INSURTECH: Haven and Lyft make Insurance into a Feature, not a Product

In today's monolithic, financial incumbent world, manufacturing financial product is the highest honor. Picking investments, underwriting insurance, extending credit, powering payments -- these are the best-paid and most defensible careers in finance. Yet we are in a multi-decade transition that rotates the orientation of all industries away from manufacturing product that is "pushed" at consumers, to aggregating consumers that indicate the features to be built and "pulled" from a platform. Looking at the most powerful insurance companies, nearly all are organized as product-first corporations with extensive distribution and intermediation value-chains, protected by sticky rent-taking along the way. And on top of that, insurance companies get to run third party capital through massive, captive asset management businesses as a side-hustle.

Steve Jobs (and likely others) 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 the insurance product, historically standalone, is being transformed into a platform feature by non-insurance players. Take for example Lyft and Uber. Both firms have launched captive insurance units in Hawaii, which is a friendly, low-tax jurisdiction for such activity. While these ride-sharing companies have relationships with third party insurers, building insurance product as a feature of the transportation platform buttresses the business model with a lower cost alternative. 

Another example is Haven, the joint venture between Berkshire Hathaway, Amazon and JP Morgan. The venture has a not-for-profit structure and an explicit mission to reduce costs and improve healthcare outcomes for consumers. Let's put aside the point about America's failure to agree on a sane public solution for health insurance. Instead, notice that this medical finance product is being offered to the employees of the three companies in the joint venture. The first takeaway is that this is the core Amazon playbook: become your platform's first customer. The second takeaway is that this offering is a feature of being employed in these organizations, and nowhere else. Insurance is not a product to be bought separately, but something these companies are building for themselves out of necessity in their course of business.


CRYPTO: BitMax and $1.5 Billion in Phantom Daily Volume from Transaction Mining

Once in a while we land on Coinmarketcap's crypto exchange ranking, and choose "Reported" volumes instead of "Adjusted" ones. In that world, everything is topsy turvy. Binance is no longer on the top, and BitMax, Bithumb and other unmentionables float around the meniscus. The answer as to why this happens is called "Transaction Mining", and was a big deal halfway through last year. This practice is not really mining, as much as it is churning. Normally, an exchange charges a fee to the buyer and seller for facilitating a trade on its platform. In this case, however, the exchange also pays the trader a rebate in the form of its own token. The more you trade, the more of the exchange's proprietary token you receive. And some tokens, like Binance's BNB, have become valuable to the tune of $2 billion.

The positive way to look at this practice is to say that it is "growth hacking" the exchange rankings, thereby creating more visibility for high ranking platforms. Imagine you are trying to maximize visitors to your website. Well, you might practice some search optimization techniques, get back links from blogs, and perhaps even pay for some fake ones. Or, you are growing a social media audience, and decide to cheat by buying fake followers to create the impression of engagement. These techniques -- while misleading -- are merely meant to get you noticed, and then real activity can begin. Traditional banks offer $250 rebates to sign up for a new account or credit card all the time! And in the case of crypto exchanges last year, a number of them used transaction mining to growth hack the rankings, spread around their token, and have now switched to more accepted pricing models.

But Bitmax, and its $1.4 billion of mined volume per day, seems an extreme. The negative way to look at this practice is to compare it to churning an account. If a financial advisor with a fiduciary duty directs trades in a client's account in order to generate fees and create the impression of activity, they are breaking the law. In such an example, the financial advisor has full control of the account. You may say that crypto exchanges are optional, and that the decision to churn trades in order to generate/mine exchange tokens is voluntary. Sure. But if bot-driven advertising can swing an American election, certainly misleading financial incentives can skew how people make investment decisions. The belief that the exchange token is worth something -- backed by little other than promises that it will be worth more once other people have it -- leads to destructive financial activity. To us, this looks a lot like a digital-first version of churning driven by a suspect financial promotion. 


Source: Coinmarketcap (Exchanges), CoingeckoBitmax, Crypto Currency Hub (Is transaction fee mining a ponzi scheme)

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. 


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

ONLINE BANKING: Metro Bank and Revolut in the Doghouse

Facebook used to say "Move Fast and Break Things". It sure did. There are many ways to win, and some are sharper elbowed than others. Is growth inevitably tied to bad behavior, or is there a version of sustainable entrepreneurship that doesn't require us to sacrifice Ethics at the altar of Monopoly? Prior marquee Fintech bad-actors include Zenefits (fastest growing insurer whose brokers were unlicensed) and Lending Club (what's a little self-dealing?), not to mention all of Wall Street and at one point or another. Now we are seeing the same sharp elbows from Revolut and Metro Bank.

Metro Bank may be a fast growing operation, but it doesn't seem to be very good at being a bank. Of its £14.5 billion loan book, the company mis-categorized 10% of its assets last month, grading that capital at 100% when it should have been at best a 50% (e.g., commercial property loans are more risky than cash). That means the balance sheet needs way more cash, and Metro Bank is out raising a cushion of £350 million -- a number that will mean chunky dilution given that the public market cap has been under pressure. There is a certain irony here as well. Consider the sins of a bigger offender -- RBS getting a £45 billion bail-out a decade ago and being forced to set aside £775 million to as penance. Of those funds, £120 million are now flowing to Metro Bank to promote banking competition. 

