With Lemonade out of stealth, the Fintech Genome community has a P2P bellwether to analyze

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The Daily Fintech founders are at SIBOS in Geneva; reporting every day, snippets of insights on the Fintech Genome. Stay tuned on all SIBOS Insights conversations.

We held our breath for nearly 9 months after the $13m Sequoia Capital Seed round for Lemonade was announced at the end of 2015.

Release breath – they are out of stealth mode.

The day we launched Fintech Genome (was it really only 3 months ago, it has been a whirlwind), all we could see was that P2P Insurance was hot and that Lemonade was likely to be a key player.

A few weeks later on this discussion thread all we really knew was that Lemonade was going direct and cutting out the brokers.

@oscar pointed out the significance of this

“I am under NDA with the firms I am working with but I can tell you that the Insurance industry is prepared to go direct and remove the broker barrier. The current broker model is broken, it does not serve any value to a business other than additional cost.”

Now we have some facts about Lemonade

After Lemonade’s coming out of stealth party, the Fintech Genome community weighed in on this thread.

This video is an accessible way to learn about Lemonade and answers some questions – The Science Behind Lemonade.

My takeaways were:

* home owners and renters

* Public Benefit Corporation

* eliminate brokers using AI

@rickhuckstep pointed out we should add fourth bullet point:

* Fundamentally aligns the interests of the insured and insurer

That is a big deal. Rick points out that they don’t profit from withholding a claim and goes on to tell us that:

“Lemonade take a flat fee of 20% of gross written premiums. They make their profit or loss from the fee.

The 80% of premiums remain to settle claims. It’s no skin off Lemonade’s nose if they pay out or not. Any surplus premiums are given to a good cause chosen by the policyholder”

@amyradin was ready to be an early adopter ending her review with:

“I’ll be shopping as soon as they offer coverage in my state!”

@amyradin key takeaways were:

  • “It’s well-known that Millennials are under-insured – what a smart move to make renters part of the V1.0 offering – an easy to understand, basic insurance product to bring a receptive audience into a relationship with the brand.
  • Lemonade has broken the win/lose basis of traditional insurance. In my work within the industry, speaking with people who own or seek to buy insurance, it’s not uncommon to hear people literally say, “when I win they lose.” Or vice versa. Aligning interests between the person buying insurance and the insurance carrier reframes the relationship, can reinstate trust, and gets back to the original idea behind insurance — pooling funds so members of a community can care for each other.
  • Love the Intelligent use of UX + Data + Virtual agent to have a truly personalized, relevant conversation that results in giving the person something they need, in easy to understand terms. This is surely an exemplar that will be studied — with attempts to imitate — within insurance and beyond. But putting ‘lipstick on a pig’ won’t work. The fact that Lemonade has been built from the ground up will make imitation hard.

 A stat shared at a conference I recently attended: 70% of millennials would rather do business with Google, Facebook, Amazon than a traditional FI. Insert “Lemonade” in that sentence. 

BTW also note that Lemonade is powered by one of the most renowned behavioral economists in the world, Dan Ariely.

Kudos for a true disruptor having the tenacity and focus to make a statement about what insurance can be.

@rickhuckstep pointed us towards the next P2P venture – Teambrella

“Lemonade are clearly a Wave 2 P2P insurer – what I call the Carrier Model.

Next will come wave 3 later this year with the likes of Teambrella”

Before it’s news, it’s on Fintech Genome.

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

Fintech’s might be scalable but are they defensible?

Scaling a business is a challenging endeavour for a fintech provider up against the big old boys of banking. Unlike an incumbent, in the early days many are single product shops, and often lack a decent loss leader. This can prove challenging on the pricing front, especially when you’re trying to get a foot in the door of a price-sensitive small business. Banks on the other hand have a number of cards up their sleeves – from bank accounts to payments – that can in essence be given away, priming them for a future up-selling opportunity.

