innovation

INNOVATION & PAYMENTS: Tesla entering the autonomous vehicle "space race" does not bring us closer to a Utopian future, yet

It's difficult to ignore the utopian dream of riding shotgun in a fully autonomous vehicle whilst chuckling at the seemingly prehistoric ideas of road rage, congestion, and side-mirrors. Yet, upstarts dedicated to making this dream a reality ingest massive amounts of venture funding with little return. Take transportation-on-demand app Uber -- who recently raised $1 billion for its Advanced Technologies Group (ATG) from Softbank, Toyota, and auto-parts manufacturer Denso (here). The aim of the investment is to accelerate the development and commercialization of automated ridesharing services, especially given that the company blames the bulk of its estimated $702 million net loss this quarter on costs attributed to human drivers (here). Question is, how sophisticated the software has become since the 2018 incident in which a driverless Uber vehicle struck and killed a pedestrian? Interestingly, Alphabet-backed and Uber-rival Waymo, boasts racking up over 10 million miles worth of autonomous driving data as a hedge against such fatal incidents. Up until last week, Waymo prided itself as the only upstart to have launched a dedicated commercial driverless car service (Waymo One). Enter electric-vehicle giant Tesla -- who promised an all-electric, 1 million car fleet of self driving Tesla taxis by the end of 2020. Some, of which, will come from existing Tesla's on the road -- which will be used as autonomous taxis when their owners do not need them. This is noteworthy because Tesla has amassed over 1 billion miles worth of 'Autopilot' data, which was used to build their latest custom-designed artificial intelligence driving chip -- claimed to allow Tesla's to pilot themselves. The only missing pieces to the puzzle are (1) regulatory approval for such vehicles to legally operate and (2) "feature-complete" software to prevent any life-threatening incidents, both of which are assured to be ready for 2020 year end launch. 

Whilst there's no doubt that we have a "space race" type scenario between digital transportation upstarts: Waymo, Uber, and now Tesla -- all competing to arbitrage a phone's GPS to deliver custom mobility solutions with greater precision and experience than a human transaction can. There is concern around the impact that autonomous taxis will have on the existing infrastructure, especially what they will do in-between customers: park, go home, or drive around aimlessly. All of these have significant congestion implications. Such implications could incentivise upstarts aimed at offering an aggregated view of transportation options available to customers, such as CityMapper -- whose latest subscription offer 'Pass' -- exemplifies how to take this one step further by building an instantiated financial product on top of abstracted digital infrastructure (here). Until then we will continue to dream.

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Source: BusinessWire (Uber's Advanced Technologies Group $1 billion), Waymo, Techcrunch (Tesla Ridesharing App), Techcrunch (Uber vs. Tesla), Gizmodo (Citymapper Pass)

FINTECH: Amazon R&D Spend is 2x JP Morgan's Entire Tech Budget

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Yet another surprising data point in the 2018 Internet Trends report is the amount of money American companies devote to Research and Development. Tech companies spend 18% of their revenue on R&D and Capex; with Amazon at $34 billion, Google at $30 billion, Apple at $24 billion, and Facebook at $15 billion, with the industry total at approximately $260 billion. More than half of those GAFA figures are flowing into R&D, an investment into the future. We are not sure if that includes the free cash used for acquisitions, but an acquisitive posture in the industry by incumbents is also great at motivating entrepreneurs to start companies in the space and contribute to overall growth.

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This clicked for us because we were recently at a Fintech event at a top-5 global custodian, where the audience discussed how historically the financial services industry itself has not had an R&D function, and that Innovation and Corporate Venture arms of financial incumbents targeted at the Fintech industry are now essentially catching up. In fact, this was true for all of venture. In 2010, global venture capital investment was $45 billion, of which less than $2 billion was in Fintech. That's less than 4% and completely out of balance. Remember that financial services as percent of GDP is about 20%. In 2017, global venture capital was $130 billion, with Fintech funding at about $30 billion -- that 23% looks far healthier.

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But when we look at financial incumbents, a similar level of future investment is simply not present. We had done a deep dive on tech spending and Fintech readiness by big banks last year, called Bankosaurus. We found that the biggest spender was JP Morgan, with a $9 billion tech budget, of which about $6 billion flowed through the P&L. That's not R&D, but the cost of keeping all tech running, plus investments in technology. In the graphic below, you can see that few banks have more than $1-2 billion to devote to technology, and even less to devote to Fintech. Total tech spend is 5-25% of costs for most banks, which implies 3-12% of revenue, give-or-take. Haircut that by 50% for keeping the lights on, and you have 1-5% devoted to R&D. Thus the leading banks are spending 5% of revenue on "change the bank" initiatives, with the rest quite behind. Not a pretty picture, and one that has to change for finance to remain relevant.

