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

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

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

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

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FINTECH & PAYMENTS: BBVA launches a product that will ‘live’ within a third party’s platform & Uber’s new move looks to restaurants-as-a-service

Three weeks ago, we wrote a story on how Fintechs such as Square and Stripe are prime examples of digital startups that have used their enrolled bases of small merchants to cross-sell other services. Additionally, ride-hailers are starting to take note by replicating this model -- using their extensive base of both drivers and riders to build out their own ecosystems. See here for a refresher.

Turns out we could have been closer to the truth. As a new alliance between car-hailing giant Uber and digital bank BBVA seeks to leverage the potential of open banking to enhance financial service provision to Uber's Mexico-based drivers and delivery partners and their families. Essentially, the Uber application becomes the interface through which the aforementioned users can open a BBVA digital account linked to Uber's worldwide 'Driver Partner Debit Card,' allowing family members to receive instant access to earnings made by the driver, without the need of costly international money transfers. Additionally, the benefits of offering a centralized and aggregated platform to drivers and their families means the collected data can be used to offer financial benefits such as loans and insurance, as well as, non-financial benefits such as loyalty rewards, discounts, and subsidized purchases. A smart move if you ask us, especially knowing that Uber is currently incurring card processing fees of around $749 million (2017) to get paid and pay its drivers.

On another note, this last week Uber announced the launch of a dine-in option to its UberEats app – this feature lets users order food ahead of time, go to the restaurant, and then sit down inside to eat. Adding Dine-In lets Uber Eats insert itself into more food transactions, expand to restaurants that care about presentation and don’t do delivery and avoid paying drivers while earning low-overhead revenue. And now that Uber Eats does delivery, take-out and dine-in, it’d make perfect sense to offer traditional restaurant reservations through the app as well. This move pits the on-demand food app directly against OpenTable, Resy and Yelp. Similarly, instead of focusing on a single use-case of on-demand food delivery -- exposing the company to the risk of heavy competition -- appealing to a niche demographic requiring such services, Uber Eats’ strategy is to own the digital service aligned to the impatient and hungry customer.

By changing gears to offer its drivers more perks and job security through the BBVA partnership, as well as, embedding functionalities that promote customer, user, and employee experiences, it’s only a matter of time before Uber launches a fully functional financial suite allowing for users to make payments, customers to maximise profits, drivers to maximise earning potential, and the incentives across the application to cater to a wider demographic as its competitors. It's always better to be a product than a feature.

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Source: El Sol De Mexico (website), Techcrunch (Uber dine-in)

ROBOADVISORS & DIGITAL WEALTH: Artificial intelligence battles in financial markets but conquers in cryptocurrencies

It has become commonplace for users of online platforms to expect that their attention i.e. time spent using the platform, converts to loyalty -- in the form of an artificial intelligence algorithm that knows them better over time e.g. auto-populating search fields, recommending preferred clothes to wear, books to read, or food to eat. Yet, when it comes to applying such sophisticated algorithms to financial markets, why aren't such quant funds always outperforming the market?

Artificial Intelligence is most useful where the problem set is narrowly defined, i.e., it is well known what is being optimized and how, and where the fuzzy data needs the structuring at scale that AI provides. A narrowly defined problem may be – given this particular set of personal characteristics about a person, should they be allowed to borrow this particular amount of money based on prior examples. A poorly defined problem may be – predict the price of a stock tomorrow given thousands of inter-correlated data points and their price history. It all boils down to the reliance of quant investment strategies reliance on pattern recognition: models look to correlate past periods of superior returns with specific factors including value, size, volatility, yield, quality and momentum. Such approaches have several fundamental weaknesses: (1) hindsight bias — the belief that understanding the past allows the future to be predicted, (2) ergodicity -- the lack of a truly representative data sample used in the model, and (3) overfitting --  when a model tries to predict a trend in data that is too noisy i.e. too many parameters or factors. Logically, over time the anomalies that these quant strategies are relied upon to exploit should dissipate, given the swift pace at which technology, competitors, and data moves to correct such anomalies. This is not stopping the likes of augmented analyst platform Kensho (acquired by S&P Global for $550 million), crowdsourced machine learning hedge fund Numerai, and the industry-leading quantamental funds of BlackRock. There is an inherent contradiction in that the approach exploits inefficiencies, but requires market efficiency to realign prices to generate returns.

