BIG TECH: Apple's Credit Card, Google's Digital Gold, and IBM's Crypto Custody show the reckoning is here

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?


Source: Apple Card (ForbesBBC), Coindesk (Trustology iPhoneIBM), Deal Street Asia (Google Gold)

BIG TECH & BLOCKCHAIN: Samsung's big gamble on crypto and foldable phones

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!


Source: Samsung (foldable phones via HyperbeastBBC, crypto via CoinDesk), Coindesk (Zuckerberg on identity), MIT Tech Review (hacking ETC), Walled Gardens (social vs searchmobile web vs apps)

BIG TECH: When Attention Platforms please the Sovereign and not the User

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.


Source: Business Insider (AbsherApple & Google), China Media Project (Little Red Phone), NY Times (Little Red App), Bloomberg (Reddit / Tencent), Netflix & GDPR

PAYMENTS: Ant Financial's $700 million for pushing into the West, which could help Square and Lightning

We're on a payments kick, so let's highlight some further developments. The first is Ant Financial -- the world's most valuable Fintech company -- spending $700 million to acquire WorldFirst, a UK paytech "startup". That's a sizeable check, but WorldFirst is a 15-year old firm with 600 employees and $10 billion of volume per year. Put another way, WorldFirst is like a B2B version of Transferwise (or Revolut if you like), eliminating FX spread and other money movement cost for cross-border payments. Compare and contrast to our JPM coin discussion above. The secular growth in global value chains (i.e., Chinese manufacturers on Western retail attention platforms) is the main driver for a business of this nature.

This is so strategic, in fact, that Amazon has a proprietary FX service for international merchants on its own ecosystem as well as another partnership with Western Union called PayCode. Remember that in a platform-first world, native economic activity between platform participants is the main vector, and this stuff (i.e., finance) is just the derivative. As another interesting permutation, Ant also is partnering with 7,000 Walgreens locations in the US on accepting Alipay. The business rationale is that Chinese tourists abroad are used to paying wth QR codes on their phone and do not have credit cards. This initiative would make the lives of that target audience easier.

It would also train American staff in retail locations to use QR codes to process value transfer. We've already discussed Amazon and European banks trying to push the West towards such methods of payments, but American consumers (other than at Starbucks) are endlessly allergic to modern mobile wallet adoption. However, once you do teach Americans to leave cards at home and use phones to pay via app, tokenized digital finance -- from key management to open banking to cryptocurrency -- becomes second nature. Put another way, a QR code on WeChat is a token for a single purchase. A QR code for Bitcoin is your public address, allowing money transfer with a very comparable user experience. Another proof-point: Square has the most popular personal finance app called Cash on iOS, and Cash will support Bitcoin off-chain money movement service called Lightning. Square has lots of point of sale devices tethered to phones running mobile software. How hard do you think it will be to let that software read Lightning invoices with QR codes?


Source: Financial Times (Ant Financial), TechCrunch (WorldFirstWalgreens), Company Websites, Autonomous NEXT (Amazon QR Codes), Coindesk (Square and BTC Lightning), Consumer Reports (Cash App)

ARTIFICIAL INTELLIGENCE: "Financial Deadbeats" map is the worst things about Chinese Fintech

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. 


Source: Abacus News (deadbeat map), Independent (deadbeats), Vox (algo-racism), On bankruptcy normalization and bankruptcy zip codes

ARTIFICIAL INTELLIGENCE: Evolution of Creative AI and WeChat's Payment Score

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.


Source: Medium (GANs), Joel Simon (GANreeder), TechCrunch (WeChat)

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

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

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

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


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

ARTIFICIAL INTELLIGENCE: Paying by Smile with Alibaba or by Blinking with Ping An


Chinese commerce is very digital already, far outpacing the US in both nominal and percentage terms. Since almost no mobile payments in 2011, China now sees almost 100 trillion yuan, or $14 trillion USD, in mobile payment transaction volume. This compares to less than $100 billion in the United States -- a 10x difference in adoption of using phones, rather than cards or cash, to pay for things. Further, unlike in the West, the vector of payments intersects much more closely with social identity and networking, which is the platform globally for developing artificial intelligence. Just check your Facebook Newsfeed.

