Happy Birthday Switzerland where Wealth Management 2.0 is being built on transparency

By Bernard Lunn

Tomorrow is Swiss National Day. I feel very lucky to be living in this wonderful country and to be celebrating the birthday up in those glorious Swiss mountains.

I think Switzerland is becoming one of the world’s major Fintech Hubs. I have to be careful not to take sides in the Fintech Capital of the world debate. Daily Fintech is global blog. I am a Brit who married into an American family and lived in Asia before moving to Switzerland. Efi Pylarinou, another Founding Partner of Daily Fintech Advisers who covers Investing Tech is a Greek who used to work on Wall Street and now also lives in Switzerland. I will be moderating a session at SIBOS (in Singapore in October) on Fintech Hubs.

So while being as neutral as Switzerland I do want to celebrate Switzerland’s growing strength in Fintech on Switzerland’s birthday.

Most of the Fintech Capital of the world debate is media driven. The reality of global trade is the emergence of specialization. To put it more simply, it is “horses for courses”.

I do not think it is a big deal where the venture funding is located. Capital flows to innovation. If it temporarily flows the other way you can be confident that will change. Today we have that temporary dislocation where Swiss investors fly to London to meet Swiss entrepreneurs. With all those great Swiss hotels, one assumes that a congenial meeting place could be found within the country 🙂

With so many Family Offices and Wealth Managers based in Switzerland, the trip to London to invest in innovation may be a temporary phenomenon.

What matters is innovative customers who will use the new services created by entrepreneurs. That innovation is what attracts both entrepreneurs and investors. That is the single native ingredient. Everything else (including capital and talent) can be imported.

Switzerland scores low when it comes to innovation from mainstream consumers. The reason is the lovely problem that things mostly work pretty well in Switzerland, so consumers have little reason to innovate. American consumers have been great early adopters. So have UK consumers. In different ways, consumers in Asia and Africa are driving innovation today.

However in Wealth Management (aka Private Banking) there is both a great motivation to innovate as well as the expertise to innovate effectively.

The easy world of Swiss Wealth Management 1.0 is morphing into something more complex to which we can affix the 2.0 label. This transition is full of opportunity and risk. Therein lies the motivation to innovate.

Swiss Wealth Management 1.0 was more Private than Banking. To keep transactions secret, banks offered numbered accounts and “hold all mail” capability. Keeping the money hidden was more important than delivering good investment returns.

Post FATCA and GATCA, that secrecy USP has gone. Now the challenge is how to deliver good risk adjusted returns.

The transition from Swiss Wealth Management 1.0 is the transition from secrecy to transparency.

I don’t mean transparency to governments. That is the realm of FATCA, GATCA and KYC/AML. Swiss Wealth Managers will be as transparent as they have to be by law – no more and no less.

I mean transparency to customers (aka investors/traders). This is where Swiss Wealth Management has a big opportunity to rebrand and offer a unique value proposition.

To understand this one has to go back to those wild days in September 2008 when the global financial system had a cardiac arrest (and nearly died). The problem – the clogged arteries if you like – was very simply the lack of transparency.

Look at the two biggest problems manifested during the Global Financial Crisis. Both were fundamentally transparency issues:

1. Subprime Mortgages. There is nothing wrong with Subprime Mortgages – if the risk is priced properly. If the data is opaque, risk cannot be properly priced. In other words, an investment bank saying “buy this lovely bundle, it is AAA, no really it is AAA and we know its is AAA because we say it is AAA” is not transparent. Transparent means being able to drill down to whatever level of granularity you want and apply whatever algorithms you want. In short – the issue is transparency and transparency is a data problem.

2. Madoff. He said “our returns are consistently x% per annum and no, I cannot tell you how I do that because it is a secret”. In short – the issue is transparency and transparency is a data problem.

This is NOT a regulatory issue. Sure, regulators are demanding greater transparency as a baseline. However any bank that sees that as a cost burden only is missing the point. The opportunity is to get ahead of the regulators by offering a level of transparency that customers would be asking for if they knew that it was technically possible – which it is.

The reason that Switzerland can seize the initiative on transparency is that Switzerland was only a bit part player in the Global Financial Crisis. Of course there were Swiss banks that bought and sold Subprime Mortgages recklessly. Of course some Swiss Wealth Managers failed to do their due diligence on Madoff. However that was true everywhere. Switzerland was certainly not the epicenter of the Global Financial Crisis. That dubious prize went to New York and to a lesser extent London.

