ChatBots in Consumer Banking


Image courtesy of SuitPossum

This is Day 5 of ChatBot Week on Daily Fintech. You can see the intro and index here.

How Much?

ChatBots are great when customers want answers to various “how much” type questions, such as how much….

  • Have I got left?
  • Will this cost me in interest/fees?
  • Will I earn/save by doing this?

Sure I could go online or check an App, but just texting those questions is easier.

Finding this innovation in the wild

MyKai from Kasisto launched on June 28. They must have had the back end ready and had the aha moment when they saw the launch of the Facebook Messenger App Store.

Bits don’t stop at borders but money has to show its passport. I wanted to try out Kasisto, but stopped at this Stop Sign (I am based in Switzerland):

“Right now, I am available in the U.S. If you live in another country, you can sign up and I’ll let you know when I’ve arrived.”

Do I have enough to…
“Eyeballing” physical cash in your leather wallet is how millions budget. We need an equivalent for the digital age.  MyKai shows shows how this can work by integrating with Venmo (check your balance before paying). Imagine that linked to your budgeting rules (Budget Nanny says no to that Latte).
Cousin of Siri

Kasisto which created MyKai originated from SRI International, the company that came out of Stanford University and created Siri.


MyKai anonymizes the data and does not have full access to your banking passwords. My take is “be careful” and this will be a big hurdle with most consumers, which brings us to the next point.

Public Proof Of Concept
MyKai is like a Public Proof Of Concept for a service that Kasisto sells to Banks. That is how they aim to make money. They claim Royal Bank of Canada and DBS Bank as early customers and Wells Fargo Startup Accelerator is an investor.
The future is already here….in Denmark

LunarWay, a Danish full stack startup bank (now tagged “neobank”, aka “challenger bank” in UK) offers LunarWay Bot today (in Beta with a few thousand users). It was developed in-house

…And in Africa

ABSA (Barclays Africa) offers ChatBots via both Twitter and Facebook.

Conclusion from innovation in the wild

ChatBot looks like a natural UI for a mobile first Bank. It will become an increasingly standard feature of both  startup and incumbent banks. Oh…and make tons of money for Facebook (showing us again how valuable being an ID provider is).

Messaging channels

Facebook is certainly the big one in America where Kasisto plays. When Kasisto hit a tech glitch they used SMS and Slack as fallback channels. Messaging itself is clearly a commodity. The money is at the intersection of ecommerce and payments and that is where Account Linking is the key innovation from Facebook (which we identified in the intro to ChatBot Week).

PSD2 and other utility regulation

Account Linking can be used a) by Banks to offer a better service or b) by startups who innovate on top of bank account data and aim to commoditise  banks into being low margin utilities. Actually that is not the objective of startups. They just want to offer a better service to consumers and to do that they need access to account data; turning banks into commoditised utilities is simply a by-product consequence.

PSD2 and other regulation is key to this. When banks have to open up their data, then they will.

It is a level playing field. Banks could win. Methinks we will see a lot of ChatBots from Banks soon.

level playing field

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge Network. Bernard Lunn is a Fintech thought-leader.

ChatBots in InsurTech From Offshoring to Automation to New Experience


This is Day 4 of ChatBot Week on Daily Fintech. You can see the intro and index here.

Unusually we are seeing more adoption from Incumbents than upstarts . This is the reverse of the cycle of innovation in banking (startups show the way and then banks “fast follow” via mix of copy and acquire). This post explains why it is being done differently when it comes to ChatBots in Insurance and then looks at a few early stage startups that may point to the future.

The action is from Incumbents

Look at this list of ChatBots in Insurance compiled by @rickhuckstep who tracks InsurTech very well. You can see a long list of incumbents and one startup.

You can also see what Halifax is doing on which does Service as well as Sales (Service is the key to retention) and is big in Insurance is clearly looking at this.