With Cryptocurrencies, the strategies are different. Native Cryptocurrencies i.e. Ether and Bitcoin, are considered unconstrained assets, with limited correlations to other assets. Additionally, the data sets and factors that need to be considered when trading Cryptocurrencies are far fewer — many of which are speculative and co-dependent, resulting in far more predictable patterns than in financial markets. Because most of Cryptocurrency trading is autonomously and algorithmically driven, patterns are more easily discernible and human trading behavior often sticks out in stark contrast to established market behavior.The issue of course is not the opportunity to profit — it’s the magnitude of such profits. Currently, Cryptocurrencies simply do not have the volume and liquidity necessary for autonomous trading strategies to be deployed in large quantums. Percentage returns for algorithmic Cryptocurrency trading may be significant, but beyond certain volumes, especially when assets under management start approaching the hundreds of millions of dollars, traders need to get far more creative and circumspect in deploying funds as the opportunities are far fewer at larger order sizes.

For now at least, AI and machine learning are still some ways away from consistently beating the financial markets, but with a bit of tweaking they may be a lot closer to beating the Cryptocurrency markets. Evidence of this is already beginning to show -- in 2018 Swiss asset manager GAM's Systematic Cantab quant fund lost 23.1 percent, as well as, Neuberger Berman is considering closing their factor investing quant fund over poor performance. All this whilst Cryptocurrency quant funds returned on average 8% over the same period. While the prospect of searching for phantom signals that eventually disappear could dissuade some people from working in finance or Cryptocurrency trading — the lure of solving tough problems coupled with the potential to dip into the $200 billion opportunity means that there will always be more than enough people who will try.

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Source: Autonomous NEXT Keystone Deck (Augmented Commerce), PWC (2019 Crypto Hedge Fund 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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2019 FINTECH PREDICTION: Real Autonomous Organizations Take Shape

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

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

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

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Source: DeFi Pulse

2019 FINTECH PREDICTION: Government and Enterprise Platforming, led by AI and Mixed Reality

We have saved our favorite for last. Over the last decade, consumer tech has undergone a cycle of platform building, user aggregation, data mining, and value extraction, resulting in GAFA monopolies. Exhaustion with social media networks and big tech, and the adjacent issues of privacy and radicalization, in our view, will lead to problems building new splintered consumer attention platforms for AI, AR/VR and other new media ground up. This implies that consumer platforms based on new technologies will be much more long-tail oriented, serving niche markets with very strong fit. Communities may be passionate, but smaller.

Enterprise tech lags retail adoption by, give or take, 5 years. Similar platforming has not fully penetrated on the enterprise side -- Salesforce is not yet the AI monopoly we should all fear, and Open Banking is barely a fizzle. Therefore, we expect increasing data transparency, aggregation and monetization to occur in enterprise underwritten by venture capital investors. As an example, augmented reality adoption and economics will be driven primarily by municipalities, utilities, large industrial manufacturers, and the military. We have seen this from multiple big tech players. Earlier this year Facebook doubled down on the enterprise-centric use case for mixed reality -- announcing its Oculus device-management subscription for enterprise users. Similarly, VR has found a fruitful niche as a training platform with OssoVR teaching the next generation of surgeons, and Walmart using VR to train its retail staff. Additionally, artificial intelligence at scale are to be directed largely at the workflows and manufacturing processes of large corporates. Take South African deep learning startup DataProphet who use AI and machine vision to reduce defects and scrap in the manufacturing sector by more than 50 percent. Don't get us wrong -- consumer AI is extremely important -- but within Financial Services, the scope for this in the corporate world is even larger.

The corollary is that the pricing pressure that started in consumer Fintech -- roboadvice (150 bps to 25 bps) or in remittance (600 bps to 10 bps) -- will spill over into B2B banking, money movement, insurance, treasury management and product manufacturing. An inevitable outcome, like that in the first entry above, is pressure on profit margins as prices equilibriate. For those companies that are able to re-design operations using a digital chassis, they will be able to compete on the margin with Fintech unicorns. Those that are not should exit, or retreat into more bespoke, relationship-driven business lines. This is where we are likely to see even more M&A activity over the course of the year.