One of our favorites, Revolut, has also been in the news with a spat of ugly news. There are reports of over-clocked, destructive culture. Some Fintech aspirants are asked to sign up 200 funded accounts for Revolut as part of the interview process, without a job guarantee. Once they do land a job, workers are expected to drive 100 mph through weekends and holidays, leading to burnout and churn. Sounds like SoFi two years ago. Money Laundering concerns abound, with information coming out that KYC/AML control lapsed in the middle of last year. For a company that launched Bitcoin trading, this type of news is both embarassing and systematically destructive. And lastly, the main adult in the room (CFO Peter O'Higgins, former JP Morgan) has just quit as well. 

It's easy to say to look at people doing hard things and judge them on style. But sometimes the ambition isn't worth the damage. 


Source: Guardian (Metro Bank), SharesMagazine (Metro Bank), AltFi (RBS Settlement), Wired (Revolut Culture), Finextra (Revolut CFO), Banking Tech (Revolut AML)

CRYPTO: Understanding the Decentralized Finance Movement with Data Sources

When digital music assailed the music labels, their first response was to sue teenagers for peer-to-peer file sharing and to hire technologists to write Digital Rights Management software. DVDs bought in Asia wouldn't play in American DVD players, and so on. For finance, as blockchain nips at the ankles of storied industry, much of the response has been to (a) bring sovereign power to bear on the misfits, chasing them around to jurisdictions like Bermuda and Malta, and (b) hire technologists to build up enterprise control of crypto assets for issuance and trading. Symptoms of this abound -- from London Stock Exchange putting $20 million into Nivaura, to Swiss private bank Julius Baer entering the space, to regulators of various risk-tolerance drawing lines in the sand around token activities.

This is all good progress, we think, but it is an intermediate step to the Spotify (or Google or Netflix) of finance. Let us dwell on a distinction for a moment. Fintech players democratized access to financial products -- see our many earlier entries on amassing consumers through attention platforms at discounted prices. Those financial products, however, are still institutionally manufactured. But when you look at music or film today, an increasingly large portion of our attention is going to creator-generated content that sits on Youtube and Twitch. We all watch Game of Thrones (i.e., made by the Goldman Sachs of content production), but we also see Gary Vaynerchuk and Joe Rogan endlessly peddling their hustle -- without traditional institutional backing. The same point can be made about Uber drivers.

Decentralized finance is the latest iteration of the crypto theme, and its core premise is that the manufacturing of financial products across the whole stack will be done by individual creators, or aggregated to scale via crowd cooperation driven by DAO governance like Aragon. For the more traditional readers of this newsletter, these words sound like nonsense, but they are not. Payments is the simplest use-case, and already has a decentralized product that works to this day: Bitcoin. Lending, Trading, and Derivatives -- intermediated by software networks and not by legal issuers -- are starting to come online. The tracker below shows some of the smaller independent projects, the maturity of which reminds us of Ethereum's dApp tracker in early 2017.

The other reading we encourage you to do is check out Multicoin Capital's report on crypto exchange Binance, its BNB token, and decentralization plans. Facebook and Amazon, companies whose value has been built over 20 years, are locked into a public shareholder structure that will disallow them from burning down the house and giving all the value away to users. Not so for a multi-billion dollar phenomenon built in a few years, where the largest existential danger is legal sanction to the billionaire founders for unregistered securities dealing. Atomizing the economic value of a quickly-built monopoly into software running on millions of computers, such that it cannot be shut down or controlled (e.g., Pirate Bay), could be the chassis of real, at-scale decentralized finance. Right now though, this theme is struggling to get off-the-ground with meaningful volumes, so a heroic event will be necessary to properly kick things off.


Source: Forbes (Nivaura), Finextra (Julius Baer), Cambridge Associates (on Venture), Decentralized Finance (The BlockDeFi Pulse), Multicoin (Binance), Bloqboard (Lending DeFi), ConsenSys (Trading DeFi)

FINTECH: SoFi, Square and Twitter as the Horsemen of the Fintech Apocalypse

SoFi has thrown two bricks through the window of the finance industry this week. The first is a set of no-fee Exchange Traded Funds (ETFs) to be distributed through its proprietary roboadvisor and third party brokers like Fidelity and Schwab. SoFi is the second meaningful institution -- after Fidelity -- to price beta exposure to public markets at zero. We think back to Napster and the collapse of music prices to zero as distribution channels shifted from (a) buying records to (b) "piracy", i.e., kids trading songs with each other on the web. It's not that the cost of manufacturing the song, or the ETF, is nothing. Rather, when distributed to millions of users, the fixed cost trends towards nothing and the variable cost is de-minimis.

The business model implication for Music was to give away the very core offering, and to charge for t-shirst, concerts, and the convenience of using Spotify's neat interface. The business model implication for investment management is to give away the very core offering, and to charge for asset allocation, planning, and a subscription to an easy-to-use financial services bundle. There is more to be said about hiding monetization, about making it hard to see and quantify. Arguably, Google, Facebook and the other web companies have made this trade-off opaque; we get the core offering for free, and pay invisible, unfelt things that aggregate into monstrous compromises. Similar dangers lurk here -- from Robinhood's liquidity selling to algo traders to Fidelity's "infrastructure fee" of 15 bps to mutual funds on its brokerage shelf. Money will be made somewhere, and as a mere human consumer, you likely won't see how.

