.  In its heyday the Dockyard employed 7,000, and my grandfather worked here during the War, building ships.  Then, after the Falklands War, Margaret Thatcher made the decision to shut it down.

Now, it is a museum and one of the top attractions in Kent.  It’s also a film set, with movies like Les Miserables filming scenes here along with TV series like Call the Midwife and Mr Selfridge being regular visitors.

Here’s a film that shows you the beauty of where I live:

Chatham Historic Dockyard by Sam Biddle

And here’s the movie we made asking When will the Fintech bubble burst? (nothing beautiful about this 🙂

For those who can’t watch it, the question I asked is whether there’s a Fintech bubble and is it about to burst.  With $12.7 billion raised for over 1,000 start-ups in the past five years, there’s a huge amount of people buzzing around this market and some say a further $20 billion is going to be invested in just this year alone.

What’s going on?

Well what is happening is a re-architecting of financial services with technology.  Today, it is the integration of technology with money; the digitalisation of money; and the move from local to global exchange.  That’s what I blog about every day but my claim in the video is that this is just what we’re talking about today, and it’s a transitory moment as the picture long-term is far bigger.  It is far bigger because we are completely rethinking how we exchange value.  It is why bitcoin is a big deal, because that is the most likely form of the digitalisation of money.  It is far bigger because the old bank model of the physical distribution of paper in a physical network is turned on its head when we are moving to the digital distribution of data in a global network.

Our world has changed thanks to the internet, and the most likely outcome is a new value exchange ecosystem of value tokens, value exchanges and value stores.  I’ll blog more about that another day but, meantime, this explains why (a) there is no Fintech bubble and therefore (b) it will not burst.

There’s no Fintech bubble because we’re re-architecting our world to digitise value exchange.  This will therefore morph our world into something different and new.  It is not until the different and new is finished that any bubble will burst.  For example, it is noteworthy that we talk about the internet bubble and burst of the 1990s, and yet we should note that the internet bubble burst in 2001 and then came back because we moved from Net 1.0 to Net 2.0.  As I’m saying we have another five generations of internet to go yet, there’s no bubble here.  Just a rise and fall of innovation as we move through the internet age.

That’s why there’s no Fintech bubble bursting.  Just a re-architecting of finance through technology that, until it finishes, will see us moving through waves of innovation and change.

 

Postscript:

This video was filmed very quickly in under two hours for 15 minutes of edited finished product.  It was completely unscripted, although I did make a few notes to think about beforehand so, just in the interests of completeness, here are those notes:

Why there’s a bubble:

  • Money2020 predicted that venture capital deployment in FinTech will top $20 billion in 2015
  • Silicon Valley Bank state that FinTech is one of the top five investment areas today with investments in over 2,000 startups between 2009-2013 and over $10 billion invested

It’s also an area that is being changed by technology itself.

For example, investments in FinTech start-ups saw crowdfunding platforms as a key component of developing this market.

But banks have responded:

Accenture note that FinTech investments by banks would reach at least $8 billion by 2018 in New York alone, around 40% of total

Barclays has The Accelerator, SWIFT has The Start-up Challenge, Finovate highlights the hot new guys and BBVA challenge them all to show their capabilities using APIs and so on.

Many of the largest banks are creating corporate venture capital firms.

SBT Ventures — the venture capital arm of Sberbank, the largest bank in Russia — led the $8 million seed round for Moven, as part of its $100 million investment fund.

HSBC’s fund runs at $200 million and Santander’s fintech fund has $100 million in capital.

Who are these new fintech firms?

If you look at the FinTech50 that came out at the end of January, the firms are mainly based around cryptocurrencies and mobile apps for retail banking and payments, P2P firms, wealth management, trading and even a few bank innovators like mBank in Poland.

Names you would recognise like Traxpay, Nutmeg, Crowdcube, Transferwise, Currency Cloud, Funding Circle.

And names of people you know are clever as backers like Richard Branson, Marc Andreesen, and Reid Hoffman.

These guys are in there because they see reformation.