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CRYPTOCURRENCY & BLOCKCHAIN: An adoption & regulation deep-dive in Facebook's new digital currency Libra

First came digital gold in the form of Bitcoin in 2009, then utility tokens led by Ether in 2014 and now, the global payments world could be turned upside-down by Facebook's stablecoin, Libra. It is very difficult not to be excited over this new digital currency, and without repeating the good work done by many great resources (referenced below), we wish to touch on two aspects that are important to get your head around, namely: (1) Adoption & Scale, and (2) Regulatory acceptance.

(1) Adoption & Scale

Let's get straight to the point here. According to its whitepaper: "Libra's core mission is to enable a simple global currency and financial infrastructure that empowers billions of people". As with most digital goods and services, the issue of adoption and scale is directly correlated to the efficiencies of the onramps and off-ramps (taking deposits and making withdrawals) provided by the infrastructural layer supporting them e.g., exchanges like Coinbase or Binance for cryptocurrencies. Interestingly, Libra's whitepaper mentions the term "global currency" five times, meaning that Libra's ambitions are to skip the intermediate step of concurrently using cash and digital payments, and somehow become a primary currency used by most economies around the globe.

But, just how ambitious is Libra? In short, very! We know stablecoins are traditionally backed on a one-to-one basis by mainstream assets like the U.S. dollar e.g., USD Coin, while others are collateralized by baskets of cryptocurrencies e.g., Havven. Some of these use algorithms to maintain stable values e.g., CarbonUSD. Libra is a different beast that uses a basket of real assets -- currencies such the US Dollar, GB Pound, and Japanese Yen, as well as, government bonds -- to be backed by, in what it calls the Libra Reserve. This has profound implications on adoption in targeted unbanked-heavy economies as Libra will have to coexist with the local currency, and be supported by the existing financial on-ramps and off-ramps (Bank branches, ATMs, MPesa agents etc.). Local governments are thus likely to demand concessions before allowing Libra access to its market, such as: (1) The Libra reserve must contain assets denominated in the local currency, (2) access to facets of the transaction data to track possible money laundering cases, and/or (3) permitting the local central bank to retain control over the monetary supply necessary to implement monetary policies. Iran and North Korea are good examples of a countries whose imposed sanctions by the U.S. could hinder the adoption of the digital currency by its unbanked target market.

(2) Regulatory Acceptance

Facebook have been clever here. Firstly, the Libra Association is made up of regulated entity partners who will provide the front-end platforms (on-ramps and off-ramps). Facebook is not required to become a financial entity as a result. Secondly, Calibra is set to "have strong protections in place" to keep the reserves and private information of users safe. Bank-grade KYC / AML processes are said to form part of these protections, as well as, automated systems designed to proactively monitor activity and prevent fraudulent behaviour on user’s accounts. Lastly, Libra, supported by its Association members, could be the whipping boy of cryptocurrency – defending the ecosystem against regulators, politicians, institutions, and central banks that seek diminish its legitimacy.

Such regulatory question marks have led to the creation of a task force within the Group of Seven (G7) nations to address these. There is a major concern that Libra will severely threaten not only the economic structures of the global economy, but the political dynamics as well. France’s finance minister, Bruno Le Maire, making this explicitly clear by stating that “It is out of question’’ that Libra be allowed “become a sovereign currency a sovereign currency, and thus. The G7 currently consists of Canada, France, Germany, Italy, Japan, the U.K. and the U.S.

Keep a firm eye on the Libra scales over the coming months -- like our artwork for the week depicts -- these are exciting times.

For more detail see the following:
Basic breakdown
10 Takeaways from the announcement

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Source: Libra Association (via Techcrunch), Libra (via Financial Times), Facebook Libra (via Financial Times)

ARTIFICIAL INTELLIGENCE: Follow up -- Humanity fights deepfake AI algorithms with AI algorithms

Last week, we noted the terrifying reality of how artificial intelligence (AI) can now be used by malicious actors to conduct espionage. Using sophisticated AI algorithms to trick their targets into perceiving the false as real.

