Holland’s #central #bank is preparing to #open a #campus dedicated to teaching others about #blockchain. In early September of this year, De Nederlandsche Bank is expected to open a campus where #banks and financial institutions can work together “under one roof” to learn more about the distributed ledger #technology that underlies #bitcoin, according to a […]
fintech techcrunch
What I heard at the Swiss International Finance Forum Last week I attended the Swiss International Finance Forum organized by NZZ konferenzen and with a theme “#Back to #growth”. Sergio Ermotti, CEO of UBS reminded the audience that all the &8220;Regulations that are killing us&8221; (us the regulated #banks) have succeeded in reducing the systemic…Read more Back to growth #despite the triple-witching in #banking & with a AAA #regulatory #recipe
Bank Innovation
The introduction of new technologies has facilitated new consumer and customer behaviors. These new behaviors have facilitated the adoption of new technologies. The resulting virtuous circle has ushered a period of rapid change which has profoundly change one industry after another. Industry incumbents have had to face a new reality where vertical integration, a fancy word for “owning the entire value chain” has turned into a liability. Indeed, the virtuous circle I mention has allowed new competitors to deliver value at one point of the value chain, without owning the entire value chain. Take the media and entertainment industries as an example. It used to be that “content was king” and “pipes were dumb”. Based on these heuristics Hollywood studios ruled over an entire value chain and were comfortable living in a world where the only thing they needed to do was to deliver their content to movie theaters. This is no longer true. Even though original content still rules, pipes are not dumb anymore. Pipes are actually smart, and that are built on top of platform strategies. Content is important, but so is how you create content, how you deliver it, with what and to whom, how you measure how it is delivered, plus the balkanization of communities of users make it eminently more difficult for a vertically integrated entertainment business to remain at the top of the food chain without profound changes. Witness the rise of Netflix, Amazon with their different value propositions around entertainment content and compare to how the main Hollywood studios are armed for the future.
The financial services industry in general, and the #banking industry in particular are now faced with the same tectonic changes other industries have faced. For #banks, this is an even more perilous exercise as most of them have never faced a breakdown of their value chain in the past and have enjoyed “near” monopoly in their geographies thanks to accommodating regulatory frameworks.
For simplicity’s sake, I break down a bank’s business into four layers (borrowing from a Boston Consulting Group framework):
Yesterday’s bank owned each layer. Clients dutifully visited their branches or relationship managers to consume products created by their bank which were delivered by the infrastructure owned by the same bank.
To the extent that banks faced competition it was from another bank which also owned its entire vertical stack end to end, which was operating in the same geography. Oligarch banks ruled.
Today’s bank is under threat at each layer of its stack instead which makes for a much more complex competitive landscape.
First, clients spend more time somewhere else than with a bank. We all know the relative decline of branches. Not only are retail consumers not visiting their branches as much as they used to, but they are also increasingly spending time in completely different ecosystems than in the past; communities where a local bank relationship manager has little leverage if any. These ecosystems are called Facebook, Google, Amazon, WhatsApp, Snapchat, Instagram, Pinterest. (Even though such change is not as pronounced with SME and enterprise clients, there is also change with these segments.) Second clients are used to a different customer experience based on the service they are getting from these digital communities, thereby making bank web apps and mobile apps always play catch up. In other words, clients are moving banks, and bank customer interfaces are under threat. Third, products are under threat although we have to nuance this statement and look at lending separate from the rest. Let’s look at the rest first. Accounts are being loosened from the tight grip of Mr Banker – PSD2 in Europe, the open bank initiative in the UK will take care of that – allowing, under consent, third party access to account data and meta data. Payments is experiencing the highest level of competition given it has the lowest barrier to entry, either from #fintech startups endogenous to the industry, new entrants exogenous to the industry (Amazon, Apple, Google, Facebook) or grown up startups (PayPal). Brokerage and Investments are prone to the same opening to multi-competition. This leaves us with lending which I believe should be analyzed completely differently than the rest because no one will ever be able to come up with a “zero marginal cost” lending product. Indeed, the cost of borrowing is comprised of the bank’s cost of borrowing and a margin to compensate for risk and provide adequate profit. That cost will never scale to zero or near zero. This, in my view is the main reason why lending will never experience an “Uber” moment where banks will be completely disintermediated – further, think of the unintended negative consequences of a massively large lender for example – whereas the main cost of the “rest” is that of delivery and marginal cost of delivery can and should be driven down to near zero. Fourth, infrastructure is where there has been to date the least disruption and competition, notably around core banking systems and CRM, even though #blockchain #technology holds the promise of much change in asset servicing.
To date the overwhelming number of competitors attacking the above layers have not been successful. Fintech startups focused on investments (#robo advisory), brokerage, lending have not reached escape velocity and acquired meaningful market share to the detriment of banks. Some pundits believe it is because banks have much more defensible business models (regulation, licenses…). Although I do agree most startups have failed so far, I also know not to discount the entrepreneur/startup threat over the long run on the basis of a failed first wave. I am actually paranoid for banks as the overwhelming types of strategies banks have put in place to deal with change are in my opinion either inadequate or short term focused.
Indeed, banks have focused on revenue optimization strategies (pricing, cross selling, upselling, margins) or cost reduction strategies (layoffs, better hardware, better software) by applying concepts (digital banking, API banking, mobile banking, cognitive banking) on existing business models. To the exception of a few banks who recently started working on a platform strategy – which forces them to address the competition they are will face at each of the four layers – all other banks are still in a “vertical integration” paradigm. This will change – the market will force that change, some banks will adapt, other competitors will rise to the challenge.
