payments

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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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)

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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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)

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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PAYMENTS: Chinese WeChat Pay follows Alipay into Western Markets, which could mean tokenized digital finance for all

New attention platforms create the opportunity to re-negotiate market share and consumer behavior in open frontiers. Mobile commerce leverages the increasing attention spent by users in phones to design elegant and high-conversion shopping experiences for anything from clothes to food. Nowhere has this been more successful than China where such shopping and lifestyle experiences are augmented by financial services after the onboarding of a few million customers, making the experience stickier -- a great example of this is China's version of Uber called Didi Chuxing which sells insurance, loans, and wealth product to its 550 million users via its app.

We have highlighted before how eCommerce giant Alibaba's financial arm called Ant Financial has partnered with 7,000 Walgreens locations in the US on accepting Alipay. The business rationale is that Chinese tourists abroad are used to paying with QR codes on their mobile phone and do not have credit cards. This initiative would make the lives of that target audience easier. Tencent's multi-purpose messaging, social media and mobile payment app WeChat Pay seems to be following in its competitor's footsteps, announcing its plans to grow its cross-border business into Europe, in hopes of capitalising on over 16 million Chinese tourists who visit the region each year. The Chinese mobile payment app has already begun to expand its list of merchants within Europe with two of the first examples being Paris-based department store Le BHV Marais, and Schiphol Airport in Amsterdam.

But why should WeChat Pay bother with Western markets? Firstly, 32% of the transactions made by tourists abroad were with a mobile phone in 2018. Additionally, 90% of Chinese tourists admitted that the lack of merchant support in destinations abroad prevented them from using mobile payments. Therefore, growing its merchant network abroad will help boost volumes by a considerable amount. Secondly, mobile wallets pose a direct threat to card networks competing in Europe such as UnionPay, Visa, and Mastercard, who miss out on large chunks of transaction fee revenue as more consumers are enticed by WeChat Pay and Alipay's attractive fees, ease of use, and overall stickiness. In China, such benefits have culminated in 92% of consumers using either Alipay or WeChat Pay. 

Another point we love to make is that the presence of such QR-code based payment platforms would train western staff in retail locations to use QR-codes to process value transfer. Tokenized digital finance enabled by QR-coded mobile wallet platforms -- from key management to open banking to cryptocurrency -- becomes second nature to these new consumer bases. So would it be wrong to cheer these platforms on?

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Source: Autonomous NEXT Analysis (2019 Payments Report), 2018 Trends for Mobile Payment in Chinese outbound tourism (Nielsen), ChinaDaily (Article), Airport Review (Article)

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

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

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

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

VIRTUAL REALITY: Enterprise applications of VR prove we are on track for a $200 billion mixed commerce market by 2025

We stand by our position that 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. Yet 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. Billions 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. Last week, Facebook doubled down on the former enterprise-centric use case for mixed reality -- announcing its Oculus device-management subscription for enterprise users. The subscription will cost $180 per device per year and promises "a dedicated software suite offering device setup and management tools, enterprise-grade service and support, and a new user experience customized for business use cases" (see here). Evidently, companies deploying mixed reality solutions generally see better customer retention, satisfaction and operating metrics. Take VR surgical training platform OssoVR -- who claim to have witnessed a 230% improvement in performance by surgeons training in VR. Whilst Walmart admits to VR training boosting employee confidence, retention, and overall training test scores by 10-15%. And let's never forget the VR training platform for cooks in fast-food giant KFC's Chicken Mastery program -- the nightmare-sh and BioShock-esque “escape room” replete with narration from an omnipresent, mildly demonic Colonel Sanders. Apart from giving trainees a mild post-traumatic stress disorder, the training platform (on average) reduced instruction time by 60%.

In financial services much of the framework-setting falls to a centralized function, whether that's a Chief Investment Officer creating portfolios or a more decentralised one i.e., branch or advisor office role assisting in the task of consolidating accounts, or discussing mortgage finance options. Yet realistic presence and emotional resonance, via a truly immersive experience, still matter. Facebook Reality Labs, recently announced, that it's working on this -- bringing full-body avatars to its Oculus experience. Will this allow us to emotionally connect with others in a virtual setting or merely remind us that virtual worlds have no place for such complexity? Either way it's important to note that in our latest payments report we estimated the install base for AR/VR active devices to reach 1 billion by 2025, fueling a revenue pool for mixed commerce of $200 billion at the same time. Seemingly, we are on track.