In the early days of a fintech’s lifecycle, the mono-product strategy is often an advantage. A highly specialised provider can not only catch a bank on the back foot technology wise, but can often turn a dime in a market where margins are still relatively high across the board, thanks to a lack of competition. Winning customers with a technically superior product plus a marginal cost saving is the ultimate sweet spot for supercharged acquisition. ‘Wow’, says the prospective customer, ‘not only is this better than what I have, but it will save me $X per month. Sign me up!’

As the banking sleeping giants wake up, the easiest weapon at their disposal is price. Suddenly the fintech has to shift their sales pitch to a much more value orientated style of messaging. The deals will still be won, however the sales team will have to work harder for them. By continuing to innovate on the product front, then this attack is defensible using this strategy

But what next, after the purchasing decision is made? It is unlikely the customer ever stops fully comparing what they are using verses what the market has to offer. The purchasing state can be triggered at any time. And banks know this.

This is where it  becomes super important to work out how to continuously show the return on investment your fintech product is delivering verses your competitors. Most banks are terrible at this. However many fintechs are yet to work out how to fully exploit this to their advantage. This is where customer data and behavioural analytics can be mined in order to pre-empt the customers desire to shop around.

Show me the return

I’ve seen this in action in a few places. As part of our research at Tyro into the current account market we’ve noticed ING employing this type of ‘continuous ROI’ tactic. As part of their Australian cashback campaign, each month they’d let their customers know how much they’d earned.

But imagine if, for the very same account, how much more powerful this would be if you could state, with some degree of certainty, to what lengths you’d helped customers avoid paying late fees, dishonour fees and admin fees. You could even get customers, when they onboarded, to input these charges at the beginning of their contract, from their previous provider, so your assumptions were calculated using a personalised baseline.

Any fintech could then generate a continuous ROI measurement on their product and deliver this on a regular basis. The unfortunate reality is in startup land, many only see value in implementing these sorts of tactics once churn becomes a problem. When marketing and communication tools were seen as a cost centre only there was some rationale behind not expending unnecessary resources here. This is not the case anymore. In my opinion, increasing the sale-ability of your product is equally important as increasing the defensibility of your product. Most companies are catching up on the sale-ability front with online forms and lightening fast on boarding. These companies include banks – see Goldman Sachs Group’s latest announcement. On the defensibility front however, I think there’s plenty of opportunity.

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.

Goldman is leading the “Sell-side empowers the Buy-side” movement.

The Daily Fintech founders are at SIBOS in Geneva; reporting every day, snippets of insights on the Fintech Genome. Stay tuned on all SIBOS Insights conversations.

For years the Sell side was the incubator of financial innovation and the marketplace where products and services were designed and the platforms where market making and execution took place. The Buy side, were the institutional clients!

The buy side players have always included at hedge funds, asset managers at institutionsmutual funds and pension funds. Despite the fact that individual investors are technically on the buy side, the term has usually been reserved for professional money managers. Only recently, maybe, with the explosion of Fintechs democratizing the investing space that has been traditionally only available to professionals or HNW; we can broaden the definition of the Buy side.

For all kinds of asset classes (equities, fixed income, derivatives, structured products, ect), we all understood that the Sell Side was the service provider and in the driver’s seat or the power position; whereas the Buy side was the client. It was traditionally, a Sell-side market. The competitive advantages were on the Sell Side, the proprietary algorithms were mostly on the sell side. The Buy Side was captive (partly or wholly) to the Sell Side, in ALL the phases of the trading life cycle. Starting from portfolio construction, research, product discovery, execution, and post-trade monitoring.

Fast forward, to our customer centric era and ask yourself:

Is the Sell Side, still the Sell side and the Buy side, still the Buy side?

A 35,000 feet look

The Buy Side is still using the ubiquitous Bloomberg terminal or the Eikon Thomson Reuters tools.

