XBRL – the OTHER technology wave hitting Fintech

Judging by Google trends, if XBRL was a stock it would a penny stock and heading towards delisting.

Bitcoin – judged on the same Google Trends analysis – would be a momentum stock that is covered in breathless terms by talking heads on CNBC.

Both are disruptive Fintech technologies, it’s just that one is undervalued.

There is a reason why I use the analogy of a stock. If you look at Google Trends for Bitcoin, it tracks the price of Bitcoin. People are interested in Bitcoin because you can buy it and maybe sell it later for a profit. It’s exciting, with huge price action.

Tech entrepreneurs are also interested in Bitcoin as a disruptive technology. The same is true of XBRL. However there simply are not that many entrepreneurs checking out fundamental technology that could be disruptive to big financial services markets to make a big impact on Google trends. What registers is a lot of people wanting an answer to “how can I make lots of money, fast?”   

(I am assuming readers already understand the basics of XBRL. If not, here is a link to a post on ReadWriteWeb from 2009 which explains why I am excited by XBRL; it also contains links to some good basic introductions).

Here is why XBRL may be about to have it’s  “show me the money” moment:

1. There are easy pickings in small cap stocks, because it is a very inefficient market. Here is a report from Credit Suisse that shows why trading in Big Caps is a mugs game for retail investors, but how there are big opportunities if you can quickly find the undervalued/overvalued small cap stocks. The TL:DR summary of that Credit Suisse report:

“Shares in small and mid cap companies are, for the most part, less liquid than those of large caps. The typically higher risk of an investment in small and mid cap stocks is reflected in higher risk and liquidity premiums and has a positive effect on performance over time.”

2. HFT (High Frequency Trading) killed off the Day Trading business. When speed of trading is the game, computers will always beat humans. So there are a lot of retail investors looking to find the next game.

3. The XBRL rollout on US stocks is now complete. The SEC mandate was that over time ALL publicly listed companies would have to report in XBRL. When I was writing the SAAS Insights Report in 2010, only Big Caps (over $2bn market cap) had to report in XBRL. Now I can get all the SAAS stocks in XBRL. Or all Biotech, Oil, Property, e-commerce stocks, whatever is the focus of your research. Then I can set up automated screening programs to find the investing gems (long or short) in those markets. in 2010, Small Cap stocks were in “Small Cap Hell” and there was not much that anybody could do about it.

Those who have been toiling in XBRL world maybe thinking “but the data is still not totally reliable”. True, but it is still way better than what we have now (manually cutting and pasting from HTML into Excel). To the retail investor, finding a data problem is an opportunity. They have the time. If you use XBRL to screen 100 stocks based on some parameter and end up with 3 that “look interesting” they can easily eyeball those three to spot where data errors might be or why a stock that looks crazily undervalued based only on the numbers is still a lousy stock to buy. Automated analysis of the basics enables more time for value added analysis (“Alpha” in Hedge Fund speak).

So, XBRL needs stories of a couple of geeky young Warren Buffet like investors to make a fortune this way. That will get them onto CNBC or Fortune or Business Insider. A good reporter with a nose for the story will ask “how did you do it?” and that is where the newly-rich investors will go against their best interests and reveal that XBRL analysis tool they used.

This will be like somebody in 1994 talking about how they were making a lot of money trading stocks at home using this e-Trade platform.

Don’t expect a lot of positive stories about XBRL from Wall Street, because XBRL is deeply disruptive to “the way we do things around here”. XBRL democratizes fundamental stock analysis in the same way that PCs democratized computing and social media democratized HTML. When you can compare the cash holdings across 100 companies with a single entry in your spreadsheet, or see quarter to quarter revenue growth for every company in the index that you devised, do you need mega brokers and their me too reports churned out by freshly minted MBA graduates in an outsourcing center somewhere?

Maybe XBRL will remain a hidden enabling technology. Maybe the tech entrepreneur who makes fundamental stock analysis as easy as day trading based on chart action will be the name that everybody is Googling. Maybe that tech entrepreneur used XBRL to make it happen. In which case, XBRL will have just quietly disrupted the world of money management. I think that is inevitable, but having tracked the emergence of a lot of new technologies I have stopped trying to figure out when this will happen because “inevitable does not mean imminent”.

Hey, Banks, your  fat margin is my opportunity

That is a Jeff Bezos line:

“your fat margin is my opportunity”.

