fintech

ONLINE BANK: Just how are US incumbent banks using Fintech to future-proof themselves?

It's without a doubt that the global banking industry is undergoing a digital renaissance. Digitally native neobanks are serving customers at a third of the cost of incumbent banks, leveraging modern core technology architectures to innovate faster and operate more efficiently, and earning them a significant chunk of market share. Fintech companies are building solutions around lucrative niches in the value chain. A good example of this is payments unicorn Stripe, valued at a cool $22 Billion, recently announcing it will be offering loans to online businesses to support their growth ambitions. In contrast, incumbents are subjected to the limitations of their core architectures and the resultant slow rate of change to innovate and adopt operational efficiencies necessary to retain their market share.

In the US, incumbent banks are actively investing in Fintech companies as a means to "future-proof" themselves. By "future-proof" we mean three things: (1) increasing the potential for high returns in the short-to-medium term leveraging the benefits stated above -- take Goldman Sach's investment in digital lender Better Mortgage. (2) Gain exposure to emerging sub-industries, as well as, utilize new Fintech platforms to enable rapid scaling and less expensive development of ecosystems and ancillary services -- take Wells Fargo's investment in OpenFin, who is now used to help modernize the bank's software for front-and-back-office functions. (3) Lastly, reduce spending on IT by leveraging the structures of Fintech companies such as the removal of technical debt, leveraging the economies of scale of cloud-based services, and using development tools that support automation (DevSecOps).

We recently came across CB Insights' latest Fintech trends report which notes that in 2019 YTD, US banks have participated in 24 equity deals to Fintech companies -- approximately 54% of the record 45 deals in 2018. Unsurprisingly, Goldman Sachs, Citigroup, and JP Morgan Chase were noted to be the most active US incumbent bank investors in Fintech. Since 2016, Goldman Sachs has primarily invested in Real estate and data analytics Fintech companies which compliments their current strategy, Citigroup has focused on payments & settlements and Blockchain Fintechs providing evidence of a potential Banking-as-a-service platform in the near future, and lastly JP Morgan Chase has prioritized investment in capital markets and accounting & tax Fintechs in hopes of strengthening its payments play.

For those incumbents averse to Fintech partnerships, McKinsey outlines three options for replacing the core to their next generation platform. The costliest ($100M to $500M+) and most time consuming option being a full replacement of the core with "new" traditional tech platforms. Opposite to this is the cheapest ($50M to $100M) and arguably the most value-add option of migrating the bank's core onto a "greenfield" tech stack -- essentially a modular and API-first cloud-native architecture. RBS' Bó, National Australia Bank's launch of unsecured lending solution QuickBiz, and Goldman Sach's Marcus are all examples of the greenfield approach. As noted by the Economist Intelligence Unit, the greenfield approach was considered the most sought after bank innovation strategy by 36% of the 400 banking respondents, a close second was to invest in Fintech start-ups with 31%.

We have noted it before and we will note it again, greenhouse approaches are only effective when the incumbent acknowledges digital as more of a transformation strategy than a channel -- case in point is JP Morgan Chase's failed digital bank Finn. The financial initiatives of Chinese tech companies such as Alibaba and Tencent, for example, serve as a powerful representation of how a core tech chassis serving e-commerce 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 industry aggregate deal value for 2019 -- more than twice the aggregate of the same period in 2018.

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INSURTECH: Breaking down how technology seeks to transform the $5 Trillion Insurance industry

When it comes to insurance, the $5 Trillion global industry is often deemed to be a slow-moving conservative sector resistant to change. Innovation is thought to be achieved by merely repackaging existing products into flavorsome marketing wrappers with re-bundled cost structures. Breaking down the variables that impact the need for change such as changing demographics and consumer behavior, enhanced connectedness through digital mediums, the emergence of the shared economy, and shift from asset ownership into renting or fractal ownership, we see a profound effect on the sector as a whole. These variables are enabled by the likes of artificial intelligence (AI) applications, internet of things (IoT) ecosystems, and decentralized ledger technologies (DLT) which help accelerate the insurance sector to respond to new trends, the streamlining of operations, reduction in costs, creation of new revenue models and evolution in innovative products and solutions across the value chain. Let's take a look at some examples.

The core to any insurance product is the back-office process of underwriting, which is leveraging AI to extract insights from various data sources, using IoT devices as the collection mediums, and cloud infrastructure to instantaneously update data to models used to improve risk profiling and thus pricing. US-based Flyreel developed an AI-enabled underwriting system replacing the need for professional insurance inspections. It achieves this via an app on a mobile device which is used to scan a property. The image content is then run through computer vision algorithms to automatically identify items relevant to the customer's policy, enabling property owners to improve underwriting efficiency. Very cool.

The reduction in fraudulent claims losses -- estimated to run the US $80 billion per year -- and improving claim settlement efficiency are crucial areas in which technology is sought to address. Inscribe.ai is a San Francisco-based fraud documents detection platform that uses a combination of natural language processing (NLP) and computer vision to scan documents to identify fraudulent claims. In terms of improving claim settlement efficiency, State Farm is testing a permissioned DLT powered by smart contracts in auto claims subrogation -- a process by which insurers settle claims losses amongst each other -- to significantly speed up the process with immediate automatic payment disbursement as soon as liability determination is completed.

