Wrap of Week #34: Data and robo-advisors, SmallBiz, Credit reporting, Insurtech trends, Investment returns


About Daily Fintech Advisers

Alternative data (a broad term), types and quality, is not really used by Robo-advisors. A first look at what data feeds robo-advisors and what potential exists.

Why serving SmallBiz is becoming a smart move after being a dumb one in the past.

From Australia a look at evidence that Fintech players are pushing on Comprehensive Credit Reporting.

A look at what VC funding in the insurtech sector is telling us about the direction of the market, here.

The Millennials (a controversial term in the Fintech community, see Fintech Genome conversation here) aren’t really what is at heart of the unstoppable robo-investing trend. It’s the fees stupid! Fee Adjusted Return On Capital (FAROC)

On the Fintech Genome you can read or engage in many interesting conversations on Chatbots, Mortgage banking, Corporate Lending, P2P lending Transparency, Banking APIs, disruptive insurance products, Yirendai, etc.

Two conversations related to SmallBiz and Robos are: “The US B2B robos are powering ahead” and “Banks and Lending marketplaces in partnership for corporate lending”. A nascent area is MortgageTech, join the conversation here.

You can also read about How to generate great conversations or listen to a podcast version from the moderators of the platform.

If you enjoy reading the Daily Fintech insights by our experts è Subscribe to this newsletter.

If you want to engage and converse with the Fintech community è Register on Fintech Genome. 

It’s the fees stupid! Fee Adjusted Return On Capital (FAROC).


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It’s the fees stupid! is one thing that old and young can agree on

One conference session that I ignore is the one that tells me that Millennials use mobile phones and that explains their adoption of new financial services. The conference session usually starts with a middle aged exec telling a story about his/her teenager(s) and their use of mobile and how we must build a User Experience (UX) that meets what those teenagers want . All the UX talk disguises the harder truth about Millennials which is that they got sideswiped by the Global Financial Crisis and are saddled with student debt and hobbled by a weak job market. In short, its the fees stupid! 

At the other end of the age barbell, pensioners got sideswiped by prolonged ZIRP/NIRP and they don’t buy the idea that they should take on a lot more risk, so they get out their bifocals to look hard at the small print showing the fees. They will adopt the same services as the Millennials if they deliver better Fee Adjusted Return On Capital (FAROC). 

Millennials and Baby Boomers agree on one thing – It’s the Fees Stupid!

UX design and mobile technology is the essential tool that abstracts complexity to make a service easy to use, but ease of use is not the end objective – the objective is lower cost delivery to enable lower fees. 

Whether the fees are for ATMs or Fund AUM or Overdrafts or whatever, we are in the cheap decade (or two). Cheap wins. That is a very uncomfortable fact if you sell expensive products/services. Grasping that fact is tough for both FinServ (incumbent Financial Services firms) and Fintech startups, because the low fees do not support expensive marketing.

In this post, we focus on low fees for asset management. The same low fees trend is also hitting consumer banking, but that is another story.

Low fees leads to a marketing challenge

In ye olden days, marketing a fund was easy. You charged high fees and paid intermediaries a big chunk of those fees to gather assets.

When your fees are a few Basis Points, the intermediaries cannot make enough money. So you look at selling direct using digital technology. After all, Facebook and other free social media services did this and did not spend a dime on advertising. So why do we see so many ads for B2C Fintech startups? The answer is simple – there is a friction chasm between free and cheap (even very, very cheap). Consumers will adopt a new free service easily when the only cost is a bit of their time, but as soon as the service asks for money (even a very, very small sum of money) the consumer hesitates and that leads to much lower conversion and much higher CAC. You need a trusted brand to get people to entrust their hard earned money and creating a trusted brand costs time and money – lots and lots of time and money.

Of course there is a spectrum of solutions for B2C Fintech marketing but the simple reality is – it ain’t easy and it needs deep pockets.

So Fintech looks to partner with FinServ – in short, B2B2C. This can be a good strategy as long as their is realistic thinking on both sides (a subject we explore in this post).