And bitcoin, or rather cryptocurrencies, are reformational as is mobile.

Meantime, P2P replaces core banking products like loans, mortgages and insurances.

EGs Zopa, Funding Circle, House Crowd and Friendsurance.

It’s not just P2P though – as bitcoin is that – it’s replacing expensive physical infrastructure with digital infrastructure.

In code we trust.

And the banks are not ignoring this.

Just look at the size of the deals from bank funded venture capital groups and that banks like BBVA , Bank Inter and the NYSE and USAA are investing in cryptocurrency firms and buying businesses like Simple and you know there’s a big deal here.

Is it a bubble though?

This dockyard has seen plenty of bubbles, the most famous of which was perhaps the South Sea Bubble of the 18th Century.

In 1711, a war with France left Britain millions of pounds in debt and the government had its hands tied as the Bank of England was a private bank and the sole lender to the government.

As a result, a British joint-stock company was founded, the South Sea Company, as a public–private partnership to consolidate and reduce the cost of national debt.

To sweeten the deal, the government gave the company a monopoly for all trading in the South Seas along South America, an amazing gift people thought.

Because of their monopolistic position and strength with government backing, shares in the South Sea Company rose to ten times their initial public offering price.

Seeing the success of the first issue of shares, the South Sea Company quickly issued more.  Again, the stock was rapidly consumed as investors saw that the stock was going to the stratosphere and they wanted in.

Equally, many investors were impressed by the lavish corporate offices the Company had set up.

Soon, most of the members of the House of Commons and House of Lords had some sort of stake in the South Sea Company.  Everyone bought into the stock – the MADNESS OF CROWDS.

Then the ‘bubble’ burst because people discovered that the South Sea Company had yet to actually deliver any goods or produce from the South Seas.  The shares had been valuable on paper, but worthless in reality.

Hence, the herd mentality that caused this madness of crowds suddenly sobered up and everyone pulled their money out.

Is that’s what going to happen to FinTech?  Like the internet boom and bust of the 1990s, or the Mortgage Securities boom and bust of the 2000s, is fintech next?  I don’t think so and here’s why.

Fundamental shift.

Banking is dead because banking banked money.  It banked physical goods and services.  We are now supporting digital exchange.

PewDiePie.

Fidor Bank who bank gold –both physical and digital (world of Warcraft)

Value exchange: Move from the physical distribution of paper in a localised network to digital distribution of data in a globalised network.  That’s what the book is all about.

The recent announcement of BBVA, NYSE and USAA investing in Coinbase articulated more of what I mean about Value Exchange. For example, BBVA Ventures Executive Director Jay Reinemann said: “at its core, Bitcoin is a decentralized protocol that enables exchange of value among parties around the world, giving it the potential to alter the financial services landscape.” 

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Crime-as-a-Service: pay-as-you-blow with #bitcoin

So I’ve talked about Banking-as-a-Service for some time, but what about Crime-as-a-Service?  It does exist on a pay-as-you-blow basis.

Europol were one of the first to note this trend, in a report published late last year (from ITPro):

According to the organisation’s 2014 Internet Organised Crime Threat Assessment (iOCTA), the model allows cybercriminals to develop sophisticated malicious products and services before selling them on to the less experienced to use via the “digital underground” world.

As a result, it’s getting easier for less technically-minded criminals to engage with cybercrime, putting companies at even bigger risk.

“In a simplified business model, a cybercriminal’s toolkit may include malicious software, supporting infrastructure, stolen personal and financial data and the means to monetise their criminal gains,” the report states.

“With every aspect of this toolkit available to purchase or hire as a service, it is relatively easy for cybercrime initiates – lacking experience and technical skills – to launch cyber attacks not only of a scale highly disproportionate to their ability but for a price similarly disproportionate to the potential damage.”

Many of these transactions take place on the “Dark Net”, which the report states has fuelled evolution of cybercrime in recent years.

