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  • @fintechna 7:17 am on May 11, 2017 Permalink | Reply
    Tags: , , Alternative, , ,   

    Who’s Who in Alternative Banking Solutions 

    Open , virtual branches, machine learning, and AI &; these are just some components of the banking puzzle. Digital-first upstarts that provide alternative lending have now proved to the banking world that they are as good (if not better) at attracting, underwriting, and servicing customers, when compared to traditional peers. What’s more important, [&;]
    Bank Innovation

     
  • @fintechna 12:18 am on September 28, 2016 Permalink | Reply
    Tags: , Alternative, , , , Trouble   

    Alternative Lending Is in Trouble? No One Told Elevate 

    It&;s been a brutal year for the industry. Scandals, staff cuts, rate hikes, and recently a Lending Club investment posted its first negative return in five years this August. But the alternative lender , a subprime specialist, is continuing to advance toward its IPO, and recently celebrated the hiring ofRead More
    Bank Innovation

     
  • @fintechna 9:40 pm on July 25, 2016 Permalink | Reply
    Tags: Alternative, , , , , ,   

    Alternative Ethereum Blockchain Gains Support as Price Declines 

    Classic may have started as a protest currency against the hard fork, but it is gaining more services.Alternative Ethereum Blockchain Gains Support as Price Declines fintech
    CoinDesk

     
  • @fintechna 7:40 pm on July 24, 2016 Permalink | Reply
    Tags: Alternative, , financial market, ,   

    Alternative Global Financial Market Infrastructure 

    Alternative Global Financial Market Infrastructure fintech

    “Huston we have a problem”[1]. The original Apollo 13 phrase back in 1970, is applicable to the current in 2016. 

    There are many commentators on the breath of the problems, but few practical solutions on the table; there are even people who believe the system is beyond fixing.

    This post will limit the discussions to addressing the technical aspects of a replacement Financial Market Infrastructure, and leave the  “economic theory” an “politics” to others.

    What is required?
    It is pretty obvious that the technical infrastructure of the existing FMI is beyond repair, it has evolved over a number of years to the point where it is simply unstable. Major pieces of the infrastructure are starting to fail[2]. In many cases the defects are
    Architectural and cannot be patched. Any system architect knows full well that KISS, always underpins any practical solution, and that legacy system migrations are both costly and high risk, especially systems such as the existing FMI. It is hard to completely identity, all elements, or risks of the existing global FMI.

    Where to start?
    One of the better documents in this space is the Bank of International Settlements (BIS) “Principles for Financial Market Infrastructure“. There is no reason why an  FMI should not meet the same principles, and applicable regulations as the existing  FMI.

    So lets set these as the starting point for our replacement Financial Market Infrastructure and check any proposed solution against these principles. We will perform a review of the proposal solution, at the end of this post.

    The Vision, is  a Continuous Global Market, which never closes?
    The attention and responsiveness participants bring to the Market, joins them together across intuitions, space and time. All participants observe the Market continuously (without any interruption) with synchronicity and temporal immediacy. Everyone on the planet sees the same Market simultaneously and in real-time. A new  level of global integration, and interdependence will emerge, as temporal, systemic risk and significant “tied up” clearing capital within the existing market simply vanish, or gets redeployed in more productive venues.

     

    The Key Design Principle

    Simplify the existing highly complex systems and procedures,

    while reducing

    Systemic RISK.

    The System Building Blocks

    Secure Global Identity

    A global secure Identity underpins all elements of the FMI, and is embedded into each of the FMI elements.

    • there is no centralized infrastructure or entity required
    • the secure identity is under the exclusive control of the Individual
    • can securely support the full range of Identity and authentication requirements

    Identity Attributes:

    • Ownership can be digitally proven with high assurance, and possible non-repudiation
    • Disposable
    • Support digitally signed by owner
    • Third parties may offer digital attestations:
      • Identity Verification, Inc. digitally signs as passing their 100 points check.
      • Auction Provider, digitally signs as having a certain reputation score, on their website.
      • Decentralized market users, digitally sign one another’s attributes, building a decentralized reputation, social network. 
    • Full compliance with KYC, AML/CTP and cross boarder regulations
    • Needs to assist with financial inclusion, and remove the “unknown” within world population.

    Global Payments Rail

    Supports the global PVP unconditional settlements.

    1. Scalable, known risk solution
    2. Utilizes Secure Identity for entities
    3. High Assurance global P2P Payments Rail
    4. Supports Fiat Digital Currencies, as legal tender
    5. Provides “trust” between unknown and untrusted P2P entities
    6. Requires zero, payment specific hardware, or technologies
    7. Can be globally deployed without any barriers, technical, or regulatory
    8. Provides a “known level” of security, and hence risk
    9. Leverages existing commercial FIPS 140-2  certified  TPM’s, protection profiles and libraries
    10. Secure all existing ecommerce sites, with same trusted path assurance of all payment parties via HSM protected keys
    11. Provide a more secure, lower risk, solution than any existing hardware based payment solution, like ENV chip cards or ATM, and POS terminals
    12. Require zero shared secrets in any element which participates in the network.
    13. All payments are P2P occurring inside and between two FIPS-140-2 certified HSM’s;
    14. Mandatory security policy, which all parties, including all nodes hosts and processes must be mutually authenticated via hardware (HSM)  key pairs.
    15. All ownership of all payments are codified on a Public  Block Chain Ledger
    16. Needs to support financial inclusion, and remove the “unbanked” of the worlds population.