Don't pack for the hills just yet. What should be comforting is that the same degree of sophistication used to create deepfakes is being used to counter them. Take Adobe -- a company renowned for their photoshop product, which is often used to edit and manipulate images using their advanced software toolkit -- who is collaborating with students from UC Berkeley to develop a method for detecting edits to images in general. Initially focussing on detecting when a face has been subtly manipulated using Adobe Photoshop’s own Face Aware Liquify tool which makes it relatively easy to modify the characteristics of someone’s eyes, nose, mouth, or entire face. As with any neural network, training to move beyond this initial use-case will take time.

Decentralized public network Hadera Hashgraph has been a prominent promoter of how Distributed Ledger Technology (DLT) can play a vital role in establishing the origins of a form of media (images, video, and sound). DLTs are really good at providing an immutable and distributed timestamping service — in which any material action (an edit) conducted to a piece of media secured by the specific DLT is recorded via a timestamp. Such a timestamp could indicate an edit made by a malicious actor.

Earlier this month, saw Microsoft remove its MS Celeb database of more than 10 million images of 100,000 faces, primarily used by Chinese surveillance companies. Initially intended for academic purposes, the concern was that this database was being used to train sophisticated AI algorithms for government surveillance, as well as, deepfake applications. 

The U.S. House is currently developing the DEEPFAKES Accountability Act -- are you ready for the acronym: Defending Each and Every Person from False Appearances by Keeping Exploitation Subject to Accountability Act -- which seeks to criminalize any synthetic media that fails to meet its requirements to brand it as such. The Act would enforce creators of synthetic media imitating a real person to disclose the media as altered or generated, using "irremovable digital watermarks, as well as textual descriptions" embedded in the metadata.

Within a financial context, there is no doubt that cyber crime takes the lion's share of most financial institutions -- in 2016, JPMorgan doubled its cybersecurity to $500 million, and Bank of America said it has an unlimited budget for combating cyber crime. As the threats of deepfakes become more prominent for financial institutions, should they ensure that, not only action against such an attack forms part of these budgets, but they should be actively investing in the solutions above in order to accelerate the development in the neural networks needed to form an effective defence against deepfake attacks. 

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Source: Adobe Deepfake detection tool (via Engadget), Deepfake detection (via CBS News), DEEPFAKE Accountability Act

NEOBANKS & FINTECH: Secrecy reigns supreme as JP Morgan recruit for new digital bank, and Revolut seek beta testers for their new in-house payments processor

Neobanks, Challenger banks, Digital Banks, Fintech Banks -- the complicated taxonomy of how we classify the companies bound to these labels seems to be ever-changing. What's consistent is that Fintech is, at its best, multifaceted, difficult, iterating on a solution to cater to the largest customer demographic as possible. Access and democratization are its core values, even if it is not decentralized nor truly disruptive. Get this wrong and you are subjected to a fate similar to that of JP Morgan Chase's recently deceased neobank Finn.

In 1892, two boxers, Harry Sharpe and Frank Crosby, went head to head for 77 rounds lasting five hours and five minutes, making it the longest fight in the sport’s modern history. Like one of the boxers in the late rounds of this fight, JP Morgan is pretty beat up having lost the neobank round, but the investment bank isn't done with digital-first products just yet. Although there is very little information in circulation, JP Morgan is said to be recruiting for a secretive Fintech skunkworks project based in London. The goal is to build a completely cloud-based banking platform i.e., AWS for banking, similar to that of Starling Bank or 11:FS Foundary. The offerings are said to compete with Goldman Sach's digital bank Marcus, as well as, challenger banks Atom and Tandem. Success would mean considering digital as a transformation strategy, as opposed to a mere channel. If JP Morgan get this wrong the second time then we will continue to watch them fight a losing battle in the longest match in history.

Digital as a transformation strategy seems to be the philosophy behind Revolut's latest move to build their own payments processor. We will remind your that a payment processor is a company that handles the secure authorisation communications between the different players in the payment workflow e.g., PayPal. Revolut's processor will be called RevP, and is currently in a public beta test to work out some kinks in hopes of processing the millions of Revolut transactions which take place across the globe each day. In our recent payments report, we noted that Payment Processors can take as much as US$0.30 per transaction from the merchant. The long tail of online commerce (i.e., the many small shops on the Web and social networks like Instagram) has been trending towards renting software from horizontal platforms. This includes website development tools like SquareSpace, storefronts like Shopify, various marketing agencies, and payments solutions like Stripe. Stripe claims to generate a 50-70% reduction in ongoing costs per 1,000 annual transactions, which is particularly meaningful for small businesses. This is a juicy steak for Revolut to sink its teeth into, don't you think?

