commerce

FINTECH & PAYMENTS: BBVA launches a product that will ‘live’ within a third party’s platform & Uber’s new move looks to restaurants-as-a-service

Three weeks ago, we wrote a story on how Fintechs such as Square and Stripe are prime examples of digital startups that have used their enrolled bases of small merchants to cross-sell other services. Additionally, ride-hailers are starting to take note by replicating this model -- using their extensive base of both drivers and riders to build out their own ecosystems. See here for a refresher.

Turns out we could have been closer to the truth. As a new alliance between car-hailing giant Uber and digital bank BBVA seeks to leverage the potential of open banking to enhance financial service provision to Uber's Mexico-based drivers and delivery partners and their families. Essentially, the Uber application becomes the interface through which the aforementioned users can open a BBVA digital account linked to Uber's worldwide 'Driver Partner Debit Card,' allowing family members to receive instant access to earnings made by the driver, without the need of costly international money transfers. Additionally, the benefits of offering a centralized and aggregated platform to drivers and their families means the collected data can be used to offer financial benefits such as loans and insurance, as well as, non-financial benefits such as loyalty rewards, discounts, and subsidized purchases. A smart move if you ask us, especially knowing that Uber is currently incurring card processing fees of around $749 million (2017) to get paid and pay its drivers.

On another note, this last week Uber announced the launch of a dine-in option to its UberEats app – this feature lets users order food ahead of time, go to the restaurant, and then sit down inside to eat. Adding Dine-In lets Uber Eats insert itself into more food transactions, expand to restaurants that care about presentation and don’t do delivery and avoid paying drivers while earning low-overhead revenue. And now that Uber Eats does delivery, take-out and dine-in, it’d make perfect sense to offer traditional restaurant reservations through the app as well. This move pits the on-demand food app directly against OpenTable, Resy and Yelp. Similarly, instead of focusing on a single use-case of on-demand food delivery -- exposing the company to the risk of heavy competition -- appealing to a niche demographic requiring such services, Uber Eats’ strategy is to own the digital service aligned to the impatient and hungry customer.

By changing gears to offer its drivers more perks and job security through the BBVA partnership, as well as, embedding functionalities that promote customer, user, and employee experiences, it’s only a matter of time before Uber launches a fully functional financial suite allowing for users to make payments, customers to maximise profits, drivers to maximise earning potential, and the incentives across the application to cater to a wider demographic as its competitors. It's always better to be a product than a feature.

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Source: El Sol De Mexico (website), Techcrunch (Uber dine-in)

2019 FINTECH PREDICTION: Collision of Fintech Bundles and Focus on Transformation Strategies

The economic principle of perfect information is applied to instances in which arbitrage opportunities are driven away by a market with indifferent and absolute information. This principle has led us to predict that in 2019, we will see the convergence of unicorn fintech startups like Robinhood, Acorns, Revolut, Monzo, N26, Betterment, SoFi, Lending Club and others on the same multiple financial product offering across lending, banking, payments and investments. Noting that, if most players -- including large operating businesses -- understand how to market to and serve Millennials in relation to their competitors, then customer acquisition costs are likely to rise and the digital model will become more competitive as servicing costs commoditize at a cheaper price point.

Let's take this one layer deeper. Digitization costs are falling -- fueled by open banking regulation, data democratization, and freely accessible infrastructural platforms offering data storage or marketing for nothing. This is, in part, thanks to the long tail of finance aggregators such as Plaid, Bud, and Tink who pull data across multiple capital sources, using it to build/offer consumer facing products/services like budgeting tools, wealth management nudges, and/or service provider recommendations. As a result, Fintech verticals are becoming more competitive red oceans, as both big and small players fight over shrinking profit margins driven by such transparent data and freely available technology. But this isn't new news. What's happening now is a reaction by Fintech players and financial incumbents to get bigger, shed fixed costs, and take a shot to monopolize the industry vertical. The payments industry is a great example of where consolidation is happening all at once, with FIS buying Worldpay for $35 billion and Fiserv winning First Data for $22 billion. Consolidation is taking place in other forms as well, take UK-based challenger bank Revolut -- consolidating its cost exposure per transaction by building its own payment processor called RevP, and potentially launching a fee-free trading product to target Robinhood by the end of the year.

We have already seen what happens when traditional bank-backed neobanks use apps as digital channels in an attempt to capture a younger client base through edgy and innovative user experiences tied to traditional financial product -- JP Morgan's Finn became a victim of this approach which eventually resulted in its demise. Wells Fargo's Greenhouse, RBS's Mettle,and MUFG's PurePoint could face a similar fate, should they fail to acknowledge digital as more of a transformation strategy than a channel. The financial initiatives of Chinese e-commerce giant Alibaba, for example, serve as a powerful representation of how an online e-commerce chassis can translate to the physical world leveraging a digital value proposition across its front, middle and back ends. This is why we still believe to see more Fintech mergers and acquisitions beyond the current $97.53 billion industry aggregate deal value for 2019 -- more than twice the aggregate of the same period in 2018.

