OPEN BANKING: Newly-horned unicorn Plaid acquires data aggregator Quovo for up to $200 million

In another unicorn story, let's take a look at Plaid, which we discussed just a few weeks back when they raised $250 million at a $2.7 billion valuation. Plaid solved the problem of financial authentication. Some of you may remember that when you connected a third party service to your bank account in the Dinosaur Age, that service would send you a few pennies into the account as a secret pass-phrase. It would be a random number, which you would then tell to the provider as proof you control the account. A few billion dollars later, Plaid has replaced this for tech companies with a simple API call. They do other stuff too -- which, broadly speaking, can be said to encompass all of the "Open Banking" PSD2 regulation in Europe. They just do it in the US, regardless of the wishes of the banks.

So we were delighted to see that Plaid used some of its new money to buy Quovo, a strong player in the digital wealth data space for up to $200 million. Unlike Plaid's banking focus, Quovo is strong at understanding investment management data. Take for example the following -- credit card transaction data categorization (Starbucks is a coffee shop), and tax basis reporting for stock purchases (bought at $100). These are different problems and require different teams. Quovo had built a strong stack on the investments side, powered a meaningful amount of the account aggregation for folks like Betterment and AdvisorEngine. Still, the acquisition likely has (1) much of the consideration in the form of Plaid stock, since venture investors don't love funding acquisitions, and (2) revenue-based valuation earn-outs. The cash outlay in that $200 million, we suspect, is more modest.

But also, let's look back and compare. Quovo's closest analog would be ByAllAccounts, which Morningstar bought for $28 million. Someone wasn't good at selling! Plaid's closest analog would be Yodlee, which used to power Mint and was purchased by wealth platform Envestnet for $590 million. In turn, BlackRock has bought into over $100 million of Envestnet stock. These more traditional versions of the same business were way, way cheaper than the Silicon Valley equivalents, and were prescient moves by the incumbents. Yet these are early days for financial data -- we are rooting for the whole industry to open up and digitize. 

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Source: Envestnet (Yodlee), Investment News (Morningstar), RIA Biz (Plaid/Quovo)

ONLINE BANK: Here's why N26 can be valued at $2.7 Billion

One key prediction for 2019 -- digital, mobile-first Fintech bundles -- is already coming true. N26, a German neo-bank, has raised a new $300 million to fund international expansion at a ridiculous, eye-popping, anxiety-inducing $2.7 billion valuation. After just a few years of operation and some European Millennials downloading the app. Can this thing really be worth it? Our initial bearish take was that this is not about how much the company is worth, but how much it needs. Venture investors are happy to burn money in order to grow B2C consumer brands, which have now gotten large enough to need (rather than earn through revenue or income) their unicorn valuations. Anecdotally, there's a 5x difference between the public and private markets -- so if you divide the billions by 5 and are no longer outraged, then this price is fair.

But on further thought, there is some defensible industrial logic here. Let's assume -- for the sake of argument -- that all the tech and financial product is trivial, and that all of the venture funding is being used to acquire customers. Further, let's assume that each round is responsible for client acquisition in the prior period. This translates into a simple fact: venture money is a marketing budget, so traction acquiring customers isn't an accomplishment. It's just paying for Facebook ads. On N26's 2.3 million users, customer acquisition costs are between $20-100 per user.

Let's assume that deposits are at $1.5 billion, which is about $650 per customer. That looks a lot like Acorns and Robinhood to us. Depending on assumptions, N26 could make somewhere between $3 and $10 per user per year, which is roughly a 5-10 year payback period. Looking at Revolut, who raised $344 million and probably spent about $150 million of that, venture capital per user looks like $40-110, slightly more expensive. Revolut's revenue is somewhere in the $20 to $30 million range, with a per user revenue of $5-10 as well. There are 600+ banks in the US with assets over $1 billion, so this looks ridiculous (i.e., not special) on its face. Until you realize that customer acquisition cost for financial products is $300, regardless of business line, that customer turn-churn is low, and that acquisitions in the market recently happened at $60 per lead. So we think that the customer acquisition machine is fairly reasonable. Deriving enterprise value on that by multiplying money raised by 10x does seem a meaningful stretch.

Another interesting angle is the fact that the last two rounds involved Asian money -- Tencent and GIC respectively. Those are not particularly price sensitive investors, and N26 is -- from that frame -- a cheap experiment to run in order to see what a foreign banking entrant can do in the United States. If I were Tencent, I would be taking detailed, copious notes.

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Source: Autonomous NEXT analysis, Bloomberg (N26), Company website

INSURTECH: Rage Against the Machine and $500MM telematics Softbank investment

Let's start off with the ridiculous, and get more ridiculous. SoftBank has a lot of money to invest in category killing fintech businesses, and one of the latest such players is Cambridge Mobile Telematics, which just received $500 million from the investor. What is it? A widget attached to a car windshield, and then used to collect data about the quality of a particular driver -- from speeding to breaking. This data is then tied to the purchasing of insurance, where "good" drivers have access to lower cost financial products. This is an interesting, and pioneeing, example of how edge computing will create orders of magnitudes more digital data that then feeds the manufacturing of finance. 