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Source: JP Morgan's secret digital bank (via TechCrunch), Autonomous NEXT Analysis

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

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

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

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

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

Fintechs such as Square and Stripe are prime examples of digital startups that have used their enrolled bases of small merchants to cross-sell other services. Ride-hailers are starting to take note by replicating this model -- using their extensive base of both drivers and riders to build out their own ecosystems.

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

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

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

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

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

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

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

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

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

PAYMENTS: E-Commerce sales growing at a "solid" 12.4% vs. Retail's 2%. What is driving this?

Last week was made great by the release of Mary Meeker's Internet Trends report. If you haven't seen the 2019 version yet, what are you waiting for? Time to read 334 slides in 30 minutes. The key takeaway we remember from last year was the broad digitization of commerce, with E-commerce living in the web and in our mobile apps, plus the augmentation of the physical space with embedded digital commerce. See entry 1 above. 

Ecommerce is still very much a highlight of this report. Specifically, the fact that US ecommerce sales growth is noted as being “solid”, reaching 12.4% year-on-year growth in Q1 of 2019, up from 12.1% in Q4 2018. Similarly, physical retail sales are noted as “solid”, albeit growing more conservatively at 2%. Additionally, customer acquisition costs were found to be rising to unsustainable levels.

What we found most interesting about the reported ecommerce growth in 2019, is its sources where not only from the expected channels i.e., offline sales shifting to online, or search-directed sales on ecommerce websites. Rather, Meeker’s report tells a story of retail becoming a feature that is integrated into apps and services of every kind, and ecommerce reaching new communities and demographics: (1) Social apps -- like Kakao, Line, and Instagram are increasingly integrating transaction and ecommerce features. The monetisation of features embedded in large scale attention platforms makes sense.(2) Ecommerce platforms are making delivery a focal point of their offering. Much of the friction on these platforms lies in the delivery phase of the customer's journey with either cost or time creating negative experiences. Data-driven and direct fulfilment is growing rapidly with agile and low cost third-party platforms -- such as Rappi -- helping to remove such friction points. Enabling local merchants to expand their online presence, and improve access of their ecommerce platform to customers in entirely new and traditionally inaccessible markets. (3) Online grocery formats in China are competing for consumer wallet share. Here, Meeker showcases the sheer variety of grocery retailers competing using different formats for customers to access them i.e., digital-only stores, physical stores with a native digital app, digital-only stores that leverage a franchised community of retail partners to provide the goods and deliver.

It's always good to know we were right. As our 2019 predictions state "customer acquisition costs will rise and the digital model will become more competitive as servicing costs commoditize at a cheaper price point. What we mean is that if everyone -- including large operating businesses -- will understand how to market to and serve Millennials, driving away the arbitrage opportunity Fintech companies have had to date". We'll take that!

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

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

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

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

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

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

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

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

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

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

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

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

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

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

NEOBANKS: JP Morgan Chase's Finn proves that digital banking is tougher than you think to get right

JP Morgan Chase's Finn -- is a bit of a hybrid -- a digital app loaded with features suited for its millenial target market, as well as, a digital branch mechanism to transfer customer's funds to new Chase checking and savings accounts. The reason for this was to attract customer's that sought to bank with Chase, but had little to no access to a branch. The digital banking app launched in 2018, and soon proved that the Chase brand was in fact best positioned to provide that combination of services to Finn's 47,000 customers.

Three important takeaways from this: (1) Consumers who open accounts with digital banks don't do so because they want a bank with no branches. A higher value is attributed to better financial management tools, rewards, and interest rates. (2) A differentiated service offering than what exists in the market is critical to garner significant adoption rates amongst a younger target market. Finn didn't offer its consumers -- nor existing Chase customers -- anything they couldn't get elsewhere. (3) A lack of understanding the market you are attracting, is probably the cause of poor uptake. In a recent poll by Cornerstone Advisors research – Finn had clearly tailored its market to the wrong demographic with just 7% of 20-something Millennials and 6% of 30-something Millennials said a digital bank would be in their consideration set. Contrast that to the 9% of Gen-Xers and 7% of Boomers who said they would consider a digital bank.