The simple reason you cannot beat Vanguard on fees

The asset management business has been selling expensive for a long time. The pitch has been that Hedge Funds are better than Mutual Funds which are better than Index Funds and Private Equity is better than Public Equity – in short, the more expensive the better.  Given the necessary budget, customers will always prefer the more expensive car because there is kudos as well as utility, but it does not work that way with money. Customers might get kudos in the country club for using Hedge Funds and Private Banks and Private Equity, but Fee Adjusted Return on Capital (FAROC) is what enables customers to keep paying those country club fees.

Millennials with tiny sums to invest are going to low fees. So are middle class Baby Boomer retirees searching for yield.  In between, there are a lot of folks who will retire with much less money because those entrusted to look after their pensions paid a lot of fees to fancy asset management businesses (see this story about Ohio) and those pension managers will get told not to do this by regulators. Even Warren Buffet is advising his heirs to invest via index funds.

Vanguard has been singing this tune for 40 years.

John Bogle established the first Index fund in 1976 and initially raised $11 million. Vanguard now manages approximately $3,400 billion in assets, dwarfing the number two Index player, BlackRock, with about $451 billion in Index assets and making the leading Robo Advisers with $2 billion to $5 billon look like they have an impossible catch up job.

The VC funded model of innovation does not allow for 40 years – VC GPs need to get liquidity within 10 years. One can argue that the startups can move faster now because 40 years of Vanguard singing this tune has got the message across and so consumers are receptive to low fees. Yes, they are and the conjunction with a relatively impoverished Millennial generation and Baby Boomer retirees starved of income by ZIRP/NIRP, makes the message even more attractive.

There is nothing wrong with the low fees message and value proposition. It is delivering on that value proposition and making a profit on that delivery that is the challenge.

Delivering low fees is a volume game and Vanguard is winning that volume game by a big margin. The more volume they get, the lower their fees will become, because they have no shareholders to please and it is almost zero incremental unit cost. I would not want to compete against that. It is worse than competing against Saudi Arabia as an oil producer.

The puck is going to Low Cost Alpha and Absolute Returns

Every trend that crosses to the mainstream leads to opportunity opening up elsewhere. As passive investing goes mainstream, the opportunities for active stock pickers gets better. It is simple supply and demand. Fewer stock pickers leads to more inefficient markets and that means bigger opportunities for few remaining stock pickers.

(I am using the term stock picker loosely, it could be any asset class and could be short as well as long).

It is still a Fee Adjusted Return on Capital (FAROC) game. It is just that the Return is a bit higher and the fees are a bit higher.

Traditionally this has been a game for Hedge Funds i.e. selling a high fees + high returns proposition. This is where the new follower model of Invest Then Gather Assets  is replacing the traditional model of Gather Assets Then Invest and that model allows for lower fees. In this post, we look at how this is impacting the high fees VC business, but it also applies to what we now call Hedge Funds (which invest in every style, the only common factor being the compensation model).

Hedge Funds used to mean hedging i.e. going against the market trend to ensure good absolute returns uncorrelated with the market. Sophisticated investors use these techniques, using quant based risk management. This is now being democratised by what we call Robo Adviser 2.0 startups. The simple mission is to lose less when the market declines so that your absolute return (not tied to an Index) is good. Fees is the focus of the democratisation. The end game is the same – Fee Adjusted Return on Capital (FAROC).

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge platform.

We look at biggest Fintech VC deals of 2016 to see where the InsurTech puck is going


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We looked at the 30 biggest VC deals in Fintech for 2016 (courtesy of CB Insights Pulse of Fintech Report) to see where the InsurTech puck is going to. The answer is blindingly obvious when you look at the 3 out of 30 that we tagged as primarily Insurance focused:

  • Oscar Health
  • Clover Health
  • Bright Health


Yes, big VC money is being invested to fix Health Insurance

Only 3 out of 30 deals does not sound much (10%), but they are all big deals and the total invested in those 3 is $640m and that is nearly 50% of the total that went into North American deals (the amount going into Asia was nearly 2x that going into America, but that is another story). This amount of VC money is a good indicator of traction, so it is worth looking at what they are doing.