So we give to you implementations of AI for payments in the East. The first is from Alibaba. If the customer has Alipay's app and has enabled facial recognition, a smart vending machine is able to scan your face and associate it with the payment account. We would guess that there is a geolocation element involved as well for two factor authentication, or perhaps just a phone or pin verification. The second example is the newly launched Ping An partnership with Danyang Rural Commercial Bank. The plan is to use facial recognition combined with "blink detection" to authorize a payment. The Bank claims to target 1,000 merchants for the initial pilot of the program. Reminder -- Ping An has built out machine vision capabilities to cut down on time processing insurance claims, and here it is trying to rent it out as a cloud service to other providers.

We end with a few questions. First, if Ping An was able to stand up real machine vision capabilities within a couple of years, what's stopping Visa or Mastercard or JP Morgan from building the same? Why have American finance firms failed to own the AI technology layer and its associated cloud? We think the answer has to do with the role of enterprise tech firms and implementation consultants in the US, which make the default option to out-source rather than in-source such capability. Why build, when you get this from Google for free as part of a cloud deployment? And second, we observe that massive data processing and hosting infrastructure is needed to accurately process image recognition on video for millions of people in real time. Likely, you also need high definition images to pick up blinks and smiles. So let's refresh that 5G network!


Source: Walk the Chat (Charts), Fung Global Retail & Tech (Chart), TechCrunch (Alibaba), MPayPass via CrowdFundInsider (Ping An)

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!


ARTIFICIAL INTELLIGENCE: UBS Chief Investment Officer now a Video Game AI

File this one under -- "They'll never automate my job, oh wait". We've got three delicious data points for you. The first is Google's voice generation platform called Google Duplex. We're sure you've seen the demos by now (if not see the source below), so we'll merely place this into context. Google's virtual assistant has an experimental new feature that can be your agent by calling restaurants and other small business and booking appointments. Google has the map of all SME data, their hours and phone numbers, can generate and route call, and now makes a robot that sounds eerily human as well. The virtual agent comes with "ehmms", "umms" and lip smacking in its voice generation algorithm, to the point where the clerk really has no idea they are speaking with a machine that's doing busy work. Neural networks are getting really really realistic with speech.

Second, remember Alibaba, the Chinese version of Amazon plus eBay plus all of Facebook and JP Morgan in one, give or take. One of the requirements of the platform is to enable merchants to advertise and sell goods to consumers. But the scale of the selling is beyond human management -- with some days seeing $25 billion in revenue. So the firm has launched an AI written copy generator which can manufacture description of products based on the millions of data points the firm already has on prior commerce. Yep, just casually writing 20,000 lines of proposed description, in styles ranging from "promotional, functional, fun, poetic or heartwarming.” The company claims this tool is now used on average 1,000,000 times a day. 

Last data point, which picks up nicely from several observations we made prior about HSBC using Pepper robots in branches and other physical/digital interactions. UBS is launching something fresh in Switzerland. The first is a cute virtual assistant animated object that will be able to help people do basic account actions in physical branches. It looks to us like a Siri or Cortana attempt, but for finance troubleshooting. The second is an animated 3D rendering of the firm's Chief Investment Officer, to be displayed on a screen while visiting a private banker. This AI CIO will be able to answer more complex questions in real time about markets and investing, and has been developed by IBM and FaceMe. We'll let you connect the dots.


Source: Finextra (UBS), Alizila (Alibaba AI writer), Ars Technica (Google), Autonomous NEXT (Alibaba $25BHSBC)

PAYMENTS: Alibaba's New Retail digitizes physical retail stores

Under our augmented commerce theme, we believe that mixed reality, AI and other digital enhancements will leave the browser and become anchored in the physical world through hardware and software pushed by companies like Apple and Amazon. Such a transition will be as transformative to retail commerce as the web and the browser were to e-commerce. The United States is showing glimmers of this through incremental symptoms. For example, Walmart and its competitors are implementing an IBM blockchain solution called Food Trust, which acts as a ledger for each food item across the entire supply chain, and cuts down identification time from 6 days to 2.2 seconds. Or look at DHL employing augmented reality headsets to help employees identify required packages in a warehouse.


