bankosaurus

ONLINE BANKING: Metro Bank and Revolut in the Doghouse

Facebook used to say "Move Fast and Break Things". It sure did. There are many ways to win, and some are sharper elbowed than others. Is growth inevitably tied to bad behavior, or is there a version of sustainable entrepreneurship that doesn't require us to sacrifice Ethics at the altar of Monopoly? Prior marquee Fintech bad-actors include Zenefits (fastest growing insurer whose brokers were unlicensed) and Lending Club (what's a little self-dealing?), not to mention all of Wall Street and at one point or another. Now we are seeing the same sharp elbows from Revolut and Metro Bank.

Metro Bank may be a fast growing operation, but it doesn't seem to be very good at being a bank. Of its £14.5 billion loan book, the company mis-categorized 10% of its assets last month, grading that capital at 100% when it should have been at best a 50% (e.g., commercial property loans are more risky than cash). That means the balance sheet needs way more cash, and Metro Bank is out raising a cushion of £350 million -- a number that will mean chunky dilution given that the public market cap has been under pressure. There is a certain irony here as well. Consider the sins of a bigger offender -- RBS getting a £45 billion bail-out a decade ago and being forced to set aside £775 million to as penance. Of those funds, £120 million are now flowing to Metro Bank to promote banking competition. 

One of our favorites, Revolut, has also been in the news with a spat of ugly news. There are reports of over-clocked, destructive culture. Some Fintech aspirants are asked to sign up 200 funded accounts for Revolut as part of the interview process, without a job guarantee. Once they do land a job, workers are expected to drive 100 mph through weekends and holidays, leading to burnout and churn. Sounds like SoFi two years ago. Money Laundering concerns abound, with information coming out that KYC/AML control lapsed in the middle of last year. For a company that launched Bitcoin trading, this type of news is both embarassing and systematically destructive. And lastly, the main adult in the room (CFO Peter O'Higgins, former JP Morgan) has just quit as well. 

It's easy to say to look at people doing hard things and judge them on style. But sometimes the ambition isn't worth the damage. 

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Source: Guardian (Metro Bank), SharesMagazine (Metro Bank), AltFi (RBS Settlement), Wired (Revolut Culture), Finextra (Revolut CFO), Banking Tech (Revolut AML)

BLOCKCHAIN: JP Morgan mints crypto JPM-coin, exposed to $10 trillion opportunity

You know by now that JP Morgan launched a crypto asset called JPM coin. You've probably seen the self-satisfied memes showing Jamie Dimon publicly hating on Bitcoin, contrasted with his own massive bank launching its proprietary, closed cryptocurrency (leveraging open source software created by others) within a year -- and claiming it is a meaningful invention. Perhaps you've read that this is a first-of-its-kind symptom demonstrating that banks are finally coming into crypto. Cool, huh! Yet all of these reactions are mostly irrelevant to thinking about what's happened.  

First things first. JPM has started production deployment of an internal blockchain (i.e., for its clients and divisions), which they have been developing openly for years, applied to multiple use-cases from international payments, to corporate issuance, to trading and other capital markets businesses. This is a no-brainer, and the totality of such projects should create $250 billion of industry-wide enterprise value in cost-savings over the next 10 years. The new thing is that they have added a token into this blockchain that carries digital scarcity, and can therefore be used for international value transfer. As an aside, the UBS utility settlement coin pioneered this type of asset over a year ago, led at the time by Alex Baitlin, who has since left to found smart crypto-custody company Trustology (backed by ConsenSys and Two Sigma).

Who should worry about the inevitable but welcome growing competitive landscape of bankcoins? First of all, consortia players like Ripple and SWIFT (partnered with R3) cannot be happy with the development, since JPM funnels a meaningful portion of the cross-border B2B money movement flow already -- $6 trillion per day. What's odd also is that half a year ago JPM was planning to spin out another proprietary blockchain project (Quorum), since other banks were refusing to use it. The internal value generation within the firm of essentially having a cloud-like solution for value transfer must be sufficiently large to alienate others.

