Alternative Fintech Capital – Iceland

Note: I wrote this in March 2015. Lots has changed since then and Iceland is emerging as an Alternative Fintech Capital with some power.

The Fintech Global Tour has gone to 19 locations, from the obvious (London, New York, Silicon Valley) to places that most venture investors considered to be backwaters (but where we found a surprising amount of activity).

We now move onto a new phase of the tour when we go to the Alternative Fintech Capitals. Like alternative music, these are places that feel excluded from mainstream financial services. Innovation often comes from those who have been excluded because they have unmet needs that incumbents ignore. Punk music emerged from kids alienated by rich, jaded rockers of an earlier generation. The Sundance Film Festival helped create the alternative film business with festivals now in lots of places.

We look for 7 attributes in Alternative Fintech Capitals:

  1. Outsider status (excluded from mainstream global finance).
  1. Close to big markets. Alternative usually means small home market, so Fintech startups must be focused on global markets.
  1. Access to talent (combination of colleges and open to immigration and the sort of place where techies like to live).
  1. Friendly Fintech regulation (without 2&3 this would only create nameplate operations run by lawyers).
  1. Wired population (high speed access to Internet).
  1. Some interesting startups i.e. evidence that the ground is fertile.
  1. Low cost electricity. That seems an odd attribute, but when the primary cost of the Bitcoin economy or cloud data centers is electricity, it does make sense. Note: this is the one that looked strange to remark upon in March 2015, but is now critical.

The first stop is Iceland:

  1. Outsider status. Iceland gets top score here. The Global Financial Crisis devastated the Iceland economy. Imagine what would have happened if the Banks in New York and London had not been bailed out. That is what happened in Iceland. Their banks went smash. The impact on the economy was rough but a) few people cared, because “it was only Iceland” and b) Icelanders are tough and they are now emerging “blooded but unbowed”.
  1. Close to big markets. Find Iceland on the map between America and Europe (closer to America).  Flights can stop over on route between the Old World and the Middle Aged World (Asia being the Young/New World today). Iceland is a member of EFTA but withdrew its application to join the EU. In their position between America and Europe, how they play the complex and controversial negotiations around TTIP will be interesting.
  1. Access to talent. No iconic colleges but the fundamentals seem good. As a tourist destination, Iceland has fervent fans. However Iceland is not immigration friendly and I don’t hear many people putting it on their list of places they want to relocate to.
  1. Friendly Fintech regulation. Iceland is famous for taking the decision to:

“bail out the people and jail the bankers”

This post explodes some myths and gives a reality check. Banks failed and were nationalized and then quickly privatized, but the story may not be as heroic as the legend. However the result is a bit like Sweden after their banking crisis around 1991/2 and that ended well.

Note: since then, Iceland has taken a leadership position on monetary reform known as sovereign money or positive money (or vollgeld in Switzerland). This may sound academic but it takes away the “license to print money” that has been the source of all those bank profits. Take it away and the Fintechs will compete on a level playing field. Saying this is a big deal is a “British understatement” (like saying “its a trifle chilly” when climbing above 8,000 meters on Everest).

Nor does Iceland appear to be embracing Bitcoin, having made it illegal to avoid currency flight after the crisis.

Note: amazingly it is still illegal, despite big mining operations.

However Iceland is looking at serious alternatives to the norm of letting commercial banks create credit as this recent report in the Telegraph describes. The more radical option would be to move to Bitcoin, but I don’t see any evidence that is under consideration.

  1. Wired population (high speed access to Internet). Good score here for Iceland.
  1. Some interesting startups ie evidence that the ground is fertile.

The only Icelandic Fintech startup I could find was:

Meniga described on their site as follows:

“Meniga’s Market Match is a data-driven CLO platform which allows financial institutions to provide merchant-funded offers to their online customers using the power of PFM.

Meniga’s transaction-data analytics and enrichment engine, developed and optimized through years of engagement with millions of PFM customers around the world, enables us to deliver uniquely targeted and relevant offers to the consumers on our platform.”

The real entrepreneurial revolution in Iceland seems to be around genomes and medicine, which is far removed from Fintech.

