ROBO ADVISOR: Are robos managing $1 trillion of digital wealth yet?

The center of gravity for digital wealth in the US is the In|Vest conference, and the update this week from its publishers is excellent. Let's call attention to the following phenomenon. All of a sudden, everyone wants to claim to have roboadvisor / digital wealth assets, and to get rewarded from a valuation perspective for understanding the future customer. As soon as JP Morgan started bragging about its YouInvest free trading app to compete with Robinhood and Schwab, Bank of America released an update on how much asset under management sit inside of Merrill Edge, its online investing division, and its digital strategy. So here are a few interesting numbers on the size of the robo market, broadly speaking. 

For incumbents, Merrill Edge now has $200 billion in assets under management. This is, end of the day, the small client channel. But after combination with Bank of America, Merrill gained a retail footprint in the form of bank branches. The firm is planning to put 600 new investment centers into those branches by 2020, for an omni-channel digital client experience. Another examples is Ric Edelman's post-merger mega RIA, composed of Edelman Financial, Financial Engines (formerly FNGN, the original 401k roboadvisor), and the retail footprint of the Mutual Fund Store. That's $176 billion in AUM, plus 125 physical locations, plus Ric's own $15+ billion. Let's add to that Schwab ($33 billion) and Vanguard ($112 billion). Fidelity, TD Ameritrade, Capital One Investing and others also have a similar service, so let's round that up to $10 billion generously.

On the disruptor side, we have Betterment ($15 billion), Wealthfront ($11.3 billion), Personal Capital ($8 billion) with the most assets, and maybe another $3 billion from players like SoFi, WiseBanyan and the others. Let's be kind and say micro-investing services (Acorns, Stash Invest and the rest) have $2 billion between them. That's not a knock -- those apps have millions of users, but they don't optimize for AUM. For good measure, let's throw Coinbase into the mix as well, with $20 billion in custodied crypto assets managed in a digital app. The tough part remaining is the B2B2C players in the form of SigFig, AdvisorEngine, Jemstep, FutureAdvisor, Trizic and Envestnet. We'd be willing to bet on $50 billion in total true digital delivery. Sum all that up, and we get to $650 billion. Now, these are very loose definitions. You could still add in (1) quite a bit in asset allocated crypto assets, (2) the Asian fintech digital investing numbers (e.g., Ant Financial), (3) the digital bank arms of the Europeans (e.g., BBVA, Nordea) and then get pretty close to a trillion. Do we still think roboadvice is a failing theme? 


ONLINE BANK: Varo Money Banking License and the OCC Charter

Let's review. In the US, the OCC hands out national banking licenses at the federal level. States also regulate and charter banks at the State level. Such regional banks and credit unions are subscale relative to players like Bank of America or Wells Fargo that have a national branch footprint and digital apps. But these small banks have community ties and are protected business interests within the States through lobbying. If the OCC makes it too easy for digital players to create online banks that live in our pockets through mobile phones, regional banks (with poor technology and digital client experience) will lose out. That dynamic actually has not at all played out with roboadvisors, who face the same regulatory jumble with the SEC and local Registered Investment Advisors, but so the story goes. 

Digital lenders perform a banking function (i.e., lending), but don't have a banking license or FDIC insured deposit capital. Their money comes mostly from investment funds, which is a shadow banking set up. They got around licensing by partnering with Bank-as-a-Service players. Some, like Square and SoFi, have looked at becoming an Industrial Loan Company in Utah -- a sort of quasi bank entity -- but haven't been able to pull the trigger. Neobanks in Europe got around licensing by riding the rails of pre-paid cards from the likes of Visa and MasterCard, pretending to have checking accounts while really just digitizing gift cards. Until now, as Monzo and Tandem have powered up the ability to take deposits via the FCA. So now we come to the point.

Recently, the Treasury encouraged the OCC to issue Fintech bank charters, and the OCC opened its doors for business. And immediately, the Board of Directors of the Conference of State Bank Supervisors (CSBS) announced that it is moving forward with litigation against the OCC. Way to kill the vibe! But that has not stopped fintech Varo Money / Varo Bank from getting a conditional de novo national bank license -- it can take deposits, move money and underwrite lending. Almost none of these have been granted since 2008, and so such a charter going to a digital-first player is a shot across the bow (granted, Varo needs to raise $104 million). The other interesting piece is that Varo is going to use Temenos, a European B2B2C bank platform for its core processing. Not FIS and Fiserv, the US versions of the same that power that long tail of State banks and credit unions. That's a big shot across the bow.


Source: CrowdfundInsider (Varo Money), CSBS (States suing OCC), Davis Polk (Varo Charter)

CRYPTO: Enterprise Blockchain Back in Vogue as SEC goes after ICO fraud

There was a moment in the development of peer-to-peer file sharing when the music labels, with cheerleading from Metallica, began to sue teenagers for millions in damages. We are ramping up to a similar period in crypto land. Davis Polk documents the bump in SEC enforcement actions targeting companies like TokenLot, Crypto Asset Management and FINRA registered brokers like Timothy Ayre. None of the violation descriptions are a surprise, especially if you've been listening to Preston Byrne: (1) TokenLot selling ICO tokens that qualify as unregistered securities without registering as a b/d and, (2) CAM raising a fund without registering as an investment vehicle while lying about having done so, (3) and Ayre brokering unregistered security tokens personally. Separately, the New York court in the ongoing United States v. Zaslavskiy has applied the Howey test in a motion to dismiss by the defendant, and found that a reasonable jury could conclude that the ICO was a securities offering.