They followed this up on Tuesday with an assessment that cryptocurrencies are becoming the value exchange of choice for Crime-as-a-Service (from Coindesk):

Digital currencies are increasingly serving as a money laundering platform for “freelance criminal entrepreneurs operating on a crime-as-a-service business model”, according to a new Europol report.

The EU’s law enforcement agency said that the decline of traditional hierarchical criminal networks will be accompanied by the emergence of individual criminal entrepreneurs, who come together on a project basis.

The report, which identified the key driving factors affecting the EU’s criminal landscape, predicted that the role of freelance crime organisers is expected to “become more prominent”.

It added that individuals with computer expertise are very valuable to criminal organisations and that people with such skills are expected to advertise their services in exchange for payment in cryptocurrencies.

The report continued:

“Virtual currencies are an ideal instrument for money laundering. In addition to traditional layering methods, cryptocurrencies use specialised laundering services to obfuscate transactions to the point where it is very resource-intensive to trace them.”

This gets interesting as I attended a policy forum last week where the UK’s National Crime Unit were saying that they’ve spent “an inordinate amount of time investigating cryptocurrencies”.  I asked what they meant by that, and they clarified that it was time spent understanding them.  When I then asked if they saw much criminal activity in cryptocurrencies, they said not yet.  The National Crime Unit see most money laundering crime in cash (€500 notes being the launderers note of choice).  They only use cryptocurrencies if the payee demands payment that way.

However, this is because cryptocurrencies are still minor league compared to cash markets, and they are being studied as some of the action in cryptocurrency exchange is for illicit activities on the dark net.  Note cryptocurrency guys that I say some, not all.

For example, in a further Europol study produced in February, they find that bitcoin is the preferred currency of paedophiles (from Coindesk):

http://www.coindesk.com/europol-bitcoins-popularity-growing-in-illicit-online-markets/

Bitcoin is increasingly being used to pay for livestreams of child sex broadcasted over illicit Internet sites, according to a new Europol report.

Produced by Europol’s EC3 cybercrime centre, the report sheds new light on the commercial sexual exploitation of children online, while providing evidence that individuals with a sexual interest in children are becoming more entrepreneurial.

“Live streaming of abuse for payment is no longer an emerging trend but an established reality”, the report said.

It continued:

“There is a clear shift from traditional credit card payments to the ones providing the most anonymity, namely alternatively payment options, including virtual currency.”

In line with the International Centre for Missing and Exploited Children’s (ICMEC) findings, the report said that “there is apparent migration of commercial child sexual exploitation, along with other criminal enterprises, from the traditional payments system to a new, largely regulated digital economy made up of hosting services, anonymising Internet tools and pseudonymous payment systems”.

Add to the above the use of bitcoins for terrorism.  According to Bitcoin News, the United States Central Commands have been studying the alternative payment methods terrorist organisations raise and transfer money around the globe to support their activities. Digital currencies proved to be of the most efficient mechanisms for the transfer of funds due to their decentralized nature that facilitates anonymous donations as opposed to traditional banking transactions with the use fiat currency. Recently, an Israeli analyst has come up with concrete evidence that the ISIS is raising funds in Bitcoins, most likely in the United States, to fund their operations.

This is not even to mention the use of cryptocurrencies for drug dealers.

What is intriguing in all of this is that the cryptocurrency community believe they are unassailable in all of this.  Money is decentralised by bitcoin and they believe (or hope) it is therefore immune to governmental and regulatory control.  Anyone who disagrees is a statist.

Conversely, for the reasons given above – terrorism, drug running, extortion and sex trafficking – this idea of a decentralised market that governments are excluded from controlling may be wrong.  To be clear however, bitcoin and cryptocurrencies are not the problem here.  You have massive use of cash for terrorism, money laundering, drug running and paedophilia.  It is the reason why the US dollar has more physical stores outside the USA than inside, and is the reason why it’s the currency of choice for people like Saddam Hussein.  Equally, it should be born in mind that cryptocurrencies are not anonymous, are traceable and are available in a form that can be identified, so governments do have ways to deal with them.