But Chinese tech companies are many steps ahead. A great Axios article focused our attention on an Alibaba initiative called "New Retail". A mom and pop store can pay $6,000 for a digital renovation, and a $620 annual membership fee which locks the store into the Alibaba ecosystem. The digital tools include a heat sensor to track foot traffic, an AI-backed app and the Alipay payments system, and the entire Alibaba delivery and fulfillment infrastructure. The store becomes a physical endpoint for Alibaba's e-commerce platform. JD and Tencent are doing the same.


A chain called RT-Mart updated 400 of its stores in this manner. Here are the bells and whistles: (1) one-hour arrival on e-commerce orders in a 3km radius to the physical store location, (2) orders through a branded app are fulfilled by inventory from local physical stores and carried by conveyor belts to packing/delivery areas, or all the way to a customer's home, (3) in-store physical e-commerce kiosks with payments using QR codes, and (4) red envelope coupons that are gifted within Alipay can be redeemed for physical goods. Will customers adopt these solutions? Well, 500 million already have the needed app on their phone and are trained in  digital payments behavior. Maybe China will save the American mall! And as we've been saying about Amazon, technology and finance are mere enabling features of the commerce happening in the system. 


Source: Alibaba (AxiosAlizila), WSJ (Walmart and Blockchain), UploadVR (AR for business)

ARTIFICIAL INTELLIGENCE: Chinese Government AI is the new Japanese MegaCorp

The 1980s gave us Bladerunner, with its Japanese-inspired future paranoia. Today's Japan has not taken over the world; though that may change with Mitsubishi UFJ Financial Group testing its own cryptocurrency, and Rakuten planning to tokenize $9 billion of loyalty points. But China is the new boogeyman, offering a rival vision of the world to Western consumer protection. Where Europe has GDPR, with its protected data categories, China uses each of those categories as swords -- to power omnipotent artificial intelligence machines that determine the educational, financial and social fate of citizens.

Take, for example, the news that schools are using video surveillance technology on students to monitor whether they are engaged or paying attention in class. Cameras built by Hikvision Technology, which uses the same software to prevent crime, leverage machine vision to apply Foucault's Panopticon to kids. That's only the entry drug. Data like this flows upstream into a government controlled reputation system, which is made of 4 pillars: “honesty in government affairs”, “commercial integrity”, “societal integrity” and “judicial credibility”. From cheating at video games to overdrawing your credit, all sins are remembered by the great machine, and come into play next time you apply to school, for a loan, or simply want to book a vacation. And since your only way to pay for things is with a tech-company messaging app, which uses government payment rails for the money, the sovereign appears impenetrable.

Maybe the West is just over-comfortable colonialists, mired in regulation and about to lose the next industrial revolution. Yes, more and more finance companies are using chatbots and modernizing their channels. But our reaction to accidents is to eradicate rather than lean in. Consider the freak case where an Alexa device in an Oregon woman's home misinterpreted background conversation as a series of instructions to send recordings of those conversations to a random contact in the address book (repeatedly). The customer is decidedly creeped out, and Amazon apologetic. At least these things aren't going to the CIA, right? We are going to have a hard decade.


Source: (Mitsubishi Bank), Reuters (school surveillance), Guardian (Chinese reputation machine),. Bloomberg (Payments rails), WSJ (Chatbots in finance), NBC (Alexa recordings)

FINTECH: $5 Billion Week in Private Equity for Fintech

Source: Financial Engines

Source: Financial Engines

Where are we in the Fintech cycle? Two massive private equity transactions over the last week reveal the maturity of the space. It's not just startups promising a new world order, but cashflow investors making purchasing decisions to own tech-enabled financial services businesses. If even conservative firms like TPG, Carlyle, and Hellman & Friendman think that roboadvice and digital wallets are the wave of the future, good luck to the old guard banks still in the mode of disbelief.