A sneaking suspicion in the back of our minds is that driving data is really good for training robots how to drive. Meaning, Google and the rest of the big tech companies are all running experiments with self-driving cars on the road to collect driving data. Something simple from a telematics device certainly is not equivalent to major machine vision and radar data. But it does paint a straight line towards how self-driving car insurance should be priced. Let's repeat that. If a widget in a car tells you insurance prices based on driving performance and you combine that with an AI car, you could compare humans and machines on an apples to apples basis.

The ridiculous part is the human response to tech-first transportation companies. In London, Chinese bike-sharing company Ofo is pulling out of the city because people steal and destroy their untethered bikes. In California, aspiring freedom fighters keep throwing scooters from Bird and Lime into oceans, lakes and rivers. Public service employees are straining to fish out these venture capital funded wonders out of the water. In Phoenix, self-driving Waymo cars are getting their tires slashed and assaulted by gun-wielding road-ragers (Mad Max style, we assume). All that to say that the human element in this story is allergic to being entirely prodded, measured, and automated away. Can politics catch up with SoftBank's Vision Fund, which could build Trump's wall 20 times over? We hope so.

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Source: DigIn (Softbank), Gizmodo (Ofo), Slate (Bird), Business Insider (Waymo)

PAYMENTS: Earthport selling to Visa for £200 million to solve cross-border payments

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One of the first big Finance bets on the Internet was payments. Fast forward 25 years, and we're still talking about payments. But let's set aside PayPal and its early penetration of eCommerce in favor of the enterprise. One such company is Earthport, founded in 1997 and focused on simplifying international money movement. Unlike the correspondent banking set-up and SWIFT, where money bounces between international banks like a plane ride with 5 layovers (wire instruction messages being the equivalent of your traveling luggage), Earthport built lots of local bank accounts across the world and centralized the counterparty. 

Twenty years later, it is in 200 markets and compliant in each regulated jurisdiction. As you know, that compliance is hard and expensive. For whom is the solution designed? Think about businesses paying international contractors, whether other SMEs along the supply chain, or remote workers. Or think about Transferwise, which rented the Earthport network to get its low-cost remittance product up and running. Impressive traction, you would say? 

Well, the market says it is only worth $40 million in revenue and $250 million in acquisition price. That is roughly 15% of the latest valuation for TransferWise at $1.6 billion. Even worse, it is a mere 1.6% of the $14 billion market cap for Ripple's cryptocurrency (and maybe unregistered security) XRP, supposed to be used for cross-border money movement. Same requirements for compliance, same underlying problem being solved, different generation of technology and entrepreneurs. While Visa is getting a neat capability, we can't help but scratch our heads at why Earthport didn't turn out to be a bigger deal.

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Source: The Block (Ripple class action), Crowdfund Insider (Earthport), Transferwise Graphic (By EdMercer - Own work, CC BY-SA 4.0), Penser (Ripple Graphic)

CRYPTO: 190 Exchange License applications in Japan, $183 million in funding for ICE's Bakkt

We'd love to write about all the interesting decentralized applications that the crypto community has scaled to millions of users. But we can't, because it hasn't. So instead, the news cycle is still stuck on the financialization and securitization of tokens in the far reaches of the Internet. At least it is a re-thinking of capital markets from the bottom up -- and this being a financial technology newsletter, we will oblige with the theme. But what may seem obvious on the surface is really not. Blockchain-based exchanges are not about better systems today (they may be in the future), but about finding cash flow to survive the nuclear winter and later expand into adjacent verticals (e.g., Coinbase, Binance).

The first story is about Japan, where a crypto-friendly regulator has received 190 cryptocurrency exchange license applications. Pause on that. Financial instrument exchanges are not this popular organically, with just 16 stock exchanges accounting for 87% of total stock exchange market cap (see chart below). In Europe, a similar fervor is in place about starting up new banks -- something about the power of the Crown in the palm of your hand. So seeing a wave of small, uncoordinated capital markets infrastructure teams try to bootstrap into a licensed, centralized/monopolized venue for financial exchange across the world isn't a sign of positive progress. It is a sign of a meme echoing across Twitter.

Second, we point to the $182.5 million funding round just raised by Bakkt, owned by the Intercontinental Exchange (also owner of the NYSE). Microsoft, BCG, Galaxy, Pantera and others chipped in. This is a fat raise, and it reminds us of R3's bank consortium, Digital Asset's trading systems, and a bit of Telegram's $1.7 billion venture capital black hole. Wall Street is building infrastructure for Wall Street, expecting to be the owner of all crypto OTC and institutional flows -- the blue ocean opportunity is now gone. Yet Asian exchanges like Binance continue to be the life-blood of retail crypto finance, built for users trained on video game money. Dressing this stuff up in a suit and trading a lot of it is a meme as well.