Lastly, a combination of DLTs, advanced driver-assisted systems (ADAS) or other telematics installed in consumer's vehicles to collect real-time data on driver behavior and driving patterns have been essential to create more accurate real-time dynamic risk assessments and pricing models. These include pay-as-you-drive (PAYD), pay-how-you-drive (PHYD), and on-demand just-in-time insurance pricing models, spearheaded by insurers such as Cuvva, Trōv, Metromile, Insure the box, Root Insurance. On the topic of auto insurance we would be remiss if we ignored self-driving cars. Although the argument is that such vehicles will potentially reduce insurance premiums by 85-90%, new risks such as software and hardware failure, as well as cyber attack will play a major part in formulation of new premiums. Needless to say that startups such as Avinew are already offering policies to cover semi autonomous vehicles using telematics, AI, and machine learning to help build comprehensive risk assessments and policy pricing models.

It is without a doubt that not that far in the future, we will see the emergence of decentralized autonomous insurance organisations that will leverage IoT, AI, and DLTs to enable Peer-To-Peer (P2P) insurance and eliminate the need for middle men. We will see a state of the industry in which customer engagement, policy underwriting, claim filing, inspection, claim settlement, payments are customized and fully automated. And we cannot wait.

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Source: Flyreel, Forbes (State Farm And USAA See Stark Increase In Efficiency When Testing Blockchain Subrogation), Trōv, Insure the box, Avinew

PAYMENTS: In the United Kingdom, the cashless south makes the north pay

As countries like the United Kingdom, China, India and the Nordics rapidly move towards demonetization, driven by innovative technology and enhanced policy, the social and structural implications of getting rid of cash could exacerbate economic divides within these economies. Even the US is grappling with how to deal with the evolution in payments, as certain states have banned cashless checkout at retail locations (here). Based on a recent Financial Times article, the United Kingdom represents a key example of how significant regional variations in adoption of cashless transactions could leave millions, who rely on cash, isolated, exploited, and subject to increased cash handling costs. ATM withdrawals are a strong indicator of demonetization. Given this, during the first four months of 2019 compared to the same period in 2018, cash withdrawals on average declined by 8.1% across the Southern regions of England, including 8.7% in London. By contrast, withdrawals on average declined by a mere 4.7% in the remaining regions of the United Kingdom.

Additionally, in a developed economy like the UK, the share of retail transactions in cash has fallen from 54% to 41%, and is projected to land at 10% by 2026, constituting a 81% decline. In China, the share of retail transactions in cash relative to cards (excluding all mobile payments for the moment) has fallen from 64% to 48%, and is projected to land at 42% by 2020, constituting a 32% decline. Financial services infrastructure, with bank accounts as basic entry point, remove friction involved with physical cash. Point of sale solutions provide access to digital rails, which are intermediated either by finance firms, governments, or telecoms. Access to banking allows for savings and investments as well; however, there may be regressive implications for the unbanked or groups subject to specific barriers to entry in a fully card-based world.

Notably, a 2019 independent review stated that “around 17% of the UK population – over 8 million adults – would struggle to cope in a cashless society”. This reliance on cash within the United Kingdom stems from (1) the lack of infrastructure, such as reliable and extensive mobile data coverage affecting approximately 5.3 million adults, (2) the lack of financial accessibility, including those in financial difficulty, affecting 5.4 million adults, and (3) convenience, whereby 34% of the UK population wish to have the choice of payment medium to use. We expect there to be a $200B emerging new market opportunity for “Mixed Commerce”, which we define as the intersection of the payments industry, commercial activity and mixed reality (read more here).

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Source: Access to Cash Review (Final Report), Autonomous NEXT (Payments Frontier & Mixed Commerce Report)

OPEN BANKING: PSD2's self-defeating requirements need addressing for true Open Banking to exist

We've noted before that the implementation of Open Banking (via the EU's Second Payment Services Directive or PSD2) 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 party providers (TPPs) 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 a new report by Fingleton and the Open Data Institute for the Open Banking Implementation Entity (OBIE), "The narrow focus of the Open Banking APIs limits their potential to drive wider competition in the financial sector, for example by helping customers shop around for better interest rates on savings accounts or cheaper mortgages." Additional examples of where the PSD2 mandate failed TPPs included (1) the lack of refund functionality, and (2) the lack of functionality for customers to pre-approve payments to a merchant -- similar to a subscription debit -- instead of a customer having to manually authorize each payment,

The remedial actions for the OBIE included (1) mandate "variable recurring payments" making it cheaper for merchants to receive customer payments, (2) revised customer consent rules to remove the need for customers to re-authenticate with each TPP through their bank every 90 days, and (3) the extension of Open Banking -- beyond current accounts -- to a more diverse range of products such as mortgages, insurance, pensions, and savings accounts. Subsequent to the report's publication, the OBIE announced the initiative to create "Premium APIs" that provide a commercial incentive for banks to address the above listed failures. Those are going to need to be some considerable incentives to get the incumbents to budge. Hopefully, if the TPPs trying to build experiences don't want to deal with incumbent infrastructure, there is always Bitcoin. 

