From camera-mounted sunglasses that failed to be welcomed in any social setting, to Bitmoji's creepy cartoon depictions of reality, it seems like Snapchat's parent company - Snap has tried it all to stay relevant. Especially, when Zuckerberg's army of clones - boasting an impressive 1 billion daily story users vs Snap's 186 million, threatens the story-based core social media model of the app,. Well, it seems Snap has yet to be snapped. At its recent partner summit, the social media company announced its launching StoryKit - a plan to allow apps like Tinder the ability to embed Snapchat stories into their app. The incentive being enhanced engagement and security for the partnering app, whilst Snap additionally benefit from the data they gather from users using their native camera. Quite the colonization strategy you might say. Then again, with the day-to-day data privacy-exploitation headlines streaming from Facebook HQ, it's a no-brainer that advertisers, content creators, and businesses alike are looking to alternatives such as Snap to save them from being victims in the Facebook apocalypse.
After years of existential angst from finance executives about the big tech companies entering financial services, it is time to pay the piper. Excuses like regulatory cost and complexity, strategic disinterest, and complexity of products are incrementally falling away each and every day. Across every single vertical, something is nipping at the banker's ankles. The splashiest announcement came from Apple, which launched a credit card backed by Goldman Sachs (the storied mass retail financial firm!) and transacted over the MasterCard network. You can sign up for the card directly from your phone, which integrates it into Apple Wallet and Apple Pay, and provides a 2% cash back on all transactions made with ApplePay. There are no fees on the card other than an interest rate on credit.
For Apple, this financial product is one of a thousand features within their platform. It is no more or less important than music, video, news, email, or podcasts. The presence of credit makes customers more sticky within the ecosystem, offering 3% cash back on all Apple purchases. For Goldman, this is a leapfrog into the consumer market, riding a much better recognized and respected retail brand. Finance for the wealthy is just not cool anymore in the era of Bernie Sanders and Alexandria Ocasio-Cortez.
Meanwhile in India, Google and Facebook are battling with Paytm over payments. Facebook's rumored cryptocurrency will target sending remittance over WhatsApp. Google, on the other hand, is working on a service to add a savings account to money movement. This account will be backed by custodied gold, and may include expanded wealth management products -- from mutual funds to insurance -- in the future. None of this should be surprising, as Chinese tech companies have been providing mobile search bundled with online shopping, saving, investing and payments for the last five years. These Asian companies are moving into Europe and the US, sometimes by investing in neobanks or through acquisitions. Our American tech companies are moving into Asia.
Let's round out the whole thing with IBM, the OG of American tech companies. Several young firms like BitGo, Gemini, and Kingdom Trust have all built custody for crypto assets, including a notable recent announcement from Trustology about bringing custody to the iPhone. But IBM is now moving into the space, leveraging its expertise from working on enterprise blockchain projects via Hyperledger. What's important to understand is that financial products -- including their embedded capital, credit and investment risks -- are transforming from legal paper to software. And as that happens, it is technology companies that are best positioned to hold, analyze, report on, and safekeep our money. Among the incumbents, Goldman, JP Morgan, BBVA, Santander, DBS, BlackRock, Schwab, Fidelity, NASDAQ, ICE and several others get it. So many others think it is a false alarm. Which side are you on?
In today's monolithic, financial incumbent world, manufacturing financial product is the highest honor. Picking investments, underwriting insurance, extending credit, powering payments -- these are the best-paid and most defensible careers in finance. Yet we are in a multi-decade transition that rotates the orientation of all industries away from manufacturing product that is "pushed" at consumers, to aggregating consumers that indicate the features to be built and "pulled" from a platform. Looking at the most powerful insurance companies, nearly all are organized as product-first corporations with extensive distribution and intermediation value-chains, protected by sticky rent-taking along the way. And on top of that, insurance companies get to run third party capital through massive, captive asset management businesses as a side-hustle.
Steve Jobs (and likely others) defined a key distinction that stuck with many entrepreneurs. Is your company a Product or a Feature? It's bad to be a feature -- you are just one widget in someone else's platform. It's good to be a product -- you fit into many environments and use-cases. What we are observing now is that the insurance product, historically standalone, is being transformed into a platform feature by non-insurance players. Take for example Lyft and Uber. Both firms have launched captive insurance units in Hawaii, which is a friendly, low-tax jurisdiction for such activity. While these ride-sharing companies have relationships with third party insurers, building insurance product as a feature of the transportation platform buttresses the business model with a lower cost alternative.