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Source: Cointelegraph (Japan), Japanese FSA (Virtual Currency report), Visual Capitalist (Stock Exchanges), Coindesk (Bakkt)

BIG TECH: Chinese Uber rival DiDi launches financial services to get profitable.

You likely heard that Apple is getting beat up. The two main reasons are (1) the trade war with China, a market in which it both sells phones and makes phones, and (2) consumer boredom with its products, which are seeing a slower upgrade cycle than previously. But at least we know what the company does -- makes hardware/software bundles, and sells them to us. In the parallel reality that is China, Huawei is trying to regain face after having its CFO captured, while Tencent and NetEase are not being allowed by the government to sell new video games because these games are too addictive for young people (not kidding). No existential dread over privacy (since it's the Party and not Facebook that does the spying, and election tampering is ... less important), but lots of dread over global competition and national pride.

This next bit is quite weird though. We know that financial services are bundled into all the tech companies in China -- whether into video games, online shopping, or search engines. But even more than that, financial services are seen as the seasoning that helps make your unprofitable venture-backed firm profitable. The Chinese version of Uber, called DiDi Chuxing with 550 million users, is burning about $1 billion per year. The solution? Launch insurance for critical illnesses, crowdfunding products, credit, lending, and wealth management services bundled into your taxi-hailing app. Huh? While the app certainly owns a nice consumer pipe, the idea that you can sell over-priced financial products at scale in your taxi experience to make up for poor operations is bonkers.

Who would even buy insurance from their Uber app? Quite a few people in China, actually. Unlike the West, where finance is Old Hat, Boring, and Terrible -- the unbanked narrative is much stronger in the East. As a great data point, let's revisit our recent Digital Lending analysis, that showed thousands of P2P digital lenders rushing across China to generate credit and liquidity. But reality was far from vision, with most of these enterprises revealed as Ponzi schemes and scams. The government's crackdown on the space could result in 70% closures of the industry this year, with Yingcan Group predicting that only 300 companies will remain. Doesn't look too profitable to us.

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Source: Slate (Apple), SCMP (AppleHuaweiTencentDidiDigital Lending), Autonomous NEXT (Digital Lending Evolution)

2019 FINTECH PREDICTION: Government and Enterprise Platforming, led by AI and Mixed Reality

Source: Images from Pexels,     2019 Keystone Predictions Deck

Source: Images from Pexels, 2019 Keystone Predictions Deck

Over the last decade, consumer tech has undergone a cycle of platform building, user aggregation, data mining, and value extraction, resulting in GAFA monopolies. Exhaustion with Facebook and the adjacent issues of privacy and radicalization, in our view, will lead to problems building new splintered consumer attention platforms for AI, AR/VR and other new media ground up.  This implies that consumer platforms based on new technologies will be much more long-tail oriented, serving niche markets with very strong fit. Communities may be passionate, but smaller.

Enterprise tech lags retail adoption by, give or take, 5 years. Similar platforming has not fully penetrated on the enterprise side -- Salesforce is not yet the AI monopoly we should all fear, and Open Banking is barely a fizzle. Therefore, we expect increasing data transparency, aggregation and monetization to occur in enterprise underwritten by venture capital investors. As an example, augmented reality adoption and economics will be driven primarily by municipalities, utilities, large industrial manufacturers, and the military. Similarly, artificial intelligence at scale (and its meeker cousin Robotic Process Automation) are to be directed largely at the workflows and manufacturing processes of large corporates. Dont' get us wrong -- consumer AI is extremely important -- but within Financial Services, the scope for this in the corporate world is even larger.

The corollary is that the pricing pressure that started in consumer Fintech -- roboadvice (150 bps to 25 bps) or in remittance (600 bps to 10 bps) -- will spill over into B2B banking, money movement, insurance, treasury management and product manufacturing. An inevitable outcome is pressure on profit margins as prices equilibriate. For those companies that are able to re-design operations using a digital chassis, they will be able to compete on the margin with Fintech unicorns. Those that are not should exit, or retreat into more bespoke, relationship-driven business lines. 

2019 FINTECH PREDICTION: Real Autonomous Organizations Take Shape

Source: Images from Pexels,     2019 Keystone Predictions Deck

Source: Images from Pexels, 2019 Keystone Predictions Deck

The last 5 years have seen fundamental innovation in crowdfunding, regulatory technology, the digitization of financial services, blockchain native organizations, and automated propaganda bots to attract human attention. 2018 brought with it sobriety and a back-to-traditional regulatory treatment of financial assets and their structures. In particular, the crypto asset movement (and its crypto-anarchist community construction) has been put into a well-understood, regulated box by most national regulators. While many interesting lego pieces exist, none of them have yet to fit together. Still, regular people have gotten a taste of both the distribution and manufacturing sides of financial mana.