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Source: ODI & Fingleton (Open Banking Report for the OBIE)

BIG TECH & CYBER SECURITY: Every cloud has a surveillance lining

Let's be honest here, before the turn of the 21st century, if a stranger asked to keep our photo in exchange for a funny caricature, or a supermarket had asked to put a microphone in our homes, or a train company had asked our whereabouts in the station, or physical education teacher had asked us for our step count and sleep data every day, we would have said no. Now days, we upload multiple photos to Russian-based FaceApp, buy Amazon Alexas, use London Underground’s free WiFi, and track our activity on Garmin watches. And still manage to sleep well at night...well some of us at least. We recently learnt that both Amazonand Google admitted to having employees listen to recordings from their smart speakers. Whilst Facebook argues that its "users have no expectation of privacy" on their posts. These big US internet companies — Amazon, Apple, Facebook, Google and Microsoft — have all, to some degree, failed to protect their users' data and establish a base level of security. Controversies about how Facebook -- who received a $5B fine by the Federal Trade Commission -- shared user data with developers such as Cambridge Analytica and foreign governments earns them the lowest marks on security and data privacy, while Apple's strong emphasis on adopting considerably better policies than its more data-hungry competitors, might earn it the highest marks among the five. Other examples worth noting can be found in a previous newsletter entry here.

Relatively, there are more sophisticated means to retrieving user data without the target always being aware that it is happening. One of these was revealed by the Royal Melbourne Institute of Technology, who used various native sensors — such as the accelerometer — found in smartphones to predict the personality traits of its user. Similarly, yet more terrifying, a recent story published in the Financial Times, noted how most internet companies are equally at risk from a mobile phone spyware suite called Pegasus -- produced and sold by Israel-based “Cyber Warfare” vendor The NSO Group. The same spyware implicated in a breach of WhatsApp earlier this year. Private agencies and governments have long used Pegasus to successfully harvest private data — such as passwords, contact information, calendar events, text messages, and live calls — from the mobile phones of targeted individuals. 

Shockingly, the story focuses on the recent evolution of the spyware to infiltrate the data residing in the cloud used by the targeted individual. Such data can contain a full history of location data, archived messages and/or photos, emails, sensitive passwords, and financial records. The way it works is rather smart as it allegedly copies the authentication keys used by services such as iCloud, Google Drive, Facebook, Box, and Dropbox, among others, from a corrupted mobile phone. The keys are what these services use to verify an individual's identity, and thus provide them with access to the data on the respective cloud server. Put simply, these keys allow for an attacker to impersonate the target's phone in order to gain access to the data stored on the cloud, bypassing 2-factor authentication and login notifications. Notably, the NSO Group denies having spyware that can hack such cloud applications, services, or infrastructure.

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As noted in the first entry above, the world is shifting to a more digital and decentralized form of finance and commerce, whether it be Wealthfront or Betterment roboadvisors assisting you in facilitating your wealth management, or using Robinhood's mobile app to enact stock trades. The truth is that most of this data flows through the cloud services of internet companies. And so long as hacking tools like Pegasus exist, coupled with our willingness to brazenly share our data with attention platforms, such sensitive data is subject to surveillance. But don't delete your Facebook profile just yet, as "good tech companies" — such as CrowdStrike, Cylance, and SentinelOne — are coming to our aid to fight and protect us against such cloud-native surveillance tech. Earlier this month, shares in CrowdStrike — the cyber security company that uncovered Russian hackers inside the servers of the US Democratic National Committee — jumped 97% in their trading debut on the NASDAQ, valuing the California-based cyber security group at $6.8 Billion. Since then, quarterly reports indicate revenues have risen 103% year-on-year to $96.1 Million, primarily due to the growing demand for its expertise in combating malicious cyber hacks. In any case, stay vigilant, as what we deem most crucial to our privacy in everyday life is what surveillance tech seeks to exploit (Read more here).

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Source: Tom Gauld (New Scientist), CitizenLab (Hide and Seek Report), Financial Times (NSO Group Technologies), Pew Research Center (Security & Surveillance Report 2015), Pew Research Center (Americans & Cybersecurity)

INTERNET OF THINGS & APIs: The Internet of Things wasn't really a thing

Look, we love our buzzwords as much as you do, but this one has gone on long enough. The Internet of Things (IoT) is one such buzzword that is synonymous with product design, connectivity, infrastructure, and the future. Pretty broad right? To enforce this point, IoT can be simply defined as a network of interconnected digital devices in order to exchange data. Doesn't this sound like the definition for the internet? Effectively the Internet of Things is purely a term of scale, in which the "things" are any device that can be connected to the internet. The issue of scale has resulted in a mass of tech companies -- such as GoogleAppleLGSamsung, and Huawei -- each building and protecting their own IoT solution vertical with which they compete. An example of such verticals that fall into the scope of IoT include automated temperature, lighting, and security controls for your home, or fleet tracking and driver safety controls for a logistics company. For a consumer, having multiple apps to control the functions of their home is no better than using the analogue controls IoT sought to replace. For regulators, ensuring the safety, reliability, standardization and efficiency of each solution has massively hindered the deployment of IoT across the globe.

The assumption that the future of technology relies on faster, better, newer, and more hardware is debatable. Something that big tech companies like Apple are starting to realize. Rather, the future of technology should be centered around machines working together to make magic. How this is achieved is via the gatekeepers enabling the solutions -- Application Programming Interfaces's (APIs). Essentially APIs store and dispense both data and services for hardware and software. Enabling the data source(s), the data consumer(s), and the tech manufacturer(s) the opportunity to compete within the foreign land of tech platforms (i.e., App stores and e-commerce). This generally means prices fall and economic rents go to fewer winners that have strong APIs, integrations, and a nimble balance sheet. Consumer facing services such as ZapierIFTTT, and Signalpattern form part of an emerging segment, allowing for consumers and businesses to connect devices and services together to build truly innovative solutions. Similarly, payments Fintech InstaReM launched an API-based digital B2B platform enabling companies to create their own branded credit cards. Via APIs to InstaReM's card-issuing platform, customers are said to have greater control over the creation, distribution and management of card accounts -- a Visa-supported parallel to Brex.  