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CRYPTO: Why Bitcoin Falls Down

Remember the mantra. Tech innovations swing between the extremes of meme and electricity. Memes are human sentiment, the animal spirits of the market shooting up and crashing down. Yahoo message boards, Reddit posts, Telegram communities, excited media articles. Electricity, however, is real. It's discovery and taming led to an industrial revolution, light and progress. Today's laundromats might be boring and tame, but imagine the first robotic clothes washer animated by electric powers unseen. All tech innovations have a bit of each. Crypto is enjoying its meme moment. Why is Bitcoin going down, after it went up? Let's talk about the factors that are adding up to the current sentiment.

(1) The first is definitional -- Bitcoin (and all crypto) is a volatile early stage technology asset and these massive run-ups and falls are a feature of the asset class, not an exception.

(2) The second is that data points about hacks and Ponzi schemes have been dominating the news. From Tether (which may be trying to print billions of sovereign currency) to Bitconnect (likely Ponzi scheme with a proprietary coin falling from $2.6 billion in marketcap)  the Coincheck hack ($500 million Japanese exchange hack), to Arise Bank ($600 million ICO shutdown by the SEC), billions of USD equivalent value keep are literally evaporating from the crypto economy due to bad actors. These issues are not new in the space, but now there is mainstream attention with nearly at trillion at stake, and the regulators are starting in enforcement actions.

(3) The futures market that so many crypto natives were excited about allow professional investors to actually take a bearish view. Oops. This sentiment should reflect back into the price mechanically.

(4) Decentralized systems will supposedly erode the control of centralized systems. So we should not be surprised when centralized systems fight back when coopted for this purpose -- from Facebook's Bitcoin ad block and regulator crackdown on fake bots, to the refusal of credit card issuers and banks to keep financing crypto purchases, to asset managers like Vanguard announcing they won't create vehicles for the asset class.

None of this should be new information. If in 2002 you asked the music labels whether they like Napster, not only would they answer with a resounding NO, but they would talk about Digital Rights Management and all their plans to fight back. Welcome to creating product-market fit.

BLOCKCHAIN: We Need Cryptofax, not Equifax

Here are some rhetorical questions about the current state of financial data storage. How is it possible that Bitcoin gets Jamie Dimon's misplaced finger-wagging, while Equifax can lose 140 million citizen identities? Did any of the individual consumers, whose information was hacked, knowingly consent to allow Equifax (or its oligopoly cousins) to indefinitely scrape and store financial and identity data? Did they choose to participate in this particular network, the way that millions of people have chosen to participate in public blockchains? What's even more spectacular is that the but-for causation of the hacking, in addition to the criminal activity of the hackers, was Equifax's negligence in failing to download a server upgrade for more than 5 months

There is no amount of improvement you can add to a horse and buggy for it to keep up with a Tesla. The core competency of this credit reporting agency is meant to be data security and identity. And yet one of its administrative portals used the credentials "admin/admin". Why does Equifax even manage servers when cloud providers like Amazon literally provide modern infrastructure for this use case? There is regulatory promise in Europe to create incentives to modernize such businesses, with the coming implementation of the General Data Protection Regulation that would result in up to a 4% revenue fine for a data breach. That's nearly $150 million on $3 billion + of revenue.

But there is a much better solution called blockchain, which has literally been built to be an incorruptible source of truth for digital information. Fintech companies like Token have built GDPR-ready APIs for open banking. Countries like Estonia are already running a blockchain-based national identity systems. Enterprise tech providers like IBM have an out of the box solution for the banking industry. And dozens of crypto-companies are tackling the challenge using public blockchains. It is time to get into the Tesla and put the horse carriage in the shed.

ONLINE BANK: Neobank Contrast: Revolut or Simple?

Source: Revolut

Source: Revolut

Which banking team do you think young developers out of university will be more excited to join? Is it neobank Revolut, which is publicly committing to include cryptocurrencies like Bitcoin, Litecoin and Ethereum into its mobile app based on community feedback? This development would turn Revolut into both a crypto-wallet and an app-based exchange in the long term.

Or is it Simple, the famous neobank that BBVA Compass acquired in 2014 for $117 million, wrote down $60 million last year, and that continues to apologize to its customers for forgetting how to innovate? And why is Simple mired in integration while Revolut captures the imagination of its users? Because it has been re-writing a core processing system from scratch, and is talking about budgeting and planning when the world is talking about conversational interfaces and virtual assistants.

Vision and mission are the differentiating factor in our economy. Without vision, there can be no purpose. Without purpose, how can organizations attract a world-class team? What is your vision?