This is standard thinking for entrepreneurs. Fintech entrepreneurs are eying the fat margin lines of business in the banks.

Fintech is more than Bitcoin. Having finished my exploration down the Bitcoin rabbit hole I can understand the context behind the torrent of news about Bitcoin.

However, I am a Fintech entrepreneur, not a Bitcoin entrepreneur. I first look for problems to solve, then I look for technologies that can offer solutions to that problem. Bitcoin is a big part of the solution set, in some cases it will be the core part. But it is only one part. There are so many disruptive technologies changing the Fintech game – mobile, big data, real time web, XBRL to name a few.

However entrepreneurs start with a problem. The problems I am interested in are the ones that leave consumers or small business out in the financial wilderness, with lousy and expensive services or no service at all.

Banks make a lot of money from services to the Global 2000, but these tend to be an efficient market. The Global 2000 have buying clout, so they get great prices and service. There are few “fat margin opportunities” among the Global 2000.

There are lots of “fat margin opportunities” among consumers and small businesses. Consider the spreads on lending or the fees for payments or the fees to manage money. They are massive.

When disruption really hits, the intermediation $$$ gets cut about 10x.That is what an efficient market does. This is something naive entrepreneurs and investors often miss. They see a market that is worth $10 billion today for example. That $10 billion number is official, you can attach a report showing that it is real. So the entrepreneur pitches investors with “if we only get 1% of that $10 billion” we have a great business. True, that would be a $100m revenue business.

However it never pans out that way. The disruptive technology evaporates 90% of that existing line of business. That $10 billion Total Addressable Market (TAM) becomes a $1 billion TAM. Lets call it TAM-Today and TAM-Tomorrow.

However the business opportunity for the winner is actually a lot better than what that entrepreneur is pitching. The winner does not get 1%. In a network effects game (and all digital markets are governed by network effects), the winner is more likely to get 20% or 30% or even 50% of the market. In fact, less than 50% for the winner is unlikely – think of Microsoft, Google and Facebook. Once you get to 50%, it is a short journey to worrying about anti trust as you nudge towards 70%. So the winner in that $10 billion TAM-Today will create businesses with revenues of $500m (50% of that $1 billon post-disruption market size).

Another naive error in Fintech, is to see those fat margins and think “it’s those greedy bankers”. Sure, sometimes there are easy pickings in a market where you simply bid a lower price. However, usually the fat margins are there because it is a fundamentally broken market that is totally inefficient. Those fat margins are needed to cover the cost of that inefficiency.

Consider a simple example. The old banker’s life used to be 3-6-3:

“borrow at 3%

lend at 6%

tee off on the golf course at 3″

That 3% spread included lots of paperwork processing and meetings with the borrower. That all cost money.

In an efficient, automated market that 3% could be 30 basis points. That is the 90% cut to the TAM. 30 basis points at scale is a massive business. If you do not do it at scale at that rock bottom price, somebody else will. It could even be Jeff Bezos as he sees yet another “fat margin” line of business to attack.

Turning a broken market into an efficient market is not simple. If it was simple it would have already happened. That is what great entrepreneurs do – understand the root cause behind a broken market and figure out how to make it efficient (and how to extract the small slice for doing so).

Matt Harris, a VC who really understands Fintech has a great blog called Race to the Bottom, where he says that you have to do 4 things to after these big markets:

1. Be the lowest cost provider.

In my terms, you don’t want some other entrepreneur looking at your business saying “your fat margin is my opportunity”. Or, as the soldiers would say, “don’t leave your rear exposed”.

2. Lock up differentiated distribution.

In other words, negotiate some exclusivity into your channel deals or that new upstart competitor will come to them and underbid you; even if the new upstart competitor cannot be the lowest cost provider they can use dumb money from investors to buy their way into your market. That won’t work for them but it can still kill you along the way.

3. Serve the previously unserved (and ideally previously unserveable).

This is a big part of what I am covering on this blog. It is not just the unbanked in the developing world. There are plenty of people in the West who have been left in the cold by the current financial system. Consider the 25% of Americans who have no FICO score and therefore find it hard to borrow. Or ask a small business owner how much they like using Factoring or pledging their home as collateral in order to get working capital.  Or ask any consumer or small business how much they love playing a lot of money to change currency.