Another example is Haven, the joint venture between Berkshire Hathaway, Amazon and JP Morgan. The venture has a not-for-profit structure and an explicit mission to reduce costs and improve healthcare outcomes for consumers. Let's put aside the point about America's failure to agree on a sane public solution for health insurance. Instead, notice that this medical finance product is being offered to the employees of the three companies in the joint venture. The first takeaway is that this is the core Amazon playbook: become your platform's first customer. The second takeaway is that this offering is a feature of being employed in these organizations, and nowhere else. Insurance is not a product to be bought separately, but something these companies are building for themselves out of necessity in their course of business.
We're Americans worried for Americans. We just won't understand the future coming, and then the whole tilt of the world will shift. Take Samsung, dropping two known but very meaningful bits of information. The first is foldable phones. The only note we've made of these devices has been to compare them to pizza boxes -- most prototypes look preposterous, have issues with cameras, and are prohibitively expensive. And that's still true -- Samsung's foldable phone is pretty expanded, but bizarre when folded. But no more bizarre than cellphones from the 1980s! The other meaningful companies working on bendable screens and phones are all in Asia, because the manufacturing capability and hardware innovation for this stuff has been outsourced long ago. Huawei, Xiomi and others will all champion this form factor -- and Americans won't get it.
Second, Samsung also confirmed that the Galaxy S10 phone line will be crypto-native, allowing for private key storage. We think the absolute largest roadblock to economic activity using cryptocurrency is the barrier to entry in user experience (followed closely by financial instrument packaging and bank buy-in). Having a mobile experience that allows you to interact with the decentralized web and its applications without downloading or thinking about software management is massive. Players like HTC and Sirin are also in the game, but we point to Samsung Pay as a meaningful differentiator. There should be no difference -- from the customer view -- in using a credit card in Samsung Pay wallet, and using a self-custodied digital asset. Same use case, same ease of use. And if every merchant that takes Samsung Pay takes crypto, well, you get the idea.
Thereafter, dominant phone apps like Facebook can also step up, tokenizing aspects of their services for a global install base. Collectibles, financial instruments and health records quickly follow. We worry, again, that Americans -- who don't want to use QR codes and can't stop swiping their credit cards -- will simply shrug this off. Skepticism is the antidote to innovation. But there is also plenty to be skeptical about. In particular, for normal people, the endless security worries about everything from the physical device being stolen to your crypto assets being 51% attacked (looking at you ETC) are a legitimate black swan. Not dealing with that at the protocol level will mean the rise of walled gardens, yet again. Just consider how the wild anonymity of the early Internet in the 1990s faded into protected, authenticated, verified Instagram influencers. Yikes!
Where would we be without some cautionary warnings about technology overlords and attention black holes? Since you asked, we'll give you some things to think about. The first is Absher, a web service from the Saudi government that helps men track the location of their female family members. As an all-around government services app, male users can pay parking tickets or renew a driver's license. They can also designate where a woman in their guardianship is allowed to travel -- a practice empowered by local law, culture and religion. The app will notify the man if the woman's passport is scanned at an airport or border check point with a convenient text message. The app has been downloaded over 1 million times on Android devices.
The other example is China's "Xi Study Strong Nation" app, which is the media voice of the Communist Party in a modern format. Users read articles and watch videos on the platform, earning points for such engagement -- say 0.1 points for each item. The app uses intelligence to process behavioral data so that it knows if the user is truly engaging, or just scrolling around. If you fire up the content in the evenings, however, the rewards for engagement double up. This way, readers are incented to exchange relaxation for Party reading. But why do any of this at all as a user, you ask? While we can only rely on the media sources available, those suggest that employment could be predicated on fulfilling a sufficient number of points (e.g., 40 a day) in order to remain in social and political standing. What starts out as a gamified learning experience quickly becomes a social prison. We hypothesize that data about propaganda consumption can also be tied into the country's social credit score, which determines everything from financial product & service access to potential for academic admission. No wonder Reddit's community is creeped out by the recent $300 million investment from Tencent.
