SMB Financing is a window of opportunity “big enough to drive a truck through”

The last market opportunity “big enough to drive a truck through” that I witnessed was the difference between time spent online and ad $ spent online.

SMB Financing is in that class now because of four mega trends:

  • Banks are lending less (due to balance sheet constraints) just when business is recovering and needing new capital to grow.
  • Large business continues to shed workers (forcing many to create or work for small business).
  • Networks and platforms lead to frictionless commerce that makes it easier for small firms to compete. In other words, small business is getting bigger.
  • The rise of the Rest where most people are self-employed.

Most Banks don’t even have an organization dedicated to SMB Financing. They nibble at the edges of this massive opportunity by:

  • Letting Corporate Banking sell to the M in SMB as if they were a smaller version of a Corporate.
  • Letting Consumer Banking sell home equity lines that business owners use to finance their business.

The startups that are “laughing all the way to the IPO” like Lending Club and Ondeck figured out that you don’t need any ground-breaking innovation. All you need is “better, faster, cheaper” credit evaluation using digital data.

Small business credit evaluation is complex and very expensive if done manually with paper and human bankers.

SMB is one of the biggest categories in the Fintech 1,000 Innovator Catalyst Database.

I have already reviewed the following SMB Financing ventures:




CAN Capital


Funding Circle



The last two are interesting. Iwoca go after the really, really small businesses, what might be called Micro Business. Zidisha is doing the same in the developing world. In America which is a developed country with an almost brutally efficient economy, nearly 40% of workers will soon be self-employed by 2020. In the developing world, that % is far higher.

So the market is really MSMB – Micro Small Medium Business.

I created 6 Sub Categories in Fintech 1,000 within MSMB:

  1. Efficient loan processing through analytics. This where the big money is today with the companies I have already reviewed including two that are IPO scale unicorns – LendingClub and OnDeck. This has got so big that it could have a sub prime type blow up.
  1. Digital trade finance. This has lots of ventures some them quite mature, but is not as high profile as the first segment. These go via various names such as Supply Chain Finance, Payables Finance, Receivables Finance. These offer lower APR for companies that have invoices from customers who pay reliably (or have a good credit rating). Ventures include:


Prime Revenue




Oxygen Finance

Receivables Exchange

Platform Black

Market Invoice


Tungsten Network

  1. Asset based lending. This is not as mature and still ripe for innovation. True Accord could fix the currently messy business of asset recovery post default and this could bring efficiency to asset based lending.
  1. Innovation Capital aka equity for Baby Unicorns or Unicorn Food (aka Flips). This is the world of VC and Angels and Angel List is the disruptive player, but other interesting plays are around secondary markets and private deal rooms such as GUST.
  1. Patient Capital for Butchers, Bakers & Candlestick Makers. It is hard to do equity funding for main street businesses, because is no exit, but it maybe that this simply requires innovation around portfolio construction and payout via Dividends. Crowdfunding networks, such as Seedrs, may morph into this space as the Innovation Capital space gets increasingly crowded during this stage of the macro cycle. Dealstruck offers long term loans that are an alternative to equity.
  1. SMB services for finance (payroll, tax, AP, AR etc). Selling SAAS to small biz is tough – the CAC/LTV metrics can kill you. So we may see more Freemium in return for owning the data with an upsell to financing.

Hey SMB CFO Who You Gonna Call?

Who is on the CFO Speed Dial?

It is Friday evening and the CFO and CEO are having dinner. They plan a major initiative but the financing is not in place. They know all the above types of services. Who can help them pull it all together and deliver the best APR in quick time?

It could be the next Fintech Unicorn. Or a Challenger Bank. Or a Big Bank thinking outside the box. SMB Financing is a massive market and we are still in the first innings of this game.



Quantopian – DIY open-sourced trading algorithms and a crowd-sourced hedge fund

By Efi Pylarinou

Quantopian, founded in 2012 in Boston, started in the Algorithmic trading space. It offered a web-based platform to write algorithms for US equities trading. In addition, Quantopian offered the capability to paper trade against live stock market data and – most importantly – to back-test the algorithm against historical data. So far, that describes most competent algo trading systems. Quantopian differentiates by adding a crowd-sourcing dimension. The coder of the strategy can invite other collaborators that can use or enhance the code. This is the open source aspect that Quantopian brought to an otherwise highly secretive market (proprietary algorithmic trading).