This is good news, cleaning out the opportunists trying to sell everyone their fake lottery tickets. The flip side, however, is that we now have far more human and financial capital in the space, and it needs to be directed at something. And as far as we can tell, it is again directed at the enterprise blockchain space, which is morphing to become part custody, part digital assets, part OTC trading, part consulting implementations. Remember, enterprise blockchain is a cost-cutting effort by an oligopoly of financial firms to mutualize processes and costs around the back office. Now that ICOs posited scarce, functional digital objects into digital economies, the Security Token wave is re-running the traditional crowdfunding theme through token-based securitization on public blockchain rails.

Which is why the recently announced acquisition of Chain (a payments enterprise blockchain company) by Stellar (a public chain with a built-in exchange and strong throughput capabilities) makes sense. In this way, Stellar and Chain are moving closer to Ripple's model, owning both a public digital asset and a private enterprise software. This allows the firm to build both equity value in the company, and monetary value in the tokens. Not that we think Ripple's model is necessarily right, but it's right for this market, where token prices are collapsing and good news are scarce. As another example, we attended R3's CordaCon and were impressed by the progress of the bank consortium. There are over 50 apps and 200 different company implementations, including big tech, finance, and supply chain. One example is the ECB's TARGET Instant Payments Settlement for large payments and settlements. The borders between this world and the next are getting erased.


Source: Davis Polk (SEC Enforcements), Reuters (Stellar / Chain), Preston Byrne (on ICOs), R3 (marketplace)

BIG DATA: The Beauty of Global Networks of Data Exhaust

As the human world becomes more digital, our connections and interactions are recorded and shared. We go from knowing 150 people and analyzing a few stories a week to 2 billion people sharing hundreds of millions of stories constantly. But humans still need to understand what's going on underneath. In this entry, we want to highlight how massive, machine scale systems are visualized through mathematical methods to tell new stories. These charts -- giant sprawling data webs like airplane traffic patterns etched onto the globe -- are the future of literacy in the machine age.

In the first example, we borrow two images from Google. The Google Cloud team created a service which grabs the entire Ethereum blockchain, backs it up on Cloud, and makes it easier to analyze. The first image shows the Crypto Kitty universe, with color attached to owner of the contract (kitty whales!) and size of the bubble ranking the quality of the asset. We can certainly imagine this done on regular old financial assets. The second visualization is for transactions: points are wallets and lines are asset movement. You can immediately seen wallet clustering, which shows entities that have more frequent transactions between each other closer together. In this way, one can ferret out exchange wallets or bots. Hey there Bitfinex!


The second source is a ConsenSys write up on decentralized exchanges, and is truly a spectacular chart. Do yourself a favor and click to zoom in. The dataset comes from IDEX, EtherDelta, Bancor, 0x, OasisDex, Kyber Network, and Airswap Protocol -- today's decentralized exchanges. Each point is a trading pair, the width of the line is number of normalized trades, and the line colors signify the exchange used. You can immediately see the most popular trade contracts, as well as exchanges where trading hops through an intermediate token, rather than through ETH itself. We'd love to see this for traditional FX markets, or maybe all trading period!


The last chart is from Geoff Golberg, who mapped out all Twitter accounts engaged in the Ripple XRP community with the purpose of identifying bots. And yep, the 40,000 point cloud has multiple bot armies across the world used to manufacture opinions and drive social engagement. It takes a robust mathematical approach to visualize this information, and a detailed article written by a human to infer the relationships and their activities within the data network. This is a flavor of future skillsets required to thrive in a machine world.


Source: Google (Ethereum), ConsenSys (Decentralized Exchanges), Medium (XRP Bots)

INSURANCE: $300MM Acquisition of IoT MiddleWare by Munich Re


Let's move into the physical world. Very very physical. Reinsurance company Munich Re has just written a $300 million check to acquire Relayr, a startup in which it previously invested. Relayr digitizes industrial manufacturing, installing IoT sensors in production lines on various machines that capture information at the edge, layering an artificial intelligence layer that helps maintain these machines before a breakdown happens, and then integrates this information into manufacturing enterprise software through middleware. Like in the consumer world, data exhaust can power the automation of human intelligence, but it must first come from the digital twins of physical objects.

The phrase that stuck with us was that the company's solution "reduces the risk of failure". For an insurance company that wants to minimize losses and improve underwriting accuracy (i.e., know the risks better and take better bets on average), more data and transparency goes directly to the bottom line. Insurance companies are data science companies (more so even than advertisers), so we think they are in a unique position to apply AI to the physical world. A cute question: will Google underwrite insurance for its own self-driving car, or can an insurance company start selling third party cars with built in IoT insurance after learning all the risks? 

We point to a few more symptoms in the sources below. Oxbow Partners, an insurtech research firm, just highlighted Geospatial Insights as an interesting machine vision implementation on top of satellite data. The resulting data sets include oil tanker inventory, retail parking lot car counts, crop yield predictions, and real estate infrastructure value. At least 50% of the business is insurance companies, with the rest going to investors and strategy teams. Oxbow suggests that the main barrier to success is integration of such data into workflow and middleware -- something that Relayr had clearly gotten right. If you're hungry for more Insurtech, check out below a top 49 trends article from Tearsheet, and a screenshot of a chatbot from Hi Marley, a private label insurance automated customer agent platform.