Fintechs wanting to become the alternative ubiquitous interface for most of the phases of the trading cycle, continue to popup despite the fact that VCs and accelerators don’t recommend this subspace (“Forget about creating the next Facebook or Bloomberg terminal; look at AI and ML and Big Data and pick your focus”).

All the Fintechs that can potentially be part of the next generation platform that is mostly used by the Buy Side; are directly or indirectly empowering the Buy Side.

The Sell Side was into market-making, proprietary trading, brokering, and investment banking. Expensive and proprietary tools were developed in-house to support the lucrative businesses of running large books, taking risks, and market-making. All these businesses have been shut down by the regulators and the otherwise perceived competitive advantages, i.e. the proprietary software tools, have lost their resale value and their potential to generate revenues.

The Sell Side, has a Treasure in their vaults that is worthless for them (at least as used in the past) and is valuable for the Buy Side (it always was). The Sell Side can and should empower the Buy Side. Much like Google empowered me and you, and all the relevant B2B users, by offering its open source solutions on its platform.

Goldman Sachs is leading by example: “The Sell side empowers the Buy Side”

Gain a perspective from one of the many web-based applications, SecDB, that Goldman Sachs has developed in house:

“Securities DataBase, also known as SecDB, allows users to test out potential trades and assess the risk of those positions. Up until now it was so guarded that chief operating officer Gary Cohn said he wouldn’t sell the rights to use the technology for $1 billion—maybe for $5 billion, the Journal reported.” Source

SecBD, was initially developed to manage inhouse complex derivative positions. It grew into a sophisticated risk management tool, that professionals can use to integrate new information or change parameters for their decision making. It became the Risk management Bible, on your smartphone. Deutsche bank and the likes were salivating in the previous era, to license such a system.

Fast forward to today! Goldman says : “Just take it, for free” to its Buy Side clients.

So, what has happened that led GS to offer SecDB for free to its clients instead of of some sort of revenue sharing agreement with them.

Goldman Sachs is empowering all its trade-prone customers, the Buy Side!

Goldman has publicly confessed that they are sharing for free with their Buy Side clients not One but Three applications.

SecBD has already been mentioned. SecDB is able to calculate 23 billion prices for 2.8 million positions and 500,000 market scenarios (Source: FX Magnates). Marquee (maybe in honor of CIO R. Martin Chavez, known by everyone as “Marty”) and Simon (Structured Investment Marketplace and Online) are the other two. Simon is focused on structured products and helps clients design products based on their hedging needs or investment views; instead of spending hours on the phones between with Sales and Trading. Goldman Sachs aims to increase their equity-linked note business and to become a platform for brokers or other distribution channels that have access to a broader Buy Side segment. Marquee is the software that integrates Goldman Sachs technology for the entire trade cycle.

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Source: Business Insider

The Sell-side is empowering the Buy-Side. Goldman Sachs is leading the pack. In five years, we wont be using these terms anymore, as the platforms that can integrate all the parts of the trade cycle, will be what matters. Whether they originated from what we called “The Buy-Side” or the “Sell-Side” or the from the “outskirts” of the Wall, won’t be of essence.

The digitization of the Sell-side will be synonymous to becoming a platform empowering the Buy-Side.

The Sell-Side maybe the biggest threat to the vendors or the platforms traditionally serving the Buy-Side.

It will be a Buy-side market rather than a Sell-Side market.

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.

Fintech Unicorn pain as the public/private valuation inversion comes to an end

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# 6 on our Fintech Predictions for 2016:

 The strange inversion we saw in 2015, when private companies were valued higher (on paper at least) than public companies, will end in 2016. The headlines will refer to Unicorpses.

 This is happening now. It is happening in private unless a business totally blows up like Powa and Mozido. So we don’t normally read about what is happening behind closed doors. This post aims to shine a light on what is happening, but only using data that is in the public domain; if we had any inside knowledge we would be under NDA. However there is so much data in the public domain that one can gain insight if one knows where to look and what questions to ask.