The second brick from SoFi is an agreement with Coinbase to power SoFi Invest's crypto currency trading within the lender's digital app. Targeting Robinhood and Revolut with this move, SoFi is delivering on the vision of a broad cross-sell of financial products to a captive Milliennial audience. Coinbase needs the trading, as its revenue is highly correlated with crypto asset prices. The exchange has been fairly indiscriminately listing coins, like the divisive Ripple XRP, to get its 2017 groove back. Maybe the rumored Facebook coin will do the trick. What we want to point out further is that the CEO of SoFi is the former COO of Twitter. Jack Dorsey, the CEO of Twitter and Square is a well-advertised Bitcoin and Lightning network supporter. Square controls Cash, the most popular (sorry Venmo) peer-to-peer money movement app in the United States. In 2018, the app facilitated $166 million of Bitcoin sales. These bits of data tell us one thing -- SoFi, Twitter and Square share a fact base, institutional talent overlap, and a likely vision for the future.


Source: SoFi ETFs (Wealth ManagementFinancial Planning), WSJ (Fidelity), NY Times (Facebook), Motley Fool (Venmo vs Cash)

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.


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

DIGITAL WEALTH: Schwab abandons desktop wealthtech as industry moves to open banking and investing platforms

We weren't planning to write about traditional wealthtech, but man, it's hard to pick your jaw up from the floor after reading this. Schwab Advisor Services, a $1 trillion assets under custody business, is selling its desktop portfolio management technology PortfolioCenter (which manages 2,300 advisory firms) to Envestnet for an "immaterial" price. The cost to Schwab of trying to pull those users into the cloud from desktop was higher than giving away the business, which generates about $10 million in revenue. Schwab retains its cloud version of the software, PortfolioConnect, as part of confusingly named AdvisorCenter. Reminder that one of the larger Envestnet shareholders is BlackRock, both a competitor to and manufacturer for Schwab's offering.

Fidelity paid up $250 million to buy eMoney, a cloud-based chassis for digital wealth management in 2015. The industry's conclusion was that custodians were going to be providers of technology in a freemium model, giving away tech and making money on capital. The independent wealthtech software houses (Orion, Black Diamond, ENV, AdvisorEngine, SigFig) could be in trouble. The Schwab sale of its client base given the cost of management legacy tech is enlightening. At the core, custodians are horizontal financial product platforms, enabling brands (e.g., RIAs, Cryptofunds) to deliver services to their customers. Sounds a lot like the other things happening in finance, which is open banking and data aggregation platforms building API-first layers. Can't be API-first with a desktop executable file!

So then what does a real platform look like in 2019? One take is something like Plaid, but we've discussed it before. Instead, take a look at Cambr. A joint venture between a community banking private equity firm (Stone Castle) and a core processing company (Q2), deposit products into tech apps are one integration away. Another version of a conceptually similar play is DiFi -- Digital Financial, previously Market76. Or, if we go one level down, every single bank participating in European open banking initiatives is becoming a financial product platform. See the awesome ranking Innopay has done of these below. And last, Apple itself. The hardware maker owns a massive attention and payments footprint, and is enabling none other than Goldman Sachs to launch a credit card. Apple is the platform, Goldman is the brand. We can see why Portfolio Center isn't super exciting. 


Source: RIA Biz (Schwab sale), Schwab website, Fintech Platforms (CambrDiFi), WSJ (Apple & GS), Innopay

BIG TECH & BLOCKCHAIN: Samsung's big gamble on crypto and foldable phones

We're Americans worried for Americans. We just won't understand the future coming, and then the whole tilt of the world will shift. Take Samsung, dropping two known but very meaningful bits of information. The first is foldable phones. The only note we've made of these devices has been to compare them to pizza boxes -- most prototypes look preposterous, have issues with cameras, and are prohibitively expensive. And that's still true -- Samsung's foldable phone is pretty expanded, but bizarre when folded. But no more bizarre than cellphones from the 1980s! The other meaningful companies working on bendable screens and phones are all in Asia, because the manufacturing capability and hardware innovation for this stuff has been outsourced long ago. Huawei, Xiomi and others will all champion this form factor -- and Americans won't get it.

Second, Samsung also confirmed that the Galaxy S10 phone line will be crypto-native, allowing for private key storage. We think 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). Having a mobile experience that allows you to interact with the decentralized web and its applications without downloading or thinking about software management is massive. Players like HTC and Sirin are also in the game, but we point to Samsung Pay as a meaningful differentiator. There should be no difference -- from the customer view -- in using a credit card in Samsung Pay wallet, and using a self-custodied digital asset. Same use case, same ease of use. And if every merchant that takes Samsung Pay takes crypto, well, you get the idea.

Thereafter, dominant phone apps like Facebook can also step up, tokenizing aspects of their services for a global install base. Collectibles, financial instruments and health records quickly follow. We worry, again, that Americans -- who don't want to use QR codes and can't stop swiping their credit cards -- will simply shrug this off. Skepticism is the antidote to innovation. But there is also plenty to be skeptical about. In particular, for normal people, the endless security worries about everything from the physical device being stolen to your crypto assets being 51% attacked (looking at you ETC) are a legitimate black swan. Not dealing with that at the protocol level will mean the rise of walled gardens, yet again. Just consider how the wild anonymity of the early Internet in the 1990s faded into protected, authenticated, verified Instagram influencers. Yikes!