Source: Companies (RelayrGeospatial Insight), Business Insider (Relayr), DigIn (Hi Marley), Tearsheet (49 trends)

CRYPTO: As ICOs wind down, Developers code and Financiers finance.

Hope you like bad news. We are in an Ethereum sentiment downward spiral. As prices fall both (1) quite naturally as design result from fundraising in ETH, and (2) from an increasing number of financial derivatives shorting token economies, i.e., BitMex, ETH as a currency is less attractive to hold for a newly formed company. Dissenters from the ETH thesis are becoming louder, with some claiming that all utility token values trend to zero, and others (see TechCrunch discussion source) suggesting that ETH will bleed out all of its value into those utility tokens. While we don't agree with either and it can't be both, the end result is that ICO funding has meaningfully slowed to a bit over $300 million. That's a 2017 May equivalent. 


Hope you like good news. Ethereum's use as a decentralized computing platform is growing. While many other Dapp stores (i.e., Dfinity, EOS, NEO, Cardano) are only now getting funded on future claims, Ethereum is churning away at building useful apps. ConsenSys backed Alethio put together a chart of operation codes, which we take to mean how much computing the system is doing. More is better, as is more diversity of operations. The chart has been going around the web, but we think it's useful to reiterate as a counter to the ICO fundraising data. First you raise, and then, you build. Actually, first you sell, then you hire, then you build.


Second, while non-equity token funding is failing, security token offerings (STOs) are starting to hit the market. Should we be counting this in our ICO numbers? Take for example Tokeny, which used to be primarily an ICO technology platform. Since the shift in the winds, it has pivoted to enabling STOs. The latest projects to use its system are a $250 million real estate tokenization and a $50 million equity tokenization in a fintech company. These two deals alone match the entire ICO market from last month and are just the tip of the iceberg. No wonder that Bank of America is rumored to join Nomura and Fidelity in the crypto custody race. Investment banking fees and exchange listing fees for all asset classes are in the cross-hairs, in a way that enterprise blockchain cannot solve (e.g., accepting crypto as payment). 

Unfortunately, by the time the incumbent custodians are in the game, there may not be much left of the crypto currency market caps. The snake will have eaten its own tail (thanks Cardano!). So instead of messing with digital assets backed by the techno hope of Millennials, they will turn their sights on the familiar glow of securitization.  

Source: Autonomous NEXT (ICOs), Tokeny (STO vs ICO), ICO Journal (Bank of America), Reddit (AlethioTechCrunch editorial

ONLINE BANK: How Revolut, Goldman and Google are doing the same thing

While we are fretting about whether tech companies will enter finance, whether Fintech startups can compete with incumbents, or if their business models make sense, these things are just happening. Ideas get recycled, regurgitated and presented as new again. This is the good messy stuff of creative destruction. The first data point is Revolut’s recently launched premium Metal card (an actual 18g metal card!), which provides 1% cash back on purchases outside of Europe, flight and bag delay insurance, and a dedicated concierge. Cash back is a novelty for a UK provider, and the offer has already made quite the splash with the global Instagram Millennial crowd. The rewards card gives Revolut a subscription revenue stream while being cheaper than comparable products, and creates the impression of exclusivity. The best part --  the first heavy metal card was released by Western Union in 1914, and later by JP Morgan and American Express. Long live innovation!
Speaking of premium banking services offered to the masses, Goldman Sachs is neck deep in the consumer banking opportunity. In the US, the investment firm has a $20 billion deposit online bank and digital lender Marcus (i.e., a Lending Club). It was just reported that Goldman is opening the same platform to its UK employees, in advance of opening a neobank across the pond. One way to analyze this is to see the millions of users for Revolut, Monzo, Tandem and Starling as a sign of market demand. Barclays, Lloyds, HSBC and the like have left their flank wide open for new names, given a stodgy brand and ongoing customer frustration. Another is to think about the cyclicality of Goldman’s business. Interest rates have nowhere to go but up, while equity markets are at historic highs. Goldman’s investment businesses are equities correlated, so perhaps they see the cycle turning.
The third leg of this stool is Google. The advertising firm (we jest) is rebranding its Indian app from Tez into GooglePay, which is to become the umbrella app for Google’s financial services in the country. More than 50 million Indian citizens of over 300,000 villages use the app for payments already, amounting to $30 billion in annual transactions for Venmo-like use cases. Google is now partnering with HDFC, ICICI, Kotak Mahindra. and Federal Bank to offer consumer digital loans within the app interface, underwritten in a few seconds. Sounds like Goldman, like Lending Club, like Revolut, like AmEx, like Western Union to us. The sincerest form of flattery.


Source: UK Card Association (Western Union), Forbes (Revolut), India Times (Google), Reuters (Goldman Neobank)

ROBO ADVISOR: UBS sells SmartWealth robo to its SigFig robo tech provider

This is an oddball, but first some context. UBS has two distinct businesses in Europe and North America. In Europe, they are a high end private bank that manages money for the extremely wealthy, in a market that can charge up to 200 or 300 basis points (i.e., 2-3%) per year. Roboadvice in Europe has not matured yet, despite the efforts of Scalable Capital and Nutmeg, which we believe are due to cultural factors that promote neobanks as the Fitnech app of choice. This means wealth management margins are not a melting ice cube yet. In the States, UBS is a tweener – not as big as Merrill, Smith Barney or LPL (15,000+ advisors), but not quite a lean boutique. Further, American wealth management in general costs about 80 to 150 basis points, with barely 50 bps for roboadvice. This implies that outsourcing roboadvisor technology is the right answer if you are subscale, or are not a technology power house.