2019 will re-combine these pieces to instantiate functional autonomous organizations that work in a constrained market environment and perform useful services. Unlike the failed experiments of the DAO or BitShares, these new DAOs will have a clear corporate form, a regulatory anchor, and will focus on delivering products and services to regular people, but scaled through machine strategy. The automation of company formation (Stripe Atlas) will combine with the outsourced human/machine assembly line (Invisible Tech) and distributed governance (Aragon) to create companies that scale frighteningly quickly.

Such creatures need a safe environment in which to operate, with a narrow set of functions and constraints. We see labor platforms like 99Designs or Upwork as useful sandoxes to test whether software-based organizations can compete in a human market. Such experiments will require a re-thinking of the tokenized approach, leveraging the micro-economic discoveries but avoiding the need for a poorly adopted crypto wallet or token. Designers will need to reduce friction, not just lump together coding ideas. But the timing and soil for this could be just right.

2019 FINTECH PREDICTION: Collision of Fintech Bundles and Pivots to New Channels

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Unicorn fintech startups like Robinhood, Acorns, Revolut, Monzo, N26, Betterment, SoFi, Lending Club and others will all converge on the same multiple financial product offering across lending, banking, payments and investments. This is driven by the need to cross-sell new revenue in order to justify high spending on customer acquisition. Large financial incumbents will be following the same bundling playbook through their mobile apps, intensifying the progress of Goldman Sachs, JP Morgan, UBS, DBS, BBVA and Santander along this axis. Tech and finance (as well as incumbents and startups) will all be pursuing the same customer-centric solution for the digital consumer. Great for the customer.

As a result, customer acquisition costs will rise and the digital model will become more competitive as servicing costs commoditize at a cheaper price point. What we mean is that if everyone -- including large operating businesses -- will understand how to market to and serve Millennials, driving away the arbitrage opportunity Fintech companies have had to date. As a result, at least one unicorn will implode when the cross-sell does not materialize. Most likely this will look like a devaluation of the equity component in the capital stack, such that new money is raised to maintain profitable marginal operation, but the hundreds of millions already invested in the business are mere sunk cost.

New revolutionary entrants will use channels that are foreign to existing Fintechs and financial incumbents, like video, Twitch, Discord or AR/VR. One example would be credit-as-a-service, similar to Stripe payment-as-a-service, built into a B2B customer journey. Another would be native payment systems for digital experiences and environment. Yet another idea could be social currency within chat streams for video gamers. It will be foreign territory for many, and the key to success is correct market timing balanced with adoption.

Source: Images from Pexels, 2019 Keystone Predictions Deck

2018 FINTECH PREDICTION IN REVIEW: Social Selling & Propaganda Bots

Here's what we said would matter in the past year year:

How can financial advisors, insurance agents, bank tellers and other human front office staff compete with bots? How can they compete with Kim Kardashian and kitten GIFs for attention? They can’t — at least not without some automated help. We think that 2018 will see a much fuller implementation of Social Selling, i.e., using social networks like LinkedIn to prospect for business, and that this channel will become plugged into roboadvisors, neobanks and insurtech startups. Further, social selling is all about content marketing by using writing, podcasts and video. To distribute these at scale, we expect the technology behind propaganda bots to find a way into the mainstream economy and become a more acceptable strategy. Call it demand generation.

We were strongly correct in thinking that the social media pipes of LinkedIn, Twitter and Facebook will be used for selling financial products; the claim that these tools will be supported by some of the shadier aspects of propaganda bot networks also came true in particular cases. The second largest crypto currency, Ripple, is associated with a large and active bot and sockpuppet network, which has supported the market value of XRP to be $15 billion, only behind Bitcoin, and in competition for second place with the far more functional Ethereum.

Various social influencers – like DJ Khaled (6 million followers on Instagram) – peddled digital assets during the ICO mania and have faced regulatory fines; Youtube similarly was filled with investment advice content from enthusiasts. We were wrong about the pace at which traditional businesses will do this in the short term, but are still convinced this is a longer term change that will happen with the generational shift in both sales and regulatory roles. People are spending 12 hours a day on media, increasingly on LinkedIn, Youtube, and Twitter, and marketers are well aware. And if you have a LinkedIn account, so are you. 

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Source: 2018 Keystone Predictions Deck, Twitter visualization of the XRP network by Geoff Goldberg, B2B Media Channels from State of Digital Marketing by Demand Wave

2018 FINTECH PREDICTION IN REVIEW: Augmented Commerce

Here's what we said would matter in the past year year:

Let’s go out on a limb, with that limb being a 3D rendered object in virtual reality. We think there’s a storm brewing in digital goods spilling out into our real world (think Crypto Kitties), and physical goods becoming virtual (think Ikea). Machine vision combined with Whole Foods, Amazon’s augmented reality app, and the iPhone X signals to us that a new type of commerce is emerging. Symptoms like the dominance of eSports and the popularity of sponsored SnapChat filters will only increase, and lead to new purchasing and payments experiences. Financial companies will miss this completely.