Quantopian is democratizing the secretive quant trading algorithms. It is making it easy to code (using Python), back-test and tweak the strategy. Back-testing is a serious pain point for quants. Quantopian mitigates this challenge and also creates a community to share (at each trader’s discretion) algorithms, strategies and ideas.

Recently, Quantopian enhanced their historical database (prices originally starting from 2002) with 12 years of historical data from Morningstar Corporate Fundamentals. This includes over 670 financial metrics across more than 8,000 stocks (raw values of revenue and earnings, as well as convenient pre-computed values and ratios such as market cap, earnings per share (EPS), price-to-earnings ratio (PE) and more).

Typical quant strategies include mean reversion, momentum, valuation, sentiment and seasonality. Under each of these broad strategies, traders can include their own rules that aim to produce alpha. At the end of the day, of course, traders want to produce consistently superior risk/adjusted returns compared to a comparable passive strategy.

As a Quantopian user, one can see the open source algorithm library, copy any one tradable coded strategy and maybe tweak it.

For example, think of a simple strategy like; BUY when the price is above the 50 day SMA and SELL when it is below. The original coder could have back-tested this strategy for a few ETFs (subsectors of S&P500) and I would like to back-test it for Russell 1000 and depending on the results, tweak the SELL order with a stricter condition (price is below the 50day SMA and the 100day SMA). In addition, there is a community to chat with about the nuances of the strategy.

Recently, Quantopian created their own hedge fund. This is where it gets interesting and disruptive.

Quantopian is a crowd-sourced hedge fund.

They pick the top performing managers from their quant community and subsequently connect them with investor capital. There is a trading contest for the selection process that has its guidelines and restrictions (e.g. leverage limited to x3 times, max drawdown less than 10%). Each month Quantopian picks a trader/coder winner who gets rewarded with $100,000 of investment capital to be managed free of charge (i.e. manager keeps 100% of profits) for 6 months.

Quantopian recently organized a disruptive quant trading event in NY called Quantcon. It included innovative talks and workshops, geared to improving investment performance by exploring algorithmic trading strategies and applying open-sourcing to investment ideas. Speakers included entrepreneurs, tech specialists, academics, quants, and investment managers.

This past week, Barry Ritholtz on his “Masters in Business” radio podcast, featured Meb Faber, chief investment officer of Cambria Investments. Faber explained how his investing approach has evolved from his days as a biotech analyst to becoming a quant “lite.” Faber is a disruptive quant, who this past December created the first no-fee global allocation ETF. There are a few Quantopian tradeable strategies based on Meb Faber strategies.

Quantopian has raised total capital of $23.8 million in 3 rounds. Investors are Bessemer Venture Partners, Khosla Ventures, Spark Capital, and Wicklow Capital


Fintech Global Tour Geneva Lausanne corridor nerds & rich people communicating

For such a small country, Switzerland has two poles of innovation – Zurich and Geneva.

Both have great universities that supply the Tech in Fintech. On the Fin side, Zurich is more Institutional and Geneva is more Private Wealth Management, but both centers have a mix.

(I live in between the two in the bucolic capital of Switzerland, Bern, which nobody would describe as dynamic).

Zurich and Geneva both have lots of nerds (drawn by great universities) and rich people. So they have the two active ingredients of an innovation center. The question is whether the nerds and rich people are communicating and finding common ground. That is what happens in Silicon Valley and that is why Silicon Valley is the great exemplar of wealth creation through innovation.

In London nerds and rich people connect around Fintech because many of the rich people made their money in Fin and know that Tech is critical to Fin, so a Fintech venture is not too big a stretch. That is now also starting to happen in Switzerland.

Last week I was in Lausanne. This week I was in Geneva. You would tend to put Lausanne in the nerds category and Geneva in the rich category. The meetings were the other way round. The meeting in Lausanne was the Tech Growth Forum and it was more investor centric and the MeetUp in Geneva was more tech and entrepreneur centric.

Often an innovation center is created through corridors (which can be linked by highways or trains). London to Reading, Route 128 in Boston and Route 101 are examples. The nerds need cheaper locations but cannot be too far away from the rich people. The Geneva Lausanne corridor seems to fit this profile.

Pragmatic banker conversations about Bitcoin & smart contracts on blockchain

Investors and entrepreneurs can make money at the transition between bleeding edge and leading edge.