I view all these bank moves as incremental evolutionary steps, good enough to compete another day, not good enough to reinvent banking drastically. A digital bank – and there are many startup digital banks in the UK for example – is still vertically integrated, even though it holds the promise of being a “better” bank.
Incumbents will have to choose how they want to compete going forward. Below are some of the potential options available:
I have to make several additional comments to tie loose ends.
If the above vision comes to fruition and we do see a segmentation of banking, I fully expect the regulatory and licensing landscape to change. In other words, we will see a new regulatory approach where different types of banking licenses will be issued based on the business model and its implicit and explicit risks to the market and to clients/consumers. Just to give one example, an Interface Bank as an AI powered Virtual Assistant may have to meet certain licensing requirements around providing financial advice to its clients but may not need to comply with lending requirements. To be clear, some fintech startups competing or providing services at each layer level may not require the same type of banking licensing as the Banks that will operate at each layer level.
Further, competition at each layer level forces one to think platform strategy which results in either developing and implementing one’s own platform strategy or becoming one of the building blocks of someone else’s platform strategy. There is no escaping platform strategies.
Additionally, layer specialization, other than with Lending, and I repeat myself here, can deliver very strong network effects enabled buy near zero marginal cost of delivery. This I believe will be in and of itself a revolutionary paradigm for banking.
Finally, the bank that will successfully partner and integrate with ecosystems of users, regardless of the approach taken, will stand a higher chance of success than trying to create their own new communities or continue with existing ones. Like it or not, social networks are here to stay and will take on a greater importance in our lives going forward.
Trying to craft a roadmap for the above vision is tricky. We are in the early innings of platform strategies or API/marketplace strategies for banks and much remains to be done – no one has declared a BaaS for example. I venture that we shall see increased activity along these vectors in the #next 5 years – the actions of Facebook, Google, Amazon, Apple, Alibaba (and Snapchat, Instagram, WhatsApp, WeChat….) will make that absolutely inevitable. Incumbents may also naturally gravitate towards a few of the six options I laid out above &8211; either as a result of further divestitures, acquisitions or mergers &8211; leaving space for new entrants (large tech companies, fintech startups). In other words, the industry is large enough to see various participants succeed and avoid a banks lose, new entrants wine scenario, or vice versa.
Last parting thought. I strongly believe the above also applies to the insurance industry &8211; with the appropriate tweaks.
Kickstart, a Swiss #accelerator program based in #Zurich, has announced the ten #fintech #startups selected to join its first batch of the #Kickstart summer program. These ten startups will now begin the acceleration phase and will temporarily relocate their teams to Zurich and prepare for Demo Day set to place on November 04, 2016.
The ten fintech startups are tackling a number of sub-segments composing financial services ranging from mobile payments, insurance, to risk management and stock trading.
via @UBSschweiz, Twitter
Veezoo, a Swiss startup based in Zurich that provides a tool for people to allow them to explore and visualize stock market data efficiently. Veezoo is supported by SIX.
James, owned by New York-based Crowdprocess, is a SaaS for risk departments. James allows risk officers to build, test and validate credit-scoring models, and is equipped with Machine Learning algorithms, techniques and validation methods. Crowdprocess is funded by Seedcamp, top Google executives, Thompson Reuters, the European Central Bank, Quant research funds, among other investors.
Sureify, by California-based Sureify Labs, is a SaaS-based engagement platform that provides a solution to carrier’s ongoing problem of staying connected to their policyholders. Sureify specializes in life insurance products.
Mergims is a Rwandan mobile commerce and payments app that focuses on remittances to African countries. Mergims allows for the payment of mobile topups, utility bills, but also links to critical services such as hospital, medicines, school and transports.
Gatechain is a Zurich-based startup that uses #blockchain #technology for trade finance that allows for the reduction of processing time and the lowering of costs while improving cash-flow in trade.
Zoa, a solution developed by Zurich-based company MyDataMint, is an application and a platform for exchanging personal data between consumers and companies. On Zoa, companies can buy personal data directly from users in exchange for cash.
Lenditapp, a New York-based company, provides a a cloud-based business process and Customer Acquisition Management solution for sales organization and funders catering to the alternative small business lending community.
Nivaura, formerly known as Crowdaura, provides a blockchain-based digital platform for execution and lifecycle management of small financial assets. The company targets investment #banks, asset managers, brokers, reinsurers and exchanges.
Surong 360 is a Chinese startup that provides a platform for peer-to-peer (P2P) lending. Targeted at university students and alumni, Surong 360 doesn&8217;t intervene in the transaction, but instead, functions as a social network for P2P lending with flexible interest rates.
BreadWallet is a standalone mobile #bitcoin wallet aimed at providing users with a simple, convenient and secure solution to send and receive bitcoins on their smartphones.
Launched in January this year during the Investor Summit, Kickstart combines the strengths of academia, global corporations, and many successful local startups, to deliver an internationally recognized startup program aimed at giving access to promising startups to Switzerland&8217;s hub of tech and innovation.
The Kickstart Accelerator is operated by Impact Hub Zurich and is an initiative launched in cooperation with DigitalZurich2025, a cross-industry project aimed at turning Switzerland into a leading digital innovation hub in Europe.
The Kickstart Accelerator has four verticals: fintech, smart and connected machines, future and emerging technology and food.