  1. Low cost electricity. Iceland scores well here. Update: Iceland has become a major mining centre. When the biggest cost of mining is electricity, all those geysers are lot more than eye candy for tourists.
  1. Techies and rich peopleThese are the two active ingredients for innovation as per Paul Graham of Y Combinator. I am sure Iceland has plenty of techies and rich people, but it is not what Iceland is known for. Nor do they have people who became rich by being techies, which is what makes Silicon Valley so successful.

I have not tried to reduce this to a numerical score, but an intuitive glance says Iceland is not yet a strong contender in the Alternative Fintech Capital rankings. Update: if Bitcoin became legal and they made it into an alternative to China for Bitcoin mining…

Market disruption comes from the establishment as well as the startup

By Rick Huckstep

Last week, I wrote about Silicon Valley tech startup Zenefits and how their free to use HR software platform is disrupting the health insurance broker market in the USA. And I return to this subject one week later because, as I was writing and researching the piece on Zenefits, my curiosity grew for a better understanding of the impact of the Affordable Care Act, fondly referred to as Obamacare.

Behind this curiosity was the whole notion that it isn’t just the upstart Fintech new boys that disrupt the financial services marketplace. Just as powerful a force exists in the form of the market reforms from the “establishment” i.e., regulators, politicians, industry bodies,  and the like who have the power to change the way markets behave.

Whilst they can also be the very force that prevents change, which is more often the case, I wanted to explore this notion of establishment disrupting markets and look specifically at the case of Obamacare.

The first thing that caught my eye in the Affordable Care Act is the ‘medical loss ratio’ rule. This rule determines that insurers must spend the majority of their premiums on improving the quality, efficiency and effectiveness of the healthcare services to the tune of around 85% of the premiums. Whilst the aim of this is to reduce the spend on healthcare, it also had some unintended consequences.

The direct intention of this rule is to put an end to the system of inducements and rewards for remove unnecessary tests and procedures and thereby lower the cost of healthcare.

But, as a consequence, what this means in practice for an insurance provider is that they must now redeploy capital within the business before they can return it to shareholders.

Secondly, it also drives a different behavior pattern within the insurance providers. Now we are seeing a much greater interest in the actual delivery of healthcare services from insurers, and especially in the technology that innovates lower cost, better patient care services.

These consequences of the medical loss ration rule has led to a growing number of insurers investing in startups through their own funds and in creating accelerators to support the startup ecosystem.

The size or nature of these investments from the insurance firms are not always publicly available, but one example I saw was with Horizon Healthcare Services, a New Jersey insurance provider who invested $3.7m in the $7m Series A round in COTA.

COTA is an acronym for Cancer Outcomes Tracking and Analysis and they are “the first big data platform designed by practicing oncologists to deliver real-time clinical outcomes data and cost analysis for cancer care in support of healthcare’s new value-based reimbursement model.”

For both the insurance and the healthcare providers, both sides of the supply model share some common goals as a result of Obamacare. The COTA platform addresses this by controlling the runaway costs of cancer treatment without compromising patient care.

Another key feature in Obamacare is the creation of the Health Insurance Exchanges, also known as “Marketplaces”, within each state. These marketplaces are online comparison websites where consumers can purchase health insurance from insurance providers licensed to operate in that state.

The marketplaces will ensure that everyone gets “minimum essential coverage”. They also offer a central place to receive federal subsidies and handle exemptions (such as applying mid year because of moving from one state to another). The marketplaces operate an open season that runs from mid November to mid Feb and health insurance can only be bought during this period, unless it is deemed an exemption.

Which brings me back to where I started with the reference to last week’s article…because number 2 in the Finovate Unicorn list was Oscar and their $2bn valuation.

“Hi, we’re Oscar, a better kind of health insurance company” is the greeting on the front page of the website.


Oscar is a health insurance company that provides health insurance through the New York and the New Jersey Health Insurance Exchanges or marketplaces. It already has upwards of 40,000 members and claims to have 12-15% market share for individual health insurance in New York. As well as doubling the size of its workforce in the past year. Oscar also has plans to expand into Texas and California in 2015 subject to regulatory approvals in these states.