Bleeding edge means that there is technology risk, which is a quick way to lose money. The key at this stage is to experiment and learn cheaply.

Leading edge means that lots of investors and entrepreneurs are jumping on the bandwagon and prices become too high to make money. This is when you start to hear bubble talk.

Somewhere between bleeding edge and leading edge lies opportunity. Thanks to the Internet, the transition from bleeding edge to leading edge is a lot faster than it used to be as momentum riders accentuate and accelerate every trend. There is a reason that being nimble and agile is so prized these days.

I believe that Bitcoin and smart contract blockchain systems are currently around this transition point.

Yesterday I attended a very practical MeetUp in Geneva focussed on Bitcoin and Blockchain systems. This was not like a gathering of the Crypto faithful that I witnessed at a MeetUp addressed by Vitalik Buterin of Ethereum just a few short months ago. Most business people would have felt uncomfortable in such a geeky MeetUp.

Yesterday’s MeetUp in Geneva, organized by Swiss Financial Technology, was much more business friendly.

There were two Swiss ventures on stage at the MeetUp – and Clearmatics.

SBEX are a Swiss Bitcoin broker. The most surprising insight from Alexis Roussel was that Switzerland treats Bitcoin as a currency (not as a commodity as in some jurisdictions) and the regulators found the concept of an alternative currency to be quite normal because Switzerland is a multi-currency country. What? I know Switzerland is multi-language, but I also know the famous Swiss Franc. It turns out that there is an alternative currency called WIR that was set up in 1934 that is quite legal. The WIR was set up by people wanting to create an alternative to a financial system that had failed so dramatically in 1929. Sound familiar? WIR accounts for a tiny % of Swiss GDP but it is real, useful and legal. So the idea of adding another legal currency was not too big a stretch.

Daily Fintech has already written about the competition between jurisdictions to be home to the wealth creation around Bitcoin (while avoiding the trap of being a haven for scammers and crooks). Switzerland could be one of the jurisdictions that get the formula right.

One question at the MeetUp was:

“We are in Geneva, which is home to a lot of Private Banks. What can Private Banks do to meet the needs of customers related to Bitcoin?”

There was an interesting debate around this subject. Alexis Roussel of made a key point that Bitcoin does not have a user interface, leaving lots of room for innovation and value creation around the User Experience (UX) level.


This is a new stealth-mode venture using Blockchain for clearing and settlement in OTC markets. These OTC markets are big and  complex markets and undergoing a lot of change from both digitization and regulation, so Clearmatics are fishing in good waters.

Here is my 101 guide to blockchain systems:

– Blockchain technology was used for Bitcoin, but many of the new use cases have nothing to do with Bitcoin.

– Blockchain is a Ledger, just a distributed ledger that is not controlled by any single institution. You trust the code/math rather than the institution.

– A blockchain database is immutable. In the language of transactional database systems, it is CRUD without the Delete. You can never delete a record. Update means add a new record to the Blockchain, it does not mean that you change the record. You don’t have to trust an institution to maintain this record securely (this really matters in countries with lots of corruption at Government level, because those who control the records effectively control who owns what).

– Smart Contracts are “if this then this” business rules automatically enforced by code. Most business contracts fall into some variant of “I will do x, when y happens”. The key is that enforcement is not via courts, it is via code. Smart contracts often use an entity that is akin to an escrow agent where release of funds is based on “multi sig” (multiple signatures) to confirm that funds can be released because an event has been triggered.

The idea of code-enforced contracts can be utopian or dystopian depending on your POV. I am sure there will be lots of needed debate and regulation around this subject. Can the code-controlled entities be “taken to court” if they run amok (or does Harrison Ford get enlisted in some Blade Runner future?)

From a more practical business POV, blockchain based contracts bring near real time (a few seconds) performance to the kind of intra-company  processes such as settlement, compliance and custody that we normally associate with batch processes.

Smart Contracts on the Blockchain are leaving the bleeding edge stage as Ethereum starts to deliver working code. There are plenty of issues to discuss at a technical level around scalability and security and there will be glitches and hurdles, but the balance of probability is now that it will work.

Last week I attended a conference in Lausanne (near Geneva) for investors to connect with tech entrepreneurs. Yesterday was an entrepreneur organized MeetUp where investors were trying to spot the next opportunity.