    Global Asset Settlement Rail

    Supports the global AVA and BIS DVP Model 1, unconditional settlements

    1. Scalable, known risk solution
    2. Global Asset Identifier which supports all existing  securities or assets without any central registration.
    3. Utilizes Secure Identity for entities
    4. High Assurance global P2P Settlements Rail
    5. Provides “trust” between unknown and untrusted P2P entities
    6. Leverages existing commercial FIPS 140-2  certified  TPM’s, protection profiles and libraries
    7. All asset transfers are P2P occurring inside and between two FIPS-140-2 certified HSM’s;
    8. All payments are P2P occurring inside and between two FIPS-140-2 certified HSM’s;
    9. Mandatory security policy, which all parties, including all nodes hosts and processes must be mutually authenticated via hardware (HSM)  key pairs.
    10. All ownership of all assets are codified on a Public Block Chain Ledger

    Global Market Place

    Essentially, the existing order, trade and execution, except that there is now full transparency via the Public Block Chain Order Book, and tightly integrated into the other FMI elements, this is essential for the overall FMI security and systemic risk. The main changes are identified below.

    1.  Global Asset Identifier which supports all existing  securities or assets without any central registration.
    2. Global Secure Identifiers
    3. All Market Orders available in real-time via Public Block Chain Order Book

     

    Global Asset Registers
    Support the legal codification of various forms of assets, examples are land, art, gold etc, which may be transacted as codified digital assets. 

    • All ownership of all assets are codified on a Public Block Chain Register

    Done with the key Elements..

    Ok so lets see how the above will meet the BIS principles

    • Settlement finality, done in real-time.
    • Money settlements, done via fiat legal tender
    • Physical deliveries, covers all digital assets, others TBD.
    • Central securities depositories, deprecated by P2P
    • Exchange-of-value settlement systems, all transfers are instantaneous and “atomic”
    • Participant-default rules and procedures, adapted to support the simpler solution
    • Segregation and portability, deprecated as all assets and currency directly held by P2P entities.
    • General business risk, no process change
    • Custody and investment risks, custody deprecated as all asset ownership codified on the Ledger, investment risk no change
    • Operational risk, no process change
    • Principles 18->23, no process change.
    • Disclosure of market data by trade repositories, all data is publicly available in real-time via the relevant Public Block Chains

    What exists today?
    The following is based on an existing commercial POC including all of the above elements and is available today. See Slideshow links below, for technical details of one such solution, we expect to see many more in the near future.

    Market Trading, Order Book, Matching Engine and market data distribution. Matching engine lastency ~256ns.

    DVP Model 1 Settlement,  continuous atomic P2P unconditional settlement ~ 50ms.

    Conclusion
    It is possible to provide a technical alternative to the existing FMI, in  a low risk, incremental manner, while meeting all of the regulatory and compliance requirements.

    I keep seeing posts by regulators and incumbents who simply have not spend the time and effort to understand what modern technologies make possible, plus a lot of FUD from those who see their business disappear. It is time for everyone with their wide and varied perspectives to focus on the future which fixes the broken FMI as it exists in various stove pipes and national systems today, the alternative is an world where risk runs rampant. End soapbox.

    The  most significant change is one of “mindset” within existing market participants, central  and regulators.  With  a level of understanding of the alternative FMI, a number of the current issues identified such as Basel III, Ring Fencing, and other organizations, can be more readily addressed.

    The key is a fully integrated, holistic solution, for an alternative  Global Financial Management Infrastructure, which can be incrementally deployed within an alternative “green field” solution space.

    The Road to 2020
    Ok, so we have solved the bits, but this is only a small part of replacing an existing “regulated” and typically entrenched monopolies or oligopolies.  High risk and significant capital requirements are useful barriers to entry, within distorted markets caused by misguided “regulation”.

    Lets look at one perspective of a commercial pathway, to achieving a fully functional  Global Financial Market Infrastructure by 2020.

    2016: Regulation.

    Its a commercial reality, that to achieve a 2020 objective, any solution MUST fit inside the existing legal, regulatory and compliance framework as it exists today. Experience has shown it will take at least a decade to effect any change, so no point. While most of the issues are simply mind sets, this will take at least a year to adapt the technologies to the various global jurisdictions. The road map envisions a limited set of use cases being taken though the process during 2016.

    Global Secure Identity system and  infrastructure fully operational.