This is Fintech 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. The kicker is if you get this wrong, then call it a day. 

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Source: Finn Bank (Via Chase), Insight Vault Q4 2017 (via Cornerstone)

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

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

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

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

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

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

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

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

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

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

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

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

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Source: Autonomous NEXT Analysis

FINTECH: Greentech and Fintech are a match made in heaven

Here me out here. Decarbonisation and sustainability are becoming buzzwords within the hallways of big venture. Why? Because -- global warming tensions aside -- financial services companies both big and small are coming to the realisation that they are the end customer for energy startups focused on operations, management, and analytics platforms. Bloomberg backed this up in a recent report indicating that investments into the Global clean energy totaled $332.1 billion in 2018 -- with Solar and Wind receiving the lion's share of investment at 39% each.

Politics aside, renewable resources have grown more cost competitive as a direct result of production economics -- sourcing cheaper and more efficient methods and resources to harness energy in more sustainable ways. For example, Tesla's solar roof is deemed to be 20% cheaper than a normal one. So where does Fintech fit in all of this? Since alternative energy generation sources like wind, solar, and fuel cells have become more cost competitive and popular, financial players have stepped in to source the tools and platforms necessary to maximize the return profiles of these alternative energy generating assets -- specifically using technology to inform the operational and financial performance of such assets. For example, blockchain enabled energy trading platform -- Electron, insurance and risk management platform -- Energetic Insurance, or renewable energy finance plans and services platform -- Sunrun

Ultimately, it is without a doubt that what Fintech brings to the table is customer centricity -- creating enjoyable user experiences via friendly graphical interfaces and having an obsession with cost efficiency where it matters most for the customer. Case in point is what Transferwise did for cross-border payments, or Robinhood for stock trading, or Venmo for payments. Yet, it will be up to the greentech startups as to whether the inherently dirty financial services players have cleaned up their act enough to join them on their journey. For more on this, read here.

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Source: BloombergNEF Report, Chubb Cleantech's Global Balancing Act Report, Electron (via Etondigital),Sunrun (Plans & Services)

BLOCKCHAIN & CRYPTO: DLT consortia are racing for the lion's share of the $1.5 Trillion Trade Financing Gap

Financial products -- including their embedded processes and inherent risks -- are transforming from legal paper to software. And as that happens, it is technology companies that are best positioned to manage, analyze, report on, and safekeep our money. The latest victim of this is Trade Finance - a practice that facilitates $16 trillion of trade around the globe on an annual basis. In short, trade finance covers the financial products, processes, and instruments involved in financing domestic and international trade and commerce. Each transaction often involving multiple actors (+20 in some cases), such as importers, exporters, banks, carriers, customs officials, and insurers. The juicy bit is the potential to digitize and modernize the manual, paper-intensive, and prone-to-risk processes involved in each transaction e.g., managing the cost and time implications of a trade war between two countries -- US v China showdown.

Enter distributed ledger technology (DLT), which has taken aim at the 1-2 week long paper-pushing documentary credit process. Essentially, a documentary credit is a commitment of liability by the issuing bank (representing the buyer/importer) assuring the seller/exporter that payment will be made once the goods have been received -- reducing the credit risk associated with the trade. The immutability of data and speed of distributed ledgers helps reduce the need for manual verification, as well as the risks associated with fraud, human error, and credit. Essentially, reducing the time it takes to execute the process of documentary credit to just 24 hours using smart contracts, and a purported 35% reduction in overall costs.

Interestingly, the first live end-to-end trade finance transactions on a scalable application for a fully digitized documentary credit using DLT took place in May last year, involving HSBC, ING, BNP Paribas, and Bangkok Bank. A year later, and trade finance is the 3rd most targeted sector for DLT use, involving industry consortia such as Voltron and Marco Polo -- built on R3's Corda DLT Platform, we.trade and eTrade Connect -- built on IBM's Hyperledger Fabric platform, and komgo -- built on JP Morgan's Quorum platform, all of which are after the lion's share of the $1.5 trillion trade financing gap and a piece of the $1.1 trillion of increased trade volumes by 2026.