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

We have saved our favorite for last. 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 social media networks and big tech, 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. We have seen this from multiple big tech players. Earlier this year Facebook doubled down on the enterprise-centric use case for mixed reality -- announcing its Oculus device-management subscription for enterprise users. Similarly, VR has found a fruitful niche as a training platform with OssoVR teaching the next generation of surgeons, and Walmart using VR to train its retail staff. Additionally, artificial intelligence at scale are to be directed largely at the workflows and manufacturing processes of large corporates. Take South African deep learning startup DataProphet who use AI and machine vision to reduce defects and scrap in the manufacturing sector by more than 50 percent. Don't 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, like that in the first entry above, 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. This is where we are likely to see even more M&A activity over the course of the year.

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CRYPTOCURRENCY & BLOCKCHAIN: An adoption & regulation deep-dive in Facebook's new digital currency Libra

First came digital gold in the form of Bitcoin in 2009, then utility tokens led by Ether in 2014 and now, the global payments world could be turned upside-down by Facebook's stablecoin, Libra. It is very difficult not to be excited over this new digital currency, and without repeating the good work done by many great resources (referenced below), we wish to touch on two aspects that are important to get your head around, namely: (1) Adoption & Scale, and (2) Regulatory acceptance.

(1) Adoption & Scale

Let's get straight to the point here. According to its whitepaper: "Libra's core mission is to enable a simple global currency and financial infrastructure that empowers billions of people". As with most digital goods and services, the issue of adoption and scale is directly correlated to the efficiencies of the onramps and off-ramps (taking deposits and making withdrawals) provided by the infrastructural layer supporting them e.g., exchanges like Coinbase or Binance for cryptocurrencies. Interestingly, Libra's whitepaper mentions the term "global currency" five times, meaning that Libra's ambitions are to skip the intermediate step of concurrently using cash and digital payments, and somehow become a primary currency used by most economies around the globe.

But, just how ambitious is Libra? In short, very! We know stablecoins are traditionally backed on a one-to-one basis by mainstream assets like the U.S. dollar e.g., USD Coin, while others are collateralized by baskets of cryptocurrencies e.g., Havven. Some of these use algorithms to maintain stable values e.g., CarbonUSD. Libra is a different beast that uses a basket of real assets -- currencies such the US Dollar, GB Pound, and Japanese Yen, as well as, government bonds -- to be backed by, in what it calls the Libra Reserve. This has profound implications on adoption in targeted unbanked-heavy economies as Libra will have to coexist with the local currency, and be supported by the existing financial on-ramps and off-ramps (Bank branches, ATMs, MPesa agents etc.). Local governments are thus likely to demand concessions before allowing Libra access to its market, such as: (1) The Libra reserve must contain assets denominated in the local currency, (2) access to facets of the transaction data to track possible money laundering cases, and/or (3) permitting the local central bank to retain control over the monetary supply necessary to implement monetary policies. Iran and North Korea are good examples of a countries whose imposed sanctions by the U.S. could hinder the adoption of the digital currency by its unbanked target market.

(2) Regulatory Acceptance

Facebook have been clever here. Firstly, the Libra Association is made up of regulated entity partners who will provide the front-end platforms (on-ramps and off-ramps). Facebook is not required to become a financial entity as a result. Secondly, Calibra is set to "have strong protections in place" to keep the reserves and private information of users safe. Bank-grade KYC / AML processes are said to form part of these protections, as well as, automated systems designed to proactively monitor activity and prevent fraudulent behaviour on user’s accounts. Lastly, Libra, supported by its Association members, could be the whipping boy of cryptocurrency – defending the ecosystem against regulators, politicians, institutions, and central banks that seek diminish its legitimacy.

Such regulatory question marks have led to the creation of a task force within the Group of Seven (G7) nations to address these. There is a major concern that Libra will severely threaten not only the economic structures of the global economy, but the political dynamics as well. France’s finance minister, Bruno Le Maire, making this explicitly clear by stating that “It is out of question’’ that Libra be allowed become a sovereign currency. The G7 currently consists of Canada, France, Germany, Italy, Japan, the U.K. and the U.S.

Keep a firm eye on the Libra scales over the coming months -- like our artwork for the week depicts -- these are exciting times.