First, turn humans into robotic workers

Cutting payroll cost has been a favourite enterprise project since the dawn of computing. Insurance has a ton of routine customer support work. The product is complex and critical to the customer. Good customer support is a) essential b) expensive. This is the kind of work that was first offshored and is now being automated. Once a job has been made totally process driven, eliminating individual judgement, it is quite a simple step to automate that job. An offshoring project works by breaking tasks down into repeatable, fungible “units of work” that are given to humans to do as if they are robots. If those humans leave, they are easy to replace. It is a short step from robotic workers to actual robots and that is what AI enables.

This is of course not good news for the $28 billion BPO business because about 5-6% of those jobs are low end as per this report (ie low hanging fruit for automation)

From Hal to Her

When we search for images of AI, the robot appears. The disembodied voice of Hal in Stanley Kubrick’s brilliant 2001 a Space Odyssey (released in 1968) was a bleak  view of our robot infused world.  In another brilliant science fiction film, Her by Spike Jonze (released in 2013), the robot has the gorgeous voice of Scarlett Johansson and so the protagonist naturally falls in love with the robot.

The point is we don’t see the robots who are serving our admin jobs. We see their texts or hear their voice. Maybe holograms will be the next attempt to humanise them.

Humanising robots is just marketing

Robots in factories making stuff for us are invisible to us, so they don’t need to be humanised. Robots taking care of our every day admin needs have to be humanised to be acceptable. It is Marketing 101.

This started in offshoring where the rule was that call center workers working in the Rest imitated the accents, names and behaviour of their customers in the West. Krishna, Pranav and Deepika become Bob, Ted and Alice.

The ChatBots found by Rick Huckstep are called Magda, Allie, Mia, Arbie, Nienke, Marc and Hanna. Pick a name that fits the culture of the market you are serving, it costs nothing.

From makeup to makeover

Mobile Apps followed the usual trajectory of disruptive innovation from talking heads on TV (Radio to TV) to something that is native to the new media. Early Mobile Apps were simply bad web sites on a small screen. ChatBots will follow that new trajectory.

And now for something different

Spixii is not a cute name. OK maybe it is – cuteness is in the eye of the beholder. Apparently it means Blue Parrot. I guess was not available.

This is bleeding edge.  Spixii got €15k funding at the end of 2015 as per Crunchbase.

SPIXII looks like AI with a ChatBot UI – a RoboBroker if you like. As they put it:

“The first development of SPIXII consists in selling insurance using a chatbot.”

Their TLD is .ai They clearly aim to be AI with a ChatBot UI.

You can watch their Demo Day pitch here.

This feels like SimpleBank – changing the User Experience but not as a full stack regulated Bank/Insurance company. SimpleBank was a success – founded in 2009, acquired by BBVA in 2014. SPIXII may follow the same trajectory.

Insurgram from Germany is “Insurance by Chat” and they look a bit more mature than Spixii and have a partnership with Ergo Direct (think Geico if in America).

HeyBrolly is also aiming to change the whole Insurance experience and describe themselves as a concierge rather than a broker (so chat is just a natural UI layer to a reengineered experience).

Early days

Think of the app store in 2008  – that was 8 years ago. Current examples of ChatBots are fairly crude and occasionally embarrassing and funny but this is the usual story with new tech and the economics of admin service job automation using AI + Chat is compelling, so I am sure they will get better.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge Network. Bernard Lunn is a Fintech thought-leader.

Goodbye admin, hello Pegg – Sage introduces its first small business chatbot

image1                       image2


This is Day 3 of ChatBot Week on Daily Fintech. You can see the intro and index here.

The writing is on the wall for banks and their customers. Soon banking and all its associated tasks will be completely embedded in our everyday lives. Banking will live in the platforms we love to engage with, allowing us to access our financial life exactly when we need to. We won’t have to plan our lives around banking – banking will plan its life around us.

Chatbots are shaping up as the critical ingredient that will propel this future state into being. Why? Because chatbots have the ability to create a dialogue with a customer that’s personalised, real-time and, more importantly, actually effective. No more worrying if that real-life customer support agent actually processed your form or actioned your request, or if that payment you sent through actually made it to your supplier. That’s the magic of automation – it just happens.