Our first data point is the purchase of Financial Engines by Hellman & Friendman for $3 billion. Financial Engines had an early lead in digitally-delivered financial advice services, carving out a strong presence in the 401(k) market in the 2000s. After acquiring the Mutual Fund Store, they developed a large physical footprint across the country to target mass affluent investors. The acquirer will combine the firm with Edelman Financial, one of the largest independent Registered Investment Advisors in the US. Digitally enabled wealth management, driven by purpose and mission, supplemented by a physical presence across the diverse geography of the country is the right answer for the future of financial advice. Whether this particular mix of assets achieves that goal remains to be seen, but the rationale makes sense.

One could fault Financial Engines for missing out on the roboadvisor wave, while Vanguard, Schwab and others amassed over $150 billion of assets in low cost managed accounts. But a $3 billion price is a positive data point for startups like Betterment and Wealthfront, which have unicorn valuations with narrow exit opportunities. The largest roboadvisor exits to date were $250 million (Learnvest, a bust) and $150 million (FutureAdvisor), with much quiet since.

The second data point is the $1.9 billion sale of a majority stake in Baidu's financial services arm to to TPG and Carlyle. Western capital has long wanted access to Chinese tech companies, and Fintech especially. Unlike in the Western World, Asian tech combines personal data across social media, shopping, search, and finances to hone artificial intelligence on its users. Imagine if Goldman had all the data of Google, and offered payment wallets, money market funds, and wealth management inside the chat app with 100 million users. This is what regulation as a sword, rather than a shield, looks like. Of course, part of this are fundamental ethical questions about what kind of society we would like to live in, and whether a never-forgetting chrysalis of AI software controlled by a government aligns with our aspirations. 

Source: Baidu

Source: Baidu

FINTECH: The Value of Centralized Vision

Source: SpaceX

Source: SpaceX

Elon Musk launched the Falcon Heavy rocket into space with a Tesla car carrying an astronaut dummy, blasting David Bowie. His competitors spend about $500 million per launch, because the very expensive boosters which get the payload away from Earth's gravity fall back down and explode. Musk's boosters are smart -- they can land and be re-used. As a result, his cost is $90 million per launch. Good luck competing against a 5x advantage. 

We don't bring this up to point to the cult of personality, but instead to the power of a determined, clear vision backed by well-funded and functional organizations. While Fintech has been about democratizing access to financial services for customers, Crypto has been about decentralizing production to the community. Decentralization is useful and can create certain desired attributes, but it is not always strictly better. The Falcon Heavy did not come from design by committee, crypto consensus mechanisms, or votes from survey groups about what features customers would like. It came from reverse-engineering the future based on a purpose, levered with human and financial capital.

In Finance, the West is failing to have any coherent vision of the future. Few of our financial leaders have articulated anything close to an artificial intelligence or crypto strategy that coordinates across divisions to build a coherent future. Nobody has bet the farm. Compare for example with China. Hyperledger's executive director Brian Behlendorf recently discussed why operational progress in blockchain adoption among existing industry is far ahead in Asia. Money is moving through productions systems. $2 billion is being spent on artificial intelligence research and education. Americans are still debating coal.

In that light, we have to give credit to Overstock, which continues to move in the fintech direction that Amazon is avoiding for now. The online retailer has 40 million unique visitors per month. They can buy goods using Bitcoin, and now for $9.95 a month they can get a roboadvisor offering. That's right -- in addition to launching it's own blockchain-based trading system tZero and pursuing an ICO, the company is offering investment product portfolios constructed from baskets of stocks. The custody comes from Apex, and the algorithms from FusionIQ. And who knows -- maybe Bowie's playing in the background.

PAYMENTS: Behold RippleGram!