    2017: Addressing the Payments Rail, this is the year for getting the Payments side of the DVP Model 1 settlement sorted. The CCP is no longer involved in the payment settlement the objective solution is fiat “legal tender” but with the ability to provide cross ledger “atomic” transfers with the Asset Rail. This year will see the very first “Market Place” with fully integrated trade and settlement, on  a limited set of securities and orchestrations.

    2018: The establishment of a alternative Global Market Place, with a limited set of assets. The market place operates with zero closing times and on a continuous trading and settlement basis.  The first truly low risk global FMI operating P2P BIS DVP Model 1 unconditional settlements.

    2019: The “migration” from the high cost, high risk legacy system to the new Market Place. The migration will be driven by “clients” or buy side institutions, not regulators or regulated market participants.

    2020: The volume of trades executed and settled on the Global Market Place, exceeds the legacy systems, which are now becoming uneconomical to operate. The legacy systems rapidly deprecate, from this point onwards, as they cannot compete. People are voting with their feet.

    One last observation, simply because the business of existing players has become extinct, does not mean there is a regulatory failure!

    Lets take a look at what this all means to the existing parties.
    Based upon the experience with the Global Market, Payment and Settlement Rails, the following is the my view of the future:

    Brokers these disappear, replaced by accounts held directly with Market Participants.

    Exchanges these remain, and typically will provide the FMI to their participants.

    Clearing Participants gone..

    Settlement Participants, remain and become the only operational element of the CCP. Payment settlement done via Bank FMI, no need for banking licence or central bank RTGS.

    Central counterparty (CCP), operational functions are deprecated, same with the major part of the capital requirements and liquidity as P2P DVP Model 1, has zero counterparty risk, and zero liquidity requirements., and there is no clearing function. The CCP provides the regulatory and licensing to the Settlement Participants.

    Central securities depository (CSD), gone. All assets held in high assurance HSM’s directly by the client.

    Custodians  gone, all codified assets held directly

    Registry gone, but functions performed directly by issuer. All ownership, holdings, distributions and notifications are now in real-time on the Block Chain.

    Market Makers as P2P promotes buy-side liquidity over traditional market markers, liquidity is not likely to be an issue; but jury is out.

    Market Data Providers as the Order Book and the Trades are all on the Public Block Chain, these providers have no function, these ledgers also provide full market transparency on a level playing field.

    Banks, not required as all fiat Digital Currency, held directly by client within the bank provided FMI. Like the CSD no bank can be involved within any high assurance P2P exchange. Banks will become the suppliers of technology ~  to old world “bank vaults”, the FMI infrastructure.

    Central Banks the jury is out, one view is that Central Banks will  connect directly to customers via fiat Digital Currency, no need “helicopter money” simply inject directly into the economy? The alternative view is as most of the “money” is actually created to day by commercial banks, they could simply form a consortia, and make central banks obsolete? Technology today, can support both view, only time and the market will tell.

    SWIFT, gone as security moved to HSM secured application datagrams over commodity Internet or 40Gb market networks.

    True change is driven by Empowered Individuals,
    not regulation or incumbents.

    Alternative Global Financial Market Infrastructure fintech

    FAQ
    Q: We need a CCP with novation and netting to manage risk?

    A: One needs to think about what a continuous market, where trade and settlement happens in less than 50ms actually looks like. 

    Typically this question is predicated on the systemic risk that sits in the delay pools, there is a wad of theory on why Model 3 can have some advantages over model 1 settlement ( mostly when true DVP is not possible), the second driver is the obsolete transactional engines, in the back office world.   Today any exchange worth its salt, can match and execute a trade in around  256ns, the same technologies applied to a similar architecture, supports a P2P DVP Model 1 unconditional settlement in ~ 50ms today, in fact settlements can actually happen in ~ 1ms in several use cases. This produces the lowest possible systemic risk as the latencies of the trade and settlement are now compatible. Both of these deprecate the existing Model 3 novation and netting approach.

    Quite simply continuous P2P BIS DVP Model 1 unconditional settlement in ~ 50ms is the lowest possible systemic risk solution.  Plus there is now zero counterparty and liquidity risk as the settlement is instantaneous and “atomic”. 

    Q; One needs  real-time payments system

    A: Correct, the latency of the payment system must match the latency of the asset transfer to ensure atomic transfer of asset with payment a s required by BIS DVP Model 1 gross settlement.

    Q: Traders need to have the payment sitting in their account to trade.

    A: Correct, with continuous trade and settlement occurring in ~ 50ms, anyone entering a market trade must have the capability to actually make payment. A Global Block Chain Ledger Payment Rail underpins the settlement process, within our POC the trade execution is the place where this check is performed. The days of individuals, institutions and HTF traders playing with almost zero risk in “delay pools” are over. These types of trades will now have the market allocate the correct risk to these activities, they will operate inside the market not on the outer. 