For more detail see the following:
Basic breakdown
10 Takeaways from the announcement

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Source: Libra Association (via Techcrunch), Libra (via Financial Times), Facebook Libra (via Financial Times)

NEOBANKS & FINTECH: Secrecy reigns supreme as JP Morgan recruit for new digital bank, and Revolut seek beta testers for their new in-house payments processor

Neobanks, Challenger banks, Digital Banks, Fintech Banks -- the complicated taxonomy of how we classify the companies bound to these labels seems to be ever-changing. What's consistent is that Fintech is, at its best, multifaceted, difficult, iterating on a solution to cater to the largest customer demographic as possible. Access and democratization are its core values, even if it is not decentralized nor truly disruptive. Get this wrong and you are subjected to a fate similar to that of JP Morgan Chase's recently deceased neobank Finn.

In 1892, two boxers, Harry Sharpe and Frank Crosby, went head to head for 77 rounds lasting five hours and five minutes, making it the longest fight in the sport’s modern history. Like one of the boxers in the late rounds of this fight, JP Morgan is pretty beat up having lost the neobank round, but the investment bank isn't done with digital-first products just yet. Although there is very little information in circulation, JP Morgan is said to be recruiting for a secretive Fintech skunkworks project based in London. The goal is to build a completely cloud-based banking platform i.e., AWS for banking, similar to that of Starling Bank or 11:FS Foundary. The offerings are said to compete with Goldman Sach's digital bank Marcus, as well as, challenger banks Atom and Tandem. Success would mean considering digital as a transformation strategy, as opposed to a mere channel. If JP Morgan get this wrong the second time then we will continue to watch them fight a losing battle in the longest match in history.

Digital as a transformation strategy seems to be the philosophy behind Revolut's latest move to build their own payments processor. We will remind your that a payment processor is a company that handles the secure authorisation communications between the different players in the payment workflow e.g., PayPal. Revolut's processor will be called RevP, and is currently in a public beta test to work out some kinks in hopes of processing the millions of Revolut transactions which take place across the globe each day. In our recent payments report, we noted that Payment Processors can take as much as US$0.30 per transaction from the merchant. The long tail of online commerce (i.e., the many small shops on the Web and social networks like Instagram) has been trending towards renting software from horizontal platforms. This includes website development tools like SquareSpace, storefronts like Shopify, various marketing agencies, and payments solutions like Stripe. Stripe claims to generate a 50-70% reduction in ongoing costs per 1,000 annual transactions, which is particularly meaningful for small businesses. This is a juicy steak for Revolut to sink its teeth into, don't you think?

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Source: JP Morgan's secret digital bank (via TechCrunch), Autonomous NEXT Analysis

PAYMENTS: E-Commerce sales growing at a "solid" 12.4% vs. Retail's 2%. What is driving this?

Last week was made great by the release of Mary Meeker's Internet Trends report. If you haven't seen the 2019 version yet, what are you waiting for? Time to read 334 slides in 30 minutes. The key takeaway we remember from last year was the broad digitization of commerce, with E-commerce living in the web and in our mobile apps, plus the augmentation of the physical space with embedded digital commerce. See entry 1 above. 

Ecommerce is still very much a highlight of this report. Specifically, the fact that US ecommerce sales growth is noted as being “solid”, reaching 12.4% year-on-year growth in Q1 of 2019, up from 12.1% in Q4 2018. Similarly, physical retail sales are noted as “solid”, albeit growing more conservatively at 2%. Additionally, customer acquisition costs were found to be rising to unsustainable levels.

What we found most interesting about the reported ecommerce growth in 2019, is its sources where not only from the expected channels i.e., offline sales shifting to online, or search-directed sales on ecommerce websites. Rather, Meeker’s report tells a story of retail becoming a feature that is integrated into apps and services of every kind, and ecommerce reaching new communities and demographics: (1) Social apps -- like Kakao, Line, and Instagram are increasingly integrating transaction and ecommerce features. The monetisation of features embedded in large scale attention platforms makes sense.(2) Ecommerce platforms are making delivery a focal point of their offering. Much of the friction on these platforms lies in the delivery phase of the customer's journey with either cost or time creating negative experiences. Data-driven and direct fulfilment is growing rapidly with agile and low cost third-party platforms -- such as Rappi -- helping to remove such friction points. Enabling local merchants to expand their online presence, and improve access of their ecommerce platform to customers in entirely new and traditionally inaccessible markets. (3) Online grocery formats in China are competing for consumer wallet share. Here, Meeker showcases the sheer variety of grocery retailers competing using different formats for customers to access them i.e., digital-only stores, physical stores with a native digital app, digital-only stores that leverage a franchised community of retail partners to provide the goods and deliver.