Over the last several years, the firm has had a two pronged approach to digital wealth. In the US, they invested in SigFig and private labeled its third party tech. This implies dozens, if not hundreds, of implementation headcount from the startup to be dedicated to its gigantic client. In the UK, UBS built out a separate and unrelated service called SmartWealth. It was expensive for clients, simple by US robo advice standards, but integrated into the UBS stack. The item that hit the news is that this service is now being shut down, and the tech is being sold into SigFig. Here’s why we think this isn’t just a raw fail.

Having two approaches to deploying roboadvice across the organization is likely a logistical nightmare. You wind up with different data architecture, user experience, investment choices and pricing. Coordinating between an external vendor in which you have an interest, and a home-grown application (which is likely a lighter offering), is tough because they are competitors for the same management attention and customer business. The combination is a win-win, in that it allows SigFig to enter Europe, while letting UBS have a cohesive internal offering with a single counterparty responsible for tech delivery. End of the day, they should have just either gone all proprietary or all outsourced. Better late than never.


Sources: Reuters (SmartWealth), Company Websites

CRYPTO: A utopia that can buy its own Sovereignty

Power. Sovereignty. Utopia. A recent piece from Daily Fintech points us to Sol, the Puerto Rico crypto billionaires experiment; Bitcointopia, an experimental city in Nevada; and Varyon, an artificial island off the coast of French Polynesia. These attempts at a new world are ostensibly about cryptocurency adoption, but their precedents trace to the DNA of humanity itself. A utopia (or dystopia for that matter) is a dream of the world defined by its impossibility. It may be a guiding light, or it may be a warning, but it is not reality. To carve out a utopian experiment has immediate connotations – cult-like, counter culture, naïve. See the utopias of Russian architects in the clutches of the Soviet Union, building cities on paper that could never be, or today’s techno retreat of Burning Man, where billionaires recreate Mad Max landscapes to feel human outside their corporate castles.

For most of human history, the frontier was a real place. It was the place where water dripped off the world into oblivion, the place where the pantheon of Gods looked down on mankind, a land unconquered by ships and swords. As humanity lifted the fog across the globe, the physical frontier disappeared. Sure, hard military power still applies in redefining borders between neighbors. But there is no more room left for Manifest Destiny, other than in our imagination. From this mental frame, we bring forth economic and technological frontiers, conquering not the Earth, but ourselves. But let’s not be fooled. Sovereignty, that embodiment of lethal force in the hands of the law, may have maxed out across the geography. But control of sovereignty can still be bought. After all, we are human, and our power comes from belief in the source of that power. Economic and technological conquering results in the re-shaping of sovereignty. Facebook’s 2+ billion users are larger than any country on the planet. Does it’s soft power echo across governments? You bet it does. Tech giants spend millions per year in lobbying, driving their desires into the body politic.

At the heart of every tech company with aspiration to go public is a utopia waiting to be unleashed. Uninspired by the political realm, we burn our hearts into capitalism. And these are beautiful creations. But once they taste power over people, once billionaires hold monopolies (e.g., from Bezos to Bitmain), utopias start wanting an army and a police. Small sovereigns and peripheries of large ones give first, yielding their regulatory apparatus to help perpetuate the new paradigm. Want to launch a crypto investment vehicle wrapped in a legal veneer that purports to be of equal stature to European (Malta), American (Puerto Rico) or British (Gibraltar) law? Or maybe build a new bank under custom-made Lithuanian regulation? But it won’t be enough for Crypto, which is not merely information flow, but information married with money. Crypto will buy its way into being a sovereign, if it can’t persuade the incumbent ones to let it be.


Source: Daily Fintech (Crypto utopias), Utopias (SolBitcointopiaVaryon), Lithuania (Fintech bank), Palace of the Soviets

ROBO ADVISOR: JP Morgan plans to starve Robinhood (and all other Fintech) of Oxygen


JPMorgan is taking on fintech unicorn Robinhood. The bank is launching a service branded You Invest, directed at their 47 million digital/online banking clients, which includes (1) 100 free trades/year, $2.95 thereafter, (2) free investment research, (3) unlimited free trades if a Chase Private client (typically $100k in holdings), (4) portfolio construction tools, (5) and following up with a roboadvisor in January. This comes on the heels of its announcement of Finn, the mobile-first neobank for its customers, which preempts Revolut and Monzo from doing too much damage in the States. Sounds like a bunch of proprietary Fintech offerings, all priced to blow up the venture capitalists.

And JP Morgan isn't the only one. Remember, Fidelity just recently launched an ETF that costs 0 bps in management fees.  They can afford to do this the same way that Schwab can give roboadvice away for free -- bundling. If the firm doesn't make money on investments, it still has cash sweep; or if it doesn't have commissions, it has assets under management; or if it gives away the core, it can still charge you for satellite. Such mega-banks with diversified business lines are going to fight Fintech companies by starving them of oxygen. It is essentially reversing the strategy of the unbundling Fintechs, who use venture capital funds to price undercut incumbents. But in this case, the incumbent copies an innovation and gives it away for free.