    Q: Market models currently go to great length to anonymise participants at different points in the transaction lifecycle.
    A: The days of market manipulation by large institutions are also over, the market now has full transparency to all market participants on a real-time and equal basis, this is what a perfect market requires. If an institutions wants to make a large trade, then this will be appropriately priced by the market, as it should be. 

    Q: Fat fingers

    A: Yet mistakes and failures  will have a cost, as they must. All such corrections will now be on market as they must be.

    Q: Naked short selling in the new FMI?

    A; Simply cannot exist,  this a variant of the payment side Q above.

    Q: Meeting new regulatory requirements on capital and transparency

    A; Enter a new world, where everyone has full transparency in real-time not just regulators, this is provided as zero system cost, as it is a fundermatal aspect of the new FMI.  It will be interesting to see what happens with true market transparency is provided.

    Q: Are smart contracts needed in the FMI.

    A: In short no, the existing orchestrations are well known, nothing new is required in this space, a ledger has been doing this for 50 years, and will continue to meet these requirements. Its just a Ledger..

    Q: What would FX trading and Liqudity look like?
    A: Most FX trades are OTC, and based on a “quote” driven market, the has proven to produce an unfair market, where nabks can easly distort the FX prices. We expect that FX will move to an order book, with P2P market trades ebign the norm. The existing market makers being primarly replaced by “Buy” side liquidity.  The net result will be FX becoming just another tarde, and brough into a “fair” market. This should initially see rates in the 0.09% to 0.29% range.

    Further Reading
    Securities Clearing, and the Dodo Bird..

    The Holy Grail of Settlement
    The Global Block Chain Payments Rail 

    Regulation and the Block Chain Ledger
    Your Identity is yours and yours alone.

    Slide Share

    The Global Block Chain Payment Rail

    The Global Block Chain Securities Settlement Rail

    References

    1. “Originally a genuine report of a life-threatening fault.”

    2. http://qz.com/639369/a-1-billion-cyber-heist-against-bangladeshs-central-bank-was-thwarted-by-a-spelling-error/

    3. http://www.bis.org/cpmi/publ/d101a.pdf Updated 11 December 2015
    4.
    Contagion in Payment and Settlement Systems 

    5. https://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf


      is Managing Director, System Architect | Technology Strategist | Business Analyst, and this article was originally published on linkedin.

     
  • @fintechna 7:46 pm on June 20, 2016 Permalink | Reply
    Tags: , Alternative, , , , , , , ,   

    Alternative lenders aren’t going away, they’re just misunderstood 

    Alternative lenders aren’t going away, they’re just misunderstood fintech What a difference a year makes. In 2015, Lending Club was a marketplace-lending leader with a $ 7 billion market cap, and the media was heralding the approaching tech-enabled lending revolution. Now, with Lending Club and OnDeck Capital&;s shares getting pummeled by public market investors, news outlets are asking if this is the end for . Read More

    Alternative lenders aren’t going away, they’re just misunderstood fintech Alternative lenders aren’t going away, they’re just misunderstood fintech Alternative lenders aren’t going away, they’re just misunderstood fintech Alternative lenders aren’t going away, they’re just misunderstood fintech Alternative lenders aren’t going away, they’re just misunderstood fintech Alternative lenders aren’t going away, they’re just misunderstood fintech

    Alternative lenders aren’t going away, they’re just misunderstood fintech
    fintech techcrunch

     
  • @fintechna 7:46 pm on June 20, 2016 Permalink | Reply
    Tags: , Alternative, , , , , , , ,   

    Alternative lenders aren’t going away, they’re just misunderstood 

    Alternative lenders aren’t going away, they’re just misunderstood fintech What a difference a year makes. In 2015, Lending Club was a marketplace-lending leader with a $ 7 billion market cap, and the media was heralding the approaching tech-enabled lending revolution. Now, with Lending Club and OnDeck Capital&;s shares getting pummeled by public market investors, news outlets are asking if this is the end for . Read More

    Alternative lenders aren’t going away, they’re just misunderstood fintech Alternative lenders aren’t going away, they’re just misunderstood fintech Alternative lenders aren’t going away, they’re just misunderstood fintech Alternative lenders aren’t going away, they’re just misunderstood fintech Alternative lenders aren’t going away, they’re just misunderstood fintech Alternative lenders aren’t going away, they’re just misunderstood fintech

    Alternative lenders aren’t going away, they’re just misunderstood fintech
    fintech techcrunch

     
  • @fintechna 8:56 pm on June 9, 2016 Permalink | Reply
    Tags: Alternative, , , , Licensing, , StateByState   

    US Blockchain Businesses Push for Alternative to State-By-State Licensing 

    Six and advocacy groups have submitted public comments to a report released by a US bank regulator earlier this year.US Blockchain Businesses Push for Alternative to State-By-State Licensing fintech
    fintech techcrunch

     
  • @fintechna 12:18 am on June 9, 2016 Permalink | Reply
    Tags: , Alternative, , , , , , , ,   

    Alternative Data In ‘Early Adoption Phase’ for Asset Managers, BofA Says 

    The use of for management has grown in popularity, but the industry is far from a complete , Bina Kalola head of global strategic direct investments for global banking and markets at Bank of America, said during the Future of Conference this morning. “Data is beingRead More
    Bank Innovation

     
  • @fintechna 10:54 pm on May 21, 2016 Permalink | Reply
    Tags: , , , , Alternative, , , , , , Lexicon, ,   

    The Alternative Fintech Lexicon 

    The Alternative Fintech Lexicon fintech

    The Lexicon

    – Accelerators: Where startups go to learn. What they learn is anybody&;s guess. See Decelerators.