How did we do? Not so great with the timing of the theme. While we continue to think that augmented reality, machine vision and edge computing will be combined by Amazon, Alibaba and other retail tech giants into digital shopping experiences in a physical space, this certainly has not happened yet. Tests for a cashier-less shopping experience are happening, as is the gradual but certain adoption of mixed reality on iPhones and Android devices, but we have not seen a consumer tipping point. The $125 million funding of Trax by Warburg Pincus is a start.

If anything, mixed reality seems to be headed more towards large, enterprise use-cases like city planning, construction, low skilled worker on-site instruction for utilities or manufacturers, and the military. However among young consumers, the behavior of buying digital goods in video games, and the associated monetization of content from video games using channels like eSports continues to be a powerful secular trend. Billion of revenue are generated by free games that only sell cosmetic in-game objects. See as proof points the fast growth of Twitch users and the $1B+ in revenue Fortnite made from microtransactions. In addition to being trained to value imaginary objects, they are also being trained to use virtual currency issued by brands.

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Source: 2018 Keystone Predictions Deck, Trax via Bloomberg, Twitch data via SuperData/Nielsen

2018 FINTECH PREDICTION IN REVIEW: Crypto Eighteen

Here's what we said would matter in the past year year:

If you thought 2017 was loud about crypto, just wait till 2018. Up or down, that doesn’t matter — what will certainly be in play is massive volatility as the crypto economy beats on against traditional finance, regulators and sovereign power. The largest mountains to climb are the development of institutional crypto custody and a vanilla ETF product to absorb the splurging demand, and we think this will happen. In terms of creative destruction, we expect one of the top ten 2017 currencies to collapse 80%, one of the enterprise blockchain consortia to fall apart. New technical solutions like the Tangle or Hashgraph to challenge our assumption that Bitcoin is the endgame.

How did we do? Pretty well overall. We predicted massive volatility and we got it. The massive market capitalizations of 2017, rounding up to $1 trillion, have deflated down to $100 billion and change. Many assets melted 80%+, but we will call out Bitcoin Cash specifically, which fell from $40 billion to less than $3 billion after yet another rough fork at the end of the year. On the other extreme, EOS raised $4 billion in ICO funds. New smart contract platforms indeed came to market – from EOS to Hashgraph to Dfinity – but Bitcoin dominance has stayed fairly flat at 40-60%. 

The negotiation against incumbent sovereigns and traditional banking moves forward; regulators across the world have placed many 2017 digital assets in a regulated “securities” bucket, with enforcement actions starting to target individuals and exchanges. At the same time, institutions like Fidelity have launched crypto custody divisions, the NYSE is launching crypto exchange Bakkt, and the number of enterprise players in the space has grown like weeds. While no ETF was launched due to SEC concerns around market maturity, an Exchange Traded Product did launch in Switzerland using VanEck index data.

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Source: 2018 Keystone Predictions Deck, Coinmarketcap (total capitalization, % BTC dominance), Fidelity, Amun ETP, Bakkt via ICE/NYSE

ARTIFICIAL INTELLIGENCE: Morgan Stanley, Yext and Chinese AI-first Apps.

A point is not enough. It takes two points to make a trend-line, at least in a two dimensional space. One of the muscles we try to flex often is to connect points in different sectors and themes to see the limits of the possible. Let's contrast the following: (1) Morgan Stanley partnering with Yext for financial advisor business pages, and (2) Andreessen Horowitz' commentary on Chinese consumer artificial intelligence applications on a path to capture the hearts of teenagers everywhere. Disparate, funky, and painfully obvious.

About ten years ago, "hyper-local" became a venture catchphrase. News would go from being general to local, video would go from main-stream to niche, and so on, contextualized by the GPS in our pockets. Yext is a company that won one of the battles for hyper-local content by building the retail knowledge graph that gets printed on Google Maps. Simply, if you see a business listing for a laundromat on your Maps app, likely the app provider is licensing local data from Yext. This data then scales up into pre-made business websites, analytics, and customer funnel conversion. Morgan Stanley inked a partnership with this scale content manager to give their 15,000 financial advisors a digital presence. Controlling and printing out that content at scale, with embedded compliance and into every Google/Apple phone, is hard and smart. And perhaps physical presence is the main value of a human advisor.

Now for Chinese AI. Unlike Americans, with their hand-wringing about privacy, choice, and human agency, Chinese apps don't care. The next generation version of Instagram and Snapchat is called TikTok, and the storied venture firm Andreessen celebrates them for taking away any human choice in what content a user would see. The algorithm is not a search support tool, it is the only and ultimate arbiter of where your attention goes. And it tends to make kids happy (unlike Youtube, which generally makes them into Twitter trolls). 