The competitive response from the start-ups has been to also rebundle. calls this the "super robo". See for example microinvesting app Acorns, partnered with PayPal, offering its 1mm+ users a debit card with a checking account. Or look to SoFi, a student lender with roboadvice and insurance offerings. Over the pond, German neobank N26 has every permutation of financial product a Millennial may want to buy on their phone. All these firms will need to have payments, savings, wealth, and insurance under one roof, powered by artificial intelligence, customized to perfection. Can they outspend JP Morgan's $10 billion per year? And did we mention that Bank of America, Wells Fargo and Citi are in the game too?


Source: JP Morgan (CNBC), Financial Planning (Super robo)

CRYPTO: Can Stablecoins jumpstart the digital economy?


We are bummed with the SEC's rejection of pretty much every effort to launch a Bitcoin ETF, which is at the top of the wish-list for normalizing crypto currencies and assets. The investment management value chain is now caught in a weird race: (1) either crypto custody will become regulated and build tendrils to plug into existing infrastructure, or (2) a regulated wrapper, like an ETF, must contain underlying crypto assets, and then travel along into asset allocations of regular investors. Neither is going to change the mood of the market tomorrow. So instead of focusing on financial progress, could the crypto economy show some economic progress? 

A recurring thesis for spurring on that economic activity, supported by continued investment from crypto funds and ICOs, is the emergence of stablecoins. The argument goes that if you have a virtual currency that stays pegged to the US dollar, for example, then the currency can be used to buy and sell goods without the fear of volatility (or capital gains on buying a sandwich). It can also work as a unit of account in which other assets are traded. And if we can figure out how to dampen volatility in the markets, perhaps that will also be seen as a positive by the SEC. A lot of ink has been spilled on how different projects are different -- but at the core, this is an automated macro banking algorithm that must maintain price parity, backed by assets, leverage, or fraud. One that can be manipulated or broken (e.g. below, Nubits).

We see stablecoins as incrementally helpful, but not sufficient. You still need a fiat/crypto equilibrium mechanism, and if a stablecoin becomes large enough to maintain a digital economy, it comes into direct competition with the United States government, its monetary policy, and its police force. It is highly unlikely that the US will let a decentralized or private actor print the equivalent of dollars. Who knows, maybe a central bank issued coin is still a reality -- take for example,Thailand, which is working with R3 on interbank transfers. While this isn't what most Bitcoin enthusiasts would want, the USD is the best peg to USD. Let's just get people to hold it in a Bitcoin wallet -- which is why rounding your change into crypto using Revolut, or getting a blockchain-native phone once it's out, could be so meaningful.


Source: Medium (Nathan Sexer on Stablecoins), WSJ  (SEC rejection), CoinDesk (Thailand bank coin)

ONLINE LENDING: $65 Million Venture for Lending Club CEO's "Upgrade".


The world is full of second chances it seems. Renaud Laplanche is a rare entrepreneur, building Lending Club into a public company ($575mm in revenue, $1.6B market cap), and kickstarting the P2P lending industry. But he was also caught up in a governance scandal in 2016, which resulted in a resignation and questions around ethical conduct. Within two years, Laplanche has raised $142 million of venture funding for his new company, Upgrade, of which $62 million came in this week. The startup, which (similar to Lending Club) offers personal loans, already has over 100,000 customers and more than $1 billion in loan originations. This man knows how to build a digital lender!

Another persona that knows how to build a digital lender is Mike Cagney. Cagney was the founder and CEO of SoFi, the student lending giant known for its $1 billion investment round from SoftBank. But, he too was ousted from the seat in 2017, amidst allegations of sexual harassment and problems with an aggressive culture. Cagney's new startup is called Figure, which is a home-equity lender leveraging a blockchain infrastructure, funded to the tune of $50 million. It is a smart bet on just how unprepared people are to retire -- likely needing to extract value out of their homes, without selling them. 

What's going on here? Online lending is a mature theme, where even Goldman Sachs is originating personal loans to consumers. And didn't the IPOs of Lending Club and OnDeck fall 80% since the offering? Yet, from the Fintech Treasury report, we see that US originations are showing healthy growth, from less than $5 billion in 2013 to nearly $40 billion in 2017 across consumer, student and SME financing. That's a far cry from the $200 billion addressable market we identified in 2015. Software can be better at customer acquisition than the retail footprint, and it can also be better at underwriting the risk, using machine learning. Sure, we have not seen the other side of the credit cycle. But so far, digital lenders are one of the few categories in Fintech that have generated cashflows (e.g., Elevate Financial at $670mm) because they manufacture an asset class, which solves an accute pain point for the borrower. 


Source: TechCrunch (UpgradeSoFi), Bloomberg (SoFi), FigureUpgradeTreasury Report

ARTIFICIAL INTELLIGENCE: AI Struggles in Enterprise, Because of Human Frustration.


The American and Chinese tech giants are racing to patent machine learning algorithms. While so far, much of the work has ended up in academic communities and has been open sourced, as larger revenues start to become associated with AI deployments, the fangs of the FAANGs will come out. Further, when we look at Asia vs. American patent deployments, which we did in our Augmented Finance analysis, Asian patents start to outpace those of the West. So is it all worth it? When the tech hits enterprise deployments however, we hit a snag. See below two reports on the topic.

