payments

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)

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

After years of existential angst from finance executives about the big tech companies entering financial services, it is time to pay the piper. Excuses like regulatory cost and complexity, strategic disinterest, and complexity of products are incrementally falling away each and every day. Across every single vertical, something is nipping at the banker's ankles. The splashiest announcement came from Apple, which launched a credit card backed by Goldman Sachs (the storied mass retail financial firm!) and transacted over the MasterCard network. You can sign up for the card directly from your phone, which integrates it into Apple Wallet and Apple Pay, and provides a 2% cash back on all transactions made with ApplePay. There are no fees on the card other than an interest rate on credit.

For Apple, this financial product is one of a thousand features within their platform. It is no more or less important than music, video, news, email, or podcasts. The presence of credit makes customers more sticky within the ecosystem, offering 3% cash back on all Apple purchases. For Goldman, this is a leapfrog into the consumer market, riding a much better recognized and respected retail brand. Finance for the wealthy is just not cool anymore in the era of Bernie Sanders and Alexandria Ocasio-Cortez.

Meanwhile in India, Google and Facebook are battling with Paytm over payments. Facebook's rumored cryptocurrency will target sending remittance over WhatsApp. Google, on the other hand, is working on a service to add a savings account to money movement. This account will be backed by custodied gold, and may include expanded wealth management products -- from mutual funds to insurance -- in the future. None of this should be surprising, as Chinese tech companies have been providing mobile search bundled with online shopping, saving, investing and payments for the last five years. These Asian companies are moving into Europe and the US, sometimes by investing in neobanks or through acquisitions. Our American tech companies are moving into Asia.

Let's round out the whole thing with IBM, the OG of American tech companies. Several young firms like BitGo, Gemini, and Kingdom Trust have all built custody for crypto assets, including a notable recent announcement from Trustology about bringing custody to the iPhone. But IBM is now moving into the space, leveraging its expertise from working on enterprise blockchain projects via Hyperledger. What's important to understand is that financial products -- including their embedded capital, credit and investment risks -- are transforming from legal paper to software. And as that happens, it is technology companies that are best positioned to hold, analyze, report on, and safekeep our money. Among the incumbents, Goldman, JP Morgan, BBVA, Santander, DBS, BlackRock, Schwab, Fidelity, NASDAQ, ICE and several others get it. So many others think it is a false alarm. Which side are you on?

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

PAYMENTS: Is Digital Banking hurting the Underbanked?

Here's a conundrum. You don't have a bank account and therefore cannot set up a digital payment option. Now try ordering and paying for an Uber! This example reveals a simple truth: digital services -- and in particular digital financial services -- can be regressive (benefit the haves, hurt the have-nots). As countries like the United Kingdom, China, India and the Nordics move towards demonetization, driven by technology and policy, the social and structural implications of getting rid of cash could make things a lot worse for the most vulnerable. Based on a recent UK report linked below, lowest grade workers and the unemployed use cash 49% of the time for their purchases, while those in the highest professional occupations use cash only 39% of the time. And conversely, card use is split at 37% (low income) vs. 44% (high income).

Weird. Fintech is supposed to be a democratizing force that allows anyone, regardless of account size, to access quality financial product. Let's stick with the UK for a clean analysis. If you look at penetration of mobile devices, 85% of the populace owned a smartphone in 2017, massively up from 52% in 2012. So that means, generally speaking, most people have some payment-enabled digital hardware that they can lug around in their pocket. And yet that device is not the financial key (yet) for the unbanked and underbanked. Why? One hypothesis is to look closer at the rails on which money travels, and their interoperability.

The first is paper cash. It requires no intermediaries, at least in concept, and therefore 100% of the population is able to "self custody" a little bit of it under their bed, and use it for commerce. The second is banking. Banking intermediates the financial system, and allows for modern services to function and thrive. But it also has an onboarding cost, set by the banking industry's risk tolerance, set by the legislator and the regulator, which may be prohibitive to some share of the population. It excludes "bad risks" by design. Banking also introduces costs into moving money around, which must be covered through business activity, and often warps into unethical economic rents (i.e., overdraft fees). When we talk about mobile payments, what we are really talking about is extending the banking system into the population that has adopted mobile phones -- and this excludes unbanked mobile users. As homework, we suggest the reader think about WeChat (mobile UX, media industry intermediation, government rails) and Bitcoin (mobile UX, hardware industry intermediation, blockchain rails) as being a solution to avoiding the regressive outcome. 