Selected startups are given up to 25,000 CHF in seed funding, a monthly founder stipend of up to 1,500 CHF to support living costs, dedicated mentorship from industry leaders, a shared office space and fast-track access to relevant industry partners and the Swiss startup ecosystem.
Backed by some of Switzerland&8217;s biggest companies including UBS, Credit Suisse, Swisscom, Migros and EY, the Kickstart Accelerator aims at supporting young international entrepreneurs and focuses on launching new products into the market as well as promoting the domestic digital innovation scene.
Featured image via @UBSSchweiz, Twitter.
The post Kickstart Accelerator Zurich Selects 10 Startups for Fintech Category appeared first on Fintech Schweiz Digital Finance News – FintechNewsCH.
#Beijing hosted the Global #Blockchain Summit last week and in typical fashion of Chinese events, it was a grand occasion. Over the course of the three day summit, participants were engaged in workshops, lectures and panel discussions. Leaders from the #Blockchain world all gathered at this event. Having been interested in Blockchain and #Bitcoin since the start of this year and integrating with the Blockchain community in Shanghai, this summit was the perfect chance to meet like minded people from all over the world and I found this as a unique opportunity to deepen my understanding of my newly found interest.
The conference, for me, was a bombardment of new information from thought leaders and experts on the matter of Blockchain and Bitcoin and it confirmed the 4 ways us humans anticipate and acknowledge information; There are things that you know that you know, things that you don’t know that you know, things you know that you don’t know and things that you don’t that you don’t know. Yes, slightly confusing, but learning anything with that framework helps a lot. Whether I was sitting through the talks or talking directly with people, not only did I find out new things I didn’t know but it made me deepen my understanding of the things I didn’t really know in depth but only knew that it had existed.
From a fresh mind that has just started to follow the developments and slowly learn the technical layers within the Blockchain space, and by no means an expert, here are 7 key takeaways I got from the Summit:
1. Faster innovation in China
Jeff Garzik of Bloq, and prominent figure in the Bitcoin Developer community, noted that there is faster innovation in China than the rest of the world within the Blockchain space. Aurelien Menant, CEO of Gatecoin, talked about why Blockchain Assets (cryptocurrencies/Dapp tokens) will become a leading alternative asset class. He predicts China will lead in Blockchain Assets due to the promise of cross border flexibility the #technology provides and the demand for transparency in China’s financial markets. With the Chinese government being accepting of the technology, it has become a gateway for Chinese entrepreneurs and companies to innovate and explore this technology and be a possible route for China to be transparent in their financial markets. One Chinese start-up that I thought was innovative is BitSe: BitSe, with their VEChain product aims to battle the counterfeit market to build a Blockchain for luxury brands to protect and secure the authenticity of their goods.
2. We will experience a new form of the internet
Many speakers put it differently; Jeff notably said ‘A Digital Wallet will be the new Browser’ where a user wouldn’t want 5 digital networks and wallets for 5 digital assets. There’d be that one wallet for everything. Jan Xie, a Chinese Ethereum Developer, pointed to an Internet 3.0 and there will be an interconnection of values on a larger capacity. According to him, it won’t be a social network anymore, now there will be an incentive network which will create a better business environment. Diego Guitterez of RSK Technologies compares what we have now as the Internet of Information to what we will have in the future as the Internet of Value.
3. Nobody likes the ‘Hard fork’
As the hack of the DAO came a week before the Summit, it was no surprise it will be a talking point. The consensus among many of the Chinese developers was that they were opposed to the ‘Hard fork’ idea suggested by the Ethereum Foundation.
4. Collaboration is key to push forward
Max Kordek, CEO of Lisk, emphasised the important of collaboration. He highlighted that competitors do not pose a challenge as it allows more of an opportunity to work with everyone else, but the biggest challenge is actually for that to happen, will projects collaborate and work together to move things forward?
5. Think Blockchain, Think Network
When wanting to build applications on top of a Blockchain on the biggest network and economy, I thought Jeff Garzik left us with another way to think about the Blockchain, he said not to think Blockchain as a technology but rather as a network.
6. Eric’s Law: Any asset can be digitised, will be digitised. Everyone, some machines and most AIs will have at least one digital ID
CEO of ViewFin, Eric Gu, was very vocal about how digital assets and smart contracts would shape our future. Thinking about how more digital our lives could be is interesting, and more particularly the implications. How will it impact the society, economy, business and our daily lives?
7. Things need to be made easier
During the Panel Discussion about Blockchain and New trends in #Fintech, Max Kordek emphasised the importance for things need to be made easy for the real world to understand. Deng Di, the Chairman of Beijing Taiyiyuan Technologies, stated how the 1st stage of the Blockchain era was a hobby for the techies, as Bitcoin was relatively new and Blockchain, the underlying technology, had not been explored. They were the first to get involved with Bitcoin and the #cryptocurrency network. The 2nd stage is when it became hot when central #banks and other big players started to recognise it a few years later, where many big players and governments are exploring the technology and he said we are currently in the 3rd stage, where the consumers have no idea about the Blockchain. A bottom up approach and top bottom approach is needed to educate the masses. He finally says, we show and thus prove to them how Blockchain works, not tell them how it works.
I really think the last point is crucial because with the advent of the internet or the phone, or any technology used by the masses, many use the technologies without thinking how it works. It may be explained in simple terms from a broad level, but it could only be done after there are use cases used by the masses. For a new technology to be explained simply that has not yet been in practical use by the world is still a difficult objective to achieve. Blockchain and its information is still in a sense raw, filled with code and technical jargon and Andre De Castro, CEO of the Blockchain of Things, has identified this problem as he aims to make it simple for enterprises to conduct business and not deal with technicalities such as making a new cryptocurrency and dealing with code.
