You might as well call them e-Bank of America and #Wells Fargo #Digital Bank. Both #BofA and Wells, the No. 2 and No. 3 ranked #banks in the U.S., respectively, today for the first time released #usage numbers for their digital banking operations, and they are eyepopping. BofA got 112Read More
Bank Innovation
Three of the nation’s #largest #banks released their digital #user stats this morning, and yes, the banking world is still racing to #mobile. #Wells Fargo, in particular, demonstrated strong #growth both on yearly and quarterly basis, delivering on the CEO&8217;s promise of “continued focus” on tech and digital, despite theRead More
Bank Innovation
It’s possible that if we did nothing, the problem will eventually work itself out, but if you look around most conferences these days, there are very few people of color. #Banks and #fintech companies offer a robust, growing segment of the economy – what will it take to convince peopleRead More
Bank Innovation
Customers have recently stepped into the era of personalized services with apps built around their specific wants and needs. After Amazon, Netflix and Google pioneered customization of their offerings based on visitors’ past transaction history, consumers have grown to expect the same tailored experience from all other providers. #Banks alsoRead More
Bank Innovation
#Goldman #Sachs nudged #Google aside and claimed the No. 1 spot for the most favorite workplace among a survey of 600 students globally, a new survey from Emolument.com reveals. McKinsey claimed the No. 3 spot. Goldman Sachs and other investment #banks have been fretting that top undergrads #prefer tech startupsRead More
Bank Innovation
There are many nitty gritty problems that need solving in the financial services industry. #Technology, common sense, thoughtful regulation and new business models will address these over time.
There are also complex problems, bigly ones, that will require either deceptively simple solutions and/or intricate collaboration among many stakeholders.
I invest in solutions that address either, depending on scale and economics, and am passionate about the latter.
Here is a non-exhaustive list of solutions that address complex solutions which I am passionate about.
1) Low cost reliable banking: We know many consumers are underbanked, non banked or unhappy with their #banks. We still have not cracked the code for low cost reliable banking. I have invested in neo banks as well as digital startup banks in the UK. I still think there is much to do in this field and am interested in digital startup banks in the US to foster further competition and usher new simple licensed banking business models. I am equally interested in retail and SME low cost banking models.
2) New core banking/insurance systems: There are no new core banking systems in use by banks, same with insurers. This is a technology anomaly in need of being rectified. What with new technologies, new needs centered around data analytics, edge computing on the horizon and interoperability, we are in dire need of new core systems that are low cost to develop and low cost to maintain. I am keenly interested in open source initiatives in this space as a means to unlock this major issue.
3) Open Source financial technology: This is linked to the above core banking systems item. The power of open source software is tremendous. We see it with #blockchain technology, we see it with AI. Developing business models around open sourcing of basic code that powers financial services will deliver untold riches.
4) Bank as a Service platforms: I have written about this subject extensively. My interest lies in technology platforms that will drive the marginal cost of delivering a set of financial services or products to near zero. One can argue this is linked to points 2 & 3 above. (I need to think about Insurance as a Service).
5) Low cost savings platforms for the US: The 401K market is woefully inefficient, fees are too high, the value chain is too sclerotic. A new cheaper 401K platform would be ideal, but maybe there is a need for a new product altogether which would need legislative & regulatory nudges. Either way this is a massive investment opportunity in the US.
6) Secure micro payments platforms: There are no inexpensive and secure micro payments solutions for either digital goods & services, person to machine or machine to machine interactions. I do not see credit or debit card rails addressing this need. Maybe new models built off of Ethereum, maybe something else?
7) Regtech as a Service platforms: I believe regtech solutions will still be needed going forward for certain use cases even if we move towards a financial deregulation era. I do not believe in the viability of point solutions in regtech. I also do not believe one vendor will be able to provide a best of breed portfolio approach – the needs are too heterogenous, the technologies too varied. Hence, applying the concept of Bank as a Service to Regtech as a Service, with platforms that allow demand to meet supply in a frictionless way will be winners.
8) Digital Identity solutions: We live more of our lives digitally, we buy, sell, interact with one another, on social media platforms, on mobile apps. Our data is insecure, our payment data is insecure and our identities are are nightmare to manage. Comprehensive digital identity solutions that allow us to build trust, interact with one another and with companies, while securing our data and our privacy will emerge. I am keen to participate and collaborate with the winners in this space. Incidentally, I am equally interested in digital identities for things and for enterprises. Whoever cracks this space will have a very large success on their hands.
9) Data Marketplaces: By that I mean data marketplaces to monetize financial services data whereby at least one stakeholder (the seller or the buyer) needs a very different level of assurance with regards to data privacy & financial regulation. If we are enterting the digital age, and if data is a key ingredient of that age, then ways to monetize, exchange, buy, sell data that is tied to the financial service industries will be big businesses. Think the NYSE or NASDAQ, but for data and data sets.