Source: Samsung (foldable phones via HyperbeastBBC, crypto via CoinDesk), Coindesk (Zuckerberg on identity), MIT Tech Review (hacking ETC), Walled Gardens (social vs searchmobile web vs apps)

BIG TECH: When Attention Platforms please the Sovereign and not the User

Where would we be without some cautionary warnings about technology overlords and attention black holes? Since you asked, we'll give you some things to think about. The first is Absher, a web service from the Saudi government that helps men track the location of their female family members. As an all-around government services app, male users can pay parking tickets or renew a driver's license. They can also designate where a woman in their guardianship is allowed to travel -- a practice empowered by local law, culture and religion. The app will notify the man if the woman's passport is scanned at an airport or border check point with a convenient text message. The app has been downloaded over 1 million times on Android devices.

The other example is China's "Xi Study Strong Nation" app, which is the media voice of the Communist Party in a modern format. Users read articles and watch videos on the platform, earning points for such engagement -- say 0.1 points for each item. The app uses intelligence to process behavioral data so that it knows if the user is truly engaging, or just scrolling around. If you fire up the content in the evenings, however, the rewards for engagement double up. This way, readers are incented to exchange relaxation for Party reading. But why do any of this at all as a user, you ask? While we can only rely on the media sources available, those suggest that employment could be predicated on fulfilling a sufficient number of points (e.g., 40 a day) in order to remain in social and political standing. What starts out as a gamified learning experience quickly becomes a social prison. We hypothesize that data about propaganda consumption can also be tied into the country's social credit score, which determines everything from financial product & service access to potential for academic admission. No wonder Reddit's community is creeped out by the recent $300 million investment from Tencent.

It is dangerous to make cultural judgments from a place of ignorance -- and we are but a meek Fintech newsletter. Still, we can sharpen our mental model and draw generalizable conclusions from these cases. In the West, the tech platforms (Facebook, Google, Twitter) are in trouble for selling human attention to the highest bidder. But at least their core function is to use technology in order to increase a user's choice and self-actualization, or one's impression thereof. By sharing photos, shopping on Amazon, or searching for information, we are making personal and empowered decisions -- even if those decisions are within the speed-lanes prescribed to us by a corruptible AI-brained Newsfeed.

In these counter examples, a sovereign has penetrated the attention platform in order to redirect the attention and associated power to itself. These apps are not made to facilitate the choices of humans, but to make stronger the social human constructs of law, power, culture and religion. They extend not the open promise of creativity and self-fulfilment on the Internet, but rather cement into code the existing flawed beehive in which we operate. Putting sovereigns into software -- which unlike humans is ever-present and all-seeing -- is a bad call. In a round-about way, perhaps it is best to leave Facebook and Twitter and Netflix and Amazon alone. Allowing government control into these apps, even if just a bit, is a slippery slope way down the rabbit hole.


Source: Business Insider (AbsherApple & Google), China Media Project (Little Red Phone), NY Times (Little Red App), Bloomberg (Reddit / Tencent), Netflix & GDPR

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?


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

BLOCKCHAIN: JP Morgan mints crypto JPM-coin, exposed to $10 trillion opportunity

You know by now that JP Morgan launched a crypto asset called JPM coin. You've probably seen the self-satisfied memes showing Jamie Dimon publicly hating on Bitcoin, contrasted with his own massive bank launching its proprietary, closed cryptocurrency (leveraging open source software created by others) within a year -- and claiming it is a meaningful invention. Perhaps you've read that this is a first-of-its-kind symptom demonstrating that banks are finally coming into crypto. Cool, huh! Yet all of these reactions are mostly irrelevant to thinking about what's happened.  

First things first. JPM has started production deployment of an internal blockchain (i.e., for its clients and divisions), which they have been developing openly for years, applied to multiple use-cases from international payments, to corporate issuance, to trading and other capital markets businesses. This is a no-brainer, and the totality of such projects should create $250 billion of industry-wide enterprise value in cost-savings over the next 10 years. The new thing is that they have added a token into this blockchain that carries digital scarcity, and can therefore be used for international value transfer. As an aside, the UBS utility settlement coin pioneered this type of asset over a year ago, led at the time by Alex Baitlin, who has since left to found smart crypto-custody company Trustology (backed by ConsenSys and Two Sigma).

Who should worry about the inevitable but welcome growing competitive landscape of bankcoins? First of all, consortia players like Ripple and SWIFT (partnered with R3) cannot be happy with the development, since JPM funnels a meaningful portion of the cross-border B2B money movement flow already -- $6 trillion per day. What's odd also is that half a year ago JPM was planning to spin out another proprietary blockchain project (Quorum), since other banks were refusing to use it. The internal value generation within the firm of essentially having a cloud-like solution for value transfer must be sufficiently large to alienate others.