 We don’t do negative reviews on Daily Fintech. We are entrepreneurs ourselves and we respect the tough journey that other entrepreneurs are on. If we don’t rate the chances of what a venture is doing, we simply don’t write about that venture. However we also like being realistic and avoiding hype. So occasionally we like to shine a light on issues that the whole Fintech community faces.

The Fintech Unicorn List

This a list of Fintech Unicorn ventures from Business Insider dated August 2016 ranked by valuation:

Rong360

China Rapid Finance

Coupa Software

Jimubox

Kabbage

Funding Circle

Gusto

TransferWise

FinancialForce.com

Prosper

Avant Credit

One97

Zenefits

ZhongAn Insurance

GreenSky

Klarna

Adyen

Mozido

Oscar Health

Credit Karma

SoFi

Stripe

Qufenqi

JD Finance

Lufax

Ant Financial

Analysis using Recency & Down Amount

Private rounds are negotiated in…private. We have no inside knowledge of these negotiations and if we did have inside knowledge we would be under NDA. Two things indicate that a venture might be having trouble raising money:

Recency. If a high profile venture has neither raised money for 18 months, nor released financials to show that they are profitable, it is possible that fund raising is a challenge. The normal rule is to aim to close the next round within 12 months (and in good times you see that schedule) but have enough cash to move that to 18 months. Many entrepreneurs do get out of this hole and many investors will back them during this time; but it can be a warning sign. We see three ventures in this category:

  • Green Sky (the investor is a PE Fund and they typically like profitable companies and so Green Sky maybe growing through internal accruals).
  • One 97 (but note that their last round was $500m and that goes a long way in India).
  • Mozido. This company is clearly having deep problems.

Down Amount. The normal trajectory of a high growth company is to raise more with each round. When one sees a lower amount than the previous round it can be a warning sign. We see two ventures in this category:

  • Klarna
  • Transferwise

We used Crunchbase  for this analysis because it is open and free – so anybody can check the data (and change it if it is wrong). Our philosophy at Daily Fintech is to do original research on public domain data – no insider knowledge and no proprietary data sources.

The New Unicorn Status Club

Being valued at $1bn is soooo 2015. The new status badge is a single investment round over $1bn. In that elite club in Fintech we see:

SOFI

LUFAX

Ant Financial (with a staggering $4.5bn Series B in April 2016).

One 97 in India comes close with a $500m round, which is huge for a country where venture capital has not historically flowed easily.

We are only tracking private companies. Public stocks are a different story; that data is visible to all. The problem for the private companies is simple – the valuation comparables are in the public market. For example, if you are a Market Place Lender, valuation comparables will include Lending Club (LC), Ondeck (ONDK) and Yirendai (YRD). If you are a Payments venture, PayPal (PYPL) and Square (SQ) will be among the comparables. You can short a public stock, which acts as a good price discovery discipline. That shorting price discovery discipline is not available in the public markets, which is why we got that strange inversion in 2015 that is unravelling in 2016.

The Asia story

Looking at the location of these Fintech Unicorns we see:

  • Europe = 4
  • Asia = 9
  • America = 13

If you look at amounts invested, Asia is far bigger and the source of capital is different (more Corporate than VC fund with LP/GP structure). But that as they say is another story.

Mozido

It’s tough being in the news business. Business Insider published this list in August with Mozido as a Unicorn and in September, the news sites are writing the post mortem analysis (such as this one in Forbes). It is worth noting that two other big Fintech Unocorn flameouts – Powa and Monitize share a business model – white label payments. We have long held the view that payments is the “boulevard of broken dreams”. The Mozido story seems to confirm that.

The Mozido story also illustrates why the funding recency analysis makes sense. The last round listed on Crunchbase is October 2014, well over the 18 month bar we set.

It takes 9 months to make a baby

And it takes 10 years to make a real Unicorn. By a real Unicorn I mean with $1bn in cash from a trade sale or $1bn in the public markets after shorts have tried to bring it down.