It’s easy to visualise how texting your personalised bank chatbot will make handling your personal finances easier. The emerging opportunity now is to build on these simple early use cases and build some killer chatbot powered applications for use in small business. For example:

  • How could a business owner chat with their bank to check their pending settlements?
  • How could a business owner chat with their accounting system to confirm bills it wants to pay?

This week accounting giant Sage announced the beta launch of its new bot Pegg, built in partnership with bot platform Gupshup.

Pegg is ‘a smart assistant who lives where you work and lets you manage your business admin through your favourite messaging apps’. Just spent money on a business lunch? Message Pegg with the amount and take a photo of the receipt. You can then generate a one-time access link to a webpage where you can download a csv file of your transactions. Just been paid for your freelance design services? Let Pegg know and it will lodge this as income earned.

Let’s be clear, Sage isn’t intending Pegg to replace existing accounting software and cloud add-ons. Sage is instead using Pegg to go after the 65 percent of small businesses it claims still rely on spreadsheets and manual recording practices. Its going after the under-served portion of the market that aren’t commercially attractive for the bigger players up the food-chain. Pegg is almost like the Square of accounting.

I gave Pegg a go. It’s easy to use, and when I did run into trouble conversing with the chatbot, it prompted me to type ‘help’ so I could access a list of instructions it did understand.

The world of accounting software plugins and apps should be very nervous about chatbots. I hardly need a budgeting app and a receipt scanning plugin for my accounting software if I have a chatbot that does it all – especially if it then posts the information back to my software. And if the stats telling us nearly half of us will be freelancers by 2020, simple, lightweight accounting tools will be all the rage.

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.

Chatbots for investing: research and trading

This is Day 2 of ChatBot Week on Daily Fintech. You can see the intro and index here.

If you haven’t seen the first trade execution on a chatbot, then watch this video. The first implementation of a basic stock trade execution via a chatbot comes out of a UK brokerage house and uses the Facebook Messenger platform.

AJ Bell youInvest is the behind this; an online platform launched in 2000 as the first online SIPP provider. Since then it has grown to include ISA, Junior ISA and Dealing accounts. AJ Bell, the parent company, is one of the UK’s largest providers of online investment platforms and stockbroker services. With more than 131,100 customers and assets under administration exceeding £28 billion.

This symbolic trade demoes a buy order for Facebook stock!

  • You are asked your username on your broker account
  • Chatbot sends you a temp password on your mobile (valid for 5min)
  • You can see and choose your account
  • You can ask for a stock (e.g. Facebook stock)
  • You can choose Buy or Sell
  • The chatbot shows you updated quote (max 15sec delay)
  • You place the order
  • You get confirm

Over to New York, to look at Polly Portfolio, whose focus is on financial education and research for DIY investors or asset managers, who are seeking low cost active investments and predominantly, designing a low cost portfolio that reflects their macro views. They launched a Chatbot, PollyChat, again using the FB Messenger that can chit-chat about recent financial news headlines and prepares a financial profile based on your responses, along with customized portfolios and trade ideas; as explained on their website.

I checked it out personally and I am impressed. At first one gets a couple of macro questions with a choice of Agree, Disagree, No opinion.

That creates a profile and an asset allocation.

Screen Shot 2016-07-22 at 10.21.24

This profile can be updated with further macro views. The asset allocation, then can be refined into investment ideas. The chatbot then proposes to send financial news (curated based on views) and by accepting them or not, one personalizes the curation. There is humor. For example, at some point the chatbot responded VPL 10%; I asked “what is VPL?”, the Chat bot responded “Could you type that more slowly and loudly please? Just kidding, please type ‘Help’.

Another New York computer software company that has been focused on chatbots for banks, is Kasisto. Many of their products are focused on various consumer banking processes. Just last week however, they announced that their chatbot MyKAI designed for banks can also monitor investment portfolios and has linked with Etrade and Nasdaq. Users will be able to ask questions regarding their positions (e.g. size) and ask the chatbot to alert them when prices reach certain levels. Responses can be delivered via SMS, on Slack or FB Messenger.