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Source: Oculus for Business, KFC Virtual Training Room (Youtube), Facebook Full body VR (via CNN)

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)

NEOBANKS: T-Mobile offers a bank account with all the perks

Following a soft launch in November 2018, T-Mobile has officially taken its Money checking account live for all T-Mobile customers in the US. The telecommunications company has joined forces with digital-only MobileBank who is operated by Customers Bank. Yes, you have to be a T-Mobile customer to take advantage of the account, but it does come with some competitive perks such as: 4% yield per annum on balances under $3,000, full mobile platform payment (e.g., ApplePay or GPay) support, and comes with a Mastercard. There are no minimum balance requirements and no fees to keep it open, however, because T-Mobile Money is not supported by a major bank such as BoFA, it is likely to incur ATM fees. Such perks are indicative of a focus towards a younger market who like the idea of high annual percentage yield, whilst keeping the overall account balance low due to lower incomes -- hello Goldman's Marcus. So why is this notable news? Whilst telecommunications companies offering financial services in the US is not necessarily new, with examples like 2013's "Softcard" (originally called "Isis") - a mobile payments system created from the unique partnership of Telcos -- AT&T, Verizon and T-Mobile with Financial Service companies -- Mastercard, Visa, and AMEX, which subsequently failed due to low customer adoption. We should see more resiliency from the T-Mobile Money account as MobileBank gives T-Mobile an out-of-the-box solution to offer to their 73 million strong US customer base without the need for large capital outlays or significant risk exposures to do so. However, regulatory risk is a major factor at play here, which could be financially crippling if something were to go wrong at a time when T-Mobile Money is regulated as a Financial Services Provider.

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Source: MarketingDigest (SoftCard), CookiesandClogs (Isis), T-Mobile Money

CRYPTO: Coinbase's new Visa debit card wants to assimilate cryptocurrency and fiat accounts

We still believe that the absolute largest roadblock to economic activity using cryptocurrency is the barrier to entry in user experience (followed closely by financial instrument packaging and bank buy-in). And in our write-up of Samsung's crypto phone gamble, we stressed that there should be no difference -- from the customer view -- in using a credit card in a digital wallet, and using a self-custodied digital asset. Well it seems the folks over at Coinbase were paying attention, as last week the crypto trading website unveiled a Visa debit card that lets users buy things with fiat money converted from cryptocurrency stored in their online Coinbase wallets. Users can take advantage of the full neobank treatment with Coinbase's app providing nifty visualisations on your spending behaviour, and security controls such as disabling the card if it gets lost or stolen. The card will only be available in the UK, with a wider European release to come later this year. UK users can expect to be charged a 1 percent transaction fee and a 1.49 percent conversion fee, totalling 2.49 percent for every transaction using the card (2.69 percent in Europe and 5.49 percent elsewhere). These fees seem high when we compare them to the C2B credit card transaction fees for US-based retail and online merchants at 2.2 percent and 2.52 percent respectively, per $100 transaction -- as outlined in our latest Payments keystone report. The big question is -- is this new? and our answer is not really. Revolut, amongst others, has offered the ability to make transactions using cryptocurrency for well over a year, however, the merchant doesn't actually receive bitcoin, rather the app does a conversion back to fiat to make payment. From a transaction standpoint, we see Coinbase as no different, as they are simply taking exchange custodied wallet holdings and converting them at the spot rate to make payments. Cryptocurrency-native transactions are difficult because the distributed ledger (Blockchain) requires each transaction be verified through network consensus before it is finalized, which for Bitcoin is 10 minutes -- imagine waiting 10 minutes for the credit card machine to print the transaction slip?. What is notable about Coinbase's card is that it helps cryptocurrency adoption by assimilating one's crypto holdings at Coinbase with their fiat holdings at a bank, promoting a better user experience than before.

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Source: Coinbase (Coinbase Card via Twitter), ComputerWorld (Coinbase Card)

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)