It is dangerous to make cultural judgments from a place of ignorance -- and we are but a meek Fintech newsletter. Still, we can sharpen our mental model and draw generalizable conclusions from these cases. In the West, the tech platforms (Facebook, Google, Twitter) are in trouble for selling human attention to the highest bidder. But at least their core function is to use technology in order to increase a user's choice and self-actualization, or one's impression thereof. By sharing photos, shopping on Amazon, or searching for information, we are making personal and empowered decisions -- even if those decisions are within the speed-lanes prescribed to us by a corruptible AI-brained Newsfeed.
In these counter examples, a sovereign has penetrated the attention platform in order to redirect the attention and associated power to itself. These apps are not made to facilitate the choices of humans, but to make stronger the social human constructs of law, power, culture and religion. They extend not the open promise of creativity and self-fulfilment on the Internet, but rather cement into code the existing flawed beehive in which we operate. Putting sovereigns into software -- which unlike humans is ever-present and all-seeing -- is a bad call. In a round-about way, perhaps it is best to leave Facebook and Twitter and Netflix and Amazon alone. Allowing government control into these apps, even if just a bit, is a slippery slope way down the rabbit hole.
Spoiler alert: Fyre Festival ended up being a securities fraud that cost investors $27 million dollars, left hundreds of workers unpaid and emotionally ravaged, and negligently put attendees in dangerous conditions. Even Blink-182 cancelled their performance! Another spoiler: Theranos ended up being a securities fraud costing investors (including Betsy DeVos!) $700 million, leaving hundreds of workers unpaid and pushing at least one to suicide, negligently putting users of the product in dangerous medical circumstances. In both cases, the founders were young and narcissistic, optimizing the story-telling about their company over delivering on the promised expectations. Billy McFarland used Instagram supermodels to sell a false vision. Elizabeth Holmes leveraged the Steve Jobs black turtleneck and VC group think to do the same.
This stuff is so easy in retrospect -- to point fingers and throw the stone. Having spent a lot of time in the early stage ecosystem, we can tell you that all founders have these devils inside them. These are the devils that let you take the risk, tell the story and defend your tribe (e.g., see Elon Musk). The issue is that these particular people could not and did not execute -- and any reasonable person in their situation would know enough to stop marketing and selling lies. We can look at crypto ICOs to date and say the same thing. Surely the people who raised over $30 billion globally, and burned nearly all of it, sold us a falsehood. Some -- like John McAfee or Brock Pierce -- had to know what was up. Or did they, perhaps believing in a zeitgeist change tilting the axis of human industry?
The issue is asymmetric information and intent to profit from that asymmetry. When someone sells us a broken car claiming it works great, they are selling a "lemon" -- something the US protects against with "lemon laws" that remedy damages from relying on false claims. Let's shift from these obvious macro lemons, to the invisible micro lemons sold by Facebook and Google. It was revealed that Facebook was -- in the worst case -- paying 13+ year olds $20 per month to install a research app that scraped all their activity (from messages to emails to web) and provided root permissions to the phone, misusing Apple-issued enterprise certificates. Facebook should not have been able to create these apps for anyone other than its employees on internal apps (e.g., bug testing new versions). But it did, and got its access revoked by Apple immediately.
Google did a version of this too, exchanging gift cards for spying on web traffic. As yet another example, Google's employees refused to help the company build a war-drone AI for the US Department of Defense. So instead, Google outsourced the work to Figure Eight (a human-in-the-machine company), hiring gig economy workers for as little as $1 per hour for micro-tasks like identifying images (teaching drones to see). These workers had no clue what they were doing -- and we imagine that some would exhibit the same ethical concerns that Google employees did in refusing the work. In all these tech company examples, the lemon is the un-revealed total cost. Compared to Fyre and Theranos, where we pay billions, and get nothing in return, here we are given $1 an hour or $20 per month (i.e., nothing), but we lose our privacy, agency and humanity (i.e., everything).