It's always good to know we were right. As our 2019 predictions state "customer acquisition costs will rise and the digital model will become more competitive as servicing costs commoditize at a cheaper price point. What we mean is that if everyone -- including large operating businesses -- will understand how to market to and serve Millennials, driving away the arbitrage opportunity Fintech companies have had to date". We'll take that!

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INNOVATION & PAYMENTS: Divvy’s $200 million raise proves that all is not what it seems in Fintech

We love relating FinTech to the fabled analogy of six blind men describing an elephant solely on touch -- each man taking a narrow perspective to describe what is in their hands but never considering that there is more i.e., One feels a rope because he grabbed the tail, another a spear because he grabbed its tusk. As a result its easy to assume that the Fintechs involved in addressing an industry solution from their own narrow perspective, create significant barriers to entry for any additional player seeking to enter that market. In this sense, if retail banking was the elephant's trunk then who out of Starling, Monzo, or Revolut are using the best descriptor (neobank solution) for identifying it? What about enterprise expense tracking? You may recall a Fintech startup called Brex -- who provide a corporate credit card for small businesses, which consolidates spending and expenses across the entire organization and leverages existing corporate spending behavior to offer higher credit limits. i.e., attacking the problem vertical-by-vertical. Brex is often likened to another enterprise expense tracking platform called Divvy -- who recently secured a $200 million Series C funding round.

Whilst Brex takes a top-down approach to enterprise expense management, Divvy takes a bottoms up approach -- attacking the problems of: (1) limited access of corporate credit cards across an organisation due to trust, (2) enterprise expense management software being inherently complicated and manual, and (3) a single-view enterprise subscription management solution i.e., a single view of all the software/tools your business subscribes to and the status, cost, and terms thereof. Divvy does this by providing teams and individuals with access to their budgets for projects, campaigns, and day-to-day expenses, essentially providing access to slices of the firm’s credit to employees. Its product is aimed at whole companies, instead of just regular recipients of corporate cards (executives, founders, etc.). The point here is that enterprise expense tracking can be deemed a saturated market with companies like Brex offering novel and innovative solutions that would be tough to compete with. However, Divvy seems to have found such a unique way to describe the same part of the elephant as Brex, that backers forked out an additional $200 million for further exploration of it. In the end, the winner is not the company that best describes what it believes to be touching, but rather why it is even touching something in the first place i.e., addressing a customer need.

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Source: Hans Moeller Illustration, Divvy (homepage), Divvy (Brex comparison)

PAYMENTS: Visa plays deal or no deal with the Competition and Markets Authority (CMA) over Earthport

Earlier this year we touched on the $250 million acquisition of UK-based B2B cross border payment giant Earthport by Visa. To refresh your memory, click here. The acquisition came after a drawn out pricing battle between Mastercard and Visa who are desperately seeking to harness the expanded networks of Earthport to improve their 17% and 7% respective growth rates within the cross-border segment - based on those numbers we can see why Visa won the bidding war at a $320 million offer (28% higher than the original). But such developments have recently attracted the attention of the Competitions and Markets Authority (CMA) of the UK to investigate the potential monopolistic power Visa would hold if such an acquisition were to take place. And we don't blame them, as such a network effect could see Visa receive a hearty slice of the potential +$200 billion up for grabs to companies seeking to improve cross border B2B payments, remittances, and the unbanked, as detailed in our latest payments report. Furthermore, companies like Earthport were built to create an international interbank money movement platform more efficient than Swift and cheaper than the credit rails. Giving this network back to the “Networks” makes it hard to see how anyone can beat them at their own game. 

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Source: Visa (Q1 2019 Earnings Call)

PAYMENTS: Walgreens, Brex and Citymapper use financial products to make digital commerce physical

First you take a traditional physical industry, and make it digital. Walmart turns to Amazon. Taxis turn to Ubers. Next, you take the digital environment -- online shopping, expense management software, maps and navigation -- and re-instantiate it back into the physical world. This is how you get weird results like augmented commerce, where retail locations of physical stuff grow augmented reality overlays to create omni-channel data tracking for a company's AI. Take for example Walgreens rolling out Cooler Screens digital windows for its shopping venues. The monitors replace fridge doors, displaying products in an idealized state, with (potentially dynamic) digital prices prominently designed. You are interacting with an app, or maybe a website, on a door behind which lies the ice-cream you want to buy. Let's repeat that. A website is in front of you, an ice-cream is an inch behind the website, the website watches you with cameras, records your reactions, advertises things at you, and sends everything to the cloud. Enjoy your online in-store experience!