Chatbots in wealth management: possible use cases

In wealth management much like basic consumer banking, customers may want chatbot functions to ask for basic portfolio information and updates. From positions, cash, risk units, industry exposures, correlations to existing holdings etc. Anything that relates to accessing existing data and answering questions. Nothing predictive for now.

Chatbots could also play a major role in discovery of investment ideas and curating financial information. A Siri in a chatbot form. A personalized chatbot for financial investments, much like what PollyChat is trying.

Will Chatbots be a way that robo-advisors effectively and cheaply stay in touch with clients and personalize their profiles and asset allocation? Will brokers adapt chatbots as the best customer engagement portal with a combination of Machine learning and artificial intelligence?

We are at an early stage of this trend and we will be monitoring. If you don’t have a Facebook account, consider getting one, to stay directly in touch with the broader chatbot boom. WeChat in Asia is heavily used for transactions and professional groups.

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.


Announcing ChatBot Week on Daily Fintech


Image courtesy Admirable Design

This week is ChatBot all week on Daily Fintech. Today is the Tech in FinTech day when I attempt to summarize why so many people are excited by ChatBots and describe who is active at the platform level. Then we look at the use cases in WealthTech, Small Business Finance, InsurTech and Consumer Banking.

If you are new to ChatBots, here is a good intro (yes, there is now a ChatBot Magazine).

First we look at ChatBots through three different prisms:

Prism # 1. ChatBots = User Interface (UI) 4.0

Prism # 2. ChatBots = native UI for AI

Prism # 3. FB Messenger BotStore is like the Apple AppStore in 2008.

Then we look at what the Internet Platforms in America (GAFAM) and China (BAT) are doing with ChatBots.

Finally, to bring it home to Fintech leaders, we explain the relevance of one specific feature called Account Linking.

There will soon be a Fintech version of the Turing test. For example, is that my friendly private banker recommending an asset allocation change? Or is it a robot programmed to act like a friendly private banker?

Prism # 1. ChatBots = User Interface 4.0 

1.0 = Text command line eg DOS & “green screen” mainframe terminals.

2.0 = Windows Icon Menu Pointer (WIMP) in PCs and Macs.

3.0 = Smartphone touch

Yes, just when we all agreed on mobile first and mastered those skills….the game changes again. Apps have a problem because people are reluctant to install apps (it is the app tax friction).

The reason why ChatBots are UI 4.0 becomes clearer when we look at the next Prism.

Prism # 2. ChatBots = native UI for AI

How do we interact with those machines who appear human like in intelligence? One way is the same way that we spend a lot of time interacting with flesh and blood humans – via text messages. It is the perfect UI to hide all that complexity.

For our AI Week please click here.

Prism # 3. FB Messenger BotStore is like the Apple AppStore in 2008.

When the Apple AppStore launched in 2008, I caught a tweet by a friend that said in effect “this changes everything”. I did not get it at once so I called him and he explained and he was right. Thanks @alexiskold

The launch of Facebook Messenger platform with ChatBots on 12 April 2016 had the same inflection point significance.

6 weeks later VentureBeat was reporting 11,000 chatbots that you could try. Talk about Cambrian Explosion!

What are GAFAM doing with ChatBots?

  • Facebook (already covered above)
  • Amazon does it their own way as usual. Jeff Bezos always surprises. Their Alexa device is an AI machine in a home device. You don’t talk to Alexa with text messages. You talk with your voice – how cute and retro! It’s more VoiceBot than ChatBot, but conceptually both are UI for AI. Amazon has opened this up to developers.

Apart from the giants, all major messaging services from SnapChat to Telegram (which has a good intro for developers) have initiatives.

What are BAT doing with ChatBots?