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Source: Access to Cash (Report), Consultancy UK (2017 mobile penetration), Latin America's Banking Revolution (Euromoney)

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)

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

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

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

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

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

PAYMENTS: $3 Billion revenue video game Fortnite used for money laundering using in-game currency

Human nature does not change. We can have arcane towers of financial services and regulatory architecture, but the outcomes are a rhyming echo of our DNA. Let's start with this: Fortnite, a virtual place where 200 million people spent time playing a game in 2018, earned $3 billion for its parent company. The video streamer most popular for playing Fortnite on (essentially) TV earned $10 million for the entertainment he provided to 20 millions followers. One of his videos gathered nearly 700,000 views -- for comparison, Conan O'Brien gets about 1.3 million per night.

Fortnite makes money by selling cosmetic upgrades to players, and since they inhabit this rendered world like any other social network, our dopamine center and social pressures motivate purchases for status. Given the payments infrastructure of this game and its virtual currency (not on the blockchain!) are comparatively weak, criminals have started using in-game value for money laundering. A report from The Independent linked below finds that stolen credit card credentials are being used to purchase game currency and then cashed out at discount on eBay. Additionally, over 50,000 instances of online scams related to the game made their way to social media per month. Welcome to the Internet, everyone! We can't help but remind you that Steve Bannon (yes, that one) and Brock Pierce (EOS, Tether, Puerto Rico, etc.) once ran the largest World of Warcraft virtual money exchange.

So should we bring down the financial regulators on Epic (the maker of Fortnite) as hard as New York state came down on Bitcoin companies with the BitPay regime, freezing innovation? Should KYC/AML be required for all video games? Under the Chinese model, Tencent's "Honor of Kings" mobile game generates $2 billion in revenue per year and is under the same strict government control/license as financial products. Players are checked against a registration database to control for age and name, and (we expect) the play time data flows into a social credit score. But recent studies of KYC/AML policies persuade us otherwise. When looking at the amount of criminal proceeds actually seized by authorities based on those policies, the amount is less than 1%. The cost may not be worth the outcome.

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Source: Fortnite (IndependentSlateBitcoinist), Fortune (Streaming), Interest.co (Ron Pol on AML ineffectiveness), GamesIndustry (Tencent database), AML fines 

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

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

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

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

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

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

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

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

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

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

2019 FINTECH PREDICTION: Collision of Fintech Bundles and Pivots to New Channels

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Unicorn fintech startups like Robinhood, Acorns, Revolut, Monzo, N26, Betterment, SoFi, Lending Club and others will all converge on the same multiple financial product offering across lending, banking, payments and investments. This is driven by the need to cross-sell new revenue in order to justify high spending on customer acquisition. Large financial incumbents will be following the same bundling playbook through their mobile apps, intensifying the progress of Goldman Sachs, JP Morgan, UBS, DBS, BBVA and Santander along this axis. Tech and finance (as well as incumbents and startups) will all be pursuing the same customer-centric solution for the digital consumer. Great for the customer.

As a result, 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. As a result, at least one unicorn will implode when the cross-sell does not materialize. Most likely this will look like a devaluation of the equity component in the capital stack, such that new money is raised to maintain profitable marginal operation, but the hundreds of millions already invested in the business are mere sunk cost.

New revolutionary entrants will use channels that are foreign to existing Fintechs and financial incumbents, like video, Twitch, Discord or AR/VR. One example would be credit-as-a-service, similar to Stripe payment-as-a-service, built into a B2B customer journey. Another would be native payment systems for digital experiences and environment. Yet another idea could be social currency within chat streams for video gamers. It will be foreign territory for many, and the key to success is correct market timing balanced with adoption.

Source: Images from Pexels, 2019 Keystone Predictions Deck

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

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

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

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

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

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

PAYMENTS: Can Facebook be trusted to provide Whatsapp Payments to 200 million users in India?

Facebook's hair is on fire again. A set of company emails from around 2015 have been acquired by a UK parliamentary committee, despite being sealed by a court in the United States. The emails were on a private computer of a person of interest (Ted Kramer, CEO of Six4Three) who was traveling in the UK. The sovereign issues are interesting in themselves, as global technology companies stretch across jurisdictions to be subject to the laws of each one of them. Case in point is the US arrest of the Huawei (massive Chinese phone manufacturer) CFO in Canada as part of a feud on intellectual property and selling goods to economically sanctioned countries like Iran. So, if you're running a tech company with global impact, maybe just telecommute lest you be snatched by a regulator.