Or let's take transportation. There are the digital upstarts, arbitraging a phone's GPS to deliver mobility with greater precision than a human transaction. From Waymo, Ofo, Lyft, Uber and Lime littering our phones with icons of summonable critters, to manufacturers like Citroen creating mobile-app connected vehicles like the Ami One, transport is mobile and on-demand. So what's the next meta game? Check out CityMapper, a mere-mortal mapping application focused on beating Google and Apple at giving directions for city travel. The app is not original, but well executed. It charts out public, private and pedestrian modes of getting from here to there with time estimates, and does so locally on a device, which means no internet connection required. After acquiring a userbase for aggregated directions, they are now launching aggregated transportation through a subscription offer called Pass. This physical card costs £30 per week, and includes public transportation, bikes, and ride-sharing, with loyalty points on top. Here is an instantiated financial products that sits on top of abstracted digital infrastructure.

Another Silicon Valley favorite is fintech start-up Brex. It provides a corporate credit card for small business, which consolidates spending and expenses across the entire organization and leverages existing corporate spending behavior to offer higher credit limits. It's never been easier to give WeWork employees their own spending account, and track just how much Starbucks they drink. The interesting thing about Brex isn't that it's a card -- banks know how to issue credit to businesses, despite what the startup may tell you. The interesting thing is that the expense management software for the business owner is the primary proposition (we think), leveraging modern data aggregation into expense management and credit permissioning. The accounting industry got digitized (e.g., Wave and Quicken), and now is instantiating itself back in our physical world through a smart card and financial product. This opportunity to bridge software into the physical world with finance, and payments in particular, is an area we are are thrilled to see develop further.

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Source: Slate (Cooler Screens), Engadget (Citroen),  Techcrunch (Brex), CityMapper (Pass)

2018 FINTECH PREDICTION IN REVIEW: Augmented Commerce

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

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

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

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

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

PAYMENTS: American Express and Amazon help Amazon sell more products.

Ok, yes, we just talked about how the Amazon / Travelers partnership is primarily a way for Amazon to sell more of its IoT device and play kingmaker. But listen -- this is another great symptom that highlights why Amazon's entry into financial services isn't a threat to financial companies. It's a threat to e-commerce, the actual target of the platform. So in this example, American Express has partnered with Amazon to provide a credit card targeted at small businesses. It's a clever product which allows the small business to either (1) get cash back on purchases or (2) defer the interest on their card on that purchase. It's up to the small business, which may need the extra credit for a late-paying customer in one case, and the rewards the next.

Here's the magic. The cash back is 3% on all Amazon purchases (1-2% elsewhere), which means more shopping on the platform. But wait, there's more! If the card holder is an Amazon Prime customer, which is not a hard feat, they get 5% back. Similarly, the interest-free period is 60 days for regular holders, and 90 days for Prime holders. What this card does is make Amazon Prime shopping irresistible for a small business -- while driving Amazon's key metrics of Prime subscribers and retail volume. Sure, it's nice for AmEx. But all they get to do is sell a financial product that would apply in some retail channel anyway. Amazon gets to shift the flow of retail into its walled garden, and then monetize a sticky business customer over and over again! The cross-sell is bigger than the sell.

This is the monopoly moat of a platform, like Apple negotiating the record labels out of existence with the iTunes store by holding all the customers. Not only does Apple get the share of the music revenues, but it gets to sell all the iPods. Further, Amazon has done a remarkable job of handing out a financial feature to each big bank. JP Morgan has checking accounts, Bank of America has merchant lending, and so on. This distribution of seats at the table to the top financial incumbents is predictable -- both by power laws from the bank point of view, and by the stability of the capital base from the platform's view. At the same time, the net effect is that all these financial firms should want Amazon's share of commerce to keep increasing. 

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

AUGMENTED REALITY: More productive enterprise use AR for field work

Interesting study for an enterprise usecase of augmented reality -- productivity in the field service management industry. Think about telecom technicians installing cable, mobile doctors or nurses in healthcare, engineers deployed to sites in industry, or other service providers that travel to location. The study found that companies deploying AR solutions -- like (1) remote video and analysis of the site by experts, with work carried out by lower skilled labor, or (2) AR-based on site training modules -- saw better customer retention, satisfaction and operating metrics. Imagine coming to a complex piece of industrial equipment, and seeing three dimensional notes and explanations on how things should work.

There is a potential parallel to financial services front offices. Much of the framework-setting in finance falls to a centralized function, whether that's a Chief Investment Officer creating portfolios or a Chief Data Scientist creating a loan underwriting model. Yet physical presence and emotional resonance still matter. Perhaps the human relationship is managed in person, but relevant financial stats and metrics about the relationship are physically tied or annotated to particular geo locations, or to the emotions of the customer. Clients are less and less likely to come to a branch or advisor office, spending time instead in their phones. But can the front office come to them, with a CIO in their AR glasses? Or, could machine vision be used to assess client net worth? If Truata can scan a windshield to figure out insurance damages, could a machine estimate car or house value in real-time net worth?