In the first, Bain points to slow adoption of AI and robotic process automation in corporate finance departments, due to very human factors -- there are too many tools, they tools are not integrated, they make too many errors, and user interfaces are hard to understand. This is in part due to how AI is sold and deployed to local environments through a bespoke consulting model. A better approach is an API integration into workflows behind the scenes as a service.


The second report, from O'Reilly, shows the state of adoption in enterprise of machine learning (ML) and associated headcount. We highlight the chart breaking out adoption by stage and geography: (a) companies exploring the technology having implemented anything yet but at least thinking about it; (b)  early adopters have been working with a system for at least 2 years; and (c) sophisticated users have had something in place for 5 years. Though the sample size of 10,000+ is quite large, we are surprised to see Western countries lead Asia in enterprise ML adoption. Perhaps the difference lies in whether the software faces into the corporation to make it more cost effective, or whether the software faces the public and acts as the interface. We need to look no further than a dystopian NYTimes article describing the current state of machine vision monitoring of Chinese citizens by various Skynet companies to see that Western society is quite far behind. Perhaps thankfully!


CRYPTO: 80% Down, Ethereum and Crypto Fund Performance.

Ether, the second largest cryptocurrency by marketcap and enabler of $20+ billion of ICO issuance, got beat up quite conclusively this week. At one point, it was down over 82% off the year's high, recovering to 78% off the year's high. Yeesh, for anyone who wants this Crypto thing to do well. And for many, Ether's fall is confusing because (1) the number of developers building on top of the platform is increasing, (2) the number of ICOs on the platform has not meaningfully slowed down, (3) ConsenSys has dozens of enterprise and public projects that move the ecosystem along, and (4) it has a first mover advantage. The underlying qualities of the systems are, in theory, better than same time last year.

One driver is the negative sentiment in the Crypto fund community. We point you to the sources below, particularly a Tetras Capital paper that uses the store of value / money velocity argument to short Ether, and a strong-willed rant from the CEO of a crypto derivative exchange about the weak hands of Venture investors entering the trading game. While we agree that sentiment is a major driver, especially as funds buy and sell together, we disagree with the money velocity arguments. However, the ICO phenomenon did hurt Ether's function as currency. To use a project on the Ethereum platform, users have to buy and pay with a third party token that was issued primarily for fundraising. They don't use ETH to pay for the service. This in turn makes ETH less versatile, and less useful as a unit of account or medium of exchange. And second, ICOs that have raised ETH as their currency of choice have to sell it to fund operations.

Sure -- Ethereum could have scaled faster, traditional banks could have opened their doors instead of putting up regulatory walls, the SEC could have approved an ETF earlier. But investor sentiment now seems to disregard the steady and positive contributions by developers and entrepreneurs. Maybe this is because most of the 370+ crypto funds formed at the middle of last year, and missed out on the early boom. Looking at the self-reported performance of some funds in our database shows the extent of the damage. We have two samples: July 31st and April 30th. In each case, we compare them to the BITA 50 index, which tracks the top 50 liquid coins. The first chart shows both the returns and the index, the second chart just shows the difference. The reported outperformance averages around 20%. Given the BITA 50 index is now down about 70%, we expect that most crypto funds are at least 50% underwater for this year. No wonder so many are rushing to hedge through shorting.


FINTECH: Why Amazon beats Google for Insurance Aggregation

Just last week we discussed the industry's anxiety about Facebook reaching for the datasets of traditional banks. This week, it's Amazon again. The claim is that Amazon is considering setting up a comparison shopping site in the UK for insurance products. Given the recent rise of aggregator insurtechs like WeFox, as well as the web arbitrage of lead gen websites like GoCompare and Moneysupermarket, there seems to be a reasonably defined opportunity to mess with financial product distribution. In the US on the lending side, LendingTree and Credit Karma had carved out hundreds of millions of revenue intermediating such sales. 

So what's Amazon's game? Critics enjoy pointing out that Google had tried to do comparison shopping multiple times across financial verticals, and failed. Very little remains of their personal finance efforts. But this point betrays a misunderstanding. As a financial product manufacturer, like say insurance provider Admiral (who would love to be on the Amazon platform, thank you very much), you face a fat customer acquisition cost. Let's say this is $300-800 per client, from insurance, to mortgages to investment management. You will pay this to get the client. Right up the marketing funnel is the price comparison platform, which will get paid $50-100 per lead by the financial institution, which remember still has to close the lead at some conversion rate. Your job as a lead generator is to arbitrage the willingness to pay by the financier versus the search engine algorithm discovering an audience's interest in a financial product. So if you pay $5 to get traffic to your site, and then convert those effectively into leads to sell off, you make money. 

The search engine price comparison (e.g., Google), however, is competing with itself and the advertising spend of intermediaries. That revenue per user is the opportunity cost. If Google can monetize search intent through advertising to intermediaries better than through selling leads to manufacturers, then it should exit the leads business. And a bunch of techies probably don't know how to optimize for selling insurance. But Amazon is different. Amazon has no opportunity cost from advertising revenue in its platform, all the while facing much lower customer acquisition costs. Because the customer is already inside of Amazon.