Another observation I made when talking to people is that there is a huge split between those who are pro Proof of Work and those who are pro Proof of Stake. To my mind, when I think Blockchain, I think decentralisation, and Bitcoin offers the best example of a purely decentralised network, whereas the proof of stake is not completely decentralised and thus defeats the purpose of what the Bitcoin innovation and its underlying technology really stands for. I assume for specific use cases, it may make sense to have a Blockchain that uses ‘trusted nodes’ for verification. Anyways, this was just an observation which I won’t go into detail as there’s a lot of information about this online and there may be a long way till one prevails over the other, or perhaps coexist in the long run.
The Summit in Beijing showed me the promise of the Blockchain and what it could offer and I am excited in what the future holds. Our lives in the past decade have become more digital centric, particularly with the rise of smartphones and inter-connectivity and it could be even more digitalised if we can digitalise assets and exchange it. But it’s pretty funny; although we are so interconnected and exchanging information all the time, how is it that many people still do not know about Blockchain and Bitcoin?
[linkedinbadge URL=”https://www.linkedin.com/in/ahmed-al-balaghi-柏亚德-3a57215a” connections=”off” mode=”icon” liname=”Ahmed-Al-Balaghi-柏亚德”] is Language Student at Fudan University (Shanghai)
A group of #Russian #banks and financial services companies has formed a private-sector #consortium focused on #blockchain applications.
fintech techcrunch
At the end of the day, the bloodiest battleground in #banking is “real-time analytics for relevance in the financial relationship, and the partnerships that go into that relationship that allow that to happen.” This observation by Chris Skinner, founder of The Financial Services Club, is absolutely on point.
Banking is really about leveraging data to provide insights to customers just when they need it, in the way they prefer, through physical or digital channels. This means offering a delightful experience every time customers interact with their bank. But for this to happen, #banks need the right partners.
THE RELEVANCE STRUGGLE IS REAL
Let’s face it: banks are struggling to stay relevant in their customers’ lives.
When your customer does not know her branch director’s name anymore, or when customers avoid going to the bank more than their dentist’s office, it means the bank is losing relevance.
When customers only check their account balance, withdraw cash from the ATM and order a transfer from time to time, the Bank is not being relevant.
When customers are used to positive digital experiences with Apple, Google or Amazon, and don’t find a similar experience when dealing with their Bank, the Bank does not meet new generations’ expectations.
When customers get an instant loan from a new online lending platform, the bank is getting dis-intermediated. When customers are increasingly looking at crowdfunding and crowdlending platforms to make a better use of their money, the bank is out of the game.
As the above examples illustrate, relevance is the name of the 21st century banking game.
HOW TO STAY RELEVANT IN THE DIGITAL ERA
So how can banks stay relevant, or even gain relevance, when customers interact less and less physically, are lured by alternative options and even avoid dealing with the Bank?
Simply by impacting customers with the right solutions at the right time in the right way.
I know – easier said than done!
The best place to start is with the core function of banking: help customers better understand and manage their money. Basic, right?
But wait – which customers are we actually talking about?
The answer is all of them: the ones that are barely scraping by right up to the ones with money to burn. By all means, their bank should be reaching out to each and every one with properly segmented educational material, physical interactions and digital tools. Proactively and timely, at the different stages of their life.
To illustrate the potential contribution of #Digital Money Management (or PFM) to improving the lives of all kinds of customers, let’s separate them by saving capacity* (i.e. amount of disposable cash at the end of each month) and take a closer look. Depending on their needs and priorities, I’ll show how each customer uses the PFM features most relevant to their day-to-day financial life.
(*Separation by saving capacity is done for the sake of the argument, with no intention to oversimplify)
PFM FOR CUSTOMERS WITH LIMITED SAVING CAPACITY
These customers will generally be extremely cautious with their spending, withdrawing a maximum of around $50 from the ATM at a time. You know the type: The odd extra purchase. Minimal savings.
What these customers will love is the ability to visualize their expenses, which also come automatically categorized. They are more likely to set budgets for each category to effectively track weekly spending. Once they understand the meaning of Ok-to-Spend, they will check it often to eliminate those nasty, embarrassing surprises – no more “Card Declined” or “Insufficient Funds”.
Naturally, these customers love discounts and will appreciate receiving highly relevant offers in line with their spending habits. With the right software, their bank will be able to use machine learning algorithms to match merchant offers with customers’ purchasing behaviour at key moments in their buying journey. Before making any purchase, these customers might even check their app to see what-if they make the purchase, and how it will impact their balance and budget for that category.
Armed with these digital tools, the bank is truly helping customers with limited saving capacity to spend smarter and budget better. With this newly found discipline, such customers could even begin to start saving a little!
PFM FOR THE SAVINGS-CAPABLE (CASH-FLOW POSITIVE)
These customers generally focus on building future savings despite holding some debt, perhaps from financing their University degree or buying a car or acquiring a property. Still, they have a higher capacity to spend, and should therefore take care to spend and invest wisely.
Ok-to-Spend is an especially useful indicator for them since it factors in all direct debits, contributions to savings goals and even identifies spending patterns. The other side of the same coin would be Ok-to-Save which will become a monthly reference to build even more savings up.