While certainly not an exact match, we can see the future in some analogous applications. Below you'll see concepts of some of the apps being developed for headsets like the Magic Leap. For example, AT&T is bringing DirecTV to AR, with up to 4 different channels streaming at once, which is how communication with a colleague can happen. Or, it could be done through a render, like we see in Avatar Chat -- remember that VRChat has millions of users. As a last point, Adobe has entered the game with a professional creative suite in augmented reality, bringing what is currently a novelty toy one step closer to being a platform.

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Source: Aberdeen Study; Techcrunch (Adobe), Upload VR (Avatar Chat), Variety (AT&T)

INSURANCE: Monopoly gains to Amazon's platform from Travelers Insurance channel

Travelers, the home insurer, has partnered with Amazon to sell smart home and security devices. The company is getting its own digital storefront (amazon.com/Travelers) on the Amazon site, where channel customers can get SmartThings water sensors and motion detectors, Wyze cameras, as well as Amazon's Echo Dot. For Amazon, this is a proprietary hardware and marketplace sale. For Travelers, it is a home insurance sale, bundled with the telematics. Additionally, Travelers has integrated two skills into Amazon Alexa, rationalizing to some extent why you need all this technology to interact with your insurance policy.

This is a powerful symptom. On its face, it may look merely like a new marketing channel for a web-first demographic with a few gimmicks thrown in. Couldn't Walmart, Overstock, and the rest launch some product pages and cross-sell financial products? Here's the distinction: Amazon is a marketplace platform, whose value increases if it can grow two sides of its network: (1) manufacturers of stuff, and (2) retail customers. The manufacturers could make financial or physical objects, which don't matter. In order to win the platform game over traditional retailers, Amazon can throw in bleeding edge tech for free (or at cost). Walmart makes no phones, tablets or Artificial Intelligence-based assistants. Amazon does, and it has Big Tech leverage over all the aspiring startups in the space that want its consumer pipe.

Relative to other Internet companies, Amazon has the luxury of being post search intent. The Web is not a free-market endless bazaar, but a few walled gardens with monopoly-like attention ecosystems. Google sits in the pre-intent part of the funnel. People search "home insurance" into the box and get third party websites formatted according to their own logic. These results are driven by two markets: (1) bidding against keywords and (2) optimizing search engine results against a global, non-discriminating algorithm. Amazon is fundamentally different -- a king-maker that can select who wins business within its platform, and which has no need for an open web for Prime customers. This means insurance companies should race to claim their own custom channels on Amazon's version of the web (i.e., Amazon On Line?), which incidentally ends up selling Amazon hardware. This leads to a dynamic similar to that which Apple had on the music labels with iTunes and the iPhone. No competitors in sight.

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Source: Company Websites (AmazonTravelers), Media (DigInWSJ)

ONLINE BANK: Square's Unique Advantage in Rebundling the Bank

Square has $200 million of balances in its Cash app. At a Recode conferences focused on commerce, Square's CFO suggested that the payments company is thinking about expanding beyond its core competency (enabling long tail merchant commerce) to wrapping the full suite of financial products around those $200 million in balances. That includes savings accounts, investment offerings within the app, in addition to the current capability of buying Bticoin. This is why Square has looked into an ILC license and is expected to take advantage of the OCC Fintech license, once the legal dust has settled. For context, about 66% of banks and 80% of credit unions in the US are below $250 million in deposits, which is roughly 10,000 institutions in total of approximately the same size.

But on the other hand, this long tail has no tech DNA. Square, on the other hand, started out as a hardware solution to empower payment-taking by micro enterprises (e.g., comic book vendors). It now runs at approximately $80 billion in annual volume. It also quickly spun itself into a platform, by building out lending capability for the merchants using its payment systems. Now it originates about $400 million of SME lending per quarter, or $1.3 billion over 12 months, leveraging access to both (1) payment data at the point of purchase and (2) its network of merchants at the moment of financing need.

On the other side of the network, it has built out an active consumer user base of 3 million for its Venmo competitor, Square Cash, which has been downloaded over 30 million times. Adding crypto capability to the app has reportedly added another 6 million to the user-base. This has been a successful financial marketing and customer acquisition strategy for others as well, with Revolut doubling its user-base, Robinhood adding another million, and eToro growing 6 million as well for crypto trading. Unlike the long tail of small banks, these players grok young customers and build the features they want. And unlike the rest of the Fintech apps, Square has a physical hardware footprint and a merchant network that gives its "Bank of the Future" an asset in corporate banking, B2B payments, and various other higher margin activities. So when they talk, we would listen.