In both places I witnessed something that one normally only sees in Silicon Valley which is the money guys coming up to talk to the innovators (rather than the other way round). In Silicon Valley it is accepted wisdom that value creation comes from innovation and that money is a fungible commodity. That POV is becoming increasingly accepted in other places, including Switzerland (where that idea would have seemed totally foreign only a short time ago). It is why Angel List gets the investor to pay to access entrepreneurs whereas in Europe the norm is still that the entrepreneur pays to access investors. At the Tech Growth Forum there was a good presentation at a macro level that showed that investor returns without a technology driven “innovation shock” would be well below the 7% annual returns that are needed to maintain things like pensions and endowments. Sp, countries, regions, cities and Banks are all courting innovators like never before. At a micro level, we can expect more investors attending MeetUps that are in the transition between bleeding edge and leading edge, particularly if the MeetUps are Fintech related (because investors understand the Fin part even as they climb up the learning curve on theTech part).

Not That Many InsuranceTech Startups – Yet.

InsuranceTech is not as developed as other parts of the Fintech market. It feels more like Fintech around 2011, when a lot was happening but few people were observing what was happening.

InsuranceTech could develop at a faster pace because a lot of people who missed the rise of Fintech want to make sure they do not miss the next big market opportunity. The explosion of Social, Mobile, Analytics and Cloud (SMAC) technologies means that startups operating at the top of the stack – at the application layer – can often get tremendously rapid traction.

The other reason that InsuranceTech could happen fast is consumer demand. The three types of companies that often get consumers angry – what I call the “three horsemen of the consumerclypse” – are phone companies, banks and insurance. Banks got a lot of the bad press after the subprime mortgage blow up, but if you ask a lot of consumers what really causes them stress on a day to day basis and you will often hear insurance companies. Buying insurance is supposed to reduce stress, but dealing with a bureaucracy that often seems to hold all the cards and to be fundamentally motivated to reduce or disallow payouts at a time when you are dealing with the stress of sickness or a car crash or a disaster that struck your home dramatically increases stress levels.

Insurance is complex, with many segments. Some segments such as Health Insurance are country specific. Others such as Home and Auto insurance tend to work the same globally. Re-Insurance is a totally global market but one that consumers tend not to see (it is a B2B market). To navigate this complexity, I sought an expert and found Rick Huckstep. I asked Rick what trends he sees impacting the insurance market and which startups look interesting. His fundamental point is surprise that we are not seeing more:

“Insurance is conspicuous by its absence from the Fintech scene in London and it’s a mystery to me why it has such a low profile given the massive opportunity in this sector”.

Rick went on to tell me:

“Insurance spend on IT represents about 25% of the global financial services marketplace, therefore, it would be reasonable to expect 1 in 4 of all new Fintech startups to hit the street as being InsuranceTech. But that is not what I am seeing when I look around the Incubators, Accelerators and Angel investing clubs in London.

Of course, some of the major insurers, like the banks, are getting behind the Incubators, or setting up their own creative spaces, such as Aviva’s Digital Garage. But there is a massive difference between encouraging your staff to wear jeans and think of new ways to make insurance cheaper, and the truly disruptive, no-holds barred approach of an entrepreneur who wants to change the game forever.

To illustrate my point (in a completely unscientific way), last week I went to the Bobsguide Fintech Innovation Awards dinner in London. It was a fine event with big name keynote speakers and 400 of Fintech’s finest in the room. I counted 75 businesses as the nominees against 18 award categories, none of which were categories specifically for Insurance.

Of the 75 businesses, only 1 would be labeled as ‘Insurance’. And that was ‘Bought by Many’, who act as an insurance intermediary to provide group discounts and better terms for communities of interest, such as traveller insurance for specific health conditions like diabetes or a heart condition, or pet insurance for specific breeds of dog, such as a labrador, bearded collie or bloodhound.

Ironically, given the point I’m making, Bought by Many went on to be named Winner in the category for Fintech Innovation of the Year!

The reason there isn’t more InsuranceTech is simple; the technology and the condition for change have not been here until now! Insurance has largely operated the same way for the past 300 years, but now technology really can enable all lines of insurance business to be radically changed.

Lets just look at the fundamental issue of pricing. Back in the 17th century, in Edward Lloyd’s coffee house on Tower Street, insurance risk was priced individually. How much to insure my cargo ship from crashing on the rocks or being raided by pirates?

As insurance expanded beyond Lloyd’s and into providing protection for the masses, the fundamental principle of the pooling of shared risk was established and the whole business model for an insurer was built upon it.

