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.

 

Australia more “fintech-ready” than some European peers – TransferWise

Often touted as a niche industry, this author is seeing early signs that mass-acceptance of fintech providers by consumers and businesses is creeping closer to a tipping point, of sorts.

The call may be slightly premature, however the following recent announcements by various industry players all point towards a growing momentum and confidence in the sector from the wider consumer and business market.

Lending picks up steam

SocietyOne, Australia’s leading P2P lender in the consumer loans market, says it is on track to hit $200 million at the end of the calendar year. In a graph that demonstrates almost hockey stick like growth and a default rate supposedly less than the market average, it’s no wonder a top level ex-BCG’r and an ex-banker now feel comfortable joining the fold.

On the business lending front the picture is relatively rosy as well. In July PayPal reported it had hit the $85m mark with its working capital solution in Australia alone. No doubt it has already surpassed $100m. After two years in operation down-under, it’s not bad going. The global payments giant is fast becoming the local competitor to beat.

So just who are PayPal competing with? Prospa is one of the bigger names, claiming to have now lent $140 million to the small business sector since its start in 2011. The Australian arm of German fintech lender Spotcap announced in May it had hit the $11m mark after its first year in operation. There’s no shortage of other lenders staking a claim on the sector either, as we reported earlier this year.

Fintech sentiment shifting

So what other evidence do we have the tide might be turning?

According to the Moula backed Disruption Index, SMEs are becoming increasingly aware of fintech lenders, up 14 percent in Q2 of FY16 over Q1.

The Future of Finance report by P2P money transfer service TransferWise is also relatively bullish on Australia, suggesting the country is more “fintech-ready” than Germany or the United Kingdom. According to TransferWise, 61 percent of Australians believe they’ll be using a tech provider as a replacement for at least one service their bank would normally provide by as early as 2020. By 2026 15 percent believe it could replace their bank entirely.

Fintech might not be hitting a complete home run yet, but the shifting sentiment is certainly a good tail wind for the sector, and those of us that invest and work in it.

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.

Secco Bank and the Future World of MyDigitalAssets

During a webinar focused on Digital Wealth Management for one of our clients, I thought that I would poke the audience by discussing a Future World in which we all create wealth by investing in our Digital Assets. I started by referring to MyCreditScore, as a Digital asset, only because it is not that utopian as a concept especially in the US. In aSpring post, “Who’ll help Small Business get Credit Score fit?”, we looked at Fintechs that are focused on helping SMEs to monetize their Credit Score.

The second digital asset that came to mind was MyReputation. Twitter could claim to be a “Bank” that caters to this asset. Twitter users can get a Klout Score that can put them in lead tables of their specialty and that can compete head to head to other qualifications, from education diplomas to professional experiences. It can be monetized directly through speaker fees or consulting engagements. If Twitter, gave rebates to high Klout Score members, to use for the paid Twitter services, then they would start qualifying. Prosper could give rebates on their loans; to high Klout score members too.

Sentifi, the sentiment-based Fintech, offers MyScore, which measures online and offline behavior to get a measure of one’s relevance in global financial markets.

As such digital assets, dynamic measures of reputation in broad or specific areas, start competing; then they could become mainstream for recruitment and for entrepreneurial mandates.

RiskAnalyze, offers one number, MyRisk (Risk Number) so that financial advisors can use it to create customzie investment solutions for their clients.

Once the Transparency movement gains traction, we could each have a MyInvestment score that reflects our investment choice track record from discretionary choices to non-discretionary.

We are far away from an integration of our digital personality which in an ideal world should not be seen as separate form our offline persona.

In the current world, other companies are taking advantage of our own data, to create consumer products or services that we will want to buy. Our data is being monetized by businesses and we only benefit by being offered “suitable, maybe customized products”. We are far away from being able to use our own data, to gain insights that can be monetized.

Open APIs are linking businesses not end-users. Data brokers are serving businesses not end-users.

Of course, they are using end-user data, which is given for free to the businesses innovating in monetizing our data. Shifting from Data Ownership to Data usage for the end user, has not been the mission of financial institutions, either incumbents or insurgents. With the exception of Secco Bank.

Outside financial markets, there is more going on in terms of Data usage that benefit end users and. Telefonica Spain is a recent example of a Telco that wants to help its customers choose what data they share with the internet companies (Google, Facebook, WhatsApp etc) and moreso to give them a platform to monetize their personal data (a platform to be launched by year end).

“According to the operator, these data belong to the customer and must be the user who ultimately decides what to do with that information.The company has decided not to sell because it believes that such data are valuable and because the customer already pays every month.” Auto-translated Excpert from here.

Personal data marketplaces are a subsector on their own. An example of a Big Data startup targeting personal data is Datacoup which is in partnership with Stripe. Currently they are running a beta version, where they offer users $8 a month in return for their data (operating only in the US).

Handshake is a European company that also looks to disrupt Data Brokers and their clients. Their opening statement includes “Did you know that companies spend over $2 billion* a year in the US alone to buy personal data from data brokers?”. They are out there to challenge business like Experian, Irish based, focused on MyCreditScore, Digital asset.