So let's mesh these things together. A financial services version of TikTok with a Yext overlay would be an app that is tied to the physical world, perhaps through Augmented Reality or just simple Maps, that would decide for you which financial provider to find. It would know that you still want to talk to a person for that emotional connection, and would find one that's closest geographically and a best-fit emotionally -- a two factor optimization problem for an AI. Yext financial advisor reviews, combined with a Morgan Stanley risk/behavioral client questionnaire could do this. Thus the TikTok aspect kicks in, with the human in the loop simply being a form of physical content marketing, gaming the algorithm with a meatspace presence. 

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Source: Finextra (Yext), Andreessen Horowitz (AI apps), FactorDaily (App downloads), 

ONLINE BANK: Killing the Banks softly with Robinhood and Good Money

But wait, there's more! Certainly all top-3 neobank champions by geography are hungrily eyeing international expansion . The US is looking delicious for Revolut and N26, Europe is interesting for Ping An as it invests over EUR 40MM into fintech venture studio Finleap, Fidelity wants to open a roboadvisor in the UK, and so on. Technology does not have borders. This is why we are particularly interested in Good Money, funded to the tune of $30 million by Galaxy EOS VC fund (remember EOS raised $4 billion). Good Money is a "banking platform" whose equity will be owned by users when they take certain actions, like opening an account, installing the app, or referring friends.

If that sounds like tokenized equity intermingled with Binance referral codes, you're right! One thing we've learned from the ICO mania, other than that some people are sharp-elbowed opportunists who will go to jail, is that human beings like being in communities, and that communities grow way faster and cheaper than "customers". By combining crowdfunding with account actions, this play has a chance to build viral loops, and pioneer a model where a corporate structure (equity) and utopian philosophy (communal ownership of money) have mutually-reinforcing benefits. The blockchain software progress of the last two years makes this possible. Whether it will work or not is another fun story. 

Last, but not least, is Robinhood and their announcment of banking service to their 6 million mobile-first customers. The products is called "Checking & Savings", will deliver a 3% interest rate (vs. Goldman Marcus at 1.85%) and rebated ATM access with a debit card. It is not a bank account and therefore not subject to FDIC insurance. In fact, the whole thing is old hat -- Schwab does this well now (albeit with lower rates on its money market funds), and every HNW wealth management shop ran such an offering for the last 20 years. But you know, Robinhood actually knows how to sell and position a product for its audience, and are willing to burn venture money to deliver a 3% return. Steve Jobs made a killing announcing previously existing products as inventions of Apple -- and he won, because Apple's re-inventions were better suited for the times. Who will you bet on? 

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Source: Cointelegraph (Good Money), TechEU (Finleap), Newswire (Good Money), Bloomberg (Robinhood)

ONLINE BANK: Killing the Banks Softly with Plaid, Cross River, and Open Banking

A great set of symptoms this week for the theme of banking-as-a-service / open banking. To recap, due to regulations like PSD2 or plain old web-forced transparency, banking information and products are getting popped out from behind the curtain and made to compete within the foreign land of tech platforms (i.e., App stores and e-commerce). This means prices falls and economic rents go to fewer winners that have strong APIs, integrations, and a nimble balance sheet. The long tail of banks evaporates into commodity providers as their regulatory and distribution moat falls away. Maybe true, maybe just a fun story!

Symptom number one is the $100 million raise of Cross River Bank, of which 75% came from private equity firm KKR. Cross River provides the balance sheet to Affirm, Coinbase, and TransferWise. Those companies in turn are building credit-as-a-service into points of sale (think Stripe), custody and banking for digital assets (dozens of millions of users), and the destruction of international money transfer margins. Finance is correctly integrated as a product/feature within a much more meaningful and long customer journey. This means customer ownership leaves the product manufacturer and goes to the point of actual economic activity.

Symptom number two is the $250 million fundraising into Plaid, a data aggregation company, backed by Mary Meeker as her coup de grace from Kleiner Perkins. Remember Europeans, there is no PSD2 in the US, so we have to screen scrape the information out of the protesting bank hands. In the early 2000s, a number of data aggregators were built, the winners of which were Yodlee (bought for $500mm-ish by Envestnet), ByAllAccounts (bought by Morningstar), Finicity and a few others. Plaid's venture valuation of $2B+ boggles the mind, but the answer is in the product. It powers authentication and banking detail provision -- not "personal financial management" only -- for the hungry host of Silicon Valley. Any tech startup that wants your bank account and routing number goes to Plaid, not to Yodlee. Thus is built a major open financial data infrastructure for tech companies in the US. And in Europe, open banking is progressing bit by bit, with the largest incumbents opening the door to barbarians. It's a fun story.