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Source: Recode (Square Investments), TechCrunch (Square Cash screen), St Louis Fed (Number of banks by size), Statista (Lending)

PAYMENTS: $125MM Raised by Trax for Augmented Commerce

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Augmented commerce continues to develop as a theme in two directions: (1) digitizing the physical world through machine vision and (2) embodying the digital world through Augmented Reality. On the former, a few examples are Bossa Nova Robotics inventory robots deployed in 50 Walmarts, AI guardsman using machine learning on video feeds to spot shoplifters, and Amazon harnessing computer vision to bypass the need for checkouts in its stores.

As another example, Singapore-based Trax just raised $125 million (in addition to a previously raised $140 million) to do exactly that. The company owns a powerful image recognition engine for various retail products, which allows retailers to create digital versions of its physical shelf-space. At first, pictures of the shelves were taken by employees with phone or tablet devices. But this can be done with cameras or robots today. Downstream from the image recognition are data and analytics, which managers can use to run the business in real time, across all locations. Just like e-commerce, which provides data that is instantaneous and real-time, the physical environment can become similarly measured and optimized.

Another version of this wizardry is Baidu’s vending machine concept (see video link below). The user interacts with a voice interface, which projects a menu onto the glass window in the front of the machine. This interface was also touch sensitive, so a user could select the good to buy and confirm by tapping the screen, with payment enabled through facial recognition. While cool, this process was still inefficient compared to pressing a few buttons on the side of the machine. But, over time, we expect to see such smart interfaces spill out further into the world. Which leads us back to finance. Is there a version of a bank branch that benefits from such technology?
 

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Source: VentureBeat (TraxBossa Nova), Business Chief (Baidu)

VIRTUAL REALITY: Bringing together thousands of people with Augmented Reality

Let's keep it light-hearted. Here are things we did not know about Pokemon Go, the augmented reality game. It has seen over 800 million downloads, and generated over $1.2 billion in revenue since inception. Niantic, the firm that makes the game, has raised $200 million to build a Harry Potter version of the same. And the game has just run through a partnership with several cities including Akron, Ohio; Charlotte, North Carolina; Philadelphia, Pennsylvania; and San Jose, California. See the link below in the Sources for more detail -- we found the study fascinating.

Niantic and the cities created joint events that drove people outdoors and on adventures through physical communities by sprinkling scarce digital objects along the way. Like Pacman eating dots or bunnies following a trail of nibbles, people were guided along a video game narrative to participate in battles and events. In San Jose, 35,000 people showed up and spent $450k; in Philly, 10,000 had a more bespoke experience along historic landmarks. In some cases, players could modify the game in progress. What is also notable is that the most effective way to get community engagement was not to send invites to individual players, but to networks, which then self-organized and came together. It's a version of migrating a web-based forum or community to the physical world. 

So what, you say? Ok: (1) 22 million virtual and augmented reality headsets will be sold this year -- still a far cry from Whatsapp adoption, but laying the groundwork for mass adoption nonetheless, (2) software platforms like Metaverse let any person or SME program their own AR apps, which can be epxerienced on the major mobile platforms, (3) blockchain companies have laid down the groundwork for scarce digital goods owned and maintained by a community, (4) bank retail branches and physical shopping are both facing pressure from the migration online. Massively multiplayer augmented reality games could be used to bootstrap crypto economies, financial services engagement, or new types of commerce. Or at least, to watch the World Cup on your tabletop.

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Source: Venture Beat (PokemonGo revenueHarry Potter), Mobile AR (City ReportMetaverse), Prosthetic Knowledge (Soccer), Crypto projects (DecantralandBubbled*), Tech Radar (AR market); *disclosure -- Lex is advising Bubbled.

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.

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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.

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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. 

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

PAYMENTS: E-Commerce Growing to $500 Billion, Augmented Commerce Coming

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There is no greater gift to geeks like us than Mary Meeker's Internet Trends report. If you haven't seen the 2018 version yet, what are you waiting for? Time to read 300 slides in 30 minutes. The key takeaway we remember from last year is the consumerization of the enterprise, and that much of the user interfaces of today's mobile and web apps are directly inspired by 1980s video games. Not surprising, since many of the people building companies today and making design decisions grew up together with the maturation of the video game industry. This year's report has a great section on China and sovereign investment on edge technologies, but lets leave that rabbit hole for another time since we covered that last week.

In this entry, we want to highlight takeaways around payments. The story that comes through the deck is that digital commerce and digital payments are intertwined, and both are rising. E-commerce has grown to $450 billion per year, up from $180 billion in 2010. As share of total retail sales, E-commerce has doubled from 6% to 13%. In terms of everyday transactions, consumers claim to have only paid for items in retail stores 40% of the time, with digital channels comprising the other 60%. This category lumps together everything from P2P payments like Venmo (7%), to money movement through messenger apps (7%! Really!?), to shopping through smart home devices (3%). While this survey sentiment doesn't yet line up with actual retail dollars, it's fascinating to see consumers using so many emerging payment mechanisms.