In our continued amazed gawking at the Chinese fintech landscape, we bring you the following. There is now a feature within WeChat, one of two channels for all mobile chat communication, to show a map of "financial deadbeats" around you. That's right -- a shaming visualization of people who are in financial trouble, like some sort of public sex offender list. We link to the article below, and assume that it is true despite how preposterous the whole thing seems.
Offenses that could land you on the blacklist include serious ones like being the founder of a digital lender that collapsed with 12 million unpaid accounts, and trivial ones like being a single mother embroiled in a divorce proceeding. Once you are on the list, not only will your full name and financial information be public entertainment on this app, but access to credit, commerce and university admission could be revoked. To add insult to injury, a special ringback tone is added to the "discredited" person's mobile phone, alerting any potential caller about your poor financial management skills.
We add to this soup the idea of algorithmic bias exhibited by AI based on training data. We've covered this issue in the past, but point to Rep. Alexandria Ocasio-Cortez (D-NY) recently bringing it up into mainstream conversation. From propaganda bots to algo-racism, these arcane issues are starting to concern the broader Western polity. So when you combine historical training data reflecting past social and economic biases with social media enforcement systems, dystopia calls. One of the most important financial innovations in the West was bankruptcy, allowing entrepreneurs to fail and start over. This normalization of financial wipe-out led to an equilibrium with higher risk-taking and innovation. It is chilling to see technology being used, with potential for error and misuse, to stifle that spirit. Based on the US personal bankruptcy data below, you can see that 6 out of 1000 people would be guilty according to WeChat, skewed in large part to minority populations. No thanks.
One ongoing, false refrain is that machine learning does not generate creative outcomes. Increasingly, this is proven wrong by the technologists and artists playing with the technology. What started several years ago as "neural style transfer" (i.e., transferring Picasso's visual DNA to any photo) has moved on to BigGAN, which is a machine learning algorithm to manufacture images that appear realistic but are made from machine hallucination. Notably, artists are playing not just with the realistic versions of these hallucinations, which you can see below, but with the "latent space" in between. This mathematical term for interpolation is filled with abstract, surprising, and surreal outcomes. Our takeaway from these results is both (1) that machines will be far more precise in understanding and approximating humans than we assume, and (2) that machines will be far better at creativity that we assume.
Fitting a financial product to a ranked "perception" of a human being matters -- especially when it is done at a scale of a billion people. Tencent's WeChat is running a new initiative called "WeChat Pay Score", which is analogous to the Alipay's "Sesame Credit", both of which (we expect) flow to the Chinese government to make up the national social credit score. Sesame Credit looks at 5 dimensions: safety, wealth, social, compliance, and consumption from over 3,000 specific data points collected by the app. The WeChat version is collecting data on how users chat on the messenger, what they read and buy, where they travel, and how they run their life in general. These combined attributes grant access to perks, like waiving bank account minimums.
Listen, in a massive nation where a large swath of the population doesn't have traditional financial data or bank accounts, machine-learning based estimates of credit-worthiness are a life saver. Not every economy comes with a FICO score and legacy credit agencies (though the Equifax breach wasn't particularly kind to incumbents). But they key question comes back to the two picture sets below. Do the machines see us like those perfectly generated, accurate pictures of people? Or like the surreal goo in abstraction? The former means distributed access to well-suited financial products, while the other is a Black Mirror nightmare.
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.
Here's what we said would matter in the past year year:
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.
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.
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?
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?
News broke that Amazon is back at trying to push its payments rails adoption into retail. The gist seems to be that it plans to do QR payments using the Amazon app in restaurants and gas stations as a pilot. No NFC reader necessary. This is regular customer behavior in much of the Asian world, but foreign to Americans who still cash in wet-signature checks at their local bank. We've discussed financial products within Amazon's strategy before -- mere features to increase platform adoption. In this way, pushing its wallet into physical commerce from e-commerce makes sense, as it increases the number of people who might want a digital Amazon wallet used for consolidated shopping. The other notable point is that Amazon has Whole Foods and other retail properties, which means it can choose to be its own first customer (as per the Strategy framework).
So where can this go? Looking at Hong Kong, both Ant Financial and Tencent have announced a plan to add QR codes as a payment method to the public transport system. Instead of tapping a credit card against an NFC chip, or swiping a Metrocard, or (worst case) dropping in a metallic coin, commuters will just use a payments app that takes a picture of the code, and automatically send a payment in that encrypted direction. For reference, 92% of China's 970 million mobile users have already used mobile payments.