Automatic categorization will shed some light on their spending and possibly help correct some (bad) spending habits. The good planners will start setting budgets online to better control expenses and creating savings goals to fund a recently announced wedding or summer holidays to Europe next year. Savings-savvy customers will especially appreciate perfectly-timed, personalized alerts and push notifications received from their bank, which is helping them gain full control of their financial situation without being overly intrusive or irrelevant.
Finally, cash-flow positive customers can get a broad overview of their finances and forecast and anticipate expenses looking at their personal financial calendar. This feature improves their receptivity to relevant merchant offers, product recommendations and financial advice that are relevant to their actual financial situation and lifestyle preferences.
PFM FOR AFFLUENT CUSTOMERS WITH HIGH SAVING CAPACITY
In my early-days experience in private banking, I learned that wealthier customers generally keep a very close eye on their money (maybe that’s why they’ve been able to accumulate so much) and can even be the greediest!
However, their higher capacity to save does not mean they don’t (want to) control their spending – a common misconception. Visualizations are welcome, and not only for their investment portfolios.
Actually, having an aggregated view of all their bank and card accounts, automatically categorized, visualized and analyzed, is a kind of nirvana very few high-savers have reached with their bank.
These customers are very used to receiving and even paying for financial advice, having their portfolio rebalanced, and taking risky investment decisions – but what does their spending actually look like? No clue. What if they are losing part of their investment gains in bad spending habits? No idea. Of course, some affluent customers won’t care – but others will.
Furthermore, they and their wife (or husband) will love receiving luxury merchant offers on their smartphone that fit their exquisite lifestyle and social status.
By being proactive, pushing the right notifications at exactly the right time, and providing personalized recommendations, banks can become or and remain relevant in their customers’ lives, which is absolutely crucial in the era of digital transformation.
Banks ahead of the customer experience curve are already (re)engaging with customers on a regular basis. They are already (re)building their relationships in a digital world. They are slowly but surely becoming the financial companion their nature mandates.
What’s even better is the full spectrum of customers would be grateful for such a delightful banking experience, each in their own way – even the ones who had previously lost faith. They would not be looking elsewhere, why would they?
[linkedinbadge URL=”https://www.linkedin.com/in/xaviermarcillac” connections=”off” mode=”icon” liname=”Xavier Marcillac”]
Xavier Marcillac is VP APAC at Strands and this post was originally published in Strands #Fintech Pulse
In recent weeks, governance issues are a primary concern for the #Ethereum community as it deals with how to build #smart contracts that are useful as well as innovative.
I am convinced of the viability of the Ethereum concept, if executed in a way that works for real human relationships. Business intelligence tells me that establishment players like #banks and governments are convinced too. Today they lack the brainpower to duplicate Ethereum’s achievements, but in time they will manage to execute a world computer for mainstream commerce. A longtime commercial lawyer, I could just build toward that, taking from Ethereum its brilliance and giving nothing in return. But I am more than just a lawyer, I am a dreamer with a mission.
The likelihood of wide-scale smart contracts adoption makes the development of effective commercial models for Ethereum even more important. Many of us aren’t the type to accept the dominant commercial paradigm easily. We want freedom of choice, of self-determination. We want to opt-out and do it our own way. With those freedoms comes the necessity of self-governance.
Done well, smart contracts will unlock for everyday users the wonders of private law previously only available to the rich. Private law has as its fundamental underpinning “freedom of contract”, a common law concept that respects the will of the individual to bind one’s self to a promise. Courts come into play in private law only when parties fail to self-govern or damage others. Staying within the sphere of private law is desirable in building smart contracts, at least as a first step. Taking advantage of property and contracts law benefits while avoiding torts and regulatory pitfalls requires legal training, but it is possible.
When humans learned to write on a wide scale, they began to record contracts, paper documents reflecting a previously oral process. They had the same questions of intent, governance, fairness and predictability as Ethereum developers as they developed ways to deal with the permutations of human contract. They saw in written contracts tool for building vehicles of unlimited potential.
Freedom of contract is real, and as Ethereum smart contracts builders it is what will set us free.
[linkedinbadge URL=”https://www.linkedin.com/in/nina-kilbride-71185610b” connections=”off” mode=”icon” liname=”Nina Kilbride”] is Head of Legal Engineering, Eris Industries and this article was posted on linkedin.
The current #banking ecosystem is built on a clear and transparent system of fees. Customers are charged fees based on products, transactions and services. It creates a level playing field of competition whereby a customer can choose the right provider based on perceived value versus fees declared. This model is now under threat as innovation from the online digital ecosystem is merging into financial services.
Fees are like queues.
Or bad hair days.
Annoying things you have to live with.
But what if you didn’t have to…
#Technology driving competition
#Finance was one of the first industries to adopt technology at a wide scale, particularly information technology and computers (IBM, 2016). Two things in Finance changed fundamentally with the emergence Financial Technology, or #Fintech as it’s now known.
A: Costs went down
How much time does it take to maintain a bank’s ledger on paper? How much time and effort is spent keeping physical records? That’s where we started. Today, paper is on its way out. In all meaningful senses the #banks run on computers now. Computers create efficiencies by eliminating manual repetitive tasks and increasing the speed of transactions. Efficiency saves cost. There is now less of a reason to charge people menial fees for everyday operations and transactions, as they are largely automated and instantaneous.