On top of that, let's clarify what bankcoins are. Money supply is divided into M1 (cash and checking), M2 (very liquid cash equivalents), and M3 (more engineered cash equivalents). Bitcoin wants to be cash/M1, which is very hard given that to print money is to be sovereign -- see David Siegel's primer on money in the links below. So in the US, M1 is around $3 trillion. But the delta to M3 is another $10+ trillion, and includes things like money market funds, overnight obligations between investment banks (hey there corpse of Lehman Brothers), repurchase agreements, and other gargantuan liquidity instruments manufactured by banks. In fact, M3 is so obtuse and large that the Federal Reserve stopped publicly tracking it in 2006, and the data only exists on a synthetic basis from ShadowStats. This is what JPM coin is at its core. This is what all stablecoins -- tethered as cash sweep into their respective proprietary exchanges -- can ever become. A paltry $10 trillion.

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Source: CNBC (JP Morgan), Shadowstats (US M3), Wikipedia (Euro Money Supply), Medium (David Siegel on Money), Federal Reserve (M3 Data)

ONLINE BANKING: European Fintechs backed by Goldman, Paypal and Nordea get $200 Million

Open banking is happening, but it feels different than expected. The story is not the gradual digitization of incumbents through Application Programming Interfaces that liberate data and modernize incumbents. Incumbents -- other than a select few giants (e.g., JPM, Goldman, BAML, BBVA, Santander, DBS) -- are primarily performing Fintech Kabuki to look good for public equity investors. And even more, their financial performance is driven too much by exposure to capital, interest rates, regulation and compliance, physical retail costs and other risk-averse incentives, that tech-first approaches do not matter. The ice cube is melting slowly, like the media industry in early 2000s. This is how you get to absurdist PR poetry: in advertising their merger of equals, creating a $300 billion deposit bank, BB&T and SunTrust proclaim: "Two Legacies, One Future". Yes, the future of Planned Obsolescence.

Instead -- open banking looks like this. London-based Bud has raised a $20 million round from Goldman, HSBC, Investec and Sabadell to sit on top of legacy, obsolescent systems and pull data out of them into modern architecture. The firm has 80 fintech partners, and can connect third party developers into products like credit cards and insurance, as well as categorize the data exhaust coming from these sources using machine learning (but who couldn't at this point). Or take Tink, raising EUR 56 million in new funding from Insight Ventures and the Nordic banks, similarly going after the PSD2 as a service opportunity. Yet another example is Raisin, which just got $114 million for interest-rate shopping across the continent. The company has placed $11 billion across 62 partner banks; 62 banks that offered the most interest to customers, and therefore made the least money. This technology intermediator is accumulating the long tail of capital as product, while owning the customer directly.

So yes, these are all little bits. But such is the nature of erosion, until the rock-face breaks off into the ocean with a final splash. We note the investors in these entities are from the financial industry, so that creates a hedge. But we can also imagine Amazon, with a net promoter score 3x better than the national banks, snapping one of these apps as the industry yawns. Bud and Tink are cloud services, which could sit in AWS for finance. Raisin is a comparison shopping engine, at home in Prime. Neither make financial products, instead relying on the industry to get hollow in the middle and provide capital through the long tail. And capital is fungible -- for example, if a legitimate crypto-first bank comes along, offering 1% returns backed by insurance on a stablecoin, why shouldn't these open banking players connect to the decentralized ones? 

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Source: Forbes (Bud), Finn.ai (Amazon), TechCrunch (RaisinTink), Company Websites

ONLINE BANKS: $22 Billion from Fiserv for First Data, creating a Public Banktech utility

In one of the most massive Fintech headlines in recent history, core processing company Fiserv is buying merchant acquirer First Data in a $22 billion stock deal. Much of the thinking about the combination is about scale (12,000 financial services clients plus 6 million merchant locations) and synergies ($900 million in cost, $500 million in revenue). The combination is well engineered in a spreadsheet, and has the strategic rationale of defending a competitive position by vertical consolidation -- "if we own all the Payments and Banking products, we'll touch all the clients". Some folks also mention the pressure on revenues across the industry, as Fintech start-ups create transparency and competition in the space. Consolidating business lines in such an environment makes sense, though perhaps this is an afterthought at the scale we are talking about.