    – Alternative Lending: An alternative way to make the same mistakes in lending, over and over again. See Crowdfunding.

    – Anonymity: Required when discussing either financial services executives bonuses or the use of offshore centers when optimizing taxes and ownership structures. Not required when users interact with financial services firms. See Privacy.

    – AML (Anti Money Laundering): A set of procedures, laws and regulations financial services firms occasionally follow and regulators occasionally enforce. See KYC.

    &;  API (Application Programming Interface): A set of routines and protocols Wizards use to develop magical and frictionless interaction between software applications. Alternatively, an acronym Muggles use when pretending to be wizards.

    – API Call: A call muggles make to a private fintech investigator when trying to crack innovation, as in &;I think I I am going to make A Private Investigator Call now as this digital innovation thingie is very tricky.&;

    – Artificial Intelligence (AI): Neither Artificial nor Intelligent. A major vector for future unemployment in the financial services industry.

    – Augmented Reality (AR): Where the sex industry and the financial services industry will eventually meet.

    – Big Data: Applied to most data analytics projects to produce negative returns.

    : A Numismatist&8217;s worst nightmare.

    – Bitcoin : A group of digital prisoners, chained to one another, and bound to perform menial digital tasks recorded on a digital ledger in return for the promise of a better future life.

     &8211; Brick and Mortar: A Financial Services Incumbent&8217;s Alzheimer&8217;s moment.

    – Cards: Credit, Debit, Reloadable, Gift. The most profitable scam in the history of the financial services industry.

    – Card Not Present / Card Present (CNP/CP): Arcane revenue producing schemes for the payment industry.

    – Checking Account: Soon to be yesterday&8217;s money machine.

    – Conferences (Fintech): Gathering places where thought leaders pretend to educate, startups pretend to pitch, corporates pretend to care, venture investors pretend to scout for investments. Contrary to popular belief, pizza is not served freely at conferences. See Hackathons.

    – Consensus Ledgers: Free range Blockchains. Also, for the accountants in the audience, not a ledger. See Bitcoin Blockchain, Ethereum.

    – Consensus Machines: Free range Consensus Ledgers, bred with organic Turing corn.

    – Core Systems: The tools with which service providers keep , insurance companies, asset managers hostages.

    – Corporate Venture Capital (CVC): The art of pretending superior investing will occur when informed by corporate fiat. Alternatively, the science of Fin over Tech. See Venture Capital (VC).

    – Crowdfunding: Applies to either equity or lending. The art of pretending it takes a crowd to finance stuff. See Alternative Lending and Equity Crowdfunding.

    : A currency which adheres or belongs secretly to a party, sect, or other group.

    – Customers: The one thing most fintech startups are still looking for. See Traction.

    – Decelerators: Where startups go when they move too fast. See Accelerators.

    – Digital: Related to the storing of information as either a 0 or a 1. Example of a 0: &8220;Soon we will have zero brick and mortar branches&8221;. Example of a 1: &8220;Banking executives compensation is again approaching 100% increases.&8221;

    – Digital Banker/Insurer/Asset Manager: Tomorrow&8217;s endangered species.

    – Disintermediation: The act of creating another overlord as in &8220;My API will rule over your API.&8221; See API.

    – EMV (EuroPay, MasterCard, Visa): A technical standard built to promote online fraud.

    – Entrepreneur: Central protagonist in ancient Greek tragedies or comedies involving the critique of money. Alternatively, a post Marxist practitioner. See Startup.

    – Equity Crowdfunding: Platforms that may provide much work for litigation lawyers in the future.

    – Ethereum: A public blockchain platform which promises to free digital prisoners shackled to other public blockchains. See Bitcoin Blockchain.

    – Ethics: An extraordinary expense that appears below the EBITDA line both in GAAP and IFRS.

    – Financial Inclusion: An issue solved by according to blockchain enthusiasts. A profitability issue according to financial services incumbents. A game changer according to social impact investors.

    – Fintech: Neither &8220;Fin&8221; nor &8220;Tech&8221;. Modern day alchemical process.

    – Fraud: The act of defining loose operations control in order to elicit fraudulent activities which will eventually be billed at cost plus to the end user. In the payments industry, the tradeoff between convenience and privacy.

    – Free: A new &8220;source of revenue&8221; paradigm, e.g. free trading, free investing, free payments. To be noted, free fraud is not yet recognized as a new source of revenue.