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Source: Payments Source (Cross River), Open Works (APIs), CNBC (Plaid), Fortune (Plaid) 

PAYMENTS: Can Facebook be trusted to provide Whatsapp Payments to 200 million users in India?

Facebook's hair is on fire again. A set of company emails from around 2015 have been acquired by a UK parliamentary committee, despite being sealed by a court in the United States. The emails were on a private computer of a person of interest (Ted Kramer, CEO of Six4Three) who was traveling in the UK. The sovereign issues are interesting in themselves, as global technology companies stretch across jurisdictions to be subject to the laws of each one of them. Case in point is the US arrest of the Huawei (massive Chinese phone manufacturer) CFO in Canada as part of a feud on intellectual property and selling goods to economically sanctioned countries like Iran. So, if you're running a tech company with global impact, maybe just telecommute lest you be snatched by a regulator.

What we learned from the emails is that Facebook acts like a monopoly, using its control over APIs and data to (1) starve or (2) reward players that help cement its position at the center of the attention economy. It is ruthless in its taking and leveraging of customer data, it does so with minimal warning, and it is largely unconcerned about the social consequences unless they have negative PR implications. What else is new ? It's a successful capitalist organism following its incentive structure. But from this vantage point, let's take a look at Whatsapp in India.

Whatsapp has 200 million users in India, and like several other tech companies, wants to power payments to this population. It has formally written to the Reserve Bank of India to get permission. Why do we think India is a better target for tech company wallets than the West? A few reasons. The first is the large percentage of the population that is unbanked, and therefore not served by a financial incumbent, but served by a chat app. The second is the cost of customer acquisition is far lower when a user is already captured, vs. when you have to convert them cold. And third, consumer preferences have not been set with "good enough" services as in the West, and China's example shows the way. A takeaway concern we have is around Aadhaar, India's digital government identity. If Facebook can't be trusted with data we permission it to store, can it be trusted to ingest the equivalent of Social Security numbers?

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Source: Guardian (Huawei arrest); Slate (on Facebook emails), CNN (Facebook), Telegraph India (Whatsapp)

BLOCKCHAIN: $1 Trillion lost in Crypto since all-time-highs, but $700 million in November still flowed in

Ugh. Here's the monthly update on the crypto fundraising figures. Let's start with some good examples -- we are fans of Trustology raising $8MM in equity from Two Sigma and ConsenSys, and ErisX raising $28MM from Fidelity and Nasdaq. Those sound a lot like the institutional chassis needed for traditional players. However, from a retail perspective, the crypto markets are not holding their value in an overall downturn, and have been fairly correlated with traditional equities as everything nosedives together. This is in meaningful part, we think, driven by the availability of instruments to take short positions in the market. 

We took the ever excellent OnchainFX data from Messari, and looked at the total loss of market capitalization (i.e., "hopium") across their tracked coins from all-time-highs. The answer is that there has been nearly a trillion of burned down value in the last year. Millennials are going to be salty for a long time! But look, it's not all doom and gloom. November saw another $700 million or so in blockchain-first funding, again roughly split 50% between token sales and venture investment.  The sustained flow of venture is encouraging to the promise of this sector in the future.

Some conclusions from looking at the tokens in detail: (1) an Arizona offering stood out as an interesting jurisdiction, (2) a few EOS projects are going forward, (3) some projects are using the STO monicker to try and position more positively, and (4) there are still quite a few questionable business models in the mix. Looking at crypto funds, we continue to see new entrants in the space, even as 2018 funds face -80% performance profiles and shed employees. Crypto projects are also starting to downsize, and we projected for Bloomberg a contraction of 25-50% in the number of funded seats at the blockchain table for existing companies today. That doesn't mean there can't be new companies with new opportunities ahead -- it just means their journey will be more rational, and potentially more fruitful.

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Source: Messari (liquid coin data), Autonomous NEXT (crypto fund data set, ICO tracker leverages and cleans CoinSchedule, ICO Rating, ICO Bench, ICO drops and various others), Bloomberg (layoffs)

VIRTUAL REALITY: Headset shipments grow to almost 2 million per quarter

Simple, feel good news. IDC updated its mixed reality headset shipment tracker, and people are buying more devices. Relative to a year ago, sales went up by about 10%, and global shipments are nearly 2 million per quarter. Headsets that don't have a screen (like Samsung's Gear VR or Google cardboard) are becoming less popular, while intrerest in standalone headsets that come with a screen and a processor seem to be growing. Facebook's Oculus Go would be an example (as an aside, the thought of Facebook knowing what we look at in a VR environment seems inevitable). The rest -- or about half of all the shipped devices -- are those you plug into a computer or a Playstation.