  • Baidu has Duer, a digital concierge service.
  • Alibaba has not made a move yet as far as we can see, but given their big ambitions in FinTech, we can expect it to be highly relevant when they do.
  • TenCent has WeChat, currently the world’s biggest messaging platform with 700 million users, so they were early with ChatBots and have a digital concierge service called WeSecretary that helps users buy products, book restaurants, pay bills and other internet-based admin activities. It sounds more practical than SIRI.

ChatBot Account Linking

Facebook has an opt-in feature called account linking that allows you to, for example, link your Facebook account with a retailer. The ChatBot can then suggest new products based on a recommendation system. Watch out Amazon.

We expect this intersection of payments and e-commerce to be very active.

An example from Telecoms shows how this could work. You can chat to your Telecoms assistant to find out how much bandwith you have left or how much an international call will cost. That clearly has to link to your Telecoms account. Now imagine opening up to your banking accounts using PSD2.

Calendar for the rest of the week

Tuesday          ChatBots in WealthTech

Wednesday    ChatBots in Small Business Finance

Thursday        ChatBots in InsurTech

Friday               ChatBots in Consumer Banking

Please tell us about any use cases in those areas that you know about. We may already be researching them, but a heads up is always appreciated.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge Network. Bernard Lunn is a Fintech thought-leader.

Wrap of Week #29: Robo-advisors, Marketplace lending, Banking APIs, Deposits, Insurtech


We looked at 4 scenarios regarding the fate of Lending Club, just two months after the accident.

We showcased an Emerging market Fintech theme that brings that is evidence of both “First the Rest and then the West” and the “Rebundling” trend. A Banking API case.

This is also part of the emerging Banking API space that is being mapped out by the Fintech community on the Fintech Genome. You can read a curated post here. And you can join the live 24/7 conversation here.

We raised the question about whether Deposit accounts will be disrupted. Is it broken or will it be fixed anyway?

We curated the take-aways of the community from the odd, extended halt of trading on the Betterment platform.

The three most active Insutech conversations this past week on the Fintech Genome are below; click here to join them.

Screen Shot 2016-07-22 at 17.00.34

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. 














This week we celebrate the 2 year anniversary of Daily Fintech by launching a peer to peer knowledge network, the Fintech Genome (ala genetics).


Join, engage, interact by clicking here.


We extended an invitation to the growing Fintech community and explained the concept in “Help us decode the Fintech Genome”.


This was done without any interruption of the regular schedule of our insights. This week too, it was another trip globally.


A first look at the most hard hit public valuations in the Daily Fintech Index, after the Brexit.


A first look at the Fintech recruitment scene with the input from Nicole Curtin and Fintech Recruiters; and some disruptors.


Over to Australia, where there are three fintech IPOs in the pipeline and we look at the real time KYCexpert serving financial institutions, which is a re-branding of the Global Business Register.


A two day coverage of innovation in the Life Insurance space. First part more focused on categorizing innovation players within life insurance. Second part, more focused on the pain points of the industry and the opportunities.



We mentioned

Nicole Curtin, Fintech Recruiters, Angel list, efinancialcareers, The Banking practice, Ashmore Stark, New Finance

Global Business Register Limited (GBR), @KYCexpert, @ChimpChangeMe @CoAssets, @OnMktBookBuilds, @ASX, Kyckr,, AvoxClarient and SmartStream

Hearsay Social, Smart Asset, Policy Genius, Slice Labs, InforcePro, Haven Life, VitalityNew York LifePacific LifeFarmers and AXA.









, a UK based a 2yr old practice which positions itself as a online talent platform for financial services.

New Finance, the financial network operating out of London via Meetup, is also stepping into the jobs space.

Ashmore Stark, i






Robo-advisors, Blockchain; Insurtech and Small Business; in-store mobile payments; Marketplace lending


The UK is in the spotlight for many reasons (some good, some bad). We gave it first position this week but we also traveled from Australia to the US.


21 #roboinvesting ventures in the UK & the Blackrock tale. Sizing the UK robo-advisory market, which seems on the way to triple its size.


An in depth look at the important B2B niche in Small Business Finance: How to tackle the Approved Payables Finance. Could this be an example of a permissioned network that makes sense, Blockchain


The 4 US based Small Business Friendly InsurTech Ventures that are filling in the gap that Zenefits left.