What we learned from the emails is that Facebook acts like a monopoly, using its control over APIs and data to (1) starve or (2) reward players that help cement its position at the center of the attention economy. It is ruthless in its taking and leveraging of customer data, it does so with minimal warning, and it is largely unconcerned about the social consequences unless they have negative PR implications. What else is new ? It's a successful capitalist organism following its incentive structure. But from this vantage point, let's take a look at Whatsapp in India.

Whatsapp has 200 million users in India, and like several other tech companies, wants to power payments to this population. It has formally written to the Reserve Bank of India to get permission. Why do we think India is a better target for tech company wallets than the West? A few reasons. The first is the large percentage of the population that is unbanked, and therefore not served by a financial incumbent, but served by a chat app. The second is the cost of customer acquisition is far lower when a user is already captured, vs. when you have to convert them cold. And third, consumer preferences have not been set with "good enough" services as in the West, and China's example shows the way. A takeaway concern we have is around Aadhaar, India's digital government identity. If Facebook can't be trusted with data we permission it to store, can it be trusted to ingest the equivalent of Social Security numbers?

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Source: Guardian (Huawei arrest); Slate (on Facebook emails), CNN (Facebook), Telegraph India (Whatsapp)

VIRTUAL REALITY: Headset shipments grow to almost 2 million per quarter

Simple, feel good news. IDC updated its mixed reality headset shipment tracker, and people are buying more devices. Relative to a year ago, sales went up by about 10%, and global shipments are nearly 2 million per quarter. Headsets that don't have a screen (like Samsung's Gear VR or Google cardboard) are becoming less popular, while intrerest in standalone headsets that come with a screen and a processor seem to be growing. Facebook's Oculus Go would be an example (as an aside, the thought of Facebook knowing what we look at in a VR environment seems inevitable). The rest -- or about half of all the shipped devices -- are those you plug into a computer or a Playstation.

Dedicated Augmented Reality hardware is doing much worse in the retail market, shipping a couple of dozen thousand for even the best biggest brand. We think this is due to (1) every Apple and Android phone manufactured from now on being an AR device, and (2) folks waiting for Magic Leap and the next gen Microsoft Hololens. Further, as we had explored previously, Microsoft just secured a $480 million HoloLens contract with the Untied States military. It's likely that some of these early technologies will fail to be attention platforms, but succeed at being government or enterprise technology. 

To bring it back into financial services, we recently attended Fintech Connect to moderate a panel on artificial intelligence. There, we came across digital consultancy Softserve, which built a fun prototype for the conference simulating a payment experience using hand gestures within a Magic Leap environment. Payment menus appeared in the view, and a camera that read hand gestures could understand whether you were confirming a transaction. This suggests different ideas -- from building a virtual checkout located physically next to a purchased good with a rendered interface, to the sale of virtual goods in a physical environment. And the folks at Magic Leap are willing to pay developers up to $500,000 per app to fill up its barren app store.

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Source: IDC Tracker (release), Verge (US Army contract), Game Daily (Magic Leap), Hollywood Reporter (Infographic)

PAYMENTS: Amazon working towards digital wallet retail adoption

News broke that Amazon is back at trying to push its payments rails adoption into retail. The gist seems to be that it plans to do QR payments using the Amazon app in restaurants and gas stations as a pilot. No NFC reader necessary. This is regular customer behavior in much of the Asian world, but foreign to Americans who still cash in wet-signature checks at their local bank. We've discussed financial products within Amazon's strategy before -- mere features to increase platform adoption. In this way, pushing its wallet into physical commerce from e-commerce makes sense, as it increases the number of people who might want a digital Amazon wallet used for consolidated shopping. The other notable point is that Amazon has Whole Foods and other retail properties, which means it can choose to be its own first customer (as per the Strategy framework).

So where can this go? Looking at Hong Kong, both Ant Financial and Tencent have announced a plan to add QR codes as a payment method to the public transport system. Instead of tapping a credit card against an NFC chip, or swiping a Metrocard, or (worst case) dropping in a metallic coin, commuters will just use a payments app that takes a picture of the code, and automatically send a payment in that encrypted direction. For reference, 92% of China's 970 million mobile users have already used mobile payments. 

Further, Switzerland is planning also to introduce a QR-based billing system into the economy. These can be used at both the consumer and enterprise level, with B2B payments as a particularly compelling use case. Instead of entering in IBAN numbers and bank accounts, a generated QR code can contain all of this information inside the image. Perhaps this type of initiative can work to train enterprise users for QR adoption, and spread into consumer mind-share. As a relevant aside, transferring digital assets via QR codes read by an app on your phone (perhaps a phone running a local wallet) would be one way that crypto currencies make their way into the mainstream economy.