 4. Change the game

If a market is broken you have to fix it. Huge rewards follow anybody who can fix broken markets and make them efficient, but this is harder than launching a social media site. You need to a) understand the root cause of why it is broken and b) have a disruptive technology that you can use to fix that root cause problem.

Identifying these big broken markets is easy. Find out all the places where you as a consumer or small business owner are getting a lousy deal from the current financial system. You won’t lack for problems to solve. Figuring out how to solve them is obviously harder, but as Matt Harris says at the end of his blog:

“All of these are big bets, and none of them may pay off.  But the juice is surely worth the squeeze.”

My explorations down the Bitcoin rabbit hole

This series of posts records my attempt to understand Bitcoin and the Blockchain.

I am a Fintech entrepreneur . I am NOT:

– a financial speculator or Bitcoin Miner (so I am not selling my portfolio)

– in the media business (so I am not selling page views or conference seats)

Bitcoin comes up in conversation with team members, partners, press and investors, so I need to understand the basics. Writing helps me to get my thinking clear and connect with others who are fishing in similar waters.

I expect readers to be reasonably familiar with the basics of Bitcoin (there are many very good introductions online).

I call it the “rabbit hole”, because like Alice you have to suspend disbelief and be ready to see strange things when you explore Bitcoin.

This is my wrap-up post. Bitcoin is a big part of what we cover at Daily Fintech, but it is only one part.  I am a Fintech entrepreneur, not a Bitcoin entrepreneur.

At first, I tried planning out the sequence of posts but I soon found that my explorations led me to interesting new posts that I had not anticipated. In other words, these posts emerged as my understanding of Bitcoin grew. I have not attempted to rewrite the earlier ones based on what I learned later. Other people who are on the same journey of exploration may appreciate the travel tales as well as the map.

Each post addresses a question:

Who will create the Netscape of the Bitcoin era? This question started my exploration. The accepted wisdom is that Bitcoin today is like the Internet in early 1990s, before the Netscape browser made it accessible to the mainstream. Later I thought that Netscape is the wrong analogy and wrote a new post on Who will create the iTunes of the Bitcoin era?

Will M-Pesa or Bitcoin be the first global payments service? I posted this on ReadWrite and got flamed by Bitcoin aficionados for suggesting that M-Pesa had a chance. I still think Bitcoiners have a western mindset and really do not understand the needs of the 70% of the world that is unbanked. The interesting opportunities are related to bringing Bitcoin and M-Pesa together to solve real world problems. In other  words it is not Bitcoin OR M-Pesa but rather Bitcoin AND M-Pesa.

Ethereum, Maidsafe, Blockchain and the emerging P2P decentralized stack. This started with a question: “if you had the Blockchain and wanted a killer app, would you create a digital currency or something else?”

Will the Bitcoin off-ramp regulatory problem limit it to transactions within national borders?

What will trigger merchant transaction volume?

What will trigger Wall Street adoption of Bitcoin?

Where is the VC money flowing, what is the % of Bitcoin vs total Fintech?

Could London become the Bitcoin capital of the world?

How can we have Bitcoin payment security in a world without charge-backs?

How are the bleeding edge Bitcoin 2.0 platforms getting funded?

What will make us feel safe with Bitcoins in a digital wallet?

Who will create the iTunes of the Bitcoin era?

Who will create the iTunes of the Bitcoin era?

This is one of a series called Explorations down the Bitcoin rabbit hole.

I started my exploration down the Bitcoin rabbit hole with a question:

Who will create the Netscape of the Bitcoin era?

The accepted wisdom is that Bitcoin today is like the Internet in 1992, before the Netscape browser made it accessible to the mainstream.

Maybe Netscape is the wrong analogy. Maybe the better question is:

Who will create the iTunes of the Bitcoin era?

The historical analogy is that Napster blew up the music business with free and illegal, but iTunes reaped the reward with cheap and legal. Bitcoin is blowing up the currency business with free and sort of maybe in some circumstances illegal (in other words, a regulatory hairball that makes the lawyers rich).

Steve Jobs brought MP3 digital music to the mainstream.

Will some entrepreneur or bank do the same with digital currencies?

iTunes scored by offering all the ease of use advantages of MP3 digital music; but rather than make it free, Steve Jobs just made it cheap (well, cheaper than CDs).