Today, however, technology enables the 17th century approach of individual risk to be applied to those same masses. No longer should my car insurance be priced according to a category determined by my age, gender and location when it can be priced specifically to how well and how often I drive my car (thanks to the telematics data from my car).

Technology now provides the means for disruption in Insurance through the wholesale adoption of new tech such as wearables, the proliferation of the Internet Of Things, the EU directive to ensure telematics in every car from next year and, of course, the massive capability of big data.

And so, given we have all this technology at our fingertips, more funding available to Fintech and London than ever before, a UK Government that has created a fertile environment for entrepreneurs and investors alike, and a 300 year old industry ripe for change, why are we not seeing more InsuranceTech?

Here are the names of InsuranceTech startups from Fintech 1,000. We will be reviewing many of these in the coming weeks. Please tell us which firms we have missed:

360 GlobalNet

Analyze Re

Bought By Many


Hey Guevara







The Digital Wallet User Experience will have to pass the toothbrush test.

A digital wallet could be a commodity with maybe some branding and fashion – similar to physical wallets today.

In this scenario, we will have thousands of digital wallets.

Or a digital wallet could become your mobile bank – the one thing you never leave home without – that completely changes our concepts of money and banking.

In this scenario, we could have only two wallets – one from Apple and the other from Android.

Sorry Microsoft, I should have said three.

Bias alert. I use an iPhone. I am not wedded to iPhone. I was a happy Blackberry user and I will switch to anything better. However today I have the iPhone habit, so my digital wallet example will be an iPhone example.

Passbook is the digital wallet that I use regularly. I use Passbook to keep airline boarding passes as a convenience to save pulling up the boarding pass sent via SMS because I need offline access at the boarding gate. I do the same with car reservations. This is classic digital wallet use – storing what used to be bits of paper shoved in a physical wallet. If merchants gave me loyalty cards in Passbook form I would use them more often.

I do not use Passbook to store money. Or Credit Cards. Or Drivers License. So I leave home patting my pockets to make sure I have my iPhone and my physical wallet (and my passport if I am going on a foreign trip).

Before getting to money, let me tell you about one other thing that I do not put in Passbook – my train tickets.

I keep my train tickets in my SBB app. This is a mobile app from Swiss Railways. This passes the toothbrush test. I use it on average about twice a day (it includes local trams and buses). It is an example of why User Experience rules. It works so well that I use it a lot. So I keep my train tickets there. Putting train tickets into Passbook is easy but it is an extra step with no added value.

If I switched to an Android or Microsoft powered phone one of my first downloads would be the SBB app.

User Experience is King & Queen.

I am not raving about the SBB app as a segue to a Eurotrash rant about how good public transport is in Switzerland. Swiss trains are great, but the point is about User Experience. A truly great travel app would pass the toothbrush test and would be independent of the physical transport. Citymapper comes close, but coverage is still not widespread enough. Citymapper passes the toothbrush test when I am in London (or one of the other cities they now cover). I wish that I had invested in Citymapper when I first started using it and found it to be a much better experience than anything else I had ever used for travel. It was like my SBB app for all the other places.

When using Citymapper in London, I am also using my Oyster Card, which is simply a single purpose pre-paid wallet. Oyster Card now offer a mobile alternative, so that I will be putting my phone on the reader just as I do with my boarding pass in Passbook.

What if I had the equivalent of Oyster Card for New York and Paris as well? Or any other city with public transport. I surely don’t want the hassle of buying individual tickets or storing a number of plastic cards and making sure they are loaded with cash.

If you live in a city with lousy public transport and/or you think that public transport is only for poor people, Uber may pass the toothpaste test for you. Or, if you don’t like Travis Kalanick, maybe you use Lyft every day. I happen to be a fan of public transport and believe that “A developed country is not a place where the poor have cars. It’s where the rich use public transportation.”

This is Daily Fintech, so let me bring the subject back to money.

The key point about money is that it is boring.

Money is necessary, but so is broccoli. If you don’t have enough, money can be your top concern, but that makes it necessary and that is not the same as interesting. Making money can be interesting and money does enable interesting experiences, but money itself is boring.

In the physical world, where we keep money is also boring; no I do not want another wallet for Father’s day!

The hype about digital wallets have crashed against the rock of consumer apathy because there is only one thing more boring than money and that is where we keep our money.