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So we are experiencing this broad digitization of commerce, with E-commerce living in the web and in our mobile apps. But the world is on the verge of another shift, which is augmenting the physical space with embedded digital commerce. Meeker highlights retail stores that use traffic heatmaps to optimize layout, and smart devices in shoes that measure in-store sales conversion (from fitting to purchase). We add the technology of Angus.ai, which is similar to what is likely under the hood at Amazon's stores, and at some point will be at Whole Foods. A machine vision algorithm can watch product stocks, measure sales in real time, and send workers to replenish them. Physical is becoming digital, which we believe have a deep implication on the types of payments companies that succeed. Not point of sale, but point of intent.

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PAYMENTS: $2.2. Billion for iZettle by Paypal

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If you're PayPal, maybe it's frustrating to see people talking about the future of money and not mean you. But it would be a mistake to count them out of the game. The company has been expanding expertly across the Fintech ecosystem, with the latest data point being a $2.2 billion acquisition of iZettle. iZettle is a European version of point-of-sale dongle manufacturer Square, processes $6 billion in payment volume and accepts Google/Apple pay. The success of this model is a consequence of the adoption of mobile phones and tablets -- meaning that smart devices are cheap, everywhere, and can accept payments. Thus the (slow) power shift from dedicated hardware, to payments as a feature within tech ecosystems.

Two directions to think about. First, payments is a great entry into a broader fintech business model. When looking at Chinese messaging company WeChat, we see the world's largest messenger user base, tech payments app, and money market fund. Associated with such a messenger is a large data set of conversation and commerce -- which powers lending and investing. The same playbook could happen in the West. For PayPal, such logic would drive the partnership with micro-investing app Acorns and the acquisition of social payments app Venmo (and developer focused Braintree). Lending is the next logical step -- for analogy, look at Square's merchant lending business or Goldman's success with Marcus and its expansion into Europe. 

The second direction is augmented commerce. As AR/VR penetrate the world with devices and change how people shop, we think it will be important to own a hardware asset that can adapt to the opportunity. iZettle gives PayPal an option for success in the next wave of tech transformation. Of course, it will be complicated to rationalize capability, especially in relation to Google and Apple pay. Looking at the Venmo acquisition, PayPal is now stripping out its web functionality and limiting Venmo to the mobile app -- there is no sense in having two separate web standards. And on retail commerce, there is still the question of crypto. Companies like Basepay (support Ethereum as currency at 11 million retail location) and Revolut (prepaid card that can index to crypto and be swiped at point of sale) are building a bridge that PayPal is yet to cross.

 

Source: Reuters (iZettle), Crowdfund Insider (Goldman Marcus), Reddit (Venmo), NewsBTC (Basepay).

PAYMENTS: Instagram Payments = Tip of AR/VR Iceberg

Source: Instagram

Source: Instagram

Social media and tech companies have been adding native payments into their apps for years, and nothing in the West has yet come to resemble WeChat's payments success. Venmo has the "texting money" behavior on lock, despite competing with a native feature of iOS. Banks are still in the growth mode for Zelle, a bank-pipe for messaging money. Facebook payments, and Amazon Pay, and the credit card networks' Buy Now button are all competing for our payments share of wallet (!) on the web.

So why do we think Instagram adding payments to its app is interesting? For the same reason that we think Snapchat adding a store can be compelling. Instagram is a way for many Millennials to consume brands and lifestyle. It is a platform of creators and influencers that broker fashion and retail. Platforms (like Amazon) are unlike individual products in that they can flex to include many different products and services once the use-case is proven. And influencer marketing, powered by propaganda bots, AI, and other growth hacking, is only becoming more important as a trend for generations that grew up on YouTube and eSports. This will become true in time for financial services companies.

Source: Instagram

Source: Instagram

The other side of this coin is Augmented Reality and AI. Using machine vision, Facebook / Instagram can extract products from images posted on its network. Through integrated native payments, Instagram can become the platform where commerce happens, rather than linking out to third party sites. On top of this, Facebook's Oculus Go is an upcoming $200 virtual-reality head set meant to bring VR to the masses. Building Instagram into VR and AR, similar to how Snapchat is experimenting with both the medium and its associated hardware, would allow the company to open up a new commerce category. If this category catches on, Facebook / Instagram will have a meaningful moat that even Google and Amazon cannot match, because it will have (1) the social graph that can drive commerce, (2) the AI talent to build real-time image and product recognition, and (3) the customer's device to interact with this platform. 
 

Source: Oculus

Source: Oculus