10) House Purchasing/Renting platforms: Face it, buying or renting a home is a pain. It is a pain to show you are a good tenant, and it is a pain to secure a mortgage. There are many documents to procure, many signatures to make, many steps to go through, much due diligence on the buyer/tenant and seller/landlord side for buying/renting. Any solution that helps make the experience a delight, with little friction and with embedded financial services/products is a winner.
11) Cybersecurity insurance: Nascent space for sure, with lack of understanding of the risks. I dream of a marriage of reason between a insurtech startup and a cybersecurity consulting firm, backed by a forward thinking reinsurer. Definitely interested in exploring this space, especially knowing about the untold risks of IoT security or lack thereof.
12) Securitization markets for insurance: Admittedly I know little about this space, but the potential for pooling risk, segmenting risk, providing liquidity to certain asset classes seems rather interesting. Big problem to solve, bigger opportunity.
13) On demand micro insurance platforms: Mostly for retail, tailored for new usages of any type of asset, or new behaviors &8211; gig economy or otherwise &8211; on the fly. We have barely scratched the surface on this one.
14) Specialized Climate *Change* Insurance platforms: For farming in developed or emerging markets for example. Enough said.
Let me know about what makes you tick and which solutions/problems in financial services should be tackled.
ps: I have several other pipe dreams that are not as investable as the above, the main one being digital fiat currencies (physical fiat be gone). Maybe the subject for another post.
pps: Even though I am bullish on enabling technologies &8211; AR/VR, blockchain, AI, advanced data analytics, quantum computing &8211; I have not focused on these in this post, believing any of the above will be powered by one or several of them, hence my agnosticism.
8. Tom Blomfield, Monzo In this age of #fintech-rules-it-all, nobody (hopefully) needs an explainer on what a neobank is. U.K. specifically has been an epicenter of the mobile-first #banks, with Atom Bank, Starling Bank, Tandem Bank and Monzo as the main players. So why single out Monzo? Well, customer retentionRead More
Bank Innovation
For the last episode of the year, Brett King hosts a group of #Fintech all-stars — Chris Skinner, Jim Marous, Dave Birch, Ghela Boskovich, and Penny Crosman to review a bit of 2016 and talk about the trends and predictions for 2017. What’s #Next?
Bank Innovation
Connectivity and interdependence have increased in most industries, including financial services in the last decade. In the wave of digital transformation, new business models are born.
From the crisis of 2008 to date, EUR 19 billion has been invested in #Fintech companies (CB Insight, 2016) with hundreds of them newly founded. Though this number may not seem very high in the context of the balance sheets of the entire financial sector (EUR 28 trillion) or the recent fines some #banks needed to pay, there are many aspects that are clearly changing in the landscape of financial services. Customer expectations drive changes in business models. New partnerships as well as methods of connecting borrowers and lenders are born.
Herein I provide my reflection on recent trends and highlight some key predictions for 2017 in the #Alternative Lending landscape in #Europe.
1) Banks will continue to shrink their Balance Sheets and will invest in new business models and partnerships
Europe relies heavily on banks. Therefore, in order to assess the lending ecosystem, I always start with what is going on with the banks. Banks have been shrinking their balance sheets since the crisis. In 2008, the total assets of banks in the Euro region stood at EUR 33 trillion and declined to EUR 28 trillion by 2015 (ECB, 2016). Just to put this number into context, the decline is higher than the combined balanced sheet of five major banks (Rabobank, ING, ABNAMRO, Deutsche Bank and Unicredit) as of June 30, 2016.
In terms of profitability, it did not really improve this year. Interest rates continued to be low, capital requirements became harder, compliance rules and penalties remain harsh.
The first 6 months of financials in 2016 indicate declining trends in many aspects, including revenue and deposits. The net interest margin of the Top 10 listed banks in the sector further reduced to below 1.5%, which is structurally lower than in the US. Return on equity was 5.8%, which remains below the cost of capital, estimated to be around 9%. The prolonged low profitability is very challenging, especially as it coincided with a low equity base and increasing capital requirements.
Regarding outlook, the quantitative easing program is being extended so any interest rate hike is pushed well into the future. This environment forces banks to be more efficient with all of their key resources: people, branch network, system and their balance sheet. In practice, this implies closing down branch offices, reduction of headcount, further consolidation and tighter balance sheet management. Since the peak of 2008 till 2016, more than 350,000 jobs disappeared. This seems high, but between 2000 and 2008, almost 1 million jobs had been added to the sector. In this context, there might be still potential for job cuts. (The figures are based on listed banks representing approximately 80% of the total assets of the European sector.)
In order to create operational leverage of their business origination capacity, banks are likely to rely on future partnerships.
Banks will further explore alternative lending avenues and strengthen cooperation with institutional investors and Fintech companies. This creates new attractive opportunities for investors or potential partners that may have limited business origination or risk management capabilities but offer balance sheet capacity or more efficient business execution.
2) Political support to alternative lending will strengthen
The funding needs of the European economy remains larger than ever. The sentiment that Europe in terms of economic growth is lagging behind the USA seems more widespread than ever. The need for a more diversified funding source in Europe is more urgent than ever.