Yes, it has occasionally been done in less than 10 years, but that is rare. VC funds need entrepreneurs to do it in less than 10 years as they need to return cash to LPs. If you start on that high trajectory path, it is hard to avoid a huge flameout if things don’t go according to plan. Two Plan B options are fraught with danger:

  • Pull back on the growth throttle and get to profitability. Your investors did not back you to do this and the deal terms may enable them to force an exit.
  • Trade Sale. Strategic buyers are making the public market comparables analysis and will apply those to the valuation.

Software is eating the world and 50% of the 7 billion people on the planet are using a mobile phone. So, super high growth is possible. Yet the ending of the public/private valuation inversion could never end without some pain.  This is a high stakes game.

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

Wrap of Week #38: Wells Fargo, SeccoAura, Transferwise, Back Office and Blockchain, Ripple

 

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We are focused on insights but that doesn’t mean we don’t write about events in the financial industry, especially when they concern one of the darling favorites of incumbents. Wells Fargo Scandal and the Creative Destruction 7 Act Play, by Bernard Lunn!

Followed by the future world of disruptive banking debuted by SeccoAura; and nascent ideas around MYDigital Assets. This is not play, rather belongs to the science fiction genre that soon becomes reality.

Look at the Disruption Index to gain insights into SME lending; clearly in the “Future of Finance” genre claimed by Transferwise. Australia claims to be ahead of Europe on this front.

Switch over the focus on what is going in the Back office area; Is Blockchain promising to eliminate processes? Back Office 2.0 in sight.

The week ended with insights on whether Ripple will front run Swift on cross-border payments.

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Ripple may become real competition for SWIFT in cross border payments

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Next week, 8,000 bankers and their vendors fly into Geneva for 4 days of talking about FinTech. Last year I had to fly to Singapore. This year, I can just hop on a train from Bern (sayonara jet lag).

Last year Emergent Fintech started to move onto the main stage at SIBOS and this year it really is center stage in a way that resonates with the people who come to SIBOS; there is less talk about disruptive business models replacing incumbent banks and more about how disruptive technology can help Banks make a quantum leap in processing efficiency.

However one Emergent Fintech venture that is active at SIBOS could give SWIFT (which owns SIBOS) some cause for agita. Ripple is emerging as a real contender in cross border payments, which is a business that SWIFT has dominated for decades.

Ripple Basics and Recent Momentum

To quote from Ripple information on SIBOS (Stand F60):

“As bank-grade distributed financial technology, Ripple delivers instant, certain, and low-cost settlement for all banks via a global network of banks and market makers.

 Ripple offers a real-time cross currency settlement solution and a FX market making solution, both available for license. These solutions enable you to settle cross-currency payments efficiently, by connecting your bank directly to other banks around the globe for direct bank-to-bank settlement.”

Ripple recently closed a $55m Series B and in today’s market, a Series B is a good proxy for momentum. The investors are mainly banks, which makes sense as they will be the users.

More importantly, they are making the first live payments on the network, talking about transactions completing in 20 seconds.

The recent problems with Ethereum play into Ripple’s hands. For a long time, many people said that Ripple might be easy to implement but that it was a commercially controlled currency. The Ethereum problems show that all new digital currencies have their issues.

Visa has also just thrown in its hat into the cross border SWIFT alternatives.

The cybersecurity challenges that SWIFT suffered earlier this year must be making banks more willing to look seriously at alternatives.

Whether cross border payments use Ripple, Ethereum or Bitcoin Sidechains remains to be seen, but it seems clear that we can expect cross border payments completed within seconds in the not too distant future. It is pretty clear where the puck is headed.

SWIFT’s own Blockchain initiative 

SWIFT announced they were looking at Blockchain almost a year ago. Since then there has not been a lot of news. SWIFT can certainly buy whoever gets traction, but will face a cannibalization challenge as new entrants will be cheaper as well as faster. Cheaper payments will increase volumes so I envisage a future where SWIFT still dominates cross border payments but using Blockchain technology, with lower prices and increased volumes.