Of course that does not stop a bank or Fintech venture in New York or London rising to the challenge of offering transparency to investors . However it may be harder to do this in London or New York because ventures arise out of a culture and the trading culture that led to the Global Financial Crisis in those places is all about opaqueness – the opposite of transparency.

It is hard for incumbent to give up the revenue streams from the old way of doing things.

Swiss Banks have a hard time giving up the revenue streams related to secrecy. Consider something as simple as banks keeping customer statements and correspondence in-house. “Hold all mail” was not only essential in delivering secrecy, but was also a significant revenue stream where banks could more easily bundle other fee-based services such as brokerage.

This is the same as in all technology driven disruptions. Newspapers for example, had to keep print revenue going as long as possible while concurrently investing in digital lines of revenue.

Global Wall Street (which includes Canary Wharf in London) has an equally difficult time giving up the revenue streams based on opaqueness to investors. This is why there is so much resistance to the regulatory push to move derivatives from OTC to exchanges. Once data moves to exchanges it becomes transparent and low cost. Therein lies massive opportunity to add value higher up the stack as well as massive risk to the incumbents.

Swiss banks are invested in secrecy to governments. They are not so invested in opaqueness to investors.

Switzerland should be a major Fintech hub. It has both the Fin and the Tech. It has a big and vibrant financial services business – the Fin – and great universities turning out the people who create the Tech. It is also a big deal that Bitcoin is legal tender (thanks to the legacy of the WIR which I spotted this week “in the wild” in a sports shop in a remote mountain village)

WIR sign

That legal status for Bitcoin as well the legal protection for privacy is why we see ground-breaking moves such as Xapo moving their HQ from Silicon Valley to Switzerland and Ethereum choosing Switzerland as the jurisdiction for their Foundation.

Fintech is of course a global market. However Fintech is different from other markets because of regulation. Bits don’t stop at borders, but money has to show its passport. In Switzerland that means Bern, the sleepy old capital that is half-way between those two vibrant financial centers of Zurich  and Geneva. The Fintech MeetUps in Zurich (German-speaking) and Geneva (French-speaking) take place in English as befits a global market and are run by people with deep background in Wealth Management (John Hucker in Zurich and Al Gaillard in Geneva).

Fintech grows out of a culture. The Fintech that grows in New York and London will suit both institutional trading as well as innovative consumers. The Fintech that grows in Singapore and Hong Kong will suit the innovation coming from the growth of Asia. The Fintech that grows in Switzerland will suit the massive wealth management business. Where this intersects with institutional trading, Switzerland Fintech will be competitive with New York and London.

I think a single-minded focus on transparency for clients (whether individual or institutional) will be the key to Switzerland rebranding its financial services business and competing with London and New York.

I am heading out to enjoy those Swiss mountains.

MicroEnsure – providing cover for the under-insured mass markets in Africa

By Rick Huckstep

Africa! A continent that occupies one fifth of the world’s land mass and home to over 1 billion people, half of them under the age of 20. A continent of 54 sovereign states, well over 1,000 languages and as diverse a continent as any on Earth.

Africa straddles the equator and is the only continent to stretch from the northern to southern temperate zones. It is a continent rich in much sought after commodities and yet it is also a continent that is defined by its levels of relative and absolute poverty. Living on a low or very low income is the norm for the vast majority of the population.

Which goes some way to explaining why this mass market, with the notable exception of South Africa, are massively under-insured. The people of Africa need cover and protection in the same way the rest of us do. They still get ill, they lose their jobs, and they lose precious possessions through theft and breakage and natural disasters.

They also are vulnerable to risks that are unique to the continent, such as political violence or “decongestion”. This is the action employed by some West African governments to forcibly remove a business that is trading without a license and occupying a parcel of land deemed valuable for some alternate use. Decongestion cover offers protection for the loss of assets seized by the government.

The sheer scale of under-insurance is staggering! Nigeria is Africa’s largest country by GDP and yet it has a mere 0.6% insurance penetration. By comparison, South Africa stands at 15.4%, Namibia at 7.7% and Morocco at 3% penetration. According to a recent report in Business Day, Nigeria has “the fundamentals for a thriving insurance industry” because it has a vast population of 170 million, an active economy and a well capitalized insurance industry.

So, why does insurance have such poor adoption rates?