Growing conversion rates via a superior customer experience; focus is on in store mobile payments. A growth opportunity; a problem to be solved.


An insightful look at the value chain in marketplace lending. Where is the value in the ecosystem?


We mentioned:

ETFmatic, Nutmeg, FiverAdat, Money On toast, Money farm, EValue, Wealth Objects, Wealth Wizards, Wealth Horizon, Wealthify, Wealth Kernel, Net Wealth, Swanest, Scalable Capital, Alpima, Quantstore, Zen Assets

ApplePay, Clover, Paypal, OneTouch

CoverWallet, Embroker, Insureon, FounderShield, Zenefits

OnDeck, Kabbage, Flexport, Fluent, Credit IQ, Provenir, EOriginal, Meridian Link, Cunexus Solutions, Web Bank, Cross River Bank, CBW Bank, NSR Invest, Lending Robot, Orchard Platform, DV01, Monja, Orca Money, Kreditech, Prosper, Lending Club, Funding Circle




















Kansas: A global alternative exchange that IPO’d; BATS exchange.

Austin TX: An alternative credit history builder running in a bank; SelfLender.

Global: Western Union an incumbent innovating in payments and more; Podcast.

Global: Distribution strategy alternatives for Online business lending;

Global: 21 Insurtech Ventures changing the Auto Industry (continuation of coverage)

Global: One way that marketplace lending could thrive; watch Warren Buffet’s lips.




Pirates with Ties interview with David Thompson of Western Union

WU Edge




What’s the Trojan Horse distribution strategy for online business lending?

PayPal Working Capital, Square Capital and Shopify Capital.




@Fundera @OnDeck

InsurTech Comparison Sites transform to Robo Brokers as Insurance value chain shifts


AccuScore Telematics

DriveWay Telematics

Metromile Telematics

Octo Telematics Telematics

RootInsurance Telematics

TheFloow Telematics

TrueMotion Telematics

Wunelli Telematics

OkChexian Telematics

Acculitx Telematics

DriveSpotter Telematics

Telematic Telematics

Citymile Telematics

Goji Robo Broker

Cuvva Just In Time

CoverHound Comparison

Insurify Comparison

RenewBuy Comparison

TheZebra Comparison

ClaimDi Claims Process

SnapSheet Claims Process


Marketplace Lending depends on savers moving on from bank deposits



The IPO window is open but only the best can get through. The headwinds are still there for Fintech but skilled sailors are needed to ride the wind through turbulent weather. One of the first ventures to go through is the BATS (Better Alternative Trading System). We covered BATS in an earlier research note on Fintech in action on Western Stock Exchanges. The key point is that BATS is number 1 in ETFs. This is important because ETFs are powering Robo Advisers.


One of the largest underserved segments in the US, are individuals that don’t own this Digital Asset – Credit history. SelfLender is the first all-online credit builder loan; ideal for students, young adults especially those in no-mans land 18-21yrs old, foreign students, immigrants, H1-B visa holders, and others with zero credit history who need to establish credit.


What options do small business lenders have to maintain healthy margins, as the popular channels are failing?






4 Scenarios for Lending Club – the proxy for Fintech disruption or hype $LC



When Lending Club did it’s IPO in December 2014 I declared it as the Netscape moment for Fintech (when it became conventional wisdom that this was going to change the world). I could be accused of contributing to the Fintech hype, which became intense in 2015 with investors flooding into Fintech ventures. Meanwhile the $LC stock price tanked to such a level that by late May 2016, after the Lending Club CEO ouster, the conventional wisdom became that yes this was the Netscape moment for Fintech and we all know how the Netscape story ended – they were crushed by Microsoft.

That is one of the 4 scenarios that we analyze in this post – that incumbency wins, that big banks crush Lending Club and that Marketplace Lending becomes a footnote in banking history. In that ending, George Foreman beats Muhammad Ali in Rumble in the Jungle.  Conventional wisdom expected that George Foreman would win. But that is only one of 4 scenarios that we analyse.