Further, Switzerland is planning also to introduce a QR-based billing system into the economy. These can be used at both the consumer and enterprise level, with B2B payments as a particularly compelling use case. Instead of entering in IBAN numbers and bank accounts, a generated QR code can contain all of this information inside the image. Perhaps this type of initiative can work to train enterprise users for QR adoption, and spread into consumer mind-share. As a relevant aside, transferring digital assets via QR codes read by an app on your phone (perhaps a phone running a local wallet) would be one way that crypto currencies make their way into the mainstream economy.
ByteDance is a $75 billion AI-powered Chinese attention gathering machine. Their marquee application TikTok -- a frankenstein formed from the combination of Vine-like videos and the acquisition of Musical.ly -- boasts 500 million users, and is currently ranked the #6 free app in China and #7 in the US. That position is ahead of Facebook (surely angering comic book supervillain Mark Zuckerberg), Snapchat and Messenger, having achieved this result in mere months since launch in the US market this past July.
TikTok engages teenagers with personalized content driven by ByteDance’s proprietary machine learning algorithms, emoji video commentary features, Snapchat-like augmented reality renders, and glitchy filters. Creators on the platform have the chance to make viral content, which is distributed at scale and mass-targeted at consumers by a machine. Using AI this way is a growing strength for Chinese companies. It is also a strength of recently beleaguered Facebook, which is fighting back by launching a clone called Lasso. The app features nearly identical gesture features, structures, endless content feeds, and hashtag groupings for browsing. The main differences lie in (1) video creation, where TikTok offers up to 60 second videos compared to Lasso’s 15 seconds, and (2) TikTok’s ability to customize content using filters, music, and lenses, which far outweigh the limited selection of Facebook's Lasso.
Two conclusions of note. First, Facebook has defended their turf before, and succeeded. For photos, it outright bought Instagram. For video stories, it failed at buying Snap but succeeded at building the feature into Instagram. For messaging, it bought Whatsapp and built Messenger. We wouldn't count it out in this case either. Second, these attention companies exist to deliver advertising and form consumer preference functions. In China, data about customer preferences already informs access to financial services, such as credit, payments and investing. In the US, increasingly Facebook is seen as a conduit for opinion manufacturing to the highest advertising bidder, with such data still a step away from being included in a financial underwriting decision. Yet as tech solutions and norms are exported between global jurisdictions, we expect that line to increasingly bend.
Ok, yes, we just talked about how the Amazon / Travelers partnership is primarily a way for Amazon to sell more of its IoT device and play kingmaker. But listen -- this is another great symptom that highlights why Amazon's entry into financial services isn't a threat to financial companies. It's a threat to e-commerce, the actual target of the platform. So in this example, American Express has partnered with Amazon to provide a credit card targeted at small businesses. It's a clever product which allows the small business to either (1) get cash back on purchases or (2) defer the interest on their card on that purchase. It's up to the small business, which may need the extra credit for a late-paying customer in one case, and the rewards the next.
Here's the magic. The cash back is 3% on all Amazon purchases (1-2% elsewhere), which means more shopping on the platform. But wait, there's more! If the card holder is an Amazon Prime customer, which is not a hard feat, they get 5% back. Similarly, the interest-free period is 60 days for regular holders, and 90 days for Prime holders. What this card does is make Amazon Prime shopping irresistible for a small business -- while driving Amazon's key metrics of Prime subscribers and retail volume. Sure, it's nice for AmEx. But all they get to do is sell a financial product that would apply in some retail channel anyway. Amazon gets to shift the flow of retail into its walled garden, and then monetize a sticky business customer over and over again! The cross-sell is bigger than the sell.
This is the monopoly moat of a platform, like Apple negotiating the record labels out of existence with the iTunes store by holding all the customers. Not only does Apple get the share of the music revenues, but it gets to sell all the iPods. Further, Amazon has done a remarkable job of handing out a financial feature to each big bank. JP Morgan has checking accounts, Bank of America has merchant lending, and so on. This distribution of seats at the table to the top financial incumbents is predictable -- both by power laws from the bank point of view, and by the stability of the capital base from the platform's view. At the same time, the net effect is that all these financial firms should want Amazon's share of commerce to keep increasing.