The back office guys are getting ready

In my core banking days, the SWIFT module was critical. It still is. However we can see the vendors, consultants and oursourcers getting ready for payments via Blockchain. This announcement by Ripple, Deloitte and Temenos is an example of an industry positioning around a possible new value chain.

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

Back Office 2.0 using Blockchain promises Business Process Elimination (BPE)

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That is why the Blockchain session at SIBOS Singapore last year was standing room only and at SIBOS Geneva next week I counted 10 sessions with Blockchain as the primary theme (it will probably be mentioned in at least half the sessions).

 This is the year when Blockchain vendors have to go beyond 30,000 foot promises and deliver value (or get relegated to the dustbin of overhyped technologies).

When Core Banking systems were introduced in the 1970s, they were revolutionary. They turned paper processes into computerized processes and the financial payoff for banks was massive and the entrepreneurs who built those Back Office systems became very rich.

Since then we have had over 40 years of incremental upgrades. Back Office has been boring. We have had a lot of Business Process Optimization & Outsourcing (BPOO).

Now we are entering the Back Office 2.0 era using Blockchain when we do not optimize old processes, we eliminate old processes. This the era of Business Process Elimination (BPE).

Equities Post Trade Processing After Concurrent Delivery Versus Payment

This is an example of Business Process Elimination (BPE). Concurrent Delivery Versus Payment (CDVP) is the more technically precise term for what usually gets called Real Time Settlement. For a description of real projects working on this, please see this post.

Bank of International Settlements (BIS) defined Real Time Settlement as Delivery Versus Payment (DVP) Model 1. That definition was 23 years ago in 1992, but we had to wait all this time for Blockchain technology to make it feasible. The key points as defined by BIS are:

  • Both securities and funds need concurrent settlement. Transfer has to be final & unconditional, without any time lag between the two. This concurrency requirement is absolute, because any time lag is an opening for fraud and that requires a lot of process to prevent.
  • Must be on a gross (trade for trade) basis. Any attempt at netting creates delay and creates a multi-tier market infrastructure that will impede innovation. We have Real Time Gross Settlement (RTGS) today – between Central Banks. The disruptive change is RTGS between individuals and companies in a permissionless network (ie the way that the Internet works).

The point about Business Process Elimination (BPE) is that most the things we do in Post Trade Processing are no longer needed when we move to Concurrent Delivery Versus Payment. The processes are not optimized, they are eliminated.

Equities Settlement is only one example. Almost every asset class will move in this direction. The notoriously complex triparty Insurance claims process (customer, provider, insurance company) will also move to a trustless blockchain network. We looked at one exotic transaction type – catastrophe swaps – in this post.

This is about value exchange in any market, not just banking and insurance.

The New Back Office Stack

User Experience is the visible part of the offering and will be the source of real innovation and value creation. The reason they will be able to innovate so fast is that the rest of the stack gives them so much value.

Business As A Service is a new type of entity that is being created as we speak. They could come from a bank or an emergent Fintech or a Traditional Fintech. The key is that they do not just offer technology. Of course they do that. They also offer service delivered by humans and may also offer a regulated layer. It is a complete business service delivered to the User Experience layer via an Open API.

Blockchain middleware is a nascent space where cross-cutting services dealing with concerns such as Identity or Security or Data Integrity play.

Blockchain platforms really means a consensus mechanism and transactional currency that enables entities that do not trust each other to transact. The main options today are Sidechains (using Bitcoin), Etherum (Ether) and Ripple.

The key about this emerging stack is that each layer isolates the layer below and enables a practical migration strategy. For example, at the User Experience layer you may use different Business As A Service providers and migrate from a conventional IT stack to this new Blockchain model. A Business As A Service provider may start by build services such as Identity or Security or Data Integrity using a conventional IT stack. Blackchain Middleware will be agnostic to which Blockchain platform they use.

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