For the network of interconnected digital devices in order to exchange data to succeed device manufacturers need to open their APIs, like items on a menu, and users assemble them together into the perfect meal. The level of inter-connectivity we are talking about here is, for example, when the machinery in a factory stops operating whenever a maintenance person swipes into the main floor, or your car's navigation depended on your calendar, financial well-being/budget, and personal well-being (taking scenic routes when stressed). That is truly an internet of API-enabled things. READ MORE.

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Source: Nordic APIs (APIs power the Internet of Things)

CRYPTOCURRENCY & BLOCKCHAIN: Goldman furthers the institutionalization of Crypto whilst global economic instability furthers its benefits

The Cypto-universe is experiencing what can only be described as a storm of epic proportions. Fueled primarily by warm positively-charged air coming from the launch of the Libra project, and cool negatively-charged air from the dramatic price volatility and speculation in the market. Contrary to some testaments, the likelihood of the former impacting the latter is about as much as the correlation between the price's of Bitcoin and avocados (see here). However, the coincidence of these two developments does speak to how they both capture elements of a massive, worldwide financial transformation, all happening at a time of rising global economic instability and uncertainty.

Let’s start with the mainstream global money movements over the next decade being channeled through a mix of Blockchain-era stable-money services that operate along a centralization-to-decentralization spectrum — from JPMorgan’s JPM Coin and the new Swift Blockchain project at one end, to Facebook's Libra project and more open-standard Crypto stablecoin projects such as CENTRE’s USDC at the other. And it would be safe to assume that as these projects grow in usage and adoption, so too will the demand for Bitcoin as the digital asset hedge of choice. Emphasizing this point was the recent news that the US banking giant Goldman Sachs reportedly wants in on Blockchain now more than ever, with in-depth research going into the concept of tokenization. For the Blockchain community this is Good, for the Crypto community is this Great? According to David Solomon, Goldman Sachs will be using the Blockchain to reduce its transaction costs, and improve access to and overall efficiency of services to clients. More specifically, providing greater transparency, speed of settlement, and more resilient compliance procedures. Such a move will put Goldman in line with JP Morgan, Fidelity, and Citi who have all made huge strides in the space. This is not to discount the fact that the incumbent bank has already backed stablecoin startup Circle, and toyed with the idea of launching its own over-the-counter Crypto trading desk. Yet, Goldman has failed to reveal what exactly they’re working on, and very few are waiting on baited breath. Progress in Blockchain and decentralised ledger technology has recently been so rapid to the point where news of a major financial incumbent signing on is treated as a non-event.

The wider point merges the above with significant global economic uncertainty stemming from US-China trade tensions and the significant capital flight out of China and Hong Kong. This new round of global economic uncertainty is occurring at the same time that Cryptocurrency and Blockchains are establishing themselves as key elements of the emerging financial architecture of the world. Shortly following the financial crisis of 2008, Satoshi Nakamoto posted his/her/their white paper to a select number of online cryptography experts, also known as cypherpunks. Little did they know that such an alternative model for global finance would shift the direction of large institutions and regulators alike -- with projects like Libra playing a critical role in elevating the profile of this new model. As the global economic and political stages continue to experience massive shifts caused by the vested interests of the few, so the instability independent benefits of digital assets and Blockchain are realized. As proven by the chart below indicating a strong negative correlation between Bitcoin and the S&P500.

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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: Real Autonomous Organizations Take Shape

The last 5 years have seen fundamental innovation in crowdfunding, regulatory technology, the digitization of financial services, Blockchain native organizations, and automated propaganda bots to attract human attention. 2018 brought with it sobriety and a back-to-traditional regulatory treatment of financial assets and their structures. In particular, the crypto asset movement (and its crypto-anarchist community construction) has been put into a well-understood, regulated box by most national regulators. While many interesting lego pieces exist, none of them have yet to fit together. Still, regular people have gotten a taste of both the distribution and manufacturing sides of financial mana.

At the beginning of this year we were hopeful that 2019 would re-combine these pieces to instantiate functional autonomous organizations that work in a constrained market environment and perform useful services. In order to achieve this, however, these new DAOs will need a clear corporate form, a regulatory anchor, and to focus on delivering products and services to regular people, but scaled through machine strategy. We toyed with the idea that the automation of company formation (Stripe Atlas) will combine with the outsourced human/machine assembly line (Invisible Tech) and distributed governance (Aragon) to create companies that scale frighteningly quickly.

So where are the systems that deliver most of the financial primitives without human intervention? Let's start with the fact that Facebook's digital currency Libra is far from being considered a form of decentralized finance. For starters, Libra falls on a permissioned or centralized network, meaning the governance structure consists of a fixed number of entities (29 institutions), although this is said to be only for the first 5 years from release. Nonetheless, Decentralized Finance has grown to hold over $589.9 million of value across its lending, exchange platforms, derivatives, payments, and asset management entities. A notable development comes from Maker -- the most popular decentralized protocol focusing on lending -- is considering to expand the assets it uses as collateral for its smart contracts that generate cash loans. Although Maker is only considering digital tokens such as Basic Attention Token, Ether, Golem, Augur etc. at this time, would it be crazy to think that in the near term we could see the likes of tangible assets such as land, property, and commodities in the form of security tokens included aswel?