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Source: WSJ (Amazon pay wall), The Verge (Amazon), Stratechery (Amazon), TechCrunch (WeChat, Finextra (Switzerland), UBS (Swiss QR)

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

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

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

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

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

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

BLOCKCHAIN: Goldman, JPMorgan and Ripple Fight About International Payments

Here's the old analogy about the correspondent banking system. Let's say you want to fly from Chicago to Hong Kong. Well, to save on costs, you might take a local flight from Chicago to New York, then from New York to London, and then from London to Hong Kong. Or maybe the Travelocity algorithm will route you to Dubai for the optimized fare, who knows. And so it is with international payments -- an American business might try to pay its Chinese supplier, and the bulky enterprise payment will hop between various accounts in correspondent banks across countries, trailing instructions as to where to park this money. Cross-border payments volume is about 15% of total payments in the world, and within that 90% is business to business, representing about $300 billion in revenue.

The above system is clunky and slow. It's also expensive. Think about what Transferwise has done for consumer remittances, crushing bank revenue of 3% for FX spreads and 3% for convenience fees into 0.35% + $0.80 per transfer. Now if such cost savings could be applied across international payments, businesses would have a lot more to put back into their pockets. Anyway, all this is context. The three news items in this theme are (1) Ripple talking about how its xCurrent 120 bank payments blockchain may involve the cryptocurrency XRP, (2) Google and Goldman investing $25 million in Veem, which uses Bitcoin to replace correspondents, and (3) JPMorgan going public with the Interbank Information Network to 75 banks, including Santander and Societe Generale.

It's odd that all three of these items came up essentially within a week. The approach is different, but the target is the same. Ripple's game is to leverage its proprietary currency as the accounting unit, and thereby also inflate the market cap of this digital assets. It seems unlikely that banks would endow a third party's coin with such value (rather than say the utility settlement coin), but anything is possible. Veem has grown very quickly in just three years to 80,000 customers by focusing on small business, and its CEO had previously sold a business to Western Union. And the JPMorgan effort is expecting to see 15,000 payments a day in the new network -- though the company had previously had trouble getting the rest of the industry to adopt its Quorum solution. All that said, there's $300 billion up for grabs.

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Source: Autonomous NEXT (Payments Pools), FT (JPMorgan), CNBC (Ripple), Forbes (Veem)

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: Mastercard League of Legends Sponsorship and the Censorship of Attention

Mastercard has thrown a sponsorship behind one of the most popular e-sport games, League of Legends. We think finance people should pay a little more attention to next-gen attention machines, and competitive video games are a black hole for user growth. As symptoms, we point to the $1 billion acquisition of Twitch by Amazon, or the $400 billion market cap of Tencent with an $18 billion revenue run-rate from its game division. Further, e-sports are growing massively as an audience aggregator, with over 300 million people globally. Some events (e.g., League of Legends finals) command 40 million concurrent viewers, larger than many traditional sporting events (e.g., 20 million for the NBA finals). Perhaps not surprisingly given the Tencent example, over 50% of that attention comes from Asia Pacific.

What does this sponsorship really mean? As far as we can tell, it's a combination of (1) banner branding during the games themselves, and (2) creation of rewards related to the video game in Mastercard's Priceless program. Rewards include behind the scenes access, preferred live stadium seating, and the chance to test-drive computers used by the "athletes" at the World Championships. To be eligible for these scarce experiences, users have to input their Mastercard information as a payment rail directly into the League of Legends game platform. What is there to purchase inside such a video game? Usually cosmetic upgrades and other microtransactions -- $1 billion worth of revenue for League of Legends.

Going back to the Asian fintechs: video games are a gateway to messaging, messaging is a gateway to payments, payments is a gateway to banking, savings, lending, and investments. In addition to those watching these games, there are also 200 million active players in these ecosystems, all of which could become a Mastercard user. Further, starting at the attention end locks people into a brand that they actually like, rather than tolerate. That's why entrepreneurs have been trying to "gamify" finance, not "financialize" games, though such financialization is now happening through tokenization and cryptocurrencies. The last bit we'll leave you with is that Chinese regulators think video games to be such an addictive and powerful vector, that they are working on laws that limits time spent and number of new titles released. A freeze on new release approvals has wiped out over $100 billion from Tencent's marketcap.

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Source: Mastercard (Press release), Newzoo (Esports market size), Statista (number of players), BI Intelligence (number of viewers), Fortune (Chinese Video Game regulations), Newzoo (Tencent revenue), PC Gamer (LOL revenue)

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

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

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