Disclosure: I bought some Lending Club stock after writing this post in May (I was fortunate enough to get in at 3.51). In two of my 4 scenarios that was a dumb move. However, spoiler alert, my analysis is that one of the other two scenarios is more likely.

4 Scenarios

# 1 Like Netscape getting crushed by Microsoft, Lending Club will be crushed by big banks.

How this would play out. Banks refuse to lend to borrowers via Lending Club, so they will be dependent on retail lenders (which is only one of three lender channels that Efi Pylarinou analyses in this post and not enough to fuel rapid growth).

Evidence that this is true. After the problems that led to the Lending Club Board firing the Founder CEO, banks put a hold on lending via Lending Club (and other MarketPlace Lenders). Given the old world disclosure problems analysed by Efi Pylarinou in this post, it would have been amazing if banks had not put a hold on this while they did extra due diligence.

What will happen to Lending Club stock in this scenario? A big bank buys them for a firesale price to get access to technology and talent. There will be competition from multiple big banks, so a competent investment banker should extract a reasonable price, but there won’t be any champagne corks popping among Lending Club shareholders in this scenario.

What will happen to other MarketPlace Lenders in this scenario? They will also be acquired for firesale prices and nobody will back another MarketPlace Lending venture. It will be game over.

Likelihood rating: Least Likely.Conventional wisdom currently favours this scenario, yet I rate it as Least Likely (the next scenario is even worse for Lending Club shareholders and a bit more likely). The reason I rate this conventional wisdom as Least Likely is that it is based on a fundamental misunderstanding. Banks don’t own this money. it is a Liability on their Balance Sheet because when we Deposit money with a Bank, we are lending money to a bank. When we wire money to a Credit Hedge Fund, we are lending them the money in the hope that they will return it with profit later.  Banks and Hedge Funds are intermediaries just like Lending Club is an intermediary. So if the real investors (you and I and richer versions of you and I) decide we get a better risk adjusted return by lending via Lending Club than by lending to a bank or Credit Hedge Fund, then that is what we will do (for some more on this idea, read this post).  For some insight on how this could happen, read Jessica Ellerm’s brilliant post on how Fintech innovation may finally be coming to the deposit part of banking.

Note: even Least Likely is a possible scenario. We can declare this scenario Totally Unlikely if and when the Jeffries securitization deal that was put on hold during the disclosure problems finally closes. (I put Goldmans in a different category because they clearly have their own ambitions in marketplace lending).

# 2 The first “run on a marketplace”.

Like a run on a bank, when trust goes, it goes fast and leads to panic. This is “reverse network effects”. We have seen a run on a bank many times before in the past. A “run on a marketplace” would be unprecedented, but these times are different.

How this would play out. Lenders cannot withdraw their money (as bank depositors can) so it is not exactly like a run on a bank, but lenders can refuse to lend any new money and that will have the same fundamental effect. In a vicious cycle, retail lenders and equity investors get scared away, leading to more bad news, leading to… In this scenario, I worry less about what a few bankers think (Scenario #1), but I worry about what millions of consumers (retail lenders and equity investors) think.

Evidence that this is true. Just look at the $LC stock price.

What will happen to Lending Club stock in this scenario? Not even a firesale buyout, total loss.

What will happen to other MarketPlace Lenders in this scenario? One may prove reliable enough and emerge triumphant in a Rocky like “last man standing” result. But that is a very slim chance. More likely is the same as Scenario # 1.

Likelihood rating: Unlikely. Calm voices who look at the actual returns of retail investors such as the ever insightful Peter Renton at Lend Academy show that the risk adjusted returns are good. Individual retail lenders tell a similar story. The panic at the moment seems restricted to the media and this sort of hype/despair cycle is normal. The Lending Club Board clearly understands the issue and that is why they took decisive action in May.