Our physical wallets do pass the toothbrush test; we use or wallets at least twice per day. Yet our physical wallet has very little value. Search for cheap wallets and you get plenty of choices under $20. Keep it for 5 years and that is an annual cost of $4. Cheap probably means gross margins around 10% for the manufacturer. Don’t send me a business plan based on those unit economics.

Of course a digital wallet is zero cost on a unit basis. So Freemium is the obvious strategy and that is where Pre Paid Digital Wallets are going. Yet millions of free apps compete for our attention and unless they pass the toothbrush test, they become part of the mobile landfill of downloaded apps that we almost never use and so the developers never get a chance to sell us the Premium in Freemium.

This comes back to what Banks need to do to become relevant again in our lives. Last week I wrote about how Banks need to create great User Experience and there was some interesting debate on Twitter around two threads:

  • UX ≠UI, meaning that a slick front end is no more than lipstick on a pig. True.
  • Very few banks have ever built a truly great User Experience. Again true.

Nobody ever said this would be easy. Building a truly great User Experience that passes the toothbrush test is hard. Transforming banks to make them relevant to our modern digital lives is hard. Yet the prize is huge and failing to remain relevant to our lives will mean that Banks will go bankrupt (at huge cost in social disruption). So Banks need to try and they have the means at their disposal.

Payments are one way that Banks can remain central to our lives.

Payments is the boulevard of broken dreams. It is a massive market. Banks handled $410 trillion (yes that is a T) in non-cash payments in 2013 as per BCG. Yet most payments ventures crash against the rock of consumer apathy – credit cards, debit cards and cash work just fine (OK, mag stripe cards in America are messed up, but America will catch up to the rest of the world with chip and pin in the not too distant future and in the meantime most consumers are insulated from the problem).

Yet a couple of payments ventures have created Decacorn levels of value in a few short years. Think of Uber and AirBnB. The obvious retort is that they are travel ventures not payment ventures. Yet the reason that both sides in the transaction use services like Uber and AirBnB is that they enable payments in a relatively low friction way.

Uber and AirBnB are payment ventures dressed up as travel ventures.

Just like Amazon is a payments business dressed up as a shop and iTunes is a payments business dressed up as a music label.

Banks need to become central again in the lives of consumers. To do this they need to forget about their glorious history and focus on the future. The glorious history goes something like this:

  • 1.0: Safe place to store assets. With guys like Butch Cassidy and the Sundance Kid around, Banks had to be pretty good at this. There is still some room for banks to innovate in this today around Bitcoin, because nobody has a way to store Bitcoin that is both safe and convenient. Safe Bitcoin storage will appeal to all those who view their Fiat printing governments as the modern version of Butch Cassidy and the Sundance Kid. However, a safe place to store assets hardly makes banks central to our lives (unless you are the sort of person who gets a kick out of watching their safe and imagining what is inside it).
  • 2.0: The only place you could borrow money, withdraw cash or make/receive payments. You might not have loved going to your Bank branch, but you did it because there was no alternative. The Fintech revolution has made it abundantly clear that consumers do have alternatives.

The 3.0 future is when the Bank comes to you to be useful and relevant within context to what you are doing. In all the earlier generations of retail banking technology, you went to the Bank. Initially you went to a physical branch. Then you went to a physical ATM. Then you went to the Bank website. You went to the Bank. In 3.0, the Bank comes to you. The Bank might come to you physically via a Business Correspondent model (India) or via a Local Banker model in the West (Civilised Bank in UK). Or the Bank may come to you digitally on your mobile phone to enable whatever you want to do at that time that involves money.

It is in the mobile arena that Banks could create breakthrough services to make them once again central to their users lives. These services might be travel services or something else that we do on a regular basis where we need to spend money frequently with people and businesses that we do not have any relationship with – which is a classic description of a market looking for a trusted intermediary.

Imagine a travel app that had a trusted payment mechanism from a regulated bank. Critically, that trusted payment mechanism includes a pre-paid digital wallet so that users have off-line access to funds for small payments (in other words, transactions that we have historically use notes and coins for). The Bank could borrow from the Bitcoin concept of hot and cold storage (with cold storage being in a digital version of those 1.0 vaults and used to quickly, simply and safely re-fill the hot storage that we use for everyday spending).

Let’s get back to our traveler.