    – Gateway: A purgatory software interface where payments transit before reaching heaven.

    – Governance (in Fintech): What often lies beyond the wall.

    – Hackathons: Events that bring fintech developers, designers, corporate executives and innovation managers together around pizza. Hackathons organized around the summer solstice are sought-after events, as it is believed pizza tastes better during that period of the year.

    – Hash: Non-edible but still intriguing recipe comprising mathematical algorithms that map data of arbitrary size to data of fixed size. Frequently used in the Insurance industry as exemplified by the old saying &8220;The actuary made a hash of the life expectancy of millennials.&8221;

    – Incubators: Where corporations are able to smother good fintech ideas to death.

    – Innovation: What VCs overpay for. What corporations are seldom capable of delivering. What only a few startups can deliver.

    – Insurtech: Ego booster term crafted for the Insurance industry. See Fintech.

    – Interchange Fee: Soon to become a land far far away, especially in the US.

    – Interest Rate(s): A conceptual think piece for most fintech startups. Baudrillard&8217;s famous tirade comes to mind when addressing the Sorbonne in 1968, &8220;If interest rates were so important we would have used the term FinInt or IntTech, not Fintech.&8221;

    – Jinn: Spirit capable of appearing in human or animal form and influencing VC investors, corporations and startups alike via consulting analysis, recommendations, white papers. See White Papers.

    – Joy: What fintech startups seldom experience. Referred to in the context of an Initial Public Offering (IPO).

    – Know Your Customer (KYC): The process whereby a business weighs the cost of verifying a client&8217;s identity against the profitability of said client. For a fintech startup, that which will be developed and financed when the sooner of a cease and desist letter from a regulator is received or a $ 100 million funding round is closed, maybe. See AML.

    – Lead Generation: A poor man&8217;s version of revenue building.

    – License(s): Put or Call Options that give a regulator the right but not the obligation to levy fines in the future based on real or perceived violations of the terms of the license granted.

    – Menagerie: Pack of Thought Leaders focused on cornering the market for social media power ranking and industry top lists via &8220;elaborate&8221; insider trading techniques. See Thought Leader.

    – Millenials: What fintech startups say they focus on and financial services incumbents know they have no clue about. See Customers.

    – Mobile Wallet: Darwinian evolution of a checking account. That which will generate revenue, but not necessarily to financial services incumbents.

    – Near Prime Credit: A set of customers who are sub prime but for marketing purposes are labelled near prime as copywriting and creativity is important in the lending industry. See Sub Prime.

    – Net Interest Rate Margin (NIM): The wet dream bankers and insurers dream every time they sleep.

    – Network effect(s): Often talked about, seldom witnessed in the financial services industry.

    – Non Performing Loans: According to alternative lenders, crowd lenders, p2p lenders, marketplace lenders, a mathematical impossibility.

    – Non Traditional Data Sets: Data sets you would not want your mother to know about, let alone look at.

    – Omnibus Account: A money-carrying vehicle, originally horse-drawn. Most bank-operated omnibus accounts are allegedly still operated manually and horse-drawn.

    – P2P: A business model that allows people or entities that have nothing in common to do business with one another. From the word &8220;peer&8221; which means &8220;complete stranger&8221;.

    – Payday Lending: The act of producing indentured servitude.

    – Paying Customer: The rarest of species, seldom observed in the wild by startups.

    – Payments: Payments come in two varieties. The &8220;slow&8221; variety which refers to the medical condition whereby financial services incumbents produce revenue via the sloth-like pace of provisioning of payments. The &8220;fast&8221; variety which refers to a simple technology feat which most financial services firms pretend is impossible to achieve.

    – Payment Network(s): Money printing machines.

    – Personal Financial Management (PFM): Movement originally triggered by the wealth transfer mechanism that occurred between Intuit shareholders (buyers) and Mint shareholders (sellers).

    – Platform(s): The shoes many incumbents want to wear.

    – Prime Credit: A set of customers lenders desperately would like to lend to but never do as these customers seldom need credit. See Near Prime.

    – Privacy: What is enforced after weighing the cost of breach and compliance against executives bonuses as in &8220;We only had to pay $ 10 million fine for the latest data breach&8221;. See Anonymity.

    – Proof of Work: An emerging contributor to global warming.

    – Quantum Computing: That which will render many things and many people redundant.

    – Rails (Payment): Train tracks over which steam locomotives shuffle back and forth wagons chock full of payments.

    – RegTech: Because regulators should have their tech too. Alternatively, because why not.

    – Regulator(s): Satan and his minions, unless they use technology. See RegTech, White Walkers.

    Advisors: Not a robot. Not a financial advisor. Fancy term for a digital channel.

    – Scaling: The ability to gain traction in unique ways in fintech, e.g. &8220;Startup bankruptcies tend to scale well.&8221;, &8220;NPLs scale with ease in a down credit cycle.&8221;

    – Smart Contract: Neither smart, nor a contract. For a blockchain developer, nirvana. For a lawyer, anathema. It is believed that through selected breeding a new specie of lawyer/developers will be created thereby enabling the wide adoption of smart contracts.