To answer the question, I spoke this week with Peter Gross, Regional Director in Africa with MicroEnsure, a for-profit social enterprise founded in 2002 by Opportunity International followed by a multi-million dollar grant from the Gates Foundation in 2007. Today, MicroEnsure provide micro-insurance to 15 million people in 17 countries in Africa and Asia for whom the majority has never had insurance before.MicroEnsure-Logo

Peter explained to me the reason for the poor uptake of insurance in these mass market economies can be boiled down to 4 factors;

Cost. The typical premium from a traditional insurer can be as much as 10% of the average income. Maybe one reason for the insurers attitude in Africa is they don’t have the same loss ratio regulations to operate too as they do in countries such as the USA which gives much greater freedom to price higher premiums.

Trust, or lack of it (sound familiar?). The carrier’s haven’t done themselves any favors with their failure to build trusted brands. How is a low income, poorly educated farmer going to trust an insurer who, on the one hand, charges an excessive premium, whilst on the other, will make it almost impossible to successfully make a claim when the claimant can’t match the insurer for resources?

Access, or lack of it. The primary channel in Africa is the broker although some insurers do go the Direct to Consumer route, however, neither broker nor carrier have a great appetite for selling to the vast majority of low income masses. Even if they wanted to buy insurance, it isn’t readily available to them

Understanding, or lack of it. Traditional insurers still bring Western based policies and products to the African markets. They are not tailored for the markets or the culture or educational standards of the population. Terminology in a 30-page policy document is difficult enough for anyone to grasp.

The result is that over 90% of the population is, effectively, self-insured. When they suffer a loss, they find ingenious ways to cover their loss. This usually involves selling something that is important to their livelihood, or borrowing money wherever they can. But of course, this isn’t an ideal or sustainable situation!

MicroEnsure’s approach is to tackle the four inhibiting factors head on

Their policies and products are designed as a one-size fits all with few or no exclusions and simple terms. Most tend to be short-term policies too, and all these leads to building confidence with people who have had no prior experience with insurance.

To distribute to the market, MicroEnsure work with partners, such as the telcos and banks. What most people don’t appreciate about the telcos in Africa is that they are significantly more important and prominent than they are in the Western world. They are up there with the likes of Facebook and Google and they are key enablers in social and financial inclusion of the mass populations.

The goal for businesses in Africa is to build loyalty amongst this predominately young and increasingly mobile population. In 2013, there were 72 million smart phones in sub-Saharan Africa but this will rise to over 525 million by 2020. Data traffic in this continent is growing at twice the global average!

And the Banks are seeing the opportunity too. In Ghana and Kenya, Barclays now offer MicroEnsure’s free 3-month salary insurance for switching to their salary deposit account. Just this week, Equity Bank has announced the launch of Equitel as a fully convergent mobile and banking platform. The beauty of this service is that it eliminates the need for a mobile app to access Internet banking and enables the all features of a current account through the mobile phone.

Providing access to affordable insurance

The use of a mobile phone to pay bills, transfer money, take a loan is as commonplace in Africa as the visit to the high street branch used to be in the West. In Africa, you visit the local mobile money agent, convert your cash to electronic money and away you go. It is the network that is ubiquitous in Africa, not ATMs!

BF-AH999_AFMOBI_G_20140815130004For MicroEnsure, their approach is to offer insurance as a value-add through a partner, such as a mobile phone or banking service. At first, the partner either fully or partly subsidizes the premium for the consumer, thereby addressing both the ‘access’ and ‘cost’ inhibitors. They also make enrolment incredibly easy for the consumer, who in most cases, have very little personal information about themselves at hand; they will provide their name, but probably not their identification number.

The insurance policy is activated through a phone service by the partner organization who want to ensure a good customer service experience. They make it easy to enroll using USSD technology to simply capture their first and last names and then the policy becomes active. Simple!

Building trust and understanding

MicroEnsure then start the task of building trust and developing understanding. As the new policyholder builds their acceptance level of insurance, MicroEnsure are able to introduce other insurance products, such as simple hospital inpatient insurance through to property protection against fire and flood, to crop insurance where MicroEnsure will use weather indices to cover risk from loss through unexpected fluctuations in the weather.

These insurance products are developed by engaging with the very people that they are serving to protect and not by re-badging policies developed for a Western audience. The result is a suite of products that the low income, mass market populations can understand and can afford.

MicroEnsure has established itself as a global leader in micro-insurance to the low-income mass markets in the third world. With investment partners such as AXA, Telenor, IFC, Opportunity International, Omidyar Network and Sanlam, MicroEnsure continue to provide a safety net for those in our world who need it the most!