Source:   Ripple    

Source:  Ripple

Fine, we'll talk about Ripple. The partnership between Moneygram and the blockchain startup for using XRP for money transfers hit the media, and we think it's a big deal. As far as we know, this is the first real example of a circulating public cryptocoin intersecting with a western financial firm as an operating tool, which is different from deploying Enterprise blockchain internally (see DAH, Hyperledger, EEA). If so, it is a major win for Ripple and seems like a smart move for Moneygram, which prevents short-term disintermediation by crypto. Good also for the customer, who won't need to understand crypto in order to benefit from it. Bad news for Bitcoin and fully decentralized currencies that hope consumers care to have the coins themselves in a wallet, especially since (1) the fees are lower and (2) the speed of transfer and transaction capacity are higher.

One thing to note about Moneygram is that it was almost acquired by Chinese mega tech firm Alibaba (Ant Financial) for $1.2 billion. But the US government blocked the deal. For the payments industry, many people believe companies like AntFinancial or Wechat, with their embedded billions of users and Artificial Intelligence powered virtual assistants are the future. By that definition, Moneygram is the past -- but it has physical infrastructure, global distribution, and regulatory blessing which is valuable to new entrants. So Moneygram now has two bets: China, which didn't work out, and crypto.  An $80 billion public/private crypto thing is then not a bad back up gamble.

The crypto natives are unhappy. Ryan Selkis (former Coindesk, Digital Currency Group) highlights that to justify the XRP multi billion dollar market cap, one has to believe a series of increasingly low probability events -- from full retail adoption, to banking industry acceptance, to regulator and central bank cooperation, to limited volatility in crypto currencies. Social influencer / trader "Crypto Yoda" penned an essay about XRP being a currency issued by a private company controlling the trust nodes, which is of course more efficient than a decentralized currency burning electricity for manufacturing trust from nothing. In that way, XRP is a philosophical challenger to Bitcoin's attempt to decentralize money movement. 

Another line of questioning is about the separation between Ripple the company and XRP the currency. If we look at RippleNet, this is a meaningful industry consortium focused on solving the international payments problem. We know that the global payments revenue pool is about $1.8 trillion in revenue, of which cross-border business payments is about $300 billion. Remittances are about $30 billion. This is a big market to go after. But Ripple's rentable blockchain network for banks is not the same thing as the XRP currency. The two are not required to be used together, but when combined financial institution cost savings may double from 30% to 60%. The savings comes from not having to maintain bank accounts in multiple currencies across the world in order to effect international money transfer. But on the other hand, XRP does still need to be exchanged from fiat and back into fiat, so local exchanges are needed. Until Moneygram, much of this was a hypothetical. We are excited to see how this develops.

Source:  Autonomous Research  (with help from  Matt O'Neill

Source: Autonomous Research (with help from Matt O'Neill

REGULATION: The Ethics of Sovereign Technology


The Chinese tech companies sit comfortably between media, software and finance. No distinction needs to be made between using someone's social media data, search history, shopping habits, education and financial track record -- all of these data points flow into massive AI power-houses with half a billion users, inside Alibaba, Baidu, Tencent and others. Now, imagine if your Facebook friends and Google searches and Amazon shopping and Visa purchases determined if you could get a student loan to go to university. China's social credit system will do just that, reports while referencing an infamous Black Mirror episode that explores a dystopian view of this concept.  While countries like the US certainly struggle with systemic bias in the commercial activities of free participants, at the least such bias is not put into software by the federal government and used to determine access to services. 

Or is it? Consider that a regulatory agency, the Federal Communications Commission (FCC), is working to remove net neutrality rules in order to allow Telecom companies to meter how and where Internet traffic flows. While Comcast may not turn off access to some particular site, they could in theory tier the speed of the Internet according to economics, politics or whim -- such that, for example, Goldman Sachs or Amazon load quickly, while Crypto Kitties or Telegram load slowly. And loading time is a major determinant of consumer behavior and information exposure. We can't trust the Telecoms to not extract economic rents. Therefore, this policy choice will strengthen the ability of entrenched commercial interests to determine what people have access to, and consume.