The reasons why VCs love investing in Health Insurance is pretty obvious – it is a massive market and very broken i.e. customers urgently need something better (ask any consumer what they think of Health Insurance or look at Net Promoter Scores). However it is very hard to fix. You can say that curing cancer is a big market and customers want something better but that does not mean it is easy to find a cure for cancer.

You cannot change Health Insurance in any significant way unless you can also change the Provider side. That is where VCs have an advantage. They can see that the innovation in digital health is for real. Funding for digital health is on a tear. So that will make innovation on the Health Insurance side more likely.

We already looked at Oscar Health, which scores as the biggest HealthTech round and fortunately Amy Radin has taken on the challenge of analysing the massive complexity of the US Health Insurance business in two posts (here and here).

Bright Health is interesting because this was an $80m Series A. That is a lot of money for a first institutional round. There are two VCs (NEA and Bessemer) and both are top tier and have deep pockets; one assumes big follow on rounds will be needed for them to have an impact on such a massive market with big entrenched incumbents. This is not a garage startup with some young techies with a Minimum Viable Product. The CEO, Bob Sheehy, is the the former CEO of United Healthcare. The best analysis is in Modern Healthcare magazine. This is a full stack regulated venture aiming to be an alternative to existing insurance companies.

Clover Health is also a full stack regulated insurance startup. Consumers can buy Health insurance today (as long as you are in New Jersey, Health insurance has to grow state by state). Their round was Series C, so they are more developed than Bright Health, but this is a market where a top team with plenty of capital can do well by learning from those who were early in the market – it is not necessarily a game with first mover’s advantage. Clover Health has an interesting focus on the doctor. The idea seems to be that if doctors have an easier time on the paperwork front the best doctors will want to work with Clover, which will benefit consumers.

Another full stack regulated insurance startup is ZoomCare, but there is no evidence of recent funding.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge platform.

Fintech players up the ante on Comprehensive Credit Reporting

27321078025_41a7f7892e_oImage credit: Cafe Credit

In March 2014 the Australian Parliament rubber stamped new Credit reporting & Privacy Laws that enabled Credit Providers (CPs) and Credit Reporting Bureaus (CRBs) to commence voluntary Comprehensive Credit Reporting (CCR).

Australian lenders are well behind on CCR, much to the detriment of Australian borrowers, argue many fintech startups. Compared to the major four banks, fintech CPs suffer from large information asymmetries when it comes to assessing the credit risk of a potential customer. Many new lenders claim that if they were provided with access to repayment histories and a more detailed break down of the lending obligations a customer has outstanding, loan pricing could be more far more discretionary and potentially cheaper for a vast number of Australians.

A recent study by Veda tends to support this claim, showing a borrower’s creditworthiness increases when CCR data is available. Using the CCR data it holds on 24 percent of the retail Australian credit accounts it has on file, Veda’s study found the average score for an individual once CCR data was incorporated was materially higher than without.

So if CCR data is generally positive for both sides of the lending/borrowing equation, why is the Australian financial sector dragging its feet? And why is it so hard to work out what lenders are participating in CCR? Surely this is a competitive advantage for a financial institution and a benefit they can offer their account holders? Most likely because this stranglehold on customer data is one competitive moat incumbent financial institutions are relying heavily on going forward.

And it certainly is a deep and powerful moat at that. For no matter how slick and clever the delivery of your lending product is, if CRB data is a key input into whether or not you on-board a customer, then you’ll always be at the mercy of a competitor with better overall data they can use in conjunction with a credit score. Especially a competitor like a bank who holds the vast proportion of data points that make up the proposed CCR framework and is no doubt already leveraging them to their full advantage.

While many lenders are innovative at the front-end, it’s hard to be truly innovative at the back-end (where credit assessment takes place) when data isn’t readily available.  A few brave players overseas have tried to disrupt this thinking by doing away with traditional CRB scores altogether. SoFi is one such fintech lender. It’s yet to be seen how this will play out in the long term.

Government intervention

Australia’s 2014 Financial System Inquiry concurs with the broader fintech industry view that the benefits of CCR far outweigh the potential negatives often touted by CCR detractors. Recommendation 20 of its comprehensive report stated the Australian Government should:

Support industry efforts to expand credit data sharing under the new voluntary comprehensive credit reporting regime. If, over time, participation is inadequate, Government should consider legislating mandatory participation.