Consumers expect to pay something for payments and other banking services. Consumers don’t expect free. But they will probably switch from their current bank (the equivalent of buying CDs in a retail store) for a service that is 10x cheaper than alternatives but also legal, regulated and convenient.

This could come from:

– an existing big financial institution


– a big tech company like Apple, Google or PayPal.


– a startup.

Nothing on the horizon looks close. But then iTunes also took the market by surprise.

This is one of a series called Explorations down the Bitcoin rabbit hole.

What will make us feel safe with Bitcoins in a digital wallet?

This is one of a series called Explorations down the Bitcoin rabbit hole.

This is the mobile era and Bitcoin is far from mobile friendly. This has to change for Bitcoin to become mainstream.

Bitcoin is based on a revolutionary idea, that all of us can be our own bank. That idea seems crazy – as crazy as the things we do every day thanks to the Internet that were inconceivable before the Internet made them possible.

However the way that Bitcoin achieves this revolutionary objective (the decentralized Blockchain) means that you need big computing power to store and process Bitcoin. Even worse, because Bitcoin (like any digital data) can be hacked, you need physical vaults like old-fashioned Wild West banks to store your assets. This hardly feels like progress. It is certainly not aligned to the mobile revolution.

So will digital wallets trigger mainstream adoption of Bitcoin?

I see two forms of digital wallet – on phone and in browser. The browser version will be used for micro payments online and the mobile version will be used in physical stores or for person to person payments.

Coinbase, a well-funded Bitcoin startup, is tackling this problem with the concept of wallets and vault. You can lose the cash in your wallet but your remaining assets remain secure in your vault (aka your bank).

This concept of wallets and vaults makes sense and is now the accepted way to do this. However this alone does not solve the problem. The physical wallet analogy blinds us to the problem. A physical pickpocket can only steal one wallet at a time. A digital pickpocket can steal millions at a time, so the incentive for criminals is much bigger, we could have our digital wallets picked regularly.

I don’t know what technology will solve this. I can see many candidates. However, I am confident that it will be solved because it is not a Bitcoin specific problem and the opportunity is huge. Any cash in a digital wallet can be stolen – Fiat currency in a stored value form in a phone can be stolen as easily as Bitcoin. So all the players going after this – Apple, Google, Credit Card companies, PayPal etc – will be looking for solutions.

The long awaited Apple move into NFC maybe the trigger this market has been waiting for.

This is one of a series called Explorations down the Bitcoin rabbit hole.

Crowdfunding Bitcoin startups is eating your own dog food – controversially

This is one of a series called Explorations down the Bitcoin rabbit hole.

When I first started looking at Bitcoin 2.0 startups (Altcoins and decentralized apps using Blockchain tech) I would see “IPO” mentioned. This had me thinking “WTF” as these are really early stage ventures, far removed from the financial metrics demanded by investors for an IPO.

These ventures realized they were in a branding and legal minefield and dropped the term. What they are doing is crowdfunding, in much the same way that Kickstarter does it – except of course using their own platform and using Bitcoin for payment.

They have to use crowdfunding because these are a) bleeding edge projects that very few investors understand b) open source with no obvious monetization play. So traditional Angel to VC route is not ideal; indeed some that go this route get flamed by the community and as community enthusiasm is mission # 1 that would be a huge mistake.

Also, for platforms that are designed to disrupt the financial services status quo, it would look bad if they did not “eat their own dog food”.

I don’t think this is a new paradigm yet. Speculators jumping into a proliferation of Altcoins will end in tears. A few developers buying with some spare Bitcoin in order to get in front of the next big tech wave is OK. What is extraordinary is to see something like Ethereum raise over $12m this way. That would be a chunky Series A for what is pre Angel by most accounts.

The takeaway for me is that there is big developer enthusiasm for these platforms. So, yes, I buy the theory that this is Internet c 1992 or PCs c 1974.

This is one of a series called Explorations down the Bitcoin rabbit hole.

Ethereum – where Bitcoin meets Internet of Things

Judging by Google alerts, the two biggest tech trends are Bitcoin and Internet of Things.

Listening to the Ethereum guys talk about how Smart Contracts can automatically enable or disable locks on property such as a car or a house brings these trends together.

My first thought is yikes, scary. My second thought is “Hype Smorgasboard”. However in the context of sharing economy type services this not only makes sense but has to happen for the sharing economy services to grow into their potential.