There are two angles we want to consider. The first is that enabling financial technology -- i.e., the infrastructure needed to manufacture something financial -- trends towards both utility and monopoly over time. It is a utility in the sense that it should be dirt cheap, easily available, and nobody in their right mind would want to rebuild one (also note utilities are public, as in owned by the government). It is a monopoly in the sense that a single player should win the whole market, consolidate all the costs, and charge only at the margin. As technology evolves, the threat of entry by new players like Alipay and Whatsapp is almost as scary as the actual entry of such players. The infrastructure provider would be wise to compress their own margins to make entry by smarter, faster, better players unattractive. A corollary to this line of thinking is that the long tail of small banks and credit unions rent software from utilities, while firms like JP Morgan and Goldman Sachs get to hire AI PhDs from Google. 

The other lens to think about is where the innovation and associated growth happen. We recently re-discovered 2015 slides from venture firm Andreessen Horowitz, which showed how the flow of investment value in technology -- i.e., the investment returns for taking on some risk -- are happening in large part in the private, and not in the public markets. Said another way, private market valuations no longer have a meaningful ceiling (thanks to SoftBank and Tencent), and therefore private investors get to capture all the capital gains from fintech disruption. To go public merely is to monetize those private gains, whereas in the past going public meant getting capital for growth. That means we expect Payments and Banking industry innovation to stay private, and for large players like Fiserv and First Data to rent or acquire them, rather than lead and source them. 

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Source: Business Wire (Press Release), Andreessen Horowitz (Presentation on Venture), Company Websites for screens

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.

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: Images from Pexels,     2019 Keystone Predictions Deck

Source: Images from Pexels, 2019 Keystone Predictions Deck

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

DIGITAL LENDERS: Our new keystone deck finds $100B in global originations, merely 10% of market opportunity

We are excited to share with you our latest keystone analysis titled “Digital Lender Evolution”, which expands on our 2015 white paper on digital lending. In the updated deck, we highlight the major drivers of the space across the US, Europe and Asia -- from venture funding, to addressable market sizes, to current origination volumes, as well as operating performance. Additionally, we highlight systemic risks and technological opportunities facing the sector today. 

A few key takeaways: despite the difficulty in the public markets, the digital lender model continues to raise $5 billion in annual venture capital investment, dominated by the US, with Asia becoming a close contender year-on-year. We find that the opportunity remains large and under-penetrated: (1) in the US, the addressable market is $250 billion in originations or $1 trillion in outstanding debt; (2) for Europe, including the UK and the continent, it is $150 billion in originations or $450 billion in outstanding debt; (3) for China it is $600 billion in originations or $2.7 trillion in outstanding debt (though the Chinese market is undergoing major crackdowns on fraud and the collapse of SME lending).

Digitization of the lending process shows clear cost advantages across onboarding and ongoing servicing (up to 70% reductions). However, platform economics are challenged -- marketing costs have been unable to scale lower than $250 per loan, the high cost of capital hurts pricing from being competitive with banks, and surprise expenses, like legal fees or new product development, have eaten into margins. Initiatives like digital identity verification or AI-based underwriting can add meaningfully to cost-saving, and perhaps improve the marketing conversion funnel as well. We were also surprised to see that large global banks have begun to track digitally active or mobile-first customers as a KPI, going from <20% to 40%+ digital penetration at some of the key institutions.