In 2015, the Government’s response to the inquiry’s recommendation was relatively lacklustre, stating:

The Government agrees to support industry efforts to implement the CCR regime, but will not legislate for mandatory participation at this stage. The CCR regime has been in place for a little over a year and authorised deposit-taking institutions are still in the process of working to participate in the regime.

It has now been a solid two years plus since the new legislation came into effect. Given the opaqueness of CCR implementation across the lending sector, it is unclear how effective the call for voluntary participation has been.

Ratesetter is one fintech lender who has put its money where its data is. In December of last year it claimed it was, “the first Australian lender to fully implement Comprehensive Credit Reporting (CCR) data sharing with Veda, Australia’s leading credit bureau.” Obviously if fintech lenders want the industry to take steps towards CCR, then leading the charge is vital.

Consumers are slowly waking up to the fact that creditworthiness can be a powerful negotiating tool with a lender. A consumer led, bottom up approach may indeed help fan the flames for faster CCR implementation by the industry. Pre-election, the Labor Party campaigned on driving mandatory CCR. If it keeps the heat on for a Royal Commission into the banking sector then this byproduct issue may get some national attention.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Jessica Ellerm is a thought leader specializing in Small Business.

Why serving small business is a smart move (after decades of being a dumb move)


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In 1954, Fortune 500 companies accounted for around 1/3 of GDP in America. By 2000, that share had doubled to 2/3. Hidden in those numbers are the countless family farms that could not withstand the onslaught of Agribusiness and the Mom & Pop shops that closed when Wall Mart came to town.

During those years it was a very dumb move to serve small business. You did better by focussing on either enterprise or consumer – both had a well proven path to success. Small business had the CAC of enterprise with the price point of consumer – OK, I am exaggerating to make a point.

Imagine a world where that cycle reversed. Imagine that small businesses got back the 1/3 of the economy that they lost in the last 50 years.

This may be about to happen. This shift will have dramatic implications for investors, entrepreneurs and employees.

Professor Coase, Please Explain

Ronald Coase won the Nobel Prize for Economics in 1991, but his key work was done in the 1930s.

His main theory, described in his 1937 essay The Nature Of The Firm, is that a company exists because it is cheaper to do transactions within a company than outside the company.

The Internet has resurfaced this theory as a practical consideration.

Coase’s theory about transaction costs was pretty much ignored by business executives because it was only theoretical. Big companies took a bigger chunk of the economy during the last 50 years because they served a very real historical purpose. That purpose was to turn scarcity into abundance by manufacturing mass-produced products and selling them through mass-market distributors to retailers through warehouses and road/rail/air freight logistics. Surrounded as we are today by an abundance of mass produced products, it is hard to remember a time when people were concerned about scarcity of basic things such as food and cars. Big companies solved that problem. Small companies could not solve that problem. The job required economies of scale, vertical integration and large amounts of capital.

Digitization erodes the value of traditional economies of scale and vertical integration. This is what tilts the playing field in favor of small business.

The Internet now enables transactions of all types to be managed more efficiently externally than internally. Start-ups outsource everything that is not the one thing that they have to excel at.

A few brilliant entrepreneurs figured this out early

Scale is not dead. It is just that digital scale based on network effects has replaced analog scale based on purchasing power and vertical integration. Platforms to serve entrepreneurs have done well – think Alibaba, eBay, PayPal, Uber, AirBnB.

What gets Blockchain aficionados excited is the prospect of fully decentralised versions of these platforms with a much lower take (ie more cash for the entrepreneur, lower costs for the consumer). So we are only in the early days of this trend of meeting the needs of small business.

Meet the AirBnB entrepreneur

I dislike the Sharing Economy moniker – it smacks of marketing hype. Uber and AirBnB are not about sharing. Nor do I like the idea that we should regulate them away to protect the incumbents. They do serve a real purpose for entrepreneurs.