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Source: DeFi Pulse

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

NEOBANKS & FINTECH: Ride-hailing apps are becoming the Uber of Fintech

Steve Jobs defined a key distinction that stuck with many entrepreneurs -- is your company a Product or a Feature? It's bad to be a feature -- you are just one widget in someone else's platform. It's good to be a product -- you fit into many environments and use-cases. What we are observing now is that Fintech product is being transformed into a platform feature by non-Fintech players -- specifically ride-hailing apps like Uber, Lyft, and Grab. 

These ride-hailing giants have built their empires by making the burden of payments a truly seamless experience for their customers. Which is why the potential for them to expand into Fintech and financial services far outweighs the need for new forms of transportation -- autonomous human-carrying Uber drones or Lyft trains. The kicker being that their robust platforms and/or large customer bases create ripe cross-sell opportunities. 

Take Grab -- the $14 billion-valued ride-hailing giant that acquired Uber's Southeast Asia business last year. Since then, Grab has faced growing competition from Go-Jek -- its +$9 billion-valued rival who is backed by Google, JD.com, and others. Forcing Grab to earmark financial services as a core pillar of its strategy for regional dominance over Go-Jek and financial incumbents who are disadvantaged by the lack of financial services infrastructure and unified credit scoring. Since then, Grab has partnered with Mastercard to launch a prepaid card to target the unbanked, spun out its own financial arm -- Grab Financial Group, which brings group payments, rewards & loyalty, and insurance to its drivers and customers, and recently announced a co-branded credit card with Citi. 

Uber's initial foray into financial services was the launch of Uber Cash -- a digital wallet allowing credit to be added in advance via prepaid cards. Since then, the popular ride-hailing app has partnered with Venmo for payments, Finnish-Fintech Holvi for offering financial services access to its drivers, Flexible car-leasing startup Fair for car leasing, a credit card in partnership with Barclays for loyalty and promotions, and a recent hiring spree showing signs of a potential New York-based Fintech arm -- much like that of Grab's. One of the interesting outcomes from such an arm would be the potential for a native Uber bank account, which would help remove the ride-hailer's reliance on the existing banking system -- Card processing fees alone cost Uber $749 million in 2017 -- to get paid and pay its drivers. Such a move would see Uber partner with cheaper and more agile low-profile FDIC-insured banks such as Cross River, Green Dot, or Chime, rather than have its own charter or partner with larger institutional banks. This is likely, as US-based ride-hailing companies such as Uber and rival Lyft have come under scrutiny by lawmakers to consider their drivers as employees rather than "independent contractors". Both Uber and Lyft argue that such a move would be cripplingly expensive -- Quartz estimates the cost to be $508 million and $290 million respectively. Our question is, to what extent would native bank accounts offset these potential employee-related costs?

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. 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.

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Source: Grab (via Business Insider), Grab Financial (via TheDrum), Uber (via Business Insider), Uber Credit (via Techcrunch), Uber-Lyft wage concessions (via SFChronicle)

ARTIFICIAL INTELLIGENCE: Proof that we have been training AI fakes to stab us in the back

In the 1933 film Duck Soup, actor Chico Marx is famously known to have asked, "who ya gonna believe, me or your own eyes?" Fairly meaningless in the 30s, but today, it's more relevant than ever. Let us explain. We know how the ever-expanding capacities of computing power and algorithm efficiency are leading to some pretty wacky technology in the realm of computer vision. Deepfakes are one of the more terrifying outcomes of this. A deepfake can be described as a fraudulent copy of an authentic image, video, or sound clip, which is manipulated to create an erroneous interpretation of the events captures by the authentic media format. The word 'deep' typically refers to the 'deep learning' capability of the artificially intelligent algorithm trained to manifest the most realistic version of the faked media. Real-world applications being: Former US president Barack Obama saying some outlandish things, Facebook founder Mark Zuckerberg admitting to the privacy failings of the social media platform and promoting an art installation, and Speaker of the US House of Representatives Nancy Pelosi made to look incompetent and unfit for office.

Videos like these aren’t proof, of course, that deepfakes are going to destroy our notion of truth and evidence. But it does show that these concerns are not just theoretical, and that this technology — like any other — is slowly going to be adapted by malicious actors. Put another way, we usually tend to think that perception — the evidence of your senses (sight, smell, taste etc.) — provides pretty strong justification of reality. If something is seen with our own eyes, we normally tend to believe it i.e., a photograph. By comparison, third-party claims of senses — which philosophers call “testimony” — provide some justification, but sometimes not quite as much as perception i.e. a painting of a scene. In reality, we know your senses can be deceptive, but that’s less likely than other people (malicious actors) deceiving you.

What we saw last week took this to a whole new level. A potential spy has infiltrated some significant Washington-based political networks found on social network LinkedIn, using an AI-generated profile picture to fool existing members of these networks. Katie Jones was the alias used to connect with a number of policy experts, including a US senator’s aide, a deputy assistant secretary of state, and Paul Winfree, an economist currently being considered for a seat on the Federal Reserve. Although there's evidence to suggest that LinkedIn has been a hotbed for large-scale low-risk espionage by the Chinese government, this instance is unique because a generative adversarial network (GAN) -- an AI method popularized by websites like ThisPersonDoesNotExist.com -- was used to create the account's fake picture.