“According to a survey from TRUSTe, a privacy management firm, the percentage of US adults opting out of online behaviouraladvertising increased from 27% to 50%. There is a trend going on that consumers want more control in who has access to their data and what can organisations do with that data.” Excpert: From Data Ownership to Data Usage: How Consumers Will Monetize Their Personal Data

Back to Fintech world; Secco Bank, the blockchain-inspired alternative bank is the one that stands out as a platform positioned to be the Vault of MyMoney and MyData; and the place to create wealth out of both traditional financial assets and Digital assets. Devie Mohan spoke with Chris Gledhill, CEO and co-founder of Secco Bank, and described the alternative positioning of Secco Bank which aims to offer clients their personal programmable interface.

Secco Bank isn’t looking to join the Open API movement, they are a step ahead of the game.

They want the customer to be in control of their money and data; they want the customer to decide what to share and most importantly to chose how to realize the value of their own money and data.

Their first product SeccoAura, is accepting now pre-registration on this alternative way of monetizing personal data. SeccoAura has launched in the fashion industry. SeccoAura customers, can earn Tokens if other users Like what they are wearing. If “Likes” on SeccoAura lead to a “Buy”, then the SeccoAura customer who wore the “Liked” item, will earn a referral bonus. The concept could be applied to any retail purchase.

Will you choose to play PokemonGo as you commute; or SeccoAura. At the airport, on the weekend, while shopping, will SeccoAura catch on? Will you switch between Facebook & Instagram and SeccoAura?

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Will women take the proof of concept and jump start SeccoAura, a crowd-sourced alternative to the broken advertising model?

Will this become the next generation royalty payment program? SeccoAura is aiming to be an enabler of Data usage for end-users but also a creator of more data, more relationships, more insights; all leading to the creation of wealth through our digital assets, from the people to the people.

The P2P Fintech knowledge platform, Fintech Genome, has recently opened up a category “Neon Banks”. Check out the existing conversations or open a new topic in this evolving space.

Fintech Genome itself is a disruptor platform to the broken model of content marketing in financial innovation via paid media.

Read more here. Check out the existing convesations; Like the ones you find valuable; Start a new topic and earn Likes.

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.

Wells Fargo Scandal and the Creative Destruction 7 Act Play

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My eyes usually glaze over at headlines about Banks getting fined for yet another scandal. Yawn, just a cost of doing business, too much regulation, a few rogue traders, move on, nothing new to see here. But there was something different about the Wells Fargo story. This was not another story about a few wild eyed traders taking a short cut. This was a story about thousands of staid consumer bankers doing that.

No, this is NOT a story about Bad Bankers and Good Fintechers. To see bad Fintechers in action just read the Zenefits story. This is a story about digital headwinds meeting a “make target at all costs” culture.

In short, this is what happens when we get to Act 5 of the Creative Destruction 7 Act Play.

Yes, you could see this coming if you knew which Act the play was in.

The Creative Destruction 7 Act Play

If you are in a market that is going through wild, disruptive change where nobody knows how it will play out, you might be thinking:

“We have seen this movie before.”

You have.

Markets go through fundamental disruptive change in fairly predictable phases.

Here are the 7 acts in the Creative Destruction play. These stories have played to packed audiences in creative markets such a recorded music, newspapers, books, telecom, magazines, software (again and again and again) and are playing out now in markets that used to be boringly stable such as banking, accounting, legal services, education, car manufacturing and Healthcare. This is what happens when software eats the world.

Act 1. The Old Guard Dominate

This is when a few big companies dominate a market that has not fundamentally changed for decades (or hundreds of years in the case of banking). Mergers, debt leveraged acquisitions and “roll-ups” have locked the old guard into behemoth structures. No entrepreneur would think of competing against these companies and, if they did, no smart investor would back them.

Act 2. Straws In The Wind

This is when a few visionary/crazy entrepreneurs see opportunity. Occasionally VCs get active at this stage, but all too often VCs are part of the established order and do not see enough reason to believe that the times are changing. It takes guts to see a few straws blowing about and bet that this is caused by an invisible wind. The signs of change are far from obvious but “the answer my friend is blowing in the wind”.

Act 3. Denial

The changes are now real and the old guard management can see it. But they don’t know how to react, so they reach for high pressure management to make the numbers work. In some cases, management also reach for creative accounting tricks to smooth out earnings and make it look as if nothing has changed (known as fraud in most circles).

Act 4. The weird turn pro

The crazy entrepreneurs who started at Act 2 are now gaining real traction and major amounts of capital. They are experimenting frenetically to find what is really sustainable/scalable. This is the time “when the going gets weird, the weird turn pro” (quote from Hunter S Thompson, who was certainly weird but also professional enough to write best-selling books). During this Act there are lots of stories in the media about these strange entrepreneurs but, as the old guard numbers still appear to be OK, the accepted wisdom is still that nothing will fundamentally change.

Act 5. Blow up

This is when reality can no longer be glossed over. This is when we see scandals such as Wells Fargo (and the News Corp phone hacking scandal). This can lead to investors taking a cold hard look at the numbers and when the new numbers do finally appear, it can trigger a stock crisis, often with a restatement of earnings and a change of CEO.