One of the pleasures of using AirBnB is talking to the hosts. They are entrepreneurs. Some are mini-hotel entrepreneurs. Most use AirBnB to give them a bit of financial freedom to work on a passion project that may turn into a business or to supplement that business while they get it going.

I am sure the same is true of Uber drivers, I just don’t have enough time on a short cab ride to get to know them.

The reason it is so hard to see the AirBnB host and Uber driver as entrepreneurs is that we look at this through the prism of a very brief period of history in the West.

First the Rest then the West

In the post war era in the West, the economy was dominated by big companies – and their employees who were referred to as consumers once their 9-5 gig was done.  There were very few Entrepreneurs, even though the media hype disguised this statistical reality. Entrepreneurs were much lauded in the media, but only if they later became big companies; Mark Zuckerberg is story that sells pixels, but another restaurant or gift shop is not.

In the Rest of the World (China, India, Africa, Latin America etc) it is a very different story. Most people there are self-employed entrepreneurs. Most of these micro entrepreneurs make less than a minimum wage employee in the West, but in aggregate these billions of micro entrepreneurs is one of the biggest market opportunities around – as long as you don’t try serving them with traditional Western consumer models.

Despite all the talk of the Millennials digital nativeness, the much more critical fact is that Millennials are financially much worse off than their parent’s generation, labouring under student debt loads in a weak job market. This explains the gig economy that Uber and AirBnB serve. However, Uber and AirBnB are only the tools to create some short term cash. For many, there are also platforms such as Alibaba, eBay, PayPal and Skype that let them trade globally as micro multinationals.

The 3 ways that the playing field is getting more level

When small businesses were being crushed by large businesses, from 1950 to 2000, focusing on serving small business would have been Quixotic at best. Now the playing field is getting more level in three key areas:

• Finance.  Real time supply chains are getting rid of the curse of inventory and new low cost financing networks are emerging (tracked by Jessica Ellerm every Wednesday on Daily Fintech).

• IT. Cloud technology with a consumer UX is replacing expensive complex enterprise IT. Innovation is flowing from small business IT to big business IT (a reversal of the historic trend).

• Sales & Marketing. Selling online (via B2B or B2C or B2B2C networks) is replacing those highways and distributors as the key to success.

With this leveling of the playing field, serving small business might be the smartest thing to do. This is especially true if you want to take advantage of the fast growth economies through globalization.

Daily Fintech Advisers provide strategic consulting to organizations with business and investment interests in Fintech. Bernard Lunn is a Fintech thought-leader.

What Data feeds your robo-advisor?

robot-picking-fruitMuch like vegetables, we should all be concerned with the Kind of Data and the Quality of Data. Choices of data (and veggies) abound and we need to pick the appropriate set-combo. Quality of Data is a more complex issue that troubles mostly risk managers and regulators but should also be of great concern to the broader investment ecosystem. These issues – Picking Type and Checking Quality of Data – affect increasingly our risk-adjusted returns and their properties over time.

In this post, we will focus on the conventional investment subsector and explore what types of Data robo-advisors of all sorts use or will invest in. In future posts, we will look at the same issue – Data gathering and Quality control – in other WealthTech sectors, like marketplace lending and private markets. If you want to start a conversation on these topics, click here.

The conventional investment subsector operates mainly with publicly traded securities and has been focusing mostly on individual stocks and wrappers like ETFs, mutual funds, and only lately PTFs that provide exposure to other asset classes (e.g. fixed income, real estate, digital currencies, or private equity).

Primary Sources of Basic Data

Stock exchanges have traditionally been feeding the market with basic, fundamental data for stocks and ETFs. In our coverage of the innovations out of stock exchanges, we looked at the areas of digitization and realized that focus is either in clearing and settlements or in private markets. In the area of primary data, we only note the adaptation of XBRL for financial reporting.

The Fintech Sandbox in Boston, is a non-profit that has been facilitating access to such basic quality data for startups to test their MVP reliably without incurring the usual costs. Xignite is the major disruptor in the space of primary financial data.

All robo-advisors use this type of data.