Here's the kicker, these GANs are trained by the mundane administrative tasks we all participate in when using the internet on a day-to-day basis. Don't believe us? Take Google’s human verification service “Captcha” – more often than not you’ve completed one of these at some point. The purpose of these go beyond proving you are not a piece of software that is unable to recognise all the shopfronts in 9 images. For instance: being asked to type out a blurry word could help Googlebooks’ search function with real text in uploaded books, or rewriting skewed numbers could help train Googlestreetview to know the numbers on houses for Googlemaps, or lastly, selecting all the images that have a car in them could train google’s self-driving car company Waymo improve its algorithm to prevent accidents.

The buck doesn't stop with Google either, human-assisted AI is explicitly the modus operandi at Amazon’s Mechanical Turk (MTurk) platform, which rewards humans for assisting with tasks beyond the capability of certain AI algorithms, such as highlighting key words in an email, or rewriting difficult to read numbers from photographs. The name Mechanical Turk stems from an 18th century "automaton" or self-playing master chess player, in fact it was a mechanical illusion using a human buried under the desk of the machine to operate the arms. Clever huh?!

Ever since the financial crisis of 2008, all activity within a regulated financial institution must meet the strict compliance and ethics standards enforced by the regulator of that jurisdiction. To imagine that a tool like LinkedIn with over 500 million members can be used by malicious actors to solicit insider information, or be used as a tool for corporate espionage, should be of grave concern to all financial institutions big and small. What's worse is that neither the actors, nor the AI behind these LinkedIn profiles can be traced and prosecuted for such illicit activity, especially when private or government institutions are able to launch thousands at a time. 

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Source: Nancy Pelosi video (via Youtube), Spy AI (via Associated Press), Google Captcha (via Aalto Blogs), Amazon MTurk

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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FINTECH: From mobile networks in Africa to global eCommerce platforms, marketplace banking is on the rise

It has long been the promise of regulations like PSD2 or plain old web-forced transparency, that banking information and products get 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 fall and economic rents go to fewer winners that have strong APIs, integrations, and a nimble balance sheet. The promise is a utopian Fintech ideal in which one’s cash, savings, debts, bills, tax, investments, and assets exist in a single platform that is fast, secure, and globally accessible. And where the long tail of banks evaporates into commodity providers as their regulatory and distribution moat falls away. The symptoms of this happening aren't difficult to find either.

Take open banking platform Plaid – a US-based data aggregation platform that powers authentication and banking detail provision -- not "personal financial management" only -- for any tech startup that wants your bank account and routing number. The platform has built a major open financial data infrastructure for over 15,000 tech startups such as Venmo, Acorns, Robinhood, and Coinbase. It goes without saying that these startups Such success has driven the platform to the shores of the UK, in which it is already connected to over eight of the largest digital-only banks. The claim is that the platform will give UK Fintech businesses access to 70% of all personal current accounts and promote the democratization of financial service offerings to customers between the US and UK. Essentially, these open banking platforms -- Tink and Bud included -- aim to be the Amazon Web Services for financial service companies.
 
A less obvious but just as important example is in eCommerce, where marketplaces like Amazon are partnering with financial institutions to shift the flow of retail into its walled garden -- Bank of America for merchant lending, American Express for SME credit cards, JP Morgan for checking accounts, and so on. The goal here being to monetize a sticky business customer (SME) within the eCommerce platform over and over again -- remember the cross-sell is bigger than the sell. We found two noteworthy new developments in this department. (1) African mobile network operator MTN is building a digital marketplace platform to offer everything from financial products to household goods. The platform will be bootstrapped to MTN's existing mobile money app MoMo, with hopes of it becoming a leading full service banking and eCommerce platform, offering loans, savings accounts, insurance, as well as third party products. The reach of such a digital service would be massive with MTN operating in 22 countries with over 200 million customers. Compare that to the "Amazon of Africa" eCommerce giant Jumia's 4 million customers across 14 countries and you have yourself a juicy competitive advantage situation. 

(2) eBay has just announced a partnership with Santander to offer loans to its 200k SME customers – similar to the Amazon BoFA cooperation. The vision is that eBay have proprietary data that that could indicate SME revenues before those revenues even materialize -- for example: the traffic on product pages by consumers on the eBay website. Here the story is the same where financial institutions are leveraging the customer base and stickiness within eCommerce platforms to sell their products, with the intention to either up-sell or cross-sell them to higher margin products at a later stage.

Overall, it is clear that there is a movement to consolidate financial products and services into digital marketplace platforms is afoot. Should this concern existing banking incumbents? Not entirely, as such institutions still hold the resources sufficient to rapidly spin up their own Fintech startup -- Goldman Sach's Marcus and Well Fargo's Greenhouse. For those that don't, and rather partner with Fintech marketplaces -- the incumbent becomes the client of the Fintech -- the risk is clearly commoditization. Why would anyone choose the pain of shopping for and opening a third-party bank account, if one comes pre-installed in our virtual shopping assistants? Here, Fintech's have their cake and get to eat it.