Source: Amazon Looking at Insurance (GuardianDigital Insurance), Images from Moneysupermarket and Google Shopping

SOCIAL MEDIA: 15,000 Scammer Twitter Botnet Exposed


What's a botnet's favorite activity, when not trying to take down Minecraft servers using thousands of remotely controlled baby monitors? Some good crypto currency scamming on Twitter, of course! We loved a recent paper from Duo Labs that exposed the structure of the botnet running the "ETH Giveaway" scam which tricks people into sending a small amount of currency to an address for "verification" and never sends any money back (not unlike the famous Nigerian price).

The researchers sat on the Twitter API and pulled out data on 88 million public profiles and 576 million tweets. To classify accounts, they used 22 heuristics like posting frequency, content, unique sources, hashtags, account age and others. They trained a machine learning Random Forest model on the data set, using "verified" accounts as controls, and found a 15,000-entity botnet with a three-tiered hierarchical structure. Within this structure, there were (1) individual bots that would post spreading the scam messages, (2) hub accounts that many of the bots followed, and (3) amplification accounts which would like and otherwise engage with these messages. It's a beauty of growth hacking and attention economy manipulation.

Such creatures are inevitable in a digital-first world, no matter how much Twitter tries to fight "dehumanization". Over time, they will only get more sophisticated and invisible, as initiatives like Microsoft's TextWorld teach bots to carry a conversation with humans. Which is why we also have to use machine learning ruthlessly to weed these things out. Such is the responsibility of the attention platforms, like Google, Facebook and Twitter. At the same time, we must not cross the fine line between machine moderation and machine control (looking at you, China). Whoever gets to decide how closely to turn the dials on the algorithm controls the volume of millions of voices across the web.


Source: Futurism (Twitter Bots), Duo Labs (Paper), Slate (Dehumanization on Twitter), Microsoft TextWorld

FINTECH: Facebook's Faustian Banking Bargain.

Here's a Trojan horse if we've ever seen one. You probably already know that Facebook would like to get its paws on some banking data. The social network giant approached several of the largest global banks -- JPMorgan Chase, Citigroup, Wells Fargo, and US Bancorp -- to get financial pipes that map onto its users. Such financial data would then be integrated into Facebook Messenger, and not sold to advertisers according to the company. Putting aside issues of Cambridge Analytica and other various public trust mistakes, Facebook is clearly asking the banks to disintermediate themselves by shifting the primary consumer interaction from bank apps to its Messenger. 

This is a particularly Faustian bargain. Facebook is already integrated into payments via Mastercard,  American Express, and PayPal. It is of course exploring blockchain, and effort led by the former president of PayPal. In a recent review of P2P payments providers, Facebook lagged behind Apple Pay, Venmo and Square, but was ahead of Zelle, the banks consortium. It is experimenting with Whatsapp as a payment rail in India. Looking at a report of recent patent filings for banks, in every category including transaction processing, mobile banking, e-commerce and payments, the tech companies (e.g., IBM, Google, Microsoft) hold more intellectual property than the banks. So giving Facebook customer financial data not only hands over the customer, but puts that customer into a far better technology platform. 


Which gets us to the following -- why doesn't Facebook just buy the data with customer permission? In Europe, PSD2 has forced large banks to open up all their data via APIs. In the US, Yodlee (under Envestnet), ByAllAccounts (under Morningstar), Quovo, Plaid and many others offer account aggregation as a service across thousands of banks. These are stable, proven products used by many financial institutions. Oh wait -- Yodlee costs at minimum $0.40 per user per month. For 214 million American Facebook users, that would add up to about $1 billion of cost. We get it. Facebook wants to offer the Faustian bargain, and they want it for free.


Source: Facebook Bank Request (VergePayments Source), Consumer Reports (P2P Payments), Cipher (IP Patents Data), Yodlee 

CRYPTO: Great Investment Research, Bribery and Corruption

We fell down the rabbit hole. It all started with the stellar ICORating market research report for Q2 2018. When writing Crypto Utopia, we dedicated a section to analyzing ICO failure and returns by industry. ICORating takes the analysis one step deeper, looking at raises by geography, technical development stage, and even token structure. A couple of interesting takeaways: (1) 25% of all ICOs ended up raising less than $500k, which helps adjust our figures that look only at $1mm+ ICOs, (2) less than 10% of projects were able to list on exchanges after funding, (3) as we previously identified, EOS's endless ICO suggests a lengthening out of the fundraising process for projects like PumaPay, Moover and VideoCoin, (4) the highest return by sector has been in exchanges, which is not a surprise given recent capital markets trends for Binance and Huobi. Links and charts below, go read it.


But then we started thinking about the business models for research in the crypto space. We've seen three approaches. First, there is free, open research and data. Examples include Messari, Coinmetrics, CryptoCompare, Coinmarketcap, Medium and various other tools. Messari's model is a combination of EDGAR, Crunchbase and Wikipedia, so consumers of the data are also the contributors. Other sites are supported by ads, through aggregators like Cointraffic, with the coin price data they provide driving hundreds of thousands of clicks. In this case, consumers are the product that advertisers (i.e., ICOs) purchase. The second model is to charge a subscription fee to crypto investors -- Digital Asset Research, Fundstrat, and  Autonomous NEXT at the institutional level, or Santiment and Picolo at the retail level. In this case, the investor pays a fee for the work done, which aligns incentives.