Their customer proposition is to keep the entire act of buying and relying on health insurance as easy, mobile and as simple as possible.

First and foremost, they are a technology-based business with a mobile app that is designed for the millennials. This is reinforced by the youthful name and the child-like branding to their target audience during the annual enrollment season. The casual and uncluttered tone of the brand appeals to the millennial generation and a mobile tech audience.


This clearly differentiates them against the established, some might say “stuffy”, marketing from the corporate insurers in this market.

The Oscar app is a modern ecommerce platform that is built on a back-end system that delivers an agile and responsive platform to provide their customers with mobile help from physicians, easy access to records, help in make a claim, and guidance through the healthcare system.

The app organizes medical information on a timeline in reverse chronological order and it uses Google maps to search for healthcare services based on the users needs. It also has a straightforward search and enquiry system for ailments using plain English such as “my tummy hurts”.

Oscar also offers features to encourage preventative measures, such as each customer getting a Misfit Flash fitness tracker that syncs with the Oscar app. The daily goals start easy, at around 3,000 steps per day and they gradually increase over the year to around 10,000 a day. As the user hits their daily goal they receive a $1 credit, up to $240 a year as an incentive for keeping fit and active. In keeping with the branding for the target audience, these are paid back as Amazon gift certificates

One of the common themes with all insurance startups is the imperative to keep the insurance policy details simple and transparent. Oscar is no different and their basic plan provides for free check-ups, generic drugs, flu shots and basic preventative care. They use plain English instead of medical and insurance jargon as best that they can which is a practice that we’ve seen earlier with the likes of Riskeraser and Abaris.

In the recent PWC annual CEO survey, now in its 18th year, the survey reported that 88% of insurers thought that changes in industry regulation would be disruptive over the next 5 years. This was the highest score for any category of disruption and shows that insurance leaders see the threat of disruption coming from the establishment as well as from tech startups.

Examples like Obamacare and also the pensions shakeup in the UK, covered recently in the article about Recordsure, support these findings from the PWC survey.

Obamacare has shaken up this massive, expensive and inefficient industry in the US. Now, all sides of the supply and demand model; consumers, producers and providers alike are changing the way the healthcare market works. It’s not just the startups that are driving innovation and change in how markets behave, the market reforms imposed by the establishment, through regulation and political action are as effective a disruptor!

Which is what Fintech is all about, isn’t it?

Augur shows that decentralized blockchain apps and Ethereum are becoming real

Alt Title:  NYSE and NASDAQ should be paying attention to Augur.

Quiz: Ethereum is:

  • Vaporware
  • Trying to be all things to all apps and will be beaten by more focussed platforms that target specific niches.
  • A truly revolutionary platform that will bring in a new age of decentralized applications that happens to be well funded enough through a well executed currency crowd sale to pay for all the brilliant people who work there.

I am on record as being an Ethereum fan. My one reservation has been a question about can they deliver? Augur is a new service delivered on Ethereum. It is a Decentralized Application (DAPP, pronounced Dee-App).

If Augur works, it should indicate that Ethereum works.

There are some other DAPPs starting to appear. Last week we looked at Digital Identity services on the Blockchain. These are at the infrastructure layer. Augur is different because it works at the application layer where you and I could use it today. I am seeing a few other DAPPs at the application layer coming down the pipe, but none is as mature as Augur.

Augur is a prediction market. This is where the Alt Title comes in:

NYSE and NASDAQ should be paying attention to Augur.

A prediction market uses crowdsourcing to forecast the future.

The biggest crowdsourced prediction market is…the stock-market.

Millions of traders try to predict where prices are headed. In aggregate the market is a superb predictor, even if lots of individuals get it wrong.

Prediction markets are nothing new. Nor are betting sites, which are simply a way to monetize a prediction. I predict that Harry The Horse will win the 3.45 at Cheltenham and if I am right I get a reward. Or I can take a long shot bet on Bernie Sanders being the next President of America. Or that Lending Club will be worth a lot more or less than the $6.8bn it is worth today.