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Source: Novobrief (article), Plaid screenshot (Plaid Blog), MTN MoMo (MTN Cameroon)

CRYPTO: GAFA doubles down on a crypto future, whilst regulators bite down on a crypto past

A few things here. Firstly, this week at its Worldwide Developer Conference Apple announced the launch of a mightily powerful computer deemed “the cheese grater”, a monitor stand costing as much as an iPhone X...just for the stand, and more importantly CryptoKit . Essentially, CryptoKit is a cryptographic developer tool that allows developers to build more security functionality into their apps with improved support and ease-of-use. Such functionality comes in the form of hashing, public and private key generation, and encryption needed to be integrated into iOS applications. Not to be confused with Samsung and HTC's phones that come with native crypto wallets. Yet, it goes without question that these companies (Apple now included) are reacting to the rising demand for crypto-focused products.

This is not the first time we are seeing the tech giant embrace crypto either. Last month it was announced that debit card and payment app ‘Spend’ -- which supports over 16 different cryptocurrencies -- now has integrated Apple Pay functionality. How this works is cryptocurrencies, such as Bitcoin or Dash that have been bought in / sent to the integrated wallet, will get converted at the point-of-sale for instant purchases through the ApplePay network. 

Another GAFA giant we know is embracing crypto is none other than Facebook with their soon-to-be-launched cryptocurrency GlobalCoin. What’s interesting is that, over the past few months, the social media giant has been hard at work trying to win over financial institutions and tech companies -- such as the Bank of England and crypto-firm Gemini -- around formalizing an independent foundation -- much like the Ethereum Foundation -- to govern the digital asset. We know that the coin will most likely be a stablecoin i.e., pegged to a fiat currency / basket of currencies / or other, making it desirable and easily marketable in emerging markets where local fiat currencies are economically unstable -- such as in Venezuela. The required funding will come from the fees Facebook charges partnering firms to run a node on the network. Essentially, these firms will need to stake their interest and commitment, and tie them into supporting the network. Facebook aims to have 100 nodes at the launch of GlobalCoin, with each node costing partnering firms as much as $10 million. Based on their tarnished reputation to safeguard the privacy and security of the social network's users, we think this is ambitious to say the least.

Facebook is not the only tech firm embracing crypto with a suspect reputation. Just last week, the US Securities and Exchange Commission (SEC) took legal action against social messaging app Kik -- regarding its 2017 sale of one trillion “Kin” tokens to over 10,000 investors, raising around $100 million. The premise being that the sale was not registered with the SEC -- a requirement under US securities laws. As such, the sale is deemed an “illegal securities offering of digital tokens.” 

It is not only the SEC that are leading the fight against previous instances of cryptocurrency-powered crimes. The Joint Chiefs of Global Tax Enforcement or J5 - a team of five criminal intelligence communities from Australia, Canada, the Netherlands, the United Kingdom and the United States whose purpose is to fight against international and transnational tax crime and money laundering. Currently, J5 has opened 60 different investigations specifically related to cryptocurrency-powered crimes. One of these is a Netherlands-based cryptocurrency “mixing service” called Bestmixer.io whose primary function was to hide the ownership history of cryptocurrencies, raking in 27,000 bitcoins ($200 million) over one year alone.

As many would consider the institutionalization of crypto by GAFA and the clamp down by global regulatory bodies a negative, its important to note that if adoption is key to ensuring the prosperity of these mechanisms, then such action needs to be taken to safeguard those vulnerable to exploitation and those that consider the inherent illicit activity too great a barrier to enter.

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Source: Apple Cryptokit (via Apple), Facebook Globalcoin (via The Information), Bestmixer.io (via Europol), J5 crime unit (via IRS)

ROBOADVISORS & INVESTING: Robinhood's latest $8bn valuation means that scale players need to wake up

There’s no such thing as a free lunch in life, but there are such things as free trades on Robinhood. What Chime did with banking, Robinhood has done with trading. Their massive 4 million active user base is enviable to every other Fintech. So then it's no surprise that the firm is estimated to be valued at $7-8 billion, following a $200 million fund raise with existing investors. Founded in 2013 by two former Stanford University roommates, Baiju Bhatt and Vlad Tenev, with the goal of  building a brokerage service that democratized access to the financial system -- specifically, stock trading and its significant barriers to entry (costs, fees, and minimum capital requirements). Since it's launch, millennial investors -- an elusive audience to traditional financial services firms -- have flocked to the service to trade stocks, options, cryptocurrencies and exchange-traded funds, at low-to-no fees.

Such success stems from the app's ability to earn fees via indirect channels such as marginal interest, lending, a $6 per month premium product called Robinhood Gold -- offering up to $1,000 of margin to trade with, and lastly, rebates from high-frequency trading and payment order flow. Here, third-party market makers, such as Citadel Securities, Two Sigma, and Virtu, pay Robinhood a rebate for processing trades on the app's behalf, apparently to offer better execution quality and prices. Whilst that sounds noble, it must not be forgotten that such a non-transparent practice -- as noted by CNBC -- could encourage brokers to send orders to market makers that offer the most generous rebates, and not necessarily the ones who offer the best prices for stocks. However, this is likely not to be the case as Robinhood's leadership has stressed that "we don’t take rebates into consideration when we choose which market maker will execute your orders. Also, all market makers with whom we work have the same rebate rate". Last year Bloomberg reported that Robinhood made in excess of 40 percent ($69 million) of its 2018 revenue from payment order flow.