At this stage the reality can no longer be denied and we see real crises in big companies. These crises may lead to radical transformation, or they may lead to Chapter 11 restructuring and fire sales. Before that happens we see the kind of behavior we just saw with Wells Fargo (which went on a long time during Act 3, Denial, when hardly anybody was paying attention). This is new for banking, which has not had a major headwind like this in hundreds of years. However, bankers can study other markets that got hit by the digitization truck – for example Media.

The News Corp phone hacking scandal

News media got hit by the digitization truck before banking. To put it another way, software feasted on news media before it looked for the next tasty morsel in banking.

The day the News Corp phone hacking scandal hit I happened to be meeting with an esteemed Wealth Management firm that had put up a list of their highest conviction stocks. Right at the top of the charts was News Corp. Oops. When questioned they responded:

“Stuff like that happens, it’s impossible to predict that kind of thing where rogue employees run amok”.

Yes. that is true and the rationale for putting that stock top of the charts based on financial metrics was impeccable. Yes, the problem that crashed the stock that day was a Black Swan event and they are by definition impossible to predict. The rogues were fired. Story over? No. Nobody could predict who would go rogue and when and in what form, but it was reasonably predictable that somebody would go rogue fairly soon in some way. It was an inevitable event even if it was not an imminent event where you could predict the timing. The reason that the employees went rogue was that their business was slap bang in the path of digital disruption. Valiant efforts by sales people (Wells Fargo) or Journalists (News Corp) cannot save companies from digital disruption. Top management attempts to make that happen usually end in scandal.

Act 6. Reconstruction

This is when a new power structure starts to emerges. This is when we see IPOs from the visionary entrepreneurs who started in Act 2. Sometimes they stumble post IPO and never recover. Sometimes they stumble post IPO, recover and grow to strength; I believe this  will be the story of Lending Club (which is why, disclosure, I bought some stock in May).

Act 7.The new old guard dominates

Many entrepreneurs make the mistake of seeing how quickly the new guard arose and think that they can also be deposed quickly. The entrepreneurs who made it to this stage will be tenacious, paranoid and really hard to beat – until the next wave comes along. For example, in the Centralized Internet era we have GAFA (Google, Apple Facebook, Amazon) and BAT (Baidu Alibaba TenCent) who deposed analog media and bricks and mortar retailers and will dominate until the Decentralized Internet gets to prime time. Until that happens, don’t bet against GAFA and BAT.

So far it has not been dramatic for Wells Fargo

For those who are new to this story, the New York Times has the best summary.

The CEO has been grilled in the media (eg by Jim Cramer) and tomorrow will be grilled in Congress (where Elizabeth Warren is likely to be tougher on him than Jim Cramer) but I suspect that what the CEO really worries about is a quiet chat with Warren Buffet.

The Wells Fargo stock has dropped about 10%, nothing compared to the drop in Lending Club following their bad news in May. The Lending Club Board fired the CEO, took their pain upfront and moved on, which is classic crisis management.

I suspect the Wells Fargo stock decline is far from over, even if it is already cheap by most standards. The reason is simple – while Lending Club has a digital tailwind, Wells Fargo faces a digital headwind .

What to do with all those branches

Wells Fargo has the biggest branch network in America with 6,314 branches.

Our thesis, explored in this post, is that we will soon see a 10x reduction in bank branches. If you think that is impossible look at HMV, Blockbuster and Borders. Managing growth after the digitisation truck hits is very, very hard.  In that analysis, we defined 3 possible strategies for legacy Bank branches:

  • Close them quickly– get the pain over quickly, reposition the bank, free up management bandwidth. The problem is – who wants to buy your Retail Branch network? There is always a buyer, it is simply a question of price.
  • Close them slowly– don’t spook investors, cut costs to squeeze more cash from the older customers, manage the pain and look for smarter semi-automated ways to increase revenue per customer (more footfall conversion and more conversion of door entry to revenue).
  • Double down and improve the LTV part of the CAC/LTV ratio through cross selling.

Wells Fargo clearly adopted the last option.

Failure is not built into this story. Barnes & Noble did well while Borders failed. Blockbuster had a strategic plan that would have crushed Netflix and then they inexplicably snatched defeat from the jaws of victory. HMV could be an escape from the ashes of bankruptcy having left its CD selling days behind.

Companies may survive, but the pain for employees will be deep. My thoughts go to the 5,300 who lost their jobs at Wells Fargo. Layoffs in banking will be huge pain for families. Creative Destruction sounds OK at 30,000 foot but horrible if you are in the Destruction part. Despite the name, Destruction precedes Creation. The pain comes first.

The real worry is not Jim Cramer or Elizabeth Warren

The real worry for Wells Fargo is loss of trust by millions of consumers; I assume Warren Buffett will be saying something along those lines to the CEO and the rest of the Board. Trust can take a long time to develop but can be lost in a heartbeat. Or as we say in the social media age, trust can be lost in a single tweet that goes viral.

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