B: Competition went up
As technology created efficiencies, it also created opportunities. With technological efficiencies, you could undercut your competitors’ fees. With the onset of digital banking, initially in the form of online banking websites, banks could suddenly expand their footprint without bricks and mortar. No longer was setting up more branches and hiring feet on the ground the only solution to growing your business. You could serve customers virtually. Not just your customers, but other banks customers. Not just other banks customers, but other countries too!
Boy, this new punch card system will show ’em Midwest boys!
From monetary to value exchange
This global competition has sent financial services providers to further and further lengths to optimize their processes through technology. However, there are only certain limits to which costs can be optimized. Therefore new models have been adopted to become more competitive.
The basic building block of any business is a customer relationship. Once a customer relationship is formed, value is created through various services and goods that are sold. In the modern economy, sold has implied exchange in monetary value. After all, you could only find so many squirrel skins, and carrying pigs in your wallet gets old real quick. Given the fact that technology creates cost efficiencies, which drive prices down, and secondarily makes competition easier, there is always someone willing to take the customer relationship for a lower fee. Life insurance for a pork chop, anyone..?
The concept of Customer Lifetime Value was created to project the potential revenue that could be created from a customer over their entire customer relationship (Berger, Nasr, 1998). Therefore companies must balance the cost of acquiring a customer against the lifetime value. Whatever is left between those two figures becomes the earning potential through that single customer. Either you’re making money off Joe, or you’re paying Joe to be your customer. Usually the former. Ultimately then, competition drives up the cost of acquisition as companies go to further and further lengths to secure the earning potential of the customer, and similarly are willing to settle for lower and lower revenue in the form of fees.
In extreme cases,
like with some Fintech startups with truck loads of Venture Capital,
they will literally pay Joe to be their customer for 5 years or more.
Over time, fees become negligible, and the only logical step is to remove them completely. In a world of services that charge no fees, an alternative method for monetization must therefore exist. The concept of Value Exchange has been used in marketing to describe a transaction between a company providing a product and a customer, where the transaction goes beyond a simple monetary exchange (Ballantyne et al., 2003). This concept can be expanded to describe a business model, which is not based on monetary exchange at all. Life insurance for a back rub, takers?!
This type of approach was introduced to the masses in the 1990’s with the free online email service Hotmail. Users received free access to a fully featured email service. In exchange, they were simply exposed to advertising. As more and more users were attracted by the free service, the value of this advertising grew quickly. The model pioneered by Hotmail achieved explosive worldwide growth, making it the largest email service in the world in just two years after launching (Microsoft, 1998). Today it is one of the prevalent online business models used to great success by Google and Facebook, who are using advertising as the main revenue source across their various services and products. Through the advance of mobile technology in particular, financial services have become an increasing target for startups, which are adopting these new online business models.
Mechanisms for value exchange
Typical mechanisms for value exchange are passing the fees along the value chain, gathering customer data for targeted advertising, or monetizing the data itself. Each of these models poses different opportunities and challenges for financial services. The key issue revolves around regulatory approval, and the balance of data value versus data privacy. After all, what is the cost of one’s privacy?
A: Passing the buck
The first of the three models seems to be totally void of fees to a customer. Free ninety-nine, bro!! As it seems, nobody is paying anything. The party will go on forever! An example of this model is Robinhood, the free trading startup, currently expanding into international markets from its home base in the United States. Robinhood takes no commission at all from its customers, providing seemingly free trading. BEAUTY! According to their website, Robinhood states that they simply accrue interest off un-invested cash left in investment accounts. Given today’s zero interest rate environment, that clearly does not amount to any meaningful amount of revenue.
Suddenly every other way seems crazy
The same example of Robinhood also provides a variation on the value chain concept, by charging clear fees for additional services such as margin accounts. This model, dubbed Freemium, was widely popularized by mobile gaming companies in the late 2000’s. It means the basic service is provided at no cost to any customer, while those customers wanting additional services must pay fees, often at significant cost. The few pay the cost of the many. Who told you life was fair? This model has also become a mainstay of low cost airline carriers, as customers are increasingly paying for items such as food and drink, which were earlier modeled and built into the prices of all tickets. In the case of Robinhood, this is demonstrated in the form of fees for margin accounts, for traders who’s demands cannot be met with a regular trading account that has limits on trading volume and leverage.
Additionally, Robinhood have raised $66 million in venture capital which gives the company “freedom to focus on building an outstanding experience rather than short-term profits”, claims Robinhood (Robinhood, 2016). Which means they can afford to pay their customers to be their customers. This essentially means they are willing to lose money to make money later. While an admirably aggressive strategy, this type of price warfare pushes that later date further and further into the future. Once the business has achieved a sufficient scale, it will become profitable. Today, some investors may be willing to endure several years of revenue drought for a chance at achieving that holy grail: “scale“. Tomorrow, another investor may come along that is willing to go even further. The conditional nature of such strategies make them inherently susceptible to recession periods, where further funding may not be readily available, leaving such companies under threat of depleted cash flows and even bankruptcy. Sorry, didn’t mean to poop the party.
B: Laser-guided ads
The targeted advertising model was largely introduced by the free email services such as Google’s Gmail in particular. Through the capability of it’s famous search engine, and marketplace for bidding on ad placements, Google was able to monetize their email service. Google reserves the right to read the contents of your private and personal emails, and therefore can target very specific promotions against those contents. An example might be an email discussing flight plans to Egypt. The next day you may notice an ad within the Gmail application for a 20% discount on flights into Cairo. Dude, these Google tickets are off the chain!!
The critical element of this model is the targeting.
Finding the dude.