On top of that, let's clarify what bankcoins are. Money supply is divided into M1 (cash and checking), M2 (very liquid cash equivalents), and M3 (more engineered cash equivalents). Bitcoin wants to be cash/M1, which is very hard given that to print money is to be sovereign -- see David Siegel's primer on money in the links below. So in the US, M1 is around $3 trillion. But the delta to M3 is another $10+ trillion, and includes things like money market funds, overnight obligations between investment banks (hey there corpse of Lehman Brothers), repurchase agreements, and other gargantuan liquidity instruments manufactured by banks. In fact, M3 is so obtuse and large that the Federal Reserve stopped publicly tracking it in 2006, and the data only exists on a synthetic basis from ShadowStats. This is what JPM coin is at its core. This is what all stablecoins -- tethered as cash sweep into their respective proprietary exchanges -- can ever become. A paltry $10 trillion.


Source: CNBC (JP Morgan), Shadowstats (US M3), Wikipedia (Euro Money Supply), Medium (David Siegel on Money), Federal Reserve (M3 Data)

CRYPTO & VENTURE CAPITAL: The wild symptoms of paradigm change

Two extreme things just happened in the land of Crypto. The first concerns the Quadriga exchange, whose CEO has died while traveling in India -- while also being the only person with key access to $130 million of customer funds on various blockchains. This means the permanent loss of customer assets. Tactical comments like using multi-sig wallets or not trading on a subscale exchange are besides the point. The key takeaway is that this new-fangled crypto banking has a wildly unpalatable feature. The second extreme thing is Jack Dorsey, who loosely-speaking controls Twitter (millions in audience) and Square (millions in payments), participated in Bitcoin's "lighting torch". This is a process by which one Twitter user sends a few pennies worth of BTC to another user through the developing Lightning Network, facilitated by posting a lightning network invoice in a tweet (there's even a conspiracy theory that Twitter expanded its character limit to accommodate these invoices). So if Bitcoin is money, then it's moving like never before.

Let's pause for a moment to consider how innovations become reality. We recommend the following frameworks: (1) the book Why Greatness Cannot Be Planned: the Myth of the Objective and (2) Epsilon Theory's discussion about seeing change in the Zeitgeist, both linked below. Boiling things down, the book concludes that it is not objective maximization that gets us to great outcomes (i.e., let's develop a new money or a new artificial intelligence) but the search for novel, disagreeable, controversial outcomes. The more new or bizarre something seems, the more likely the discovery will open up a search space for entirely new directions. From that perspective, the examples of Crypto extremes above point to the most compelling stepping  stones to the future. That they are made through market evolution (from on-chain transactions to Lightning) and demonstrate some version of natural selection (exchanges without multisig wallets will die) is more promising than a corporate initiative into making practicable enterprise solutions to save cost.

On the Zeitgeist point, the essence is that an astute observer understands when the meta-game changes. We are certainly seeing this in politics, with the US pivoting away from a Bush vs. Clinton each trying to satisfy political donors, into a Trump vs. Ocasio-Cortez trying to satisfy their social media audiences and the machine learning algorithms that deliver information. More practically, we can see a zeitgeist shift in the role of technology. Whereas tech used to be the supporting Shield in financial services, today it is the aggressive Sword. This pivot is obvious when looking at Fintech's share of venture capital and comparing it to the share of the stock market in financial services companies. You can see below that what started out as 5% of venture and 23% of public equities has converged in the mid-teens. Once Fintechs started being built like Silicon Valley startups, the relative value shifted out of traditional financials into private capital. When we allow China and Ant Financial into the equation, private fintech venture is now over-indexed relative to the public markets. The soil in which things grow has become different. 


Source: Twitter (original lightning torch thread), Epsilon Theory (Zeitgeist), Youtube (Why Greatness Cannot be Planned), Bloomberg, Pitchbook

ONLINE BANKING: European Fintechs backed by Goldman, Paypal and Nordea get $200 Million

Open banking is happening, but it feels different than expected. The story is not the gradual digitization of incumbents through Application Programming Interfaces that liberate data and modernize incumbents. Incumbents -- other than a select few giants (e.g., JPM, Goldman, BAML, BBVA, Santander, DBS) -- are primarily performing Fintech Kabuki to look good for public equity investors. And even more, their financial performance is driven too much by exposure to capital, interest rates, regulation and compliance, physical retail costs and other risk-averse incentives, that tech-first approaches do not matter. The ice cube is melting slowly, like the media industry in early 2000s. This is how you get to absurdist PR poetry: in advertising their merger of equals, creating a $300 billion deposit bank, BB&T and SunTrust proclaim: "Two Legacies, One Future". Yes, the future of Planned Obsolescence.

Instead -- open banking looks like this. London-based Bud has raised a $20 million round from Goldman, HSBC, Investec and Sabadell to sit on top of legacy, obsolescent systems and pull data out of them into modern architecture. The firm has 80 fintech partners, and can connect third party developers into products like credit cards and insurance, as well as categorize the data exhaust coming from these sources using machine learning (but who couldn't at this point). Or take Tink, raising EUR 56 million in new funding from Insight Ventures and the Nordic banks, similarly going after the PSD2 as a service opportunity. Yet another example is Raisin, which just got $114 million for interest-rate shopping across the continent. The company has placed $11 billion across 62 partner banks; 62 banks that offered the most interest to customers, and therefore made the least money. This technology intermediator is accumulating the long tail of capital as product, while owning the customer directly.