Augur will reward you for getting the prediction right. In a world where retail investors have been crushed by professionals (see Crushed Dream of a Democratized Stock Market), there is a need for something that enables people to use their experience, intelligence and hard work to make a prediction and get rewarded. Of course you can do that by betting, but a rewards scheme that does not require the threat to your financial health from betting sounds good.

This still leaves one with the question:

“Why do prediction markets need a decentralized blockchain?”

You could build a crowdsourced prediction market using your favorite programming language and bung it onto AWS.

Augur’s answer to that question is that centralized prediction markets suffer from two problems:

  • They can be shut down. That can happen for all kinds of reason – regulation, bankruptcy, fraud.
  • Somebody has to report on what happened that triggers the payout. In many markets that is pretty obvious. I can see whether Harry The Horse won the 3.45 at Cheltenham and it will be front-page news everywhere if Bernie Sanders becomes President and it is easy to track the price of Lending Club. The beauty of a decentralized prediction market is that it can cover so many more markets and events – as long as there are enough people reporting on that event to be statistically significant.

Augur enables the long tail of prediction markets.

In the long tail you cannot rely on institutions to report. The chance of the one expert trusted to report on the event being subject to fraud or mistakes is high. So you need a trustless decentralized network to do the reporting.

Augur is a prediction market based on reputation. This is the game-changing part of decentralized applications using Blockchain:

 Reputation is no longer stored in silos (eBay, AirBnB, etc). It is an asset that each human owns and that can be used Internet wide.

In historical analogies, Augur could be like Visicalc for the PC. In other words this is still early days but I think we are moving from the “bleeding edge” stage of decentralized blockchain systems (incredibly high risk with monetization, if feasible, far in the future) to the leading edge stage (where lots of money can be made, albeit still with a lot of risk, because feasibility has been established and it is possible to plan a timeline to monetization).

The Great Fintech Rebundling

By Bernard Lunn

You know all those cool infographics of the Unbundling of a Bank with lots of startup logos?

The Great Fintech Unbundling also looks like this:

HiFi Separates

Rebundling usually follows Unbundling in the tech business and looks like this:


Some people care about music technology. I had pals at University who would obsess happily about woofers and tweeters (carbon dated myself there) but I was more interested in the music. It is the same in Fintech. To a few of us in the business, the nuanced differences between various Fintech offerings is endlessly fascinating. To most people, the only interesting thing is how to get all that boring money stuff done as quickly and cheaply as possible so that one can do something more interesting.

The great Fintech Rebundling story is fundamentally a Customer Experience story, as I explore in this post specific to digital wallets (aka current/checking account). You wait for Moore’s Law to transform the basic capability of woofers and tweeters and then you put it all back together into a different form factor.

Somewhere in there is some design magic, which Steve Jobs clearly had a lot of.

The Great Fintech Rebundling can only be done by a fully licensed/regulated entity aka a Bank. It could be a start-up bank or it could be a big existing bank moving into foreign markets (using the Telecoms playbook that we explained in this post).

Whatever the source of this fully licensed/regulated entity, it must be unconstrained by physical branches. It must be digital first. The Rebundling is about fulfilling the customer need for one stop shopping, to go to one entity to handle your needs for:

  • current/checking account (payments in and out)
  • earning money on savings (aka fixed income and equities)
  • borrowing money.

Daily Fintech is written by entrepreneurs for entrepreneurs. Those entrepreneurs can be in a garage, or in a big bank or in big tech company moving into Fintech or in a VC funded hyper-growth venture moving into adjacent markets or in a well funded fully licensed startup bank. What all these entrepreneurs have in common is:

  1. A clear view of unmet customer needs. These should be overlooked niche markets, which you can enter while nobody else is looking.
  1. The ability to create a great digital customer experience. This is a lot more than adding a UX layer onto an old system. The iPod looked great, but it also delivered a fundamentally different experience. Building a great mobile user experience is important, but it has to offer real value – better, faster, cheaper, more.
  1. They use the startup model. The startup model is well documented and taught in many classes – Minimum Viable Product, Product Market Fit, equity incentive, etc. Incumbents can do this if they are willing to break some eggs (break down organizational boundaries).