Dedicated Augmented Reality hardware is doing much worse in the retail market, shipping a couple of dozen thousand for even the best biggest brand. We think this is due to (1) every Apple and Android phone manufactured from now on being an AR device, and (2) folks waiting for Magic Leap and the next gen Microsoft Hololens. Further, as we had explored previously, Microsoft just secured a $480 million HoloLens contract with the Untied States military. It's likely that some of these early technologies will fail to be attention platforms, but succeed at being government or enterprise technology. 

To bring it back into financial services, we recently attended Fintech Connect to moderate a panel on artificial intelligence. There, we came across digital consultancy Softserve, which built a fun prototype for the conference simulating a payment experience using hand gestures within a Magic Leap environment. Payment menus appeared in the view, and a camera that read hand gestures could understand whether you were confirming a transaction. This suggests different ideas -- from building a virtual checkout located physically next to a purchased good with a rendered interface, to the sale of virtual goods in a physical environment. And the folks at Magic Leap are willing to pay developers up to $500,000 per app to fill up its barren app store.

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Source: IDC Tracker (release), Verge (US Army contract), Game Daily (Magic Leap), Hollywood Reporter (Infographic)

ARTIFICIAL INTELLIGENCE: Apple trying to catch up in conversational interfaces through privacy

Apple acquired Silk Labs, an AI startup with significant tech pedigree, whose tagline is to "embed instant cognition into your next product". We have to respect the science fiction marketing, of course. But we also respect that the machine learning solutions from this company allow machine vision, sound recognition and natural language processing to be done locally on a particular device. That means that a specific device that you use for conversational interface interaction will be locally better at understanding you -- rather than some giant squid-like monster AI hosted on Amazon Web Services. And of all the tech companies, Apple is the most credible in its claim to protect your privacy on the iPhone, with such an acquisition potentially powering other edge-computing / Internet of Things products.

Edge computing is the concept that there are lots of unique distributed smart devices scattered throughout our physical world, each needing to communicate with other humans and devices. Two layers of this are very familiar to us: (1) the phone and (2) the home. Apple has become a laggard in artificial intelligence -- behind Google on the phone, and behind Amazon and Google at home -- over the last several years. Further, when looking at core machine learning research, Facebook and Google lead the way. Google's assistant is the smartest and most adaptable, leveraging the company's expertise in search intent to divine meaning. Amazon's Alexa has a lead in physical presence, and thus customer development, as well as its attachment to voice commerce. Facebook is expert in vision and speech, owning the content channels for both (e.g., Instagram, Messenger). We also see (3) the car as developing warzone for tech company gadgets.

Looking back at financial services, it's hard to find a large financial technology provider -- save for maybe IBM -- that can compete for human attention or precision of conversation with the big tech firms (not to mention the Chinese techs). We do see many interesting symptoms, previously covered in our Augmented Finance analysis, like AllianceBernstein building an AI-based virtual assistant for bond traders, but barely any compete for a relationship with a human being in their regular life. The US is fertile ground for this stuff, because a regulated moat protects financial data from the tech companies. Is there room for a physical hardware financial assistant in your home? How much of your financial life would you delegate to some*thing* that decides how you should live it?

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Source: Silk Labs, Bloomberg (Bond Bot), TechCrunch (Google to be nicer if you say please), Autonomous NEXT (Augmented Finance), USA Today (car AI), Voicebot (Install Base)

ROBO ADVISOR: BlackRock's $120 million buy of Envestnet stock and Morgan Stanley's platform

We believe that most financial industry incumbents deeply misunderstand and miscategorize Fintech startups and their innovations. They think the small size of a particular roboadvisor at some time X, or the number of accounts of a particular neobank at time Y, hold any meaningful information about the future. The truth is that most of the consumer Fintech symptoms are telling you what the underlying cause -- digitization -- doing to your industry. In the case of investment management, the outcome is a re-forming of consumer preferences, which then gets reflected in the pricing of solutions (50 bps), which then require entirely new products and value chains within a digital chassis (hey there 6 bps SPDRs).

Case in point. BlackRock, which had paid $150 million for FutureAdvisor, as well as invested in European robo Scalable Capital, has now bought $120 million in public equity of turnkey asset management platform Envestnet. In the same turn, Morgan Stanley has praised a deployment of a BlackRock-powered digital wealth desktop dashboard, rolled out to 15,000 front office advisors, as a "4-year head start" versus competitors. While that's not factually true -- many other great wealth platforms exist -- it does show that finally investment distribution firms understand the operating efficiency of digital-native solutions. 

Watch carefully also what this does to asset managers, i.e., fund manufacturers. In order to get into client portfolios, which are mostly intermediated in the US, they provide technology solutions to the intermediaries, nudging the intermediaries towards their proprietary investment products. That's not nefarious, just surprising that the best way to sell iShares is to give Morgan Stanley some high quality roboadvice software.

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Source: SWFI Institute (BlackRock), Financial Planning (BlackRock), Morgan Stanley (wealth screens)