Simply placing randomized advertisements would not attract significant amounts of engagement from users, thus leading users to simply ignore the adverts. Most users have grown accustomed to such exchange in value, and even see the adverts as a useful tool in their daily lives, as opposed to seeing them as annoying adverts. After all, the dude got his tickets with a sweet deal.
This model is now making its way into the financial domain, for example in the form of spend tracking. A customer might receive a free credit card, with an accompanying mobile application for customers to track their spending. This spending data is then used by the company to attract advertisers onto the platform, to provide highly personalized ads. Against a fee, naturally. If a customer often buys groceries from a particular retail outlet, perhaps they would be interested in joining a loyalty program of that establishment. Customers that have just shopped at a sporting goods store may be interested in joining a nearby gym. Just lookin’ out for you, buddy.
Loot goes beyond savings analytics with in-app offers
This model is being adopted by some so-called challenger banks, which are offering their customers varying degrees of a digital-only bank. Often the service is limited to a credit or debit card, which comes with the companion app. This provides the bank a further opportunity to monetize, by simply charging minute interchange fees for each transaction (Guardian, 2015).
C: Pumping for data
The final model for value exchange that is being witnessed in the financial marketplace is that of direct data monetization. Perhaps the most complex of the models, it is a fine balance between maximizing the value of data gathered, while maintaining a sufficient level of privacy for customers. What kind of data is being gathered? Data about customers, data about their behavior, data about demographics, data about usage patterns, data about correlations, data about trends.
If you own a tinfoil hat, put it on now.
Early examples of data driven business models include Capital One, who recognized the value of detailed customer segmentation in evaluating consumer credit worthiness. In the 1990’s every other bank was using simple models and uniform pricing to offer credit cards. Instead, Capital One used statistical models to create more personalized products based on demographic and credit data (Capgemini, 2014). This was long before Big Data was an established term. Let’s call it Just The Right Sized Data. Trademark.
A more complicated model was introduced by the online providers of classified ads and airline tickets, which have largely replaced traditional channels. In the marketplace model, someone is selling, and someone is buying. Often, the person who is selling will pay a small fee to promote their listing online. Almost exclusively buyers enjoy the service for free. Sometimes marketplace providers will charge a transactional fee from the seller instead. In this approach, there are in fact two distinct customer groups. The more obvious customer group is the consumer of the service. Without this group there is no business model, as their data is the currency the company seeks to gather. Therefore most money and effort is targeted towards this customer group, even though they create no revenues. Hmmph, imagine that. The key is simply to gather enough data to sell. This data is then sold to the real customer, who may use it for any purpose deemed appropriate by the company in agreement. The nature of this secondary relationship may not always be apparent to the happy consumers of the free service. While obvious in the case of airline tickets, could the same be replicated to create a financial marketplace? Wait for it…
The early successes of this marketplace model have come with peer-to-peer lending (“P2P”), particularly in China. Here, the platform connects consumers or small businesses in need of cash flow with investors looking for those elusive 10%+ returns and not afraid of a bit of risk. Currently in China, there are more than 3,858 P2P providers (Economist, 2016). Leading providers CreditEase and Lufax are some of the highest valued Fintech companies in the world today. The data from China also shows that in such volumes there is always a rotten apple or two, with a few lenders running outright Ponzi schemes. If you see gold Lamborghinis, walk away.
A sea-side bungalow worth $20M was a gift to the CEO. I need a better boss.
Perhaps a more opaque, and controversial example of data monetization in Finance is that of Order Flow. Oooh, it’s on now! This concept has been widely publicized by the book Flash Boys (Lewis, 2014). Detractors of High Frequency Traders (“HFT”) point to the inherent unfairness of allowing certain market participants to pay for faster access to market and trade data. Whether HFT are a positive or negative market participant is an ongoing subject of heated debate and even academic research (Kirilenko et al., 2015). *cough* CROOKS *cough*. As market intermediaries, HFT are embedded within the financial markets, and there is precious little retail investors can do to choose how their orders are routed. Considering the traditional model was for the broker to pay for execution, it becomes clear that this arrangement may not always be in the best interest of the retail customer. Particularly, most customers will not be aware to any extent of the mechanics and impact of this business model. Seems fair! Said owner of brokerage while being paid by HFT. Totes legit. 100%.
Dude. Trust me. Duuude. It’s legit. Dude!
A promising and transparent model for data monetization is the Open Banking initiative in the United Kingdom (Open Data Institute, 2016). In theory, all banks would provide a common set of API’s that allow approved third-parties access to aggregate statistical data, but also actual customer data. This data could be used for a multitude of use cases by startups, while making competition more transparent between the banks themselves. A possible use-case of data monetization could be an intelligent fraud detection service, which aggregates data from all banks, and against a fee, provides the banks with suspected fraudulent accounts or transactions. In this scenario, customers would not be aware in any way that such a service and agreement was in place.
Some institutions may not necessarily see data aggregation and open API’s as a model worth promoting, as we have seen developing in the United States. For a number of years, account aggregation services like Mint.com, Personal Capital and FutureAdvisor have been able to carve out a sizeable market for Personal Finance Management, based on API access to bank and fund data. They have used the data to provide added value analysis and recommendations on improving consumer’s personal finances and investment decisions. As witnessed by Bank of America, J.P. Morgan Chase and Wells Fargo temporarily halting API access to such services last year, mostly around concerns in security (Wall Street Journal, 2015).