This week at IFLR's Fintech Europe 2019 conference, we learnt that Voltron - a consortia of 12 banks building a single platform to digitize all document collection, tracking, and the facilitation of exchange for Documentary Credit via its network - has recently completed global trials which saw over 50 banks and corporates participate in the simulation of multiple digital Documentary Credit transactions across 27 countries, covering a range of goods traded including soybeans, plastic derivatives, metals and wool.

So what does this mean for the future of Trade Finance? Firstly, it's likely that the International Chamber of Commerce (ICC) will release a governance framework consisting of technology standards and business rules to oversee the practices of industry consortia. Secondly, interoperability of industry consortia platforms will be critical to how they integrate with existing bank systems. Finally, it's easy to relate what Voltron is trying to achieve in trade finance to what the SWIFT Network did in cross border payments -- transferring digital data between banks and corporates, although without the help of DLT. Given this, the possibility of a platform like Voltron to become the next generation SWIFT network -- adding a payments mechanism to its Documentary Credit platform is highly likely. Such a payment mechanism could use tokens enabled by smart contracts linked to IoT devices (See Project Forcefield) tracking the goods traded. In effect, removing the need for multiple intermediaries (e.g., Issuing Bank) required to alleviate risk exposure. We can dream.

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Source: Digital Innovation in Trade Finance (BCG), Trade Finance & Blockchain ReportRebooting a Digital Solution to Trade Finance (Bain&Co)

ARTIFICIAL INTELLIGENCE: Amazon's new wearable edges us closer to a reality of emotionally manipulative financial institutions

In the past, we have touched on how a specific device that you use for conversational interface interactions will be locally better at understanding you -- rather than some giant squid-like monster AI hosted on Amazon Web Services. But, what if the conversational interface device is the friendly avatar to such a terrifying AI monster that possesses the ability to emotionally manipulate its user? Well, Isaac Asimov eat your heart out, Amazon are reportedly building an Alexa-enabled wearable that is capable of recognizing human emotions. Using an array of microphones, the wrist-worn device can collect data on the wearer's vocal patterns and use machine learning to build models discerning between states of joy, anger, sorrow, sadness, fear, disgust, boredom, and stress. As we know, Amazon are not without their fair share of data privacy concerns, with Bloomberg recently disclosing that a global team of Amazon workers were reviewing audio clips from millions of Alexa devices in an effort to enhance the capability of the assistant. Given this, we can't help but think of this as means to use the knowledge of a wearer’s emotions to recommend products or otherwise tailor responses.

Let's step back for context. Edge computing is the concept that there are lots of unique distributed smart devices scattered throughout our physical world, each needing to communicate with other humans and devices. Two layers of this are very familiar to us: (1) the phone and (2) the home. Apple has become a laggard in artificial intelligence -- behind Google on the phone, and behind Amazon and Google at home -- over the last several years. Further, when looking at core machine learning research, Facebook and Google lead the way. Google's assistant is the smartest and most adaptable, leveraging the company's expertise in search intent to divine meaning. Amazon's Alexa has a lead in physical presence, and thus customer development, as well as its attachment to voice commerce. Facebook is expert in vision and speech, owning the content channels for both (e.g., Instagram, Messenger). We also see (3) the car as developing a warzone for tech companies' data-hungry gadgets.

Looking back at financial services, it's hard to find a large financial technology provider -- save for maybe IBM -- that can compete for human attention or precision of conversation with the big tech firms (not to mention the Chinese techs). We do see many interesting symptoms, like KAI - a conversational AI platform for the finance industry used by the likes of Wells Fargo, JP Morgan, and TD Bank; but barely any compete for a relationship with a human being in their regular life. The US is fertile ground for this stuff, because a regulated moat protects financial data from the tech companies. Which is likely to keep Big Tech away from diving head first into full service banking, but with the recent launch of Apple's AppleCard we are starting to see vulnerabilities in that analogy. So how long can we rely on the narrative so eloquently put by Chris Skinner"the reason Amazon won’t get into full service banking is because dealing with technology is very different to dealing with money; furthermore, dealing with money through technology is very different to dealing with technology through money"? Also, how would you feel about your bank knowing when you are at your most vulnerable?

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Source: Bloomberg Article, KAI Platform (via Kasisto)