The great entrepreneurs can just as easily be in a big company as a garage. Apple was a big company in decline when Steve Jobs started to work his magic again after he returned via NeXT. The biggest hurdle to incumbents doing the Rebundling is the mistaken belief that their internal resources are their secret sauce.

The founders in the garage never make that mistake because it is simply not an option; they have no internal resources to leverage.

This corporate misconception cuts deep. The conversation within incumbents is all about leveraging internal:

  • Talent
  • IT
  • Data

In each case, there is likely to be a lot that can be leveraged, but the mental model has to change:

  1. Talent. 

Misconception: even if we don’t have the smartest guys in the room, they are already paid for.

New thinking: getting the best talent (from anywhere) aligned to your strategic objectives is the whole game.

  1. IT.

Misconception: everything has to be layered onto our core systems.

New thinking: what external resources can we leverage via digital interfaces? What would we do if we did not have a core system?

  1. Data.

Misconception: our customer data is our gold mine.

New thinking: our customers are a tiny % of the Total Addressable Market that we need to win. How do we leverage all the data out there in networks and clouds?

In this new way of thinking, your core competency becomes how to partner. This is so alien to corporate thinking, which is about controlled relationships (with employees and vendors). For a massive company to genuinely partner with a bunch of weird looking folks in a garage is totally alien. Yet the chance that one of those teams of weird looking folks in a garage will one day be more valuable than your business is no longer absurd. (For example, Yahoo is valuable today because of their investment in Alibaba).

Nor is it technically simple to deliver enterprise scale systems with great complexity using external resources in real time. For the user experience to work, data and services have to be delivered in context to what the user is doing at that moment in time. The Bank comes to the user not vice versa. Sure we have plenty of APIs and we can run it all in the Cloud. However just running a standard middleware stack in the cloud won’t enable this new type of service. Some new computer science is needed as well.

The Fintech Rebundling can be done by startups or by Banks. It is perfectly suited to Red Ocean markets. In Blue Ocean markets, the “do one thing and one thing only” startup mantra is more appropriate.  Startups tend to go for Blue Ocean markets and banks tend to fail at Blue Ocean markets due to organizational forces that attack such a radical idea. So Banks tend to operate in Red Ocean markets where they need to innovate in order to counter moves and by Fintech ventures to capture Millenials and other parts of the market that are up for grabs.  Rebundling is a strategic response by Banks in these Red Ocean markets and a way to create new competitive moat.

The Fintech Revolution that we write about on Daily Fintech currently looks like this:

HiFi Separates

Somewhere out there are the entrepreneurs dreaming about building this:


Daily Fintech Advisers (the commercial arm of this open source research site) can help implement strategies related to the topics written about here. Contact us to start a conversation.

Hedge Funds can’t hide from the Fintech swirls

By Efi Pylarinou

JP Morgan put out an opinion that hedge fund return volatility has been dampened after the crisis and that the risk/return profile of hedge funds is closer to bonds rather than stocks. One way to explain this is that hedge funds have only been catering to large institutions (like pension funds and endowments) and have therefore, adapted their investment strategies to the risk profiles of their clients.

Hedge funds as alternatives to bonds

Now that got me thinking about the disruptions in that asset class. I’ve covered some of the efforts to solve the conundrums in fixed income (Technologies for the fixed-income storm, Algomi) so now lets look at hedge funds.

First, from the point of the view of the investor; then I’ll look at the cap intro process (i.e. fund raising from institutional investors) and lastly, at tools for hedge fund asset managers.

Investing in hedge funds comes in three variations:

  • Directly into a fund
  • Through a fund of funds
  • as a separate managed account

The second proved too be expensive and is less popular nowadays. The others have always been accessible only to “qualified investors”, which for most people basically means a large minimum investment requirement ($1million) and some times long lockup periods (this also less frequent these days). In this post subprime crisis era, institutional clients have increasingly dominated the hedge funds clientele.

The first attempt for disruption in hedge funds comes to address this minimum investment requirement.

Sliced Investing offers quick signup, low fees, and small minimum amounts. The investment process is online and automated.