    – Spice: A highly addictive Melange which fintech celebrities &8211; VCs, entrepreneurs &8211; consume daily and heightens their awareness and prescient abilities. Repeated exposure to &8220;Up&8221; Spice mutates fintech celebrities bodies into virtual social media avatars. Repeated exposure to &8220;Down&8221; Spice is deadly.

    – Startup (Fintech): Ancient Greek play. Can either be a tragedy or a comedy. Focused on exploring and expanding upon a post Marxist critique of money. See Entrepreneur.

    – Sub Prime: A set of customers that even copywriting cannot disguise and that, with the help of advanced data analytics, will yield positive returns, up to a breaking point. See Big Data.

    – Token(s):  Reduces fraud, makes EMV obsolete, helps with authentication and authorization of transactions in the payments industry. In other words, a really cool and useful thing which explains why it is so darn difficult to adopt industry wide.

    – Traction: The startup science of demonstrating progress in the absence of Customers. See Customers.

    – Thought Leader: Rhetorician who occasionally attends conferences for the pizza, not realizing hackathons are where the dough is. See Menagerie, Conferences and Hackathons.

    – Uberization: An event that simultaneously holds the lowest probability of occurrence and the highest probability of utterance in fintech.

    – Underbanked: A universe of people and businesses that refuse to comply with traditional profitability measures as defined by financial services incumbents.

    – Unicorn: Animal hunted for its skin by rational investors. Alternatively, animal bred for its magical properties by irrational investors.

    – Valuation: A +/- rounding error. Also, one of the key ingredient of Spice. See Spice.

    – Venture Capital: The art of pretending superior investing will occur when informed by market fiat. Alternatively, the science of Tech over Fin. See Corporate Venture Capital (CVC).

    – Veteran: Old hand operator with minimum 30 years experience in the financial technology industry and minimum 4 credit or business cycles under his/her belt. There are few veterans in activity. The only credible actors to be equally efficient and effective at either of fintech investing, fintech startup building, fintech innovation. One can recognize a veteran based on his/her use of profane language and colorful views on his contemporaries.

    – Wallet: What any participant in the industry wants to &8220;share&8221;, as long as it is not theirs, as in &8220;Our share of the customer wallet is important for our future health.&8221;

    – White Papers: Exercise in casuistry.

    – White Walkers: Government officials who hold the power to resurrect dead banks but not yet the power to resurrect fintech startups to the dismay of VC investors.

    – Xanadu: An idyllic place otherwise known as the Silicon Valley. &8220;In Xanadu did the great VC Khan / A stately pleasure dome decree&8221; is a alternative copycat poem published in the 19th century describing fintech venture investing and venture eco systems.

    – Yield: See Interest Rate(s).

    – Zelig: Describes the act of mimicking the fintech activities of leaders, as in a &8220;me too&8221; fintech VC or a &8220;me too&8221; startup. For example &8220;This fintech venture fund is so zelig!&8221;

    FiniCulture

     
  • @fintechna 4:54 am on May 9, 2016 Permalink | Reply
    Tags: Alternative, , Dynamic, , Pricing   

    Dynamic Pricing in Alternative Lending & P2P Lending 

    Dynamic Pricing in Alternative Lending & P2P Lending fintech

    in the market may be driven by the potential for relationship pricing in conjunction with traditional banking partnerships.

    As a follow-up to our article, “A Business Case for Dynamic Pricing in Banking,” there is a great deal of discussion regarding the role of dynamic pricing in lending and how it may be applied in the alternative lending market. Lending is steeped in risk and every nuance of a lending product is crafted to mitigate that risk. Is dynamic pricing even possible in the alt-lending market?

    With the obvious heavy hitters like Lending ClubKabbageProsper, and OnDeck garnering the lion’s share of attention, there are still approximately 1,300 companies in the US offering services to about 1% of the overall market – one projected to be upwards of USD$ 350 million by 2025. That leaves the 6,500+ traditional American bank providers fighting for the remaining 99%. Where’s the competition, you ask?

    In the ’ view, that 1% constitutes the “unbankable” or “undesirable” loans. But there is strong evidence that it’s not the retail consumer with bad or no credit history that the alt lenders are going after, but the small/medium enterprise (SME) business customer pool that is the primary, and most profitable, target.

    Be it consumer or SME, what makes alt lenders attractive to customers comes down to pricing.

    In the consumer market, peer-to-peer lenders like European based Zopa and Funding Circle offer investors (depositors) interest rates typically between 5-6%, attractive to those offered 2-3% traditional bank returns. Granted, borrowers face much higher interest rates (6-33%) than traditional unsecured loan rates from traditional banks (average cap of 16%).