Secondary Sources of Data

Conventional Financial Data

Data related to mutual funds and indices, which at their core are nothing more than a portfolio of individual holdings, are the next kind of Data that the industry consumes insatiably. Lipper’s, Thomson Reuters, Bloomberg and Xignite, are the big providers in this space.

The rich variety of this kind of Data, starts with Fund Flows, insider activity, fund classification (e.g. value, growth, small cap etc), expense ratios, performance measures (e.g. Beta, volatility measures, return-to-vol etc), historical benchmarking, etc.

In this category, we include financial data that is used as an input for equity valuations, and projections on whether a stock is overvalued or undervalued. Data therefore, with estimates of earnings, revenues-sales, and growth, which traditionally have been provided by financial analysts on the Street. Estimize is the leading Fintech in this space, offering crowd sourced estimates for stocks.

Unstructured non-financial Data 

This is any data beyond the usual company filings. It can be web site traffic and mobile access for online businesses, parking lot traffic for physical locations, human resources data (turnover), twitter trending key words, drug pipeline for pharmaceuticals etc.

1010Data, has been offering such data to hedge funds for both equities and fixed income. Thinknum is a Fintech that focuses also in this space.

Sentiment Data

Using sentiment data (i.e. optimism, fear, trust, capitulation, etc), to drive investment decisions, is an alternative way that will eventually be combined with the other kinds of data.

In our two part coverage of the Sentiment space, we identified a couple of early partnership that are combining primary and secondary data types (e.g. Thomson Reuters with Amareos, E-trade with TipRanks, Ameritrade with Likefolio). Since this is a nascent space, we have opened a conversation on the Fintech Genome that tracks the developments. Edit the wiki or simply post in this live conversation that monitors the adaptation of sentiment data and analysis into the mainstream.

There aren’t any robo-advisors using yet this type of data. Currently robo-advisors don’t allow for a scenario “Go cash, don’t invest now” or combining momentum with fundamental and therefore, sentiment data doesn’t add value.

Model generated Data – Alpha-generated, AI & ML

Using model-generated data to rebalance a robo-advisory portfolio is the next trend that we anticipate. We foresee, that the robo-advisory space will be moving from a primitive MPT portfolio-rebalancing method, to one that is dynamic and uses data generated by models to enhance the rebalancing and also allows for “I am out of the market for now”.

 In summary, robo-advisors are mainly using the primary resources of data. Any robo-advisors using any of the secondary sources of data?

Alpima is producing and using model generated data. They are actually offering a rich variety of model generated fundamental data. Similarly, Elm Partners is using Value-momentum models; combining fundamental analysis with momentum-technical signals. Logical Invest, is a Fintech focused on signal providing for financial advisors and therefore, producing model generated data.

Quandl is producing unstructured non-financial data, sentiment data, and alpha generating data. Their offering is rich and is coined, Alternative Data; and for now is refered to as “unorthodox data”. Is Quandl, the alternative for Yahoo Finance? Join the live discussion on this topic here.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge Network.  Efi Pylarinou is a Digital Wealth Management thought leader.

Wrap of Week #33: Fintech Index, VCs, SmallBiz banks, US Health insurance, US Credit cards


Dailyfintech_logo_blue_2016-04-14-03We started the week with coverage of a new US Fintech index, a collaboration between KBW and Nasdaq.

On Tuesday, we looked at the disruption in the VC business that has been anticipated and happening, happening, …..

In Small Business, we covered the second installment of the reputation economy and our insights on the blueprint of a small Business bank.

In Insurtech, we covered the second installment around the complexity of health insurance in the US.

The week ended with a focus on America and the view that “Chip on plastic is incremental change, but Chip on mobile phone is a game-changer”. Check out our insights here.

The Fintech Genome platform is in its second month. More topics and longer conversations are shaping up. Here are more recent ones on: Chatbots, Mortgage banking, Corporate Lending, P2P lending Transparency, Banking APIs, disruptive insurance products, Yirendai, etc.

You can read about How to generate great conversations or listen to a podcast version from the moderators of the platform.

If you enjoy reading the Daily Fintech insights by our experts è Subscribe to this newsletter.

If you want to engage and converse with the Fintech community è Register on Fintech Genome.