Sorry Banks, the Fast Follower Model is dead thanks to Big Bang Disruption

By Bernard Lunn

To learn about Big Bang Disruption go to this HBR article.

TL:DR. When more than half the 7 billion people on the planet have a mobile phone, innovation happens too fast for the old way of doing things.

The old way was for incumbents to watch as a startup slowly brings some new innovation to market. Then they apply their capital and brand to move faster than the startup can do. It is that “fast follower” model that is dead thanks to Big Bang Disruption.

The HBR article lists “four strategies that incumbents have used to survive and even thrive in the face of big-bang disruption:

“See it coming.

Learning to recognize the warning signs is key to survival. But since the early market-based experiments usually fail, the familiar signals sent by low-end customers jumping ship may never arrive. You need new tools to recognize sooner than your competitors do that radical change is on the way, and that means interpreting the real meaning behind seemingly random experiments.

Slow the disruptive innovation long enough to better it.

The best survival strategy may simply be to ensure that disrupters can’t make money from their inventions until you’re ready to acquire them or you can win with a product of your own. You can’t stop a big-bang disruption once its unconstrained growth has taken off, but you can make it harder for its developers to cash in. Many big-bang disrupters build market share and network effects by offering their early products free. You can delay their profitability by lowering prices, locking in customers with long-term contracts, or forming strategic alliances with advertisers and other companies critical to your rivals’ plans.

Get closer to the exits, and be ready for a fast escape.

It’s up to senior management to confront the reality that even long-successful strategies may be suddenly upended, requiring a radical re-creation of the business. To compete with undisciplined competitors, you have to prepare for immediate evacuation of current markets and be ready to get rid of once-valuable assets.

Try a new kind of diversification.

Diversification has always been a hedge against risk in cyclical industries. As industry change becomes less cyclical and more volatile, having a diverse set of businesses is vital. Fujifilm, a perennial also-ran in the film business, has survived the transformation to digital photography by transitioning to other products and services that draw on subsidiary technologies, ranging from nanotechnology to the manufacture of flat-panel TVs. A move into cosmetics, for example, was made possible by repurposing chemical processes developed to keep photos from fading. TomTom has begun to ease its reliance on its automotive navigation systems business by signing a deal last June with Apple to provide mobile mapping services.

How do you launch your own innovations? Make sure future strategies are built on a platform that can easily be extended and experimented with, and quickly scaled both up and down. The profitable life of a big-bang disrupter may be short, and you’ll need to be ready with the next one before someone beats you to it. Think again of Amazon, which isn’t so much a set of businesses as it is a technology platform that allows the company to repurpose its intangible assets—its expertise in e-business, its remarkable efficiency in forming collaborative partnerships with thousands of other businesses, and its leadership in software virtualization—as market conditions change. Amazon now sells not just books but everything and leases its core technologies to third-party resellers. It even offers its expertise in online retailing and cloud computing to unrelated businesses that outsource their hardware and software needs to Amazon.”

Here at Daily Fintech we are “in the weeds”. We write daily about the new things happening. It is occasionally useful to step back and look at the big picture. Here are the 5 reasons Fintech is changing the world:

  • Software is eating the world. Meaning innovation goes to the top of the stack where it connects with real world concerns (such as how to make money renting a spare bedroom or driving a car for busy people).
  • Finance is the biggest part of the world left to eat. Retail and media have already been eaten.
  • Finance is the most digestible part of the world left to eat – because finance is almost entirely digital. Healthcare by contrast still involves humans doing physical things to other humans.
  • Money makes the world go around. For example, sharing economy services are really just payment processing with a vertical domain skin.
  • If you wanted to invent the ideal incumbents to attack you would invent banks. Banks shot themselves in the foot during the Global Financial Crisis. They are unloved by customers and in the cross hairs of the regulators.

Most people in the banks that we speak to understand all this. The question is what to do about it. That is where understanding Big Bang Disruption matters because it is tempting to reach for the “tried and true” strategic response of being a fast follower.

Waiting for the market to take off and hoping to be a fast follower is now a recipe for irrelevance.

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.

Incredibly simple 1,2,3 go to market plan

By Bernard Lunn

bangkok chatuchak market

I use “incredibly” deliberately. It is not credible that something as important as a go to market plan should be simple. This is so critical, so it has to be complex and difficult. Or does it?