Speaking of Amazon, news broke that the company had built out an AI-based recruiting tool that was supposed to help it rank candidates at scale. They certainly are not the only ones -- the tech startup space is littered with applicant management and analysis software, especially given that employees have many more jobs on average than in prior decades. What this AI did, however, was systematically discriminate against women, down-weighting resumes that included the phrase "women's" in descriptions or candidates that came from all female colleges. This result came unintentionally from the underlying data. If you correlate the language in thousands of employee resumes, you will get the status quo, which is that on average the Amazon employee, or any tech employee, is more likely to be male. Another artifact that mattered is the way candidates used language itself, which can be gendered in output.
Other examples of unethical AI are plenty. For example, image recognition algorithms make an error of 3% for white male faces but 30% on black females faces. Or, when used in automating sentencing criminals in the US, algorithms punish minorities more harshly. Or, when underwriting credit, AI disfavors historically disadvantaged protected classes using Zipcode. But the math isn't wrong -- it is in fact painfully correct. These outcomes are a mirror to how things are, not a solution for how we want things to be. Yet AI will be used regardless. Just this week, Lloyds adopted speech to text passwords for telephone banking, replacing pins with the sound of a customer's voice. Will this service work better for majorities and not minorities? Further, such security can be gamed using pre-recordings, or generated voices. Similarly, image recognition can be gamed with photos or by twins.
This is why we are excited to see two initiatives make the news. The first comes from the MIT Lincoln Lab, focused on machine vision. The software builds a visualization based on how a neural network sees an object, highlighting which parts and features of the object drive a particular decision. The picture below shows how the computer detects "large metal cylinders", first looking for size, then for materials and finally for shape -- each highlighted by importance-ranking heatmaps. The second comes from IBM, called the Trust and Transparency service. In an example around insurance claims automation, the company shows an explanatory overlay on the AI that points out the probabilistic weightings for different drivers of an approval/rejection decision. A human analyst can then understand why the machine made its judgment. We think such tools will be required for any serious AI company.
Travelers, the home insurer, has partnered with Amazon to sell smart home and security devices. The company is getting its own digital storefront (amazon.com/Travelers) on the Amazon site, where channel customers can get SmartThings water sensors and motion detectors, Wyze cameras, as well as Amazon's Echo Dot. For Amazon, this is a proprietary hardware and marketplace sale. For Travelers, it is a home insurance sale, bundled with the telematics. Additionally, Travelers has integrated two skills into Amazon Alexa, rationalizing to some extent why you need all this technology to interact with your insurance policy.
This is a powerful symptom. On its face, it may look merely like a new marketing channel for a web-first demographic with a few gimmicks thrown in. Couldn't Walmart, Overstock, and the rest launch some product pages and cross-sell financial products? Here's the distinction: Amazon is a marketplace platform, whose value increases if it can grow two sides of its network: (1) manufacturers of stuff, and (2) retail customers. The manufacturers could make financial or physical objects, which don't matter. In order to win the platform game over traditional retailers, Amazon can throw in bleeding edge tech for free (or at cost). Walmart makes no phones, tablets or Artificial Intelligence-based assistants. Amazon does, and it has Big Tech leverage over all the aspiring startups in the space that want its consumer pipe.
Relative to other Internet companies, Amazon has the luxury of being post search intent. The Web is not a free-market endless bazaar, but a few walled gardens with monopoly-like attention ecosystems. Google sits in the pre-intent part of the funnel. People search "home insurance" into the box and get third party websites formatted according to their own logic. These results are driven by two markets: (1) bidding against keywords and (2) optimizing search engine results against a global, non-discriminating algorithm. Amazon is fundamentally different -- a king-maker that can select who wins business within its platform, and which has no need for an open web for Prime customers. This means insurance companies should race to claim their own custom channels on Amazon's version of the web (i.e., Amazon On Line?), which incidentally ends up selling Amazon hardware. This leads to a dynamic similar to that which Apple had on the music labels with iTunes and the iPhone. No competitors in sight.
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.
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.