And what if the rationale for such policy decisions is not even driven by the sovereign, or the collective will of that state's people? Data Scientist Jeff Kao deed a deep dive on the FCC comments using natural language processing analysis. In the best case, at least 1.3 million of the pro-repeal comments sent to the FCC were automated. In the worst-case, only 800,000 of the 22 million submitted comments came from real people, with 99% of those opposing the repeal. In the graph below, the height of the bar shows how often a campaign was repeated on an exponential scale. The color Red is associated with repealing and the color Green with keeping net neutrality. The clustered Red middle suggests the work of spambots that can generate slightly different language with the same meaning. The long Green tail is likely to be written by real people, though the first top bar shows a form letter repeated 7.5 million times. This cuts in every direction.


And of course, other examples of propaganda bots are well documented -- already in use by 30 governments, with election impact in 18 countries. According to a recent report from Freedom House, Internet freedom is declining on a global basis. The mental stretch from a government controlled social credit system to global information warfare over national policies is not as unlikely as it may first appear.

Source: Freedom HouseJeff Kao

PAYMENTS: PayPal Plus Acorns Looks like Asian Fintech

PayPal was going to be the money of the internet, but instead it became the payment mechanism behind e-commerce (see Peter Thiel on Bitcoin). From that position, it grew to 6 million merchant accounts and 203 million consumer accounts, and hedged the future by buying Venmo. That may be impressive, until you compare its $94 billion market capitalization with that of Alibaba, a $500 billion behemoth that owns Alipay and multiple vertical and horizontal adjacent businesses in e-commerce and fintech.

But for regulatory barriers, PayPal has the potential to get closer to the Asian conglomerate. Investing $30 million into Acorns, the microinvesting app, and now partnering with it to provide piggy bank services to PayPal customers is the first step. While Acorns has "only" 2.4 million accounts, at an average of ~$1,000 each, consider YueBao. The money market fund plugged into Ant Financial is now the world's largest, with over $200 billion in assets. 

This approach is the right strategic direction for building a scaled fintech company that is customer centric, rather than product centric. The customer journey starts with payments, then savings, then investments for the future, and finally retirement. PayPal has a large built in consumer base, and this deal shows Acorns participating earlier in the client funnel. It also shows that Acorns is a tech company first and an investment company second, and its technology enabled product can be integrated into other ecosystems. We would not be surprised to see similar integrations with other payments providers, or messaging providers like Facebook Messenger.

PAYMENTS: Alibaba's Virtual Reality Commerce

Source: CNN, Alibaba

Source: CNN, Alibaba

 If you want to look at retail and Fintech innovation, no better place to learn from than China. In a consumerism celebration called "Singles Day", Alibaba just sold $25 billion worth of merchandise. Last year, the company premiered a platform called Buy+ that rendered a mall in virtual reality and allowed customers to purchase items digitally. This year, the firm reportedly created an augmented reality game like Pokemon Go, where the users interacted with digital characters that led to physical shopping. Cute apps like that are already available in US app stores as well.

The Buy+ VR platform did not reappear this year, however. And despite the hype about the medium as an empathy machine and digital overlay on the physical world, there are still very high barriers to its adoption. See this account of a journalist trying to spend a day working in Microsoft's mixed reality operating system. The experience is clunky, physically uncomfortable, disorienting and tiring. Our current computer and mobile equipment is far better optimized for tasks, while mixed reality is still in its "toy" phase. Or see this view that even the entertainment VR industry will fail, because the expectations gap is too strong between the current hardware and marketing slogans. This stuff is not ready yet.

But, we know that companies like Alibaba and Tencent have some of the largest user bases and data sets in the world. Even in Fintech, payments subsidiary Ant Financial has 450 million users, more than the entire population of the United States. While Amazon's efforts in mixed reality are just beginning, understanding where the more experimental Asian tech giants are going in this space will be an early indicator of what is possible.