You used a train to get to a plane to a train to a taxi to a walk. Then you found a coffee shop with a promotion and a flower shop to buy some flowers for the person you are visiting. The app enabled all these transactions, while keeping your loyalty points and alerting you to budget limits and keeping track of your expenses. The app might use services such as SBB app, Citymapper, Uber, AirBnB and Foursquare via APIs. The company providing that service would feel central to my life. It is an example of an integrated User Experience that uses lots of best of breed point solutions via APIs that I wrote about last week.

Algomi Connecting Fixed Income Buy and Sell side by enhancing distribution 

By Efi Pylarinou

The fixed income market is huge (approaching $100 trillion) but it doesn’t have the liquidity and transparency of the Currency markets and is very different than the equity markets. Three key facts help to understand this massive market:

–       Only 1.5% of outstanding bonds actually trade every day.

–       Very few bonds trade electronically and most trades are done via voice trading or some hybrid way.

–       Bond issuance has increased during this extended low-interest era, aka ZIRP (Zero Interest Rate Policies).

The market structure today has changed following the financial crisis of 2008 and 2009 and the subsequent introduction of new regulatory requirements. The sell-side (broker-dealers) no longer have the balance sheet to take on a lot of risk by warehousing bonds. Their market making and distribution capabilities have been impaired since the financial crisis.

In other words, this $100 trillion market is facing disruption from both digitization and regulation.

Some of the above need for change has been addressed by introducing “alternative” Fixed Income trading platforms, either electronic or hybrid (e.g. OpenBondX). But most  of these alternative platforms focus on offering a service to trading counter-parties away from the broker-dealers. In other words, they believe in disintermediation and offer electronic platforms for trading less liquid bonds.

Algomi on the other hand, aims to improve the efficiency of dealer’s distribution capabilities for trading less liquid corporate, high-grade, high-yield, and emerging market bonds without disturbing their intermediation function. The company’s product, Honeycomb, digitizes dealer firms’ internal sales and trading data, including trade histories and missed trades, and aims to enhance their distribution capabilities.

Algomi, is also catering to the buy-side of the fixed income market. Honeycomb allows sell-side firms to make relevant information available to their buy-side clients without jeopardizing the clients’ natural tendency to be secretive about size and price.

The fixed income trading landscape consists of big data sets of financial instruments (many issuers, many yield curves, different issue dates, different outstanding sizes, etc). Most securities are OTC (Over The Counter) and traded via an RFQ (request-for-quote) system. Fixed income securities trade less and less as they “age” (i.e. they are most active in the first weeks of issuance), making it difficult to find who is holding these older bonds. Buy-side firms may need to trade odd lots, or very large size; this creates a problem of potentially spooking the market by simply putting an intention out there. Buy-side needs hard and soft information (actual trades, missed trades) to get a feel of a two-sided market. Buy-side is challenged by parsing thousands of messages on Bloomberg chat, to get color and be able to trade. At the same time, the buy-side doesn’t want complete transparency (revealing their buying intentions and actions could move the market in ways that are not in their interests).

Algomi is working inside the parameters listed above – not outside this box. Algomi is not an alternative trading system. It is a Sales & Trading tool that spots inefficiencies, combats illiquidity, provides market color, markets and alerts. Their objective is enhance sell and buy-side relationships by effective sharing of information.

Fixed Income is a global market and Algomi is starting to compete on the global stage. Algomi, which is based in the UK, is establishing their presence in the US (which is the most transparent fixed income market), and in Asia (Singapore and Hong Kong). They are already installed in 9 banks (e.g. Deutsche Bank, Credit Suisse, Nomura, HSBC) and have more than 30 buy-side investor firms on-board (asset managers), with a target to surpass 100 firms by mid-year. They won a tech product award for 2014 from Risk magazine.

Algomi have established a partnership with the SIX exchange in Switzerland. This is based on a licensing fee and again they are not a trading platform vendor but an information management software system that works in-house and aims to unlock liquidity, enhance trading color and relationships between sell and buy side.

They were mentioned on a Bloomberg article last week as an example of the exodus of bankers towards the Fintech startup scene.

Algomi was founded by three former UBS employees in 2012 and is backed by a venture capital firm that also invested in Spotify and Angel List. They bring to them their expertise and perspective of efficiently leveraging networks.

Algomi is far from the consumer markets that have popularized the Fintech concept. Algomi is bringing change to markets driven by professional traders at the heart of Wall Street/Canary Wharf and their clients.