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ONLINE BANK: Lloyds to cut 6,000 jobs to create 8,200 digital ones, Natwest launches SME neobank

Digital hurts! In a sort-of-confusing announcement, Lloyds is getting rid of 6,000 jobs; but it's also adding another 8,000 jobs, for a net gain of 2,000, as part of a £3 billion plan to invest in digital banking. Why have a call center in Kent, if you can have a chatbot in Facebook Messenger? Reportedly, many of the existing staff will be re-skilled for new roles. But the reality is economic dislocation as a paper industry moves online -- data scientists and engineers are not the same as branch operators and lending officers.

As another example, take RBS/Natwest and their latest launch of Mettle, an SME neobank. The tech was built mobile-first by fintech consulting outfit 11:FS and Capco, with the capabilities of opening a business current account in minutes, build invoices, and automate payment reminders. Business financial management and forecasting would sit on top -- trying to apply the personal financial management concepts of the retail market in an SME market that would get immediate, tangible value of a Quickbooks with a bolted-on bank account. Think about who built this thing -- a third party composed of entrepreneurs who launched a set of neobanks and roboadvisors in the UK (Monzo, Starling, Nutmeg). You can't get something new without trying something new.

And the last data point is Zopa, which is the UK-based digital lender that hasn't gotten public (that would be Funding Circle). They've just raised £60 million to build out another next gen digital bank. The company already has the revenue side built out in place from p2p loans, having lent about £4 billion of personal credit since 2005. But without a banking license to take deposits, it doesn't have reliable capital for the bumpy economic cycle. Like every other personal finance Fintech out there, the company plans to offer savings accounts, credit cards, investments, and various other financing options. Everyone pivot together now!

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Source: Finextra (Mettle), ComputerWorld (Mettle), Independent (Lloyds), Techcrunch (Zopa)

REGULATION: It's opposite day in the United States: protect the banks, not the innovators

Here's an odd one. FDIC Chairman Jelena McWilliams attended the American Banker's Association conference and focused on how to simplify regulatory supervision in order to help banks compete with Fintechs. In a similar vein, US State regulators continue the legal fight against the OCC, a federal agency trying to allow tech companies -- mostly lenders and payments companies like Square and SoFi -- to have a special Fintech charter. Part of this grind is the alphabet soup of American regulators and inevitable conflict over jurisdiction. As an example, the SEC just launched a new hub for innovation and financial technology, much in response to the rise in digital assets. Still, a meaningful portion of the American regulatory apparatus is functioning to protect its banking coral reef from competition.

When you look at the spirit of regulation in Europe, much of its mission is actually to increase competition with banks, helping Fintechs and other innovative players take market share from incumbent national champions. PSD2, the major directive in this regard, is colloquially referred to as "Open Banking" -- quite the different mindset. The desired strategic outcome is that many incumbents will be low cost capital-providing utilities, and some players will be platforms or aggregators of tech, capital and user attention. Tech companies can back into these positions as well. If regulators instead protect the capital providers and hurt competition as a result, you will end up with disconnected tech infrastructure and a 20th century financial product-push economy. 

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Source: MarketWatch (Cards), CNBC (Amazon Lending), Autonomous NEXT (Travelers), Statista, Amazon

ONLINE BANK: Santander, DBS Getting Mobile First Right

You can split the last decade of Fintech into (1) unbundling of banking and investments into niche financial apps, and (2) the re-bundling of these apps into cross-selling machines once some amount of scale has been reached. See N26 (a bank with investments), SoFi (a digital lender with wealth and insurance), Acorns (a micro-investing app with a debt card). But direct to consumer startups are not the only ones getting it right. Today, Goldman with Marcus, JPMorgan with Finn and YouInvest, DBS, BBVA, Santander and the Nordic banks all have smart digital strategies that copy (or buy) the Fintech playbook.