So yes, these are all little bits. But such is the nature of erosion, until the rock-face breaks off into the ocean with a final splash. We note the investors in these entities are from the financial industry, so that creates a hedge. But we can also imagine Amazon, with a net promoter score 3x better than the national banks, snapping one of these apps as the industry yawns. Bud and Tink are cloud services, which could sit in AWS for finance. Raisin is a comparison shopping engine, at home in Prime. Neither make financial products, instead relying on the industry to get hollow in the middle and provide capital through the long tail. And capital is fungible -- for example, if a legitimate crypto-first bank comes along, offering 1% returns backed by insurance on a stablecoin, why shouldn't these open banking players connect to the decentralized ones? 


Source: Forbes (Bud), (Amazon), TechCrunch (RaisinTink), Company Websites

BIG TECH: The macro-scams of Fyre and Theranos & the micro-scams of Google and Facebook

Spoiler alert: Fyre Festival ended up being a securities fraud that cost investors $27 million dollars, left hundreds of workers unpaid and emotionally ravaged, and negligently put attendees in dangerous conditions. Even Blink-182 cancelled their performance! Another spoiler: Theranos ended up being a securities fraud costing investors (including Betsy DeVos!) $700 million, leaving hundreds of workers unpaid and pushing at least one to suicide, negligently putting users of the product in dangerous medical circumstances. In both cases, the founders were young and narcissistic, optimizing the story-telling about their company over delivering on the promised expectations. Billy McFarland used Instagram supermodels to sell a false vision. Elizabeth Holmes leveraged the Steve Jobs black turtleneck and VC group think to do the same.

This stuff is so easy in retrospect -- to point fingers and throw the stone. Having spent a lot of time in the early stage ecosystem, we can tell you that all founders have these devils inside them. These are the devils that let you take the risk, tell the story and defend your tribe (e.g., see Elon Musk). The issue is that these particular people could not and did not execute -- and any reasonable person in their situation would know enough to stop marketing and selling lies. We can look at crypto ICOs to date and say the same thing. Surely the people who raised over $30 billion globally, and burned nearly all of it, sold us a falsehood. Some -- like John McAfee or Brock Pierce -- had to know what was up. Or did they, perhaps believing in a zeitgeist change tilting the axis of human industry? 

The issue is asymmetric information and intent to profit from that asymmetry. When someone sells us a broken car claiming it works great, they are selling a "lemon" -- something the US protects against with "lemon laws" that remedy damages from relying on false claims. Let's shift from these obvious macro lemons, to the invisible micro lemons sold by Facebook and Google. It was revealed that Facebook was -- in the worst case -- paying 13+ year olds $20 per month to install a research app that scraped all their activity (from messages to emails to  web) and provided root permissions to the phone, misusing Apple-issued enterprise certificates. Facebook should not have been able to create these apps for anyone other than its employees on internal apps (e.g., bug testing new versions). But it did, and got its access revoked by Apple immediately.

Google did a version of this too, exchanging gift cards for spying on web traffic. As yet another example, Google's employees refused to help the company build a war-drone AI for the US Department of Defense. So instead, Google outsourced the work to Figure Eight (a human-in-the-machine company), hiring gig economy workers for as little as $1 per hour for micro-tasks like identifying images (teaching drones to see). These workers had no clue what they were doing -- and we imagine that some would exhibit the same ethical concerns that Google employees did in refusing the work. In all these tech company examples, the lemon is the un-revealed total cost. Compared to Fyre and Theranos, where we pay billions, and get nothing in return, here we are given $1 an hour or $20 per month (i.e., nothing), but we lose our privacy, agency and humanity (i.e., everything). 


Source: Wired (Project Maven), The Intercept (Google project maven), Gizmodo (Google micro-tasks), TechCrunch (Facebook, Google, Apple), Wikipedia (FyreTheranosLemon Law)

INSURANCE: Porsche and Mile Auto to cut premiums 40% using AI for pay-per-mile insurance.

Insurance is the holy grail for Artificial Intelligence and the Internet of Things in finance, because it requires a messy interaction with the physical world, rather than living merely in a spreadsheet, database, or blockchain. To this end, we like the news of Porsche partnering with Mile Auto on pay-per-mile insurance. There is a reasonable demand-side argument: owners of Porsches don't drive the car as a primary automobile, and would prefer to only pay insurance for the time they are actually on the road. The second argument is even more fun -- owners of Porsches don't want to be tracked via GPS or a black-box by something like Cambridge Mobile Telematics ($500MM from Softbank) or Metromile ($90MM from VCs) because they are fancy and private people. No tracking please!

How does the thing work? You pay a cheap base rate to Mile Auto, and once in a while take a picture of the speedometer's reading in the app. The picture is translated to numbers via a machine vision algorithm, and your per-mile variable insurance rate is calculated on the spot. The company claims this will lead to a 40% reduction in premiums for the average user. For what it's worth, we hear that the growth of renter's insurer Lemonade is similarly fueled by people who are forced to get coverage (e.g., by the landlord) but are looking for the most discounted, easy to manage product. What does that mean? It means that the low risks self-select out of the insurance pool, driving up the price for unsophisticated non-techies that don't drive a Porsche.