Making something simple makes it easier to get everybody aligned and focussed. Simplicity is key to execution and go to market plans are 1% inspiration and 99% perspiration. Constraints are good.

Note: this refers to paying customers i.e. a direct revenue business. To get a lot of free users and then monetise via advertising is a totally different game plan. Those free users have to find you. That is a totally “build it and they may come” model. Write a blog post and somebody might find it and read it.

Your go to market plan must be based on social networks. You can only get the right unit economics if one user leads to another user in an organic way. Without this your Customer Acquisition Costs (CAC) will be too high. Seth Godin calls this Tribes. Or we can say “birds of a feather flock together”. This is as applicable to enterprise as it is to consumer. Your first reference customer in enterprise in a new market segment will typecast you. You will get more customers like that. Do you want that type of customer?

3 is a magic number. You need 3 customers. Sure, you need a lot more, but you have to start somewhere. And # 3 creates a tipping point. To see this in an entertaining way, watch this Ted talk about the “first follower”.

My mantra is:

▪Once means nothing

▪Twice is a coincidence

▪Three times is a trend

By far the hardest is the first one. If you want to drive founders crazy, talk about the chicken and egg problem. Customers all say “call me again when you have your first customer”.

How do you make that First Follower get up and dance? In the video, it looks like “dance and they will come”. But in an ADD world that is crowded with great propositions trying to get attention that is not enough. This is where you have to “do things that don’t scale”. You have to deliver crazy amounts of value to those first three and go the extra mile and then some. You do whatever it takes to win over those early customers, no matter how crazy the lengths you go to do that. This is a phase – “this too shall pass”.

The net profitability of these early customers does not matter. The gross unit profitability does matter. Selling a dollar for 99 cents is easy; your revenue traction will be amazing! However if you want to sell to millions and have good unit economics, spending expensive founder time on winning the first few customers makes total sense.

Look at that first follower video again. You will see something happen after the third dancer joins. That is what could be called tipping point, or take off or traction or any number of words that basically says “its working”. Three times is a trend.

Of course that does not mean you only need three consumers. This is where you need to figure out your “bundles” of customer. That is a deliberately simplistic word to cover many types. For example a bundle could be a:

  • vertical domain (Fintech or Cleantech for example).
  • functional job type (e.g accountants or programmers)
  • business customer type by size or stage of maturity
  • tribe (types of consumers that think the same way and hang out together, which is much more actionable than traditional Lifestage or Age targetting).
  • geographic region with linguistic, regulatory and cultural similarities – marketing speak for a country

In each bundle, you have the same 1,2,3 challenge. For example, if your first enterprise customer is BMW, other car companies will be a relatively easy sell and once you have 3 car company references you are established (but a Bank or Retailer or Government customer still won’t see you as relevant).

If your first tribe is young single guys in Brooklyn who play Magic The Gathering, you will be credible when three who are influential start singing your praises (but a middle aged Mom/Dad in Brooklyn may still not view your product as relevant and will be useless as referrals).

Or think of Facebook growing through College networks. Once they were entrenched in three Colleges, all the others saw it as an inevitable trend (and only later did they break out of the college niche into the mainstream).

Once you have 3, start planning your organisational strategy in 10x increments – from 3 to 30 to 300 to 3,000 to 300k to 3m etc. That is how you scale using simple, repeatable processes. But you don’t get the opportunity to scale unless you get those first 3.

For example, if you have 3 car manufacturers, it is pretty simple to hire sales guys to go after the other car manufacturers.

Or, if you have 3 young single guys in Brooklyn who play Magic The Gathering, scaling that via community marketing is a process you can scale.

Choose the first three wisely, for they will typecast you. If you aim to eventually grow beyond a niche, they must be aspirational. For example:

– SAP got BMW as its first customer (a clearly world class manufacturer that other car companies wanted to emulate)

– Facebook started at Harvard and then Stanford, top tier colleges that are aspirational.

Car companies and colleges are all networks. Your job is to find the hubs in those networks and win them over. For example, if your first tribe is young single guys in Brooklyn who play Magic The Gathering, find somebody who is a community magnet, respected and liked by his peers. If he adopts your product, he is your first follower and others will follow you.

Once your scaling within one bundle, you can grow into adjacent bundles. This is where 3×3 is the magic number. For example if you want to be a leader in a product for manufacturing you can start with Automotive (# 1) and move into Electronics (# 2) and Pharma (# 3). Or, you can start with oung single guys in Brooklyn who play Magic The Gathering and expand to Berlin