The issue is that digitization is, to some extent, discrete. If you bring financial products into the 21st century, the remaining field for competition is audience gathering. So we note that Santander's Openbank has launched the following in addition to its neobank -- (1) micro-investing that saves a small amount per time period, (2) goal based planning and investing, and (3) a roboadvisor powered by a BlackRock investment team priced at 55 bps (unclear if this is FutureAdvisor, or just a BlackRock asset allocation model). On top of this, the app will have a password manager (surely people trust banks with their passwords, said no one ever), and a data aggregation service like Mint.com. For what it's worth, the app has a 3 star rating on the App Store, so perhaps people don't love it like they love Revolut or Monzo. But the Spanish bank claims to already have 1.35 million accounts, and is coming to the UK next.

Another forward thinking offering is Singapore's DBS. Like Openbank it has all the latest Fintech features, as well as a Facebook Messenger integrated chatbot. As a comparison, independent chatbot Cleo now supports 500,000 users. But of course, it is going to be much harder for Cleo to monetize, well anything, without manufacturing some sort of financial product as people don't pay for information alone. In the case of DBS, the tech-first approach has allowed them to double the revenue generation off a digital vs. a traditional customer (S$1,300 vs. 600), and decrease meaningfully the servicing cost (S$468 vs. 348), leading to a far better lifetime value. Can an independent fintech build that scale and product set as well?

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Source: FSTech (Santander), Coverager (CLEO), Bloomberg (DBS)

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

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

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

FINTECH: Why Amazon beats Google for Insurance Aggregation

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

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

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

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

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

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

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

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

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

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.

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

ONLINE BANK: Lessons from Monzo's annual report and £33M losses

We love unfair comparisons, but there's a reason behind the madness. Crypto currency exchange Binance is on track to print $1 billion in profits this year, while neobank Monzo has a £33 million loss to show for its £109 million in venture funding. Here's another one: Coinbase now has about $20 billion in addressable (custodied?) assets, while Monzo has £71 million (<£150 per account). One way to think about these companies is (1) store of value in crypto currency, vs (2) facilitating payments and commerce via fiat. And in this way the comparison evens out. The crypto companies to date have failed in making BTC a medium exchange, instead choosing to take economic rents through capital markets. The neobanks have hit the wall of trying to get profitable at scale, though Monzo's 750,000 users and £2 billion in facilitated payments transactions points the way. Looking at Revolut, we see about 2.2 million users and $18.5 billion of transaction volume. That's a medium of exchange story.

Two more thoughts on neobanks. The burn should slow down and economics seem likely to improve. On the revenue side, consider that most of the neobanks (Monzo included) started out as pre-paid cards that you load, with a nice mobile interface. That's pure cost, because the Fintech has to pay a third-party for each card while making no revenue of any kind. So Monzo's conversion from pre-paid card to current account under a banking license matters, because they can actually make spread revenue on deposits. On the cost side, the neobank claims to have reduced the cost of maintaining an account from  £65 to £15 -- pretty good operating leverage, but for the upfront cost of acquiring the customer. Since the market is crowded (Revolut, Starling, N26, B Bank, Finn, etc.), we expect venture funding to continue fueling the turf war.

And second, the implementation of Open Banking may not be going according to plan. As a reminder, European legislation PSD2 is supposed to expose incumbent banking data via structured APIs to third parties that want to build upon banking information and money movement. In theory, this lowers the stickiness of bank accounts, allows data to travel safely into aggregators and apps, and lays the groundwork for financial bots and agents that make shopping decisions. Surely, neobanks would benefit from the ability to see and move these traditional assets. Well, maybe not. According to blog Open Banking Space, major barriers stand in the way erected by incumbents: "(1) lack of rich data or functionality on the account information APIs, (2) a regressive method coupled with very poor authorisation journeys on the banks’ platforms, (3) technical challenges such as that posed by a lack of immutable transaction IDs’, and (4) the absence of any bank-provided, data rich testing environments." Who will get blamed for this end of the day? The apps trying to build experiences, not the incumbents. But if you don't want to deal with incumbent infrastructure, there is always Bitcoin. 

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Source: Problems in Open Banking, Monzo (current accountsAnnual Report), Coin Telegraph (Binance), Treasury XL (PSD2)