The most likely start will be on the cash-in and cash-out moments of cryptocurrency usage.  You may be able to use cryptocurrencies in a revolving credit and debit scheme bilaterally but, as soon as you try to cash out or put cash into the scheme, the national jurisdictions will make the transaction subject to national laws.

Over time they will then get other regulatory structures put in place.  A whole raft of papers have already been issued on these themes, with the latest iteration of the New York Department of Financial Services (NYDFS) cryptocurrency regulation – or the BitLicence if you prefer – providing clear requirements for cryptocurrency usage.  Issued last month, the NYDFS BitLicence requires any trading firm to adhere to a collection of rigid rules.  There’s a raft of requirements for capital provision, record-keeping, and even oversight of new or planned features, such as:

  • The BitLicence application itself costs $5,000
  • Firms must keep detailed records of customer names, addresses, dates, and transaction amounts for at least seven years
  • Audits will be made every two years by the NYDFS
  • Firms must get written approval before changing products or services, or creating new ones
  • Mandatory internal anti-money laundering programs must be implemented, including enhanced oversight of foreign customers and those who transact in amounts greater than $10,000
  • Firms must have an internal cybersecurity program to protect personal and financial information from hackers
  • Firms must show a clear disaster recovery plan in the event of attempted or successful theft

These BitLicence rules make cryptocurrency trading firms, for all intensive purposes, banks.

Equally, it means that for every step the cryptocurrency markets innovate ahead of the curve, the lawmakers review, analyse and try to keep up.  Whether they can keep up or not is a different question.

 

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The Finanser Interviews: Soner Canko, CEO of BKM, Turkey

Following on with our regular weekly interview, the Finanser talks this week with Soner Canko, CEO or BKM (Bankalararası Kart Merkezi), the ACH for Turkey. 

Soner Canko

 

BKM was established in 1990 as a partnership of public and private banks. Today, all the banks that issue a card and own a POS are members of BKM.  The ACH is notable for being a key promoter of contactless payments and, more recently, launching its own mobile payments wallet for the banks to leverage to their clientele.

How do banks and BKM interplay?

Among BKM’s main fields of activity are to develop procedures to be applied among  banks for credit/debit cards, to perform operations for ensuring standardization, to establish domestic rules, to carry out interbank authorization, clearing and settlement transactions, to establish relations with foreign entities and, if necessary, to represent its members with these entities and to carry out transactions that are already being made by any bank in a more secure, faster and cost-effective manner from a single centre. 

BKM works synergistically with its member banks.  Therefore I believe that Turkish Card Payment Systems Market is very lucky, because the needs as well as the actions that must be taken to improve the industry are discussed and determined by the committees, which meet regularly and in which the representatives of banks take a place, and also by one-to-one discussions. This is a great opportunity that many other countries do not have.

We experienced the benefits of this opportunity in the project for migration to Chip&PIN. All banks have decided their migration dates, acted together, and harmonized all credit cards, POS devices and ATMs in compatible with EMV in a very short period under the leadership of BKM and we achieved a highly successful migration, which is considered as a model throughout the world.

What motivated BKM to promote contactless in Turkey?

Turkey met with contactless cards in 2006. Turkish cardholders have always been the first to meet with many new contactless products until today. Today, as of the end of 2014, 23 percent of all credit cards and 4 percent of all terminals have contactless features. We can argue that these figures are very low for a country that has met with contactless cards very early.

But I believe that transition to the new generation of payment systems will be much more difficult until the users get used to contactless cards. Users must get used to the speed and practicability of contactless in order to have an easier adaptation to new generation of payment systems.

On the other hand having contactless terminals widespread is very important to have the infrastructure of technologies, such as NFC and HCE.

Therefore we pay significant efforts to popularize contactless terminals and ensure that users experience it.  

What does BKM see its mobile wallet now and in the future?

BKM Express is a digital wallet, developed in 2012 together with the banks in order to increase the volume of e-commerce. We did a lot in the last 2 years in this process. We initially worked hard to expand the acceptance network and today BKM Express is one of the payment methods accepted by e-commerce companies, which produce more than 50 percent of e-commerce transaction volume. 99% of the cards in Turkey can be included to the system thanks to our online integration with 17 banks.