HedgeCo Vest is an indirect approach to replicating hedge fund investing. Through mirror trading, investors can really reduce fees, reduce amounts invested (at least for liquid assets) in a DIY fashion.

Tashtego, a conventional hedge fund, tackles even less directly the issue, but also using a social trading process. They are creating a Social Equity fund that uses social media info to algorithmically create a hedge fund. They aim to raise $1million. This overlaps with the product that Quantopian aims to design, the crowd sourced hedge fund, using (no social media feedback as the main investing criterion) algorithmic trading “modules” from their broad open source quantitative library. The fund structure aims to be “all weather”

DarcMatter provides transparent, institutional-level access to alternative investment opportunities. They feature a full range of alternatives, including venture capital, private equity, hedge funds, and fixed-income products. Their minimum is as low as 25k. They are also present in the capital raising process.

Aspiration has a min of ONLY $500 and low fees for their The Aspiration Flagship mutual fund which pursues hedge-fund-like strategies including arbitrage and long/short trading.

Silver Pepper with a moto “hedge funds for the rest of us” offers a min as low as $5k, a 2% flat fee, daily liquidity (after 90days), and transparency. For now, they offer a macro fund and an arbitrage fund.

Of course, the test for all these investment products is net performance compared to middle class alternatives.

In the arena of cap intro there are more players looking to unblock the difficult match making process between investors and hedge fund managers.

Darc Matter, is a player as we already mentioned.

Artivest is an online fundraising platform for Private Equity and hedge funds.

Edgefolio is a Norwegian cap intro platform with a hedge fund data API offering also.

ALTX is a cloud-based product of Imatchative; it is a proprietary algorithm that uses a behavioral finance methodology to optimize the search for compatibility among hedge funds and institutional investors.

Hedge Force has already a worldwide presence, as a third party marketing company (since 2007) that serves the entire alternative sector.

BHA, based in Boston also since 2007, uses a networking approach for matching sophisticated investors with alternative solutions.

Back office, analytics and risk mgt tools for the particular needs of hedge funds:

Hedge Analytics, a Swiss based analytics firm focused on risk mgt.

HedgeHogs leverages social media, collaborative networks for trading idea development, sharing of analytics, and data.

Risk_AI is a cloud based solution platform for hedge fund risk analysis and reporting, with an award winning mobile technology.

Liquid offers also a complete cloud based solution for portfolio mgt, risk analytics, back office and compliance.

Hedge funds couldn’t have been left untouched from disruptions. Financial inclusion, democratizing, and crowd funding; are the main trends for now. I also see a tendency to create more overlap between the growing “quantitative trading-investing” space that is growing and re-inventing itself.

Blockchain based Digital Identity will disrupt commerce and government

Digital Identity is such a thorny problem, fraught with technical, legal, societal and political issues, because there are two different interrelated issues:

  1. Proving that you are who you say you are (aka access control).
  1. Control over your Personally Identifiable Information (PII).

Proving that you are who you say you are (Access Control).

Biometric security has to replace passwords and CAPTCHA. Chip and pin works great in a physical stores, but the pain of mobile commerce cuts deep for both buyers (extra friction) and sellers (abandoned carts).

Biometrics is technically interesting, but relatively simple at a societal/political level and not as game-changing as the issue over who controls PII. Biometric security comes down to a simple question:

“what part of your anatomy does Sir/Madam wish to use?”

– Finger. This one scares me. It is hackable, by simply recording somebody’s fingerprint and putting that on thin film. I can change my password if I am hacked, but I cannot change my finger. Also the privacy issues concern me.

Eye: Iris recognition does not seem ready for prime time yet.

Voice. This has a nice old-fashioned ring to it. Voice recognition is like the banker who recognized your voice. The tech has been brewing for a while and seems ready for prime time. VoiceVault and Nuance are the two leading contenders. Voice is probably better for high value transactions than getting a coffee or paying for a subscription. Talking to my phone in the line for my coffee seems too much like Her.

Typing rhythm. I never understood why BioPassword did not do better, it seemed so simple and elegant. Maybe mobile changed typing rhythm and created new rhythms around swipe.