# 3 Like Priceline, the stock will bounce along the floor for years and then return 100x for really patient investors.

Management slowly get past all the serious execution challenges and, because digitisation is unstoppable and digitisation means that marketplaces and networks always win in the end, the eventually upside is stunning. That is what actually happened to Priceline (no, not a measly 10 bagger but a “10x 10 bagger” aka 100x return).

How this would play out. Scott Sanborn and his team get the Board’s backing to patiently execute on their plan. There are two big execution challenges:

  • Employee stock options are under water. They either face a talent drain or issue new options that hurt common shareholders. Both choices are ugly.
  • The growth is outside America, but going for that growth will be expensive.

This will be difficult. Their Q2 results are likely to be ugly. There will be lots of setbacks and bad news cycles. That is why the stock will bounce along the floor for years (and years is a long time when day traders are considered long term investors compared to HFT).

Evidence that this is true. Hiring a credible Chief Capital Officer. In this scenario, it takes years to execute on a recovery plan, so yes that is only one of many results that the management team needs to deliver on.

What will happen to Lending Club stock in this scenario? For most investors, who give up during the years when it bounces along the floor, a loss. For a tiny number who stick with it (based on conviction or just forgetting they own the stock), a massive return.

What will happen to other MarketPlace Lenders in this scenario? Few will have the patience to execute like this and will take acquisition offers, making the last man standing even more valuable.

Likelihood rating: Possible. I am not an insider. I have no idea what is going on inside the Lending Club Board. However I do know that a) these are solvable execution challenges with a lot of patience and hard work and b) Boards are typically not very patient these days and so while this is Possible, I think the next Scenario is more likely. Also I think the value of MarketPlace Lending (which will be massive) will get distributed across an ecosystem rather than sticking to only one or two Facebook style behemoths.

# 4 Buyout, probably from a Chinese company.

How this would play out. The Lending Club Board accepts an offer.

Evidence that this is true. None, there won’t be evidence until the Lending Club Board accepts an offer, but we do know that one Chinese investor bought after the stock crashed and now owns over 11%.

What will happen to Lending Club stock in this scenario? Some premium to the market price at the time of offer.

What will happen to other MarketPlace Lenders in this scenario? Investment bankers representing them have their phones ringing off the hook.

Likelihood rating: Likely. Not only do we already see a big Chinese investor in the company, the business logic is impeccable:

  • To be a big player, Lending Club has to get into China, which is a huge market but very difficult to get into without a) deep pockets b) local partners.
  • China is a huge market for consumer loans but none of the MarketPlace Lenders in China has the organisational strength and technology of Lending Club (or Prosper or SOFI or Funding Circle).

Combine huge market and good platform and you get a great result.

Note on Scenario Ratings. I only have 5 – Totally Unlikely, Least Likely, Unlikely, Possible, Likely. I don’t try to put % numbers on this as that gives a false sense of certainty. I am looking at this as an investor and the end result for an investor is binary – profit or loss. Even a Least Likely scenario could come to pass and investors simply have to a) have confidence in their analysis and b) enough diversification to not be “weak hands” that are shaken out by a negative news cycle that drives trading sentiment and drops the share price temporarily.

Personal Note. Like most people, I love a triumph over adversity story such as Muhammed Ali in Rumble in the Jungle but my personal sport is skiing and the triumph over adversity story that I love is Franz Klammer’s comeback in 1984 as an “old man” of 30 on his home run – the Hahnenkamm.   Watching at the time, I hoped he would win but thought it Totally Unlikely.

There are two types of Fintech innovation. One type of Fintech innovation says to Banks “we bring you lunch”. It is a variant of traditional Fintech where the venture prices on a transactional revenue share basis instead of via a traditional software licensing model.

The other type of Fintech innovation says to Banks “we eat your lunch”. It is disruptive and the potential and risk for backing this type of venture is much higher. The fate of Lending Club is a bellwether for this latter type of disruptive Fintech innovation. How it prospers or fails will impact the broader sentiment about whether disruptive “we eat your lunch” Fintech innovation is viable.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge Network. Bernard Lunn is a Fintech thought-leader.