I see strong evidence that the conviction among key decision and policy makers in Europe is leaning towards increased lending via alternative sources. Over-reliance on banks made us too vulnerable and constrained our economic development and we need to increase resilience via diversifying funding sources towards the European economy.
This vulnerability of Europe is clearly illustrated by the Basel IV debate in recent months. The proposed legislations, which had been discussed in Santiago some weeks ago, favor a regime shift towards a less risk-based approach for credit risk. These would need to be aligned and inserted in capital requirements of European banks (Capital Directive) with very significant potential impact on the economy, including mortgage lending. Proposals to increase capital requirements for lower risk-weight portfolios, such as mortgage loans are disproportionately hitting European banks (Fitch, 2016).
As the European banking system finances about 75% of the economy, the potential adverse impacts are a lot higher. In contrast, only 25% of the US economy is financed by banks. It is largely capital market-based and long-term residential property risks are covered by government agencies (Fannie Mae and Freddie Mac). This diversification enables the US banks to operate with lighter balance sheets and any new legislation has less impact.
European banks are more sensitive to any regime shift and could be forced to decrease their direct lending to corporations and households. More importantly, any of these adverse changes in lending capacity has a direct impact on the economy. They understandably issued a strong pushback on the proposal.
This illustrates profound vulnerability. As Olivier Guersent, DG for Financial Stability, Financial Services and Capital Market Union at EU pointed out this month, “We have to set the rate of retention in securitization market to make sure that there is a market. Legislations are no use if there is no market anymore.”
I believe our policy makers in Europe will become more articulate about the need for a diversification of funding sources.
This implies a stronger push for support for developing alternative lending channels, securitization market and capital market union initiatives. There is also likely to be more scrutiny and consequently, regulation to ensure consistency and a more level playing field between risks of banks and non-banks and transparency to investors about risks they are taking.
3) Institutional investors will show increasing acceptance to alternative fixed income products (e.g. private debt)
The search for yield remains a key theme in a low-return, volatile environment. Those who can deal with and accept the illiquid nature of the asset class will find a safe haven in private debt. These assets have limited liquidity and mark-to-market pricing; consequently, they “look and feel” stable.
Institutional investors (insurance companies, pension funds, etc.) are inherently more suited to participate in funding the economy because they capture a large percentage of long-term savings. However, the infrastructure to facilitate this remains mostly at the banks and the investments need to be channeled via capital markets and partnerships. The growth of partnerships has been painstakingly slow. There needs to be significant education and convincing done also at supervisory board level at these institutions.
Last but not least, investors seem to have high return expectations from private debt instruments that need to be managed. At the moment, a high percentage of investments are going to the highest risk basket in private debt (e.g., direct lending with return exceptions of 6-10%). The potential private debt universe is a lot larger than lending at 6-10% to sub-investment-grade companies. European banks have about 1.5% net interest margin and lend at an average interest rate of 2.5%. The bulk of the traditional banking products are safer assets and can be an excellent alternative to traditional fixed income products. Some of these new assets classes (like Dutch mortgages) has been favored by many institutional investors recently and a lot of similar product initiatives are likely to come.
4) Fintech: Getting more mature, more regulated with new collaborations
Many companies were formed with a mission to implement a new business model in the financial services industry. 2017 is likely to be an important year for Fintech when many of these business models will be tested on their ability to scale and operate under increasing regulatory scrutiny. The market will understand the significant differences between certain sub-segments of Fintech companies. Payments and #blockchain services are likely to cause the most disruption and we will see further diversification of deposits payments from retail clients.
Some new companies will simply run out of money to support their business model. The market is likely to test the real value contribution of “smart algorithms”. With increased interdependence, potential defaults will have negative impact on others in the sector. Fintech companies will further recognize the importance of operating in a regulated environment in order to build trust and scale their business model. Regulations above a certain size is inevitable and unfortunately, extremely costly (systems, KYC, compliance and risk management costs). In contrasts, risk management and compliance are core competencies of banks and the associated costs are already inherent.
Rather than perceiving Fintech companies as competitors, financial services companies will be reviewing avenues to develop collaboration models for mutual benefit and assess to what extent they can incorporate innovative business ideas in their incumbent setup.
Many financial services companies (e.g., BBVA, Santander, Goldman Sachs, JP Morgan) have established incubation centers, dedicated VC activities and M&A departments to capture on the most interesting opportunities.
A recent survey conducted by Roland Berger confirms that over 85% of Fintech companies anticipate stronger cooperation with incumbents. The most important reason mentioned was the access to a stronger customer base.
The power of this approach is to ensure that business or product innovation can be scaled up in a regulated environment, create a mode of comfort and eventually generate a critical mass.
Companies on different sides (banks, investors, Fintech companies) will have to realize that a collaborative approach is a very powerful way not just to overcome the challenges they face but to thrive.
[linkedinbadge URL=”https://www.linkedin.com/in/kindert” connections=”off” mode=”icon” liname=”Gabriella Kindert”] is Head of Alternative Credit – NN Investment Partners and this article was originally published here.
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