There maybe something new that emerges out of smart watches, such as pulse recognition.

Biometrics has to be driven by consumer choice. I have the choice between fingerprint and password on my iPhone (Luddite confession, I choose password).

The choice over access control is so critical because the amount of Personally Identifiable Information (PII) and the power related to that PII is so massive.

Control over your Personally Identifiable Information (PII).

This is what gets into societal and political issues and can change the dynamics of commerce at a fundamental level. There is a reason why Microsoft worked so hard to get Passport established – the upside is massive. There is also a reason why any company that gets close to this prize – whether it is Facebook or Apple or Microsoft – eventually gets consumer pushback.

As Ethereum’s Vitalik Buterin points out:

“10 years from now it may be harder to change identity providers than it is to change countries”

In the West we are used to proving our identity with simple artifacts such as driver’s license, passport and social security number. In the Rest, verifiable identity is the on ramp to financial inclusion. This was brought vividly home to me when waiting in line at a Post Office in NYC and witnessing the desperation of a homeless person being refused a PO Box because she had no physical address. Without that PO Box she would be refused the job she had applied for. She would be an unperson without any official identity.

That digital identity on ramp to society cannot be solved by technology alone. In India they are tackling this through the Unique Identification Authority of India.

I have seen three interesting companies in this space:



OneName and ShoCard use blockchain technology to meet two fundamental needs:

  • Trustless and decentralized. Your Identity is not under the control of any institution (either Government or commercial).
  • Immutable. Nobody can change a record; they can only append a new record.

Trunomi is more focused on a third fundamental issue – granularity – you can have my driver’s license but not my passport or medical records and you can only have it for this one transaction.

Consumer control over Identity will enable Doc Searls vision of Vendor Relationship Management (VRM). I have been fascinated by VRM since I wrote about it for ReadWrite back in 2007. Some tech disruptions have to wait for a trigger to turn inevitable into imminent. The blockchain based identity systems may be that trigger. A similar vision is articulated in the book called Pull by David Siegel. This is a fundamental reordering of commerce. For all the talk of “customer first” a world where customers are really in charge will be a wrenching transformation for most companies.

This will challenge all the business models driven by big data and advertising. Translation of big data:

“We will assemble data about you so that we can sell to you in a way that suits us and maximizes our profit”.

The reordering of commerce enabled by consumer control over PII changes that to:

“I will buy from you when and how it suits me”.

It is also a fundamental change in our relationship with government. We are used to a world where our identity is granted to us by government. If humans control their their own ID our relationship with government also changes.

This fundamental reordering is made possible by Blockchain technology.

Those who want to take a deeper dive into this subject should check out the pioneering work done by Kaliya Hamlin aka Identity Woman.

Zenefits – free to use HR software that’s upsetting the health insurance brokers

By Rick Huckstep

About a week ago, as I was going through my daily routine of catching up on news stories and shifting through numerous blog posts, I was drawn to the article by Jim Bruene on Finovate entitled FinTech Unicorn List: 36 companies + 34 closing in.

In the article, Bruene lists the 36 companies founded since year 2000 that break through the $1bn valuation mark that elevates them to A-list celebrity status (the list actually sets the valuation at $900m to qualify as a Unicorn, but lets not split hairs!). The article also lists the next wave of challengers coming through to join this illustrious club. Bruene names this group of 34 contenders as the “semi-unicorns” based on having a valuation of $500m and above.

As I went through the well-compiled list of the galacticos of the Fintech world, I was searching for the most illusive breed of them all…the InsureTech Unicorn!

Of this list of 70 Fintechs, the vast majority (39) of them were either in the Payments or Lending space, with (only) four of them in the world of Insurance. Three of them are essentially all about insurance distribution, or the sales side of the insurance market. The fourth is ClimateCorp, who, like Meteo Protect featured in the Daily Fintech last month, are in the weather risk management space.

Top of the InsureTech pile is Zenefits, valued at a hefty $4.5bn and at number 5 in the Fintech hit parade.