    The market sets the price (as do the Central Banks). And no lender is in this for charity – they want a marginal return that covers operational costs, liquidity coverage requirements, and profit. How individual lenders, alt or not, manage their appetite for risk determines a portion of those margins. So, does risk lend itself to dynamic pricing?

    Can we Dynamically Price a Single Product?

    How elastic is single product price? We’ve asked this question in our previous post, and concluded that relationship pricing is difficult in singularity, but a competitive differentiator and a smart strategy when offerings are bundled. Questioning how the lending market may adapt to adopt dynamic pricing leads us to believe that alt-lenders will slowly start behaving more and more like traditional banks to take advantage of a pseudo-dynamic pricing strategy.

    Before we rationalize this assumption, let’s look at two pricing strategies that we predict will play a role in the lending market.

    Abandoning Strict Cohort Analysis Pricing: This method of pricing to market segmentation usually means lumping potential customers into a single risk assessment category based on FICO or credit scores. This is the primary factor that determines the price of unsecured risk. Including other factors like age, education, employment and salary history, geography, and potential lifetime earnings, as well as potential repeat lending business to assess risk is a nod to relationship pricing (and lifetime customer value to the lender) that paints a unique profile for each potential customer. With big data and behavioral analytics, the straight jacket of strict cohort pricing loosens up, and pricing inches closer to reflecting the lender/lendee relationship value.

    Alt-Lending/Bank Partnerships: While not a pricing option per se, a partnership is a risk mitigation strategy and customer service tactic by banks. It is also a way for banks to bolster their offerings, but the end result is more pricing flexibility. A recent partnership announcement between Regions Bank and alt lender Fundation underscore the advantage to banks:

    “This unique agreement….allows Regions Bank to expand loan-product offerings and method of delivery for small businesses while also cultivating long-term revenue and loan-growth opportunities.”

    RBS and Funding Circle have a similar program, something that Santander and Funding Circle did first, back in 2014.

    A referral requirement in the UK has pushed banks and alt lenders into partnership, but the US market could see a similar push towards alliances.

    Relationship pricing in this partnership context is possible when the customer’s portfolio from both the bank and the alt lender is taken into consideration when the risk pricing/rate is offered. This is especially true if a current bank customer is referred to an alt lender – because the bank doesn’t have appetite for that risk that customer poses – but has some assets at the bank the alt lender could consider collateral. We don’t see it now, but we could.

    If It Walks Like a Duck, and Talks Like a Duck …

    Let’s return to our assumption that alt-lenders will start to resemble traditional banks by offering non-lending products. While they may not accept deposits in the same way as a traditional banks, there is still a strong resemblance.

    SoFi, primarily known for its student loan refinancing, accepts cash “providers” and pays them a higher yield rate (up to 6.5% as opposed to the typical 0.03% banks pay out) for managing those loans to borrowers. It can be argued that “providers” are in fact depositors, just depositors who aren’t insured by the FDIC or subject to regulations imposed by the Federal Reserve or Office of the Comptroller of the Currency. They can call it one thing, but the subtext is “super risky deposit”.

    Zopa calls their product “savings”, but it’s the same principle. Deposit money that is in turn loaned out, and get paid a higher rate on those “savings”. It’s essentially a higher risk deposit not backed by the UK government’s Financial Services Compensation Scheme.

    Payments is a natural next step … isn’t a credit/debit type product issued by alt lenders just on the horizon? Alt lenders could easily provide a card or app that draws on those ‘savings’ or taps into the line of credit. This is because loans are not inherently sticky products, and “underbanked” and “undesirable” lending customers even less so. Because of the high risk, they’re not attractive to banks, so there’s no incentive to encourage loyalty, let alone cultivate customer lifetime value.

    But when an alt lender can provide savings and payments, as well as credit, the stickiness factor increases, and individual customer profitability margins can increase. Relationship pricing for even a small bundle of products is now viable. Nuanced pricing of loan rates could easily be tied to volume of payment product transactions, add in periodic reviews of the volume of payments and make the interest rate adjustable, dependent upon payment volume. The more the customer uses the payment product to dip into “savings”, the better the loan or savings rate.

    While this isn’t relationship pricing in strictest sense of the word, it can be dynamic.

    Of course once multiple product offerings become the de facto norm (or there’s even a whiff of it becoming a trend), regulatory scrutiny follows. What a new regulatory framework looks like is anyone’s guess, and we’re not exactly clairvoyant. But we do like to read the tea leaves.

    Alt-Lenders Expanding Their Reach

    Risk priced products are nearly impossible to price dynamically or in context of the customer relationship when offered as a stand-alone product. The current alt-lending market can’t adopt this pricing strategy. However, it can inch closer to dynamic pricing by approaching cohort analysis differently. And new bank/alt-lender partnerships crack open the door to more nuanced risk pricing.

    Our prediction is that alt lenders will start to offer new, non-lending products. If so, then the door to dynamic pricing swings ever wider and we will see bundled offerings that can be relationship priced.

    FiniCulture

     
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