The last model is like a credit rating agency -- think Moody's. The firms get paid by issuers to rate their offerings, which creates a conflict of interest. In the  traditional world of finance, rating agencies failed to warn investors about Enron or the 2008 subprime mortgage crisis. In the crypto world, this includes companies that list tokens (e.g., Coinschedule, ICO-List, Tokenmarket, Cointelegraph) and companies that rate tokens (e.g., Digrate, ICORating, ICOBench). Prices for ratings range from $500 to $20,000, depending on the platform. While folks like ICORating have clearly invested in intelligence and analytics, others like ICOBench have been called out for corruption. "Experts" on the system ask projects for $500 per 5-star rating (threatening to downvote otherwise), and the system itself is charging users 2BTC for "expert status". Not great. That said, until investors themselves realize that research and intelligence are not free, such models will continue to proliferate.

Source: ICORating (Q22018 Trends), Autonomous NEXT (Crypto Utopia), Hackernoon (Cost of ICO Marketing), Corruption (ICO Bench Charging ExpertsExperts Taking Bribes)

BLOCKCHAIN: $100 Million for Hashgraph, Doubling Down on Fat Protocol Thesis

Investors are still chasing the fat protocol thesis of crypto assets, trying to own the public highway on which everyone builds applications, and take tolls in the form of capital gains. The latest symptom is a reported $100 million investment into Hedera Hashgraph at a $6 billion valuation, with the sources of capital being institutional investors and employees. Another $20 million is planned for a public ICO. The project claims that the hashgraph, which is not a Bitcoin blockchain fork, but instead a directed acyclic graph like IOTA and Byteball, will be able to process hundreds of thousands of transactions per second while being as cryptographically robust. The pedigree of the founding team from an academic perspective makes those claims at least initially credible.

There is no shortage of contenders for Ethereum's throne, despite a good number of Crypto funds deciding together that a public smart contracts platform isn't worth its $40 billion valuation (a decision based on some very questionable math, might we add). Many platforms now claim to do better and faster what Ethereum does today -- from EOS to NEO to Cardano to Dfinity and others. And yet, we think, too many are focused on optimizing technical performance rather than user experience. Getting a functional proof of concept out is better than over-engineering something that doesn't end up working on launch at all and needs a re-write of core ideas (hi there EOS). Of course, these things were never valued at $6 billion at Seed stage before.

The other part of Hashgraph worth mentioning is the 39 company governance council that owns equity in the company, according to Forbes. This reminds us of Hyperledger and other enterprise blockchain approaches that reinforce oligolopistic outcomes. But that may be a good thing! Institutional attraction to crypto assets is steadily increasing, which validates the software even as crypto markets melt away in value. For example, look at the Intercontinental Exchange launching their crypto trading platform Bakkt, which is a collaboration between the exchange, Microsoft, BCG, Starbucks and others. The effort will convert Bitcoin into fiat, and vice versa. Whether or not we prefer public companies getting into the space is up for debate, but public companies are getting into the space.


Source: Hedera Hashgraph (CrowfundInsiderCoindeskVenture Beat), Forbes (Crypto funds shorting ETH)

ROBO ADVISOR: Digital Drives Fidelity Fund Prices to $0, Morgan Stanley to Pay Advisors for Digital Engagement.

Roboadvisors have failed, you say. Hedgeable is closing down. Robos barely made a dent in assets under management -- crossing $200 billion, as compared to the full market of $40 trillion in US wealth management, or even when compared to the $3 trillion of assets that sit with independent RIAs. Further, when looking at where those assets sit, Schwab and Vanguard hold the lion's share, with the top 3 independent B2C contenders floating at $10-15 billion each. Well, not so fast. First, we point you to a great report from Backend Benchmarking on the space, which shows that from a pricing and features perspective, the fintech startups are still doing a great job. Betterment and SigFig each are eclipsed only by Vanguard out of incumbents, while still holding on to the capacity for quick innovation, thereby defining the path of the maket.

Second, companies like Morgan Stanley are fairly desperate to implement digital wealth in existing client books. The wirehouse just launched its digital tools -- goal based financial planning and account aggregation (i.e., Personal Capital in 2012). To incentivize advisor adoption, the firm is increasing payouts to advisors by up to 3% if clients use the software tools that show external assets, and leverage internal banking and lending products. The latter part is Wealthfront's and SoFi's playbook. Imitation is the sincerest form of flattery. From a broader perspective, remember the recent mega deal: Financial Engines acquired by a private equity firm for $3 billion, merged with Rick Edelman's massive RIA, distributed through the footprint of the Mutual Fund store. All of this is digital wealth.

As a final symptom, we leave you with Fidelity. As Autonomous analyst Patrick Davitt highlighted earlier this week, Fidelity will (1) offer free self-indexed mutual funds to their brokerage clients, (2) eliminate minimums to open a brokerage account, competing with Robinhood, (3) eliminate account and money movement fees, (4) remove minimum asset thresholds on Fidelity mutual funds and 529 plans, and (5) reduce and simplify pricing on its index mutual fund product suite. On the latter, the average asset-weighted annual expense across Fidelity’s stock and bond index fund lineup will decrease by 35%, with funds as low as 1.5bps. But to say it again -- Fidelity is rolling out index mutual funds with a $0 price. That's a price that works in a digital wealth offering.


Source: Roboadvisors (Daily FintechThe Robo Report), WSJ (Morgan Stanley), Bloomberg (Fidelity), Think Advisor (HedgeableEdelman), Morgan Stanley (GPS Screenshot)