Zenefits provide a free-to-use, SaaS platform to deliver Human Resources software for smaller companies in the United States (leaving the larger firms to the likes of Peoplesoft or Workday). The platform provides an automated approach to the primary function of the HR department in a small business. It can be used to run the payroll, manage employee benefits, handle new starters and leavers, and track for vacation and employee absence.

But what has this got to do with insurance?

This Californian based start-up, led by Parker Conrad is disrupting the group health insurance market by cutting out the broker from the supply chain.

They make money by charging the insurance (and any other external service provider) a fee or commission. The reason they are categorized in Insurance is that their primary source of income is through these commissions from group health insurance, which they get by replacing the role of the traditional broker.

The opportunity in the market came from the affordability, or lack of, within small businesses for an IT system to manage their HR function. Zenefits addressed the problem in the market and built an HR platform that they provide free to use, and in so doing they established a client base.

Each of these new clients that signs up to the free HR software have the same needs; which are to provide their employees with services, such as payroll, employee benefits and insurance. Zenefits make it easy for their clients to buy these services through the platform as a one-stop shop, and in so doing; they take a margin from the external provider.

And the reason that they are attracting so much attention is that this is the classic disruptive start-up model.

They have spotted an area of the market that they can replace with technology automation, and thereby remove significant cost from the process.

The introduction of the Patient Protection and Affordable Care Act in 2010, aka Obamacare, was the most significant event in over 40 years to impact the provision of healthcare in the USA. It also created the environment for Zenefits to succeed!

But Zenefits started by addressing a different problem. With nothing to do with the reforms in healthcare, they set out to tackle the problem in the market with the cost for small businesses to manage their workforce. An IT system to automate human resources functions can be costly with manual spreadsheet-based operations the only alternative. With Obamacare, additional work was piled onto small business with the introduction of more paperwork (and cost) to enable the Government’s assessment of eligibility for the public health exchanges.

However, the introduction in 2014 of the changes to health insurance addressed one of the biggest issues for small employers. These changes removed the obligation on firms with fewer than 51 employees to provide medical underwriting and this meant that health insurance could be provided simply based on age and location.

With this information already in the platform, Zenefits was able to automate the provision of group health insurance quicker and cheaper than the traditional brokers were able to do. Now, employers must treat all employees on an equal footing when it comes to health insurance with no requirement to take into account any pre-existing medical conditions.

Zenefits has not come without some resistance through from the industry, and from the regulator, which is a sure fire sign that the disruptive threat from Zenefits is being felt and is being taken seriously. Whilst they are up and running in about 30 states in the US, this hasn’t all been plain sailing in all of them.

Last year, Zenefits stopped taking new clients in Utah having fallen foul of the state regulator. The issue put forward by Utah’s insurance department at the time was that the free to use software was effectively a rebate against the purchase of health insurance, which is outlawed in the state of Utah. They also argued that the fair market value for providing HR software is significantly greater than the value of the commissions that Zenefits receive from the insurance and other providers, which was a tenuous argument at the least!

This action in Utah was publicly derided by Conrad, and his supporters, who were able to list other states, such as Texas and Washington, that had declared this business model to be legit. The insurance broker community has a powerful lobby but eventually Zenefits won the argument. Faced with looking like a Luddite state and being seen as anti-innovation, in April this year, Utah quickly introduced a bill that stated that free to use software that led to insurance provided by Zenefits and their like, would not be considered an inducement or rebate.

In common with all the businesses on the Unicorn list, the business model behind Zenefits is remarkably simple. Which is what enabled them to get started on their own means without a massive early distraction trying to raise seed funding.

As all entrepreneurs know only too well, raising serious levels of funding is always much easier (relatively speaking) when the start-up has already established a business, albeit small scale. As they build traction, they get to prove that the business has legs and is more than a pipe dream. Most importantly they do two things;

  • they show a market exists
  • they get invaluable feedback from early adopter customers

Earlier this month, a further $500m was raised in a series C round of funding which triggered the $4.5bn valuation. For Zenefits, they are now in scale-up and the days of persuading investors of their business idea are history, which in their case isn’t very long as they’ve only been going for a couple of years!