Mint sees what you’re doing, and tells you how to save
Yet there is a longer-term challenge for banks in losing the primary customer interactions to these services, and becoming a simple commodity provider. In such a service, there is less opportunity for banks to differentiate on anything else except price. Having a third party such as Mint accumulate as many as 20 million customers in just 5 years is tipping the scale of power away from the banks. We can’t have that, Chip. Gosh darn it! Do something! Such growth stories are attracting more venture capital into Fintech startups than ever before. This massive flow of funding makes a small startup a real contender in fighting for ownership of customers. Given enough scale, such startups might choose to provide their own competing products directly to their customers. Naughty, but I like it!
Value exchange as an agent for disruption
In the modern financial system, short-term interests of shareholders greatly out-weigh long-term competitiveness. One must simply look at Mark Zuckerberg prioritizing his global social mission over the investor’s financial interests, which gathered media attention (SEC, 2012). Another famous example is Steve Jobs, who’s vision caused constant struggle with Apple’s board, leading at one point to him being fired from the company he himself founded. That must have sucked.
Given the rigidity of public corporations, what implications does this cause to financial institutions in the context of a disruptive paradigm such as value exchange? It simply means they will be unable to sacrifice short-term financial positions, in order to explore and trial new business models. Large corporations cannot sustain loss leading business models for extended periods of time, particularly if it means sacrificing existing revenue sources.
This creates an inherent and significant advantage for outsiders with fewer fiscal pressures placed upon them. In fact, it is often the goal of venture capitalists to pursue high growth for years, accumulating great losses, only to achieve a meaningful market share. Therefore the Fintech startup community is primed to adapt to the value exchange paradigm. They will be able to start without any fees, only accumulating meaningful revenue if the concept and business model find enough traction to achieve scale. Through plentiful capital, they will be able to go to extreme lengths to acquire customers at losses for years before turning a profit.
It’s like a game of financial limbo.
How low can you go?
Underground, son. Next level.
An alternative strategy, avoiding high dependancy on such excessive external capital, is being implemented by #Robo-Advisor platform provider Bambu. While the long-term goal is to enable financial inclusion through a direct-to-consumer platform, the company and brand is being built with a scalable B2B model and low cost base. This avoids the typical pitfalls of Fintech startups, that often require years of R&D and licensing to take place before customers can be acquired. Once licensed, Bambu plans to offer it’s platform to non-financial players such as telco, media and internet companies. This approach has been proven in Europe by the marriage of Fidor and Telefonica launching a digital banking app, without a bank involved. Smells like disruption to me!
Bambu wants to turn Spenders into Savers into Investors
With the consumer offering, Bambu plans to operate in a world of zero fees, and make money through value added services much like the challenger banks. This could include financing short-term loans for consumers to reach their goals quicker, or ultimately find sellers for the very thing users are saving for. An example might be selling a discounted plane ticket to a user saving for their dream holiday to the Maldives. Not only does the dude get his sweet deal, but he can save for it upfront, like a financially responsible person might do. No need to max out the credit cards as per ‘uge!
Through the work of these pioneering companies, new models are being invented, trialled, and proven at an increasing pace. Like we have seen with other disrupted industries, once a model finds footing, entire industries are changed with incumbents left wondering what just happened. Just ask those who doubted AirBnB and Über how they feel now, if they’re still in business, that is. They’re probably still listed in the phone book.
Conclusions
In the last five years, we have seen the emergence of new business models within the financial services industry, often based on an exchange of value rather than traditional monetary fees. Most of these disruptive models are adaptations of successful online businesses in other industries, such as free email services, or websites offering classified ads and airline tickets. Early adopters of value exchange are most often Fintech startups that are looking to disrupt the incumbent institutions with aggressive pricing strategies and improved customer experience.
Some of the most successful growth stories are the peer-to-peer lending companies of China. This explosive growth also showcases the key challenges of the value exchange model. How can regulators approve, track and penalize all 3,858 P2P lenders in China? As the cost-of-entry into the financial markets goes down with the advent of technology, regulators are under increasing pressure to deal with the flow of innovation. Is the answer just do it? Time will tell.
Some markets choose to tackle the challenge head on, like in Singapore, where the Monetary Authority of Singapore has established their own Fintech team to address this emerging segment of the market. Yet for even successful businesses, the challenge regulation poses is one of internationalization. Due to lack of standardization across regulatory bodies in the United States, Europe and Asia, the cost of expanding business into new markets remains high. This can be seen in the highly localized Chinese P2P lending market and U.S. Robo-Advisory market.
From the customer’s point-of-view, the trade off often comes in the form of trust and security. While the low cost or even free service seems tempting, can customers trust these companies with their private data and money? These perceptions will evolve over time, and will have significant regional biases. Millennials in the United States may be ready to invest their life savings with Robo-Advisors, but same formula has yet to be proven elsewhere at scale.
Ultimately the consumer is the winner, as competition drives both incumbents and new entrants to innovate further to provide higher value in exchange for the valued customer relationship. Privacy concerns must be tackled head on to win the hearts and minds of customers. New technology will unleash new opportunities for efficiency and competition, leading to more creative solutions for removing cost while making profit.
In the end, the future of finance is free. Hashtag disruption. Emoji smileyface.
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Rather PAY than give up PRIVACY? Go FREE or go HOME?
References
[linkedinbadge URL=”https://www.linkedin.com/in/akiranin” connections=”off” mode=”icon” liname=”Aki Ranin”], is Commercial Director at Tigerspike and this article was originally published on linkedin.
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