Let's take the argument to an absurd extreme. On the developer website Programmable Web, there are 59 separate APIs that developers can use to build insurance apps and connect into underwriting engines and carrier capital. From Clearcover (affordable car insurance in your app!) to Haven Life (term life insurance on any website or application!) to Lemonade, OCBC Materntity, Qover and a plethora of others, developers have real choice in how to weave these more digital insurance products into the attention black holes in your phone. What happens when the tech-forward customer considers only these options, and the conservative customer considers only insurance sold by agents and direct mailing? Could there be a bifurcation of risk profiles that fundamentally injures the risk-pooling function of the industry? Perfect information about risk collapses the value of hedging. Half of us will know and live in a predicted future, while the other half will pay for the ignorance.


Source: PR Newswire (Porsche), Company websites, Programmable Web (Insurance)

BLOCKCHAIN: Public Crypto searches for meaning, inventing new narratives for bear market

We have seen an unusual amount of soul searching in the Crypto community in the beginning of 2019. Crypto assets, which the more detail-oriented thinkers in the space see as fundamentally improving, continue to bleed out. Nearly 90% of decentralized applications have less than 1000 users. In response, the priesthood of the movement must find new language to motivate global open source development and continued investment. Given the type of person that has a following in the crypto space (Millennial, male, developer, international, math/econ overindexed), their stories and investment theses are rooted in Bayesian thinking, macro economics, and formal logic. The stories create a sense of data-backed philosophical inevitability, but as Nic Carter and Felipe Pereira point out (links and charts below), these are just meta-stories for why followers should keep following, and the direction in which they should go. You can think of these stories as marching orders for the army of disruption.

The two examples we will call out are (1) Pantera Capital's Open Finance and (2) the debate around crypto law. In the former, the argument is that the "primitives" (i.e., Lego pieces) of the financial system are being open sourced and built in a permissionless, global manner. New generation versions of timeless services like banking, lending, and investing will grow outside finance on parallel rails and be better than the existing system. We agree with the vector of change, though deeply question short term practicality and the framing from which the argument is made (i.e., protocol maximalism). A symptom of this change can already be seen in the repurposing of ICO offering platforms and liquidity into STO brokers and exchanges -- e.g., $400M marketcap biotech company Agenus is using Atomic Capital to launch a token that gets a royalty payment on a cancer treatment which is still in clinical trials. Or take SWIFT's trial implementation of R3's Corda to combat Ripple.

The second discussion is around norms that have emerged in the ecosystem, harking back to questions about whether "Code is Law". As we have seen from the regulatory blowback and the application of sovereign power, Law is Law (and jail is jail). The crypto-anarchist revolutionary fervor ended up being statistically incorrect in the short term, and a new narrative is needed to keep marching. We see these debates as similar to a Constitutional Moment, with online personalities jockeying to be Jeffersonian-framers of how the future should be negotiated and governed. Linked below is a piece by Vlad Zamfir on proposed norms (like keeping Crypto within the legal bounds of the real world and not intentionally breaking blockchains), and it is worth reading to understand what this community believes and how it reasons. No other part of Fitnech, but for AI ethics perhaps, does this much thinking and narrative building about itself. This is why it is a fundamental Black Swan threat to the financial industry, whose narrative has been rotting since 2008. 


Source: Token Economy (Decentralized Finance, Visions of Ether), Pantera Capital (Open Finance), Agenus (STO), Vlad Zamfir on Crypto Law, Fluence on Dapp Usage, Unrelated but interesting (Narratives of Economic Catastrophe)

ROBO ADVISOR: Digital wealth re-fuels, as Acorns raises $105M from NBC Universal, Nutmeg $58M from Goldman.

Digital investment apps are the American poster-child for B2C financial technology. The vintage of the theme -- over a decade old -- has cooled some of the excitement about the transformational potential of mobile-first money management. Other products, like digital lending, payments, insurtech and challenger banks have grown on the venture radar. The reality, however, is that in each of these verticals, a brand champion has emerged after brutal competition to acquire customers. There is a best in class neobank, trading app, savings app, asset allocation app, etc. Sporting millions of users, these single product companies are fattening out into a multi-product relationship. And the roboadvisor attack into that space has just gotten stronger.

Nutmeg, the leading but modest roboadvisor in the United Kigdom, has just received nearly $60 million of fresh funding from Goldman Sachs. To earn the honor, the company manages about $1.5 billion (compare to Betterment's $15 billion-ish) and makes 50 bps in revenue. This isn't Goldman's first rodeo either, with prior acquisitions of Honest Dollar and Clarity Money -- neither of which were cheap. Even more relevant is the entry by the company into the UK with Marcus, it's Lending Club clone for personal loans. Unlike Lending Club (or Funding Circle), Marcus is attached to a bank that can provide interest to customers, and therefore natural funding for loans through deposits. That can't feel good to Monzo, Revolut and other neobank friends. We expect Nutmeg to join this lightly integrated family of broad financial products pushed by the investment banking behemoth to retail customers.