FINTECH: Open China and Global Fintech

More than 60% of Fortune 500 companies are incorporated in the State of Delaware. Why? The state has the most developed legal system for corporate law, which leads to painless dispute resolution and efficient courts. On a global scale, one question we ask is -- what country will be the Delaware of Fintech? Which country is best positioned in terms of talent, regulation and capital availability to foster the future of financial services? Will it be Singapore, Switzerland, Luxembourg, Dubai or Gibraltar?

Or Will it be China? Bloomberg broke the news that China is lifting the limitations on foreign ownership of financial servicescompanies -- (1) for banks and asset managets, that limit is lifted immediately, (2) for securities, insurance and fund management companies it is increased to 51% and gone by 3 years. If international investment does flow in as a result, it may mature the capital markets, making the Chinese companies more competitive, and also dispurse some of the pent-up wealth management product risk in the ecosystem (see our explainer here). And Chinese Fintech companies will likely intensify their attempts to globalize, using a talent pool of Artificial Intelligence developers and ability to leverage Big Tech (Ant Financial, Tencent, as the tip of the spear without regulatory overhang.

Almost in response, Keith Noreika, the acting head of the OCC has uttered financial regulation heresy in the US by suggesting a re-examination of the separation between banking and commerce. Today, the GAFA (Google, Apple, Facebook, Amazon) can only flirt with the manufacturing of financial products. And they have done that well enough -- see Apple competing with Zelle leveraging a bank-as-servce partner Green Dot, or Facebook delivering payments through Messenger. But that is nothing compared to what Big Tech could do if the regulatory barrier protecting the financial incumbents were lifted, and their artificially intelligent assistants both engineered products and owned the customer relationship.

FINTECH: Alibaba $15 Billion for AI, IoT and Fintech Research

Source: Kakaobank,  Counterpoint Research

Source: Kakaobank, Counterpoint Research

Banks have sticky customers and large competitive moats, right? How long will that last in an artificial intelligence first world? Here are 3 data points. First, Alibaba is spending $15 billion to build a research and development program that they see as the future of financial services. It will have hubs in Beijing, Hangzhou, San Mateo, Bellevue, Moscow, Tel Aviv and Singapore. This will give the company access to a diverse talent pool and build a path out of China to the global market. The areas of research are artificial intelligence, Internet of Things (IoT), Fintech, quantum computing, and human-machine interaction. Sound familiar? Putting that into context, JP Morgan spends $7 to $9.5 billion on IT per year (depending on how you cut the data), with a fraction for Fintech and not mere maintenance. That's as good as it gets for what American financial firms can do.

Is it a big deal if an attention economy firm like Alibaba builds AI and Fintech capability? Here's a narrow example in Korea. KakaoBank is a mobile-first bank that was championed by messaging platform KakatoTalk, which has 42 million users. The bank opened 300,000 accounts in 24 hours of launch this past July, and reportedly has 45% share of all new opened bank accounts in the country since then. That's better neobank traction than Monzo, Tandem, Simple and Revolut combined. Similarly, Ant Financial and Tencent are using their chat platforms to scale some of the world's largest money market funds. What happens after putting $15 billion and AI-powered virtual assistants behind this strategy?

Here is the other boundary of this strategic vector. Numerai, the crowd-sourced machine learning hedge fund / competition / crypto-currency company has shared its strategic plan and traction to date. There are delicious bits -- 30,000 data scientists have contributed predictions and including the value of the fund's native crypto-tokens, rewards to participants have been in the $USD millions. Predictions are pooled together using a staking tournament, where the data scientists express confidence in their algorithms by committing financial resources. A meta model aggregates and combines algorithms into a trading strategy implemented by the fund. The next step is to move away from human data scientists accessing the Numerai website to APIs that are accessed by Artificial Intelligences on demand. What does this mean? It means a black hole is developing in the capital markets, and is in the open for all to see. Numerai has the ambition to monopolize intelligence and capital, and then decentralize the monopoly. Will a global conglomerate that is committing $15 billion to building the world's most powerful AI be as altruistic?