We also added P2P money transfer functionality to BKM Express in 2013. Users of BKM Express can immediately send money to a mobile phone number 7×24 thanks to our database.

We also began to allow our users to use BKM Express for face-to-face payments in 2014. Our users have begun to use their digital wallets in more areas like fuel stations and restaurants.

We are well aware that time and practicality are very important for users in today’s digitalized world. Therefore we believe that payments must be invisible and complementary for shopping experiences of users. For this purpose, we search and try what we can do to improve our user’s experiences everyday and make our developments accordingly. We aim to make BKM Express a digital wallet that can be used by its users everywhere and everytime. 

How will payments change in Turkey over the next ten years?

As BKM, our main objective is to have a society that makes payments without cash in 2023. We have already started our works both to develop the infrastructure and increase the awareness of society for this purpose. For instance, we began to explain the benefits of transition to digital payments with our Goodbye Cash campaign in 2010.

Turkish banking system has a strong infrastructure, which will certainly help us in transition to digital society. On the other hand, banks are competing with each other with their innovative products. All kinds of products and services that will meet the needs of end users are offered.

Today, approximately 40 percent of payments are made with cards in our country. 10 years later, we will have a country, in which all of the payments are made in digital environment.

What are the key things that you focus upon?

The position of our payment systems is very strong. Users meet with many payment system products for the first time in our country throughout the world thanks to valuable managers in the industry and their innovative perspectives.

We, as BKM, pay a lot of attention to adopt quickly to changes, follow up the new technologies and developments throughout the world and experience all innovations as much as possible since we are operating in a field, in which the expectations and competition are very intense.

Being a member of many different platforms to exchange knowledge is one of those very important issues for us. This allows us not only to monitor different markets but also to establish strong relationships.

How are you innovating?

We believe in internal entrepreneurship. As a part of this belief, we expect from all our employees to make contributions to the innovation.  While trying to reinforce this strategy with the trainings we receive, we are also paying a lot of attention to open communication in our job. We support all our employees as much as possible to clearly communicate their ideas and recommendations and implement them regardless of their current jobs.    

For this purpose, we established a R&D center, named BKMLab, within our company. We are testing new technologies and proactively completing our preparations before launching them.

Thanks to BKMLab, we can test and observe new products and services before they are introduced to the market and, if they are found suitable, we can continue on our works or, end them. For example, we have completed our first project in this center for integration of BKM Express and GoogleGlass. After getting the results of this project and integrating new wearable technologies, we intend to achieve the most suitable solution.

BKMLab will also soon be open for other entrepreneurs in our ecosystem. Start-ups will have an opportunity to benefit from the center at any time of the day.

Will ApplePay and PayPal Here, for example, make BKM more or less relevant?

One of the main duties of BKM is to grow the ecosystem of payment systems. For this purpose, all innovations throughout the world are monitored closely and analyzed. BKM prepares common platforms for the most suitable and fastest penetration of products, which assist in the growth, development and/or improvement of payment systems, to Turkish market and sometimes it assumes new roles in adaptation to new technologies.  

Therefore BKM is very open for new products and services throughout the world as well as for collaboration with them and provides the utmost support for development of the ecosystem.

Any innovation in payment systems is introduced quickly to Turkish market thanks to BKM’s organization that closely monitors new technologies and adopts swiftly to changes, which is also valid for all local or international players!

About Soner Canko

Dr. Soner Canko graduated from Istanbul University, Faculty of Political Science, Public Administration Department. He also received master¹s degree and Ph.D from Istanbul University, Faculty of Economics.

Dr. Soner Canko¹s career has commenced in 1990, where he performed in sales, management and consulting roles at Procter & Gamble, Citibank, Hewlett Packard. He was the founder and Country Manager of First Data Turkey, and lastly Assistant General Manager of Ziraat Bank.  Today, Dr. Canko is the CEO of BKM (Bankalararası Kart Merkezi).

 

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