The other piece of news is arguably even more sensational. Acorns, serving 4.5 million customers (compare to Robinhood's 4 million, or Coinbase's 15 million), of which nearly 400k have IRA accounts, has raised $105 million from a conglomerate of media companies like NBC Universal and Comcast Ventures. Acorns manages $1.2 billion in assets (compare to $1.5 billion at N26) and now has a $860 million valuation. How does this story make sense? Media and finance are inextricably linked, and in the American case the glue can be financial literacy. CNBC content in the app will drive engagement, the media marketing funnel will create engagement, PayPal provides the payments and bank rails, and the bet is customer stickiness and margin expansion over time. It's starting to feel a bit like Alibaba in there!

So where are the parts of digital financial advice that are still early and not winner-take-all venture bonfires? Most digital-first financial services were built by Millennials for Millennials, and therefore have a blind spot for older generations. Companies that use modern tech for the issues facing Boomers aren't getting picked up in Techcrunch, but have a similarly large opportunity. Examples include Vestwell (B2B robo for retirement), RightCapital (financial planning with focus on tax optimization and pensions), Whealthcare (financial caretaking as clients are no longer medically fit to make decisions), and Mike Cagney's Figure (home equity digital lending). Do good and do well. 


Source: Companies House (Nutmeg), Mobile Payments Today (Acorns), Company Websites (RightCapitalWhealthcareVestwell)

CRYPTO: Re-making Traditional Banks with Custodian/Exchange Staking-as-a-Service

2019 has started off with a bang in capital markets blockchain -- (1) a $20 million investment by Nasdaq in enterprise blockchain FX player Symbiont, on the heels of Baakt and ErisX, (2) a Security Token Realized conference well attended by financial services execs from companies like State Street, of which 70%+ owned BTC, (3) and meaningful technical developments and financial products from folks like Tokeny, Securitize, Templum, Atomic Capital and others. But let us shift to another leg of the crypto stool this year, which is staking-as-a-service. We recommend reading the Coindesk op-ed from Michael Casey linked below, which outlines how a transition from proof-of-work to proof-of-stake in Ethereum (if it ever happens) could lead to the intermediation of crypto deposit holding on behalf of consumers. If investors get paid for outsourcing private key management to custodians, argues Casey, we re-create the fractional banking system with its pitfalls, like counterparty risk and incentive trends towards leverage. 

We agree, but aren't immediately put off by the comparison because credit is the lifeblood of inter-temporal economic decision making. Staking reminds us of two things from traditional finance -- capital requirements for banks, and interest-bearing deposits within those banks. As soon as users realize that they should be getting some interest return from their outsourced cryptocurrency accounts at exchanges or custodians, there should be broad competition around this product. If Coinbase offers 3% while Binance offers 4% of staking rewards (or vice versa), the consumer choice becomes more clear. This is exactly what banks compete on in terms of attracting deposits.

Users can already get an interest rate on their crypto for margin lending, up to 7% or so depending on the token. As an aside -- that margin lending may be a bad deal for the lender, since you are powering the short-selling of the capital asset you hold. You could also compare staking returns to dividends that corporations pay to their shareholders, as shareholders buy the equity and commit capital to an asset.  Given that these staking rewards are raw inflation (rather than cashflow earned by a corporation), the dividends become a value transfer between holders that stake and those that do not -- a tax on the unsophisticated user. Also, a dividend by law has to be passed on to the beneficial owner, which is a good thing. But that's not very anarchist of us.


Source: Forbes (Symbiont), Security Tokens Realised (agendavideo), Coindesk (Staking op-ed), Medium (On fractional banking), Token Daily (on staking as a service), Celcius Network (interest on ETH)

ARTIFICIAL INTELLIGENCE: "Financial Deadbeats" map is the worst things about Chinese Fintech

In our continued amazed gawking at the Chinese fintech landscape, we bring you the following. There is now a feature within WeChat, one of two channels for all mobile chat communication, to show a map of "financial deadbeats" around you. That's right -- a shaming visualization of people who are in financial trouble, like some sort of public sex offender list. We link to the article below, and assume that it is true despite how preposterous the whole thing seems. 

Offenses that could land you on the blacklist include serious ones like being the founder of a digital lender that collapsed with 12 million unpaid accounts, and trivial ones like being a single mother embroiled in a divorce proceeding. Once you are on the list, not only will your full name and financial information be public entertainment on this app, but access to credit, commerce and university admission could be revoked. To add insult to injury, a special ringback tone is added to the "discredited" person's mobile phone, alerting any potential caller about your poor financial management skills.

We add to this soup the idea of algorithmic bias exhibited by AI based on training data. We've covered this issue in the past, but point to Rep. Alexandria Ocasio-Cortez (D-NY) recently bringing it up into mainstream conversation. From propaganda bots to algo-racism, these arcane issues are starting to concern the broader Western polity. So when you combine historical training data reflecting past social and economic biases with social media enforcement systems, dystopia calls. One of the most important financial innovations in the West was bankruptcy, allowing entrepreneurs to fail and start over. This normalization of financial wipe-out led to an equilibrium with higher risk-taking and innovation. It is chilling to see technology being used, with potential for error and misuse, to stifle that spirit. Based on the US personal bankruptcy data below, you can see that 6 out of 1000 people would be guilty according to WeChat, skewed in large part to minority populations. No thanks. 


Source: Abacus News (deadbeat map), Independent (deadbeats), Vox (algo-racism), On bankruptcy normalization and bankruptcy zip codes