Additionally, Robinhood is planning a U.K. launch to muscle-up against the likes of challenger broker Freetrade -- a London-based twin of Robinhood, and challenger bank Revolut -- who has indicated its intention to offer a free trading platform in the near future. The interesting aspect here is that Robinhood has been desperate to become a full-service bank, with evidence of this coming from last year when the company ended up with egg on its face after announcing its intentions to launch savings and checking accounts with 3% interest rates (30 times the U.S. national average) - despite not being FDIC insured (which is illegal). All too soon after this discovery was brought to regulator's attention, the product was rebranded as a "cash management program" and references to deposit protection were swiftly removed. Yet, the pursuit continues, as the company's second attempt has recently been made via an application for a bank charter in Push-to-Offer Traditional Banking Services with the Office of the Comptroller of the Currency (OCC).

Lastly, there are rumors that Robinhood is expecting a much bigger round of funding later this year, which could value the company at over $10 billion. This, coupled with the success of the company's latest commission-free crypto trading app, U.K. expansion, and launch of its full service bank, should make scale players in the industry such as Schwab, E-Trade, M1 Finance, and Fidelity fairly nervous. From zero-fee index funds, to zero-fee trading of single stocks. Fee-free trading apps like Robinhood, Vanguard, and FreeTrade have initiated a pricing war between scale players and themselves. So long as the strategy to fight this war remains: platforms and marketplaces who cross-sell products with the aim to retain customers and lock them into a sales cycle, this tech-enabled price war will squeeze margins down to zero. Last one to the bottom is a rotten egg.

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Source: Robo-Advisors with the most AUM (via Roboadvisorpros)

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Source: Robinhood (via Bloomberg), Robinhood Gold (Robinhood Blog), CNBC (article), Robinhood Crypto (Robinhood Blog)

CRYPTO: Are Stablecoins still poised to be crypto's saving grace?

With all the noise and hype around the recent large price movements of core cryptos like Bitcoin (BTC) and XRP, it's easy to forget the ones hard at work to minimise volatility risk in order to encourage crypto adoption among the skeptics. These are stablecoins of course. The core thesis behind them is that BTC was not used as a transactional currency because of its volatility, and therefore merchants and individuals would not rely on it as a unit of account or medium of exchange. This premise is not entirely true -- volatility is only partially explanatory of why BTC is not being used by consumers. In our view, the main barrier is not volatility but ease of use and form factor. It's just too hard to figure out how to actually pay with BTC or any other digital currency for real (i.e., non-digital) goods and services. And while there are attempts to put Bitcoin and other currencies into debit or credit cards, these are still early in market penetration. 

If you look at stablecoins themselves, there are two narratives to note. (1) Any floating currency needs to be collateralized, whether or not it is printing money algorithmically or has bots arbitrating itself against exchanges. Otherwise you cannot fund redemptions (and if you can't fund redemptions, then you are just printing specious moneys). Holding the peg to your desired currency basket, whether USD, yuan or Euro, requires being able to defend the currency with capital reserves. Any private capital reserve can be broken by a larger private capital reserve -- or even by a government actor. Consider Soros and the Bank of England. As a result, these coins are fragile and ripe honeypots for attack and manipulation. In the case where the reserve becomes so large as to be unbreakable, and where the currency is meaningfully used as a medium of exchange, it becomes a threat to the world's actual reserve currency, the USD. The US sovereign is unlikely to allow private parties to issue and own a digital dollar at scale -- though they may be catalyzed to do so publicly (i.e., central bank coins). These are not farfetched ideas either, with over 20 governments such as Brazil, Canada, Israel, and The Bahamas all considering the prospect of a Central Bank issued digital currency.

The second narrative is much more narrow -- private company networks that ride the blockchain rails need the equivalent of a Cash Sweep. Imagine opening up a Schwab brokerage account. Your free cash in a portfolio -- let's say 1.5% -- would get invested into a cash sweep vehicle, which could be a money market fund, or a trust company cash account, or something similar. For a crypto financial company, you are unlikely to want to hold a financial license for traditional banking or investment services. But you still need to manage the cash somehow. So efforts like UBS settlement coin, or any of the recent stablecoin projects, could fill in the gap of moving USD around within a limited sized network in order to reduce friction between going in and out of fiat. If the network gets so big as to include the entire economy, then it again pops up on the Treasury's radar. That's not to say it's a dead end. Banks print money by issuing credit all the time, they are just massively regulated to do so.

So where does this leave us? Non-financial companies such as Facebook and Samsung have admitted to considering their own blockchains for future native stablecoins. Facebook's reason for this is to provide its 2 billion user base with a centralised medium for international remittances, payment for premium content (e.g. games), and your attention (e.g., advertisements) across its website, Messenger, Whatsapp and Instagram. Samsung, on the other hand, wants your mobile phone to be your crypto wallet. Such non-financial companies are likely to be less risk-averse than traditional financial companies, and have greater incentive to disrupt the payments industry, with the added ability to execute at a faster, scalable pace. As a result, these companies may help defining future key growth drivers for both the global payment and the digital asset industry. But this doesn't mean that this won't create a red ocean where other big banks, social media networks and consumer electronics companies issue their own stablecoins to compete, adding "about as much competitive advantage as having your own .com address" - Bernard Lunn of Daily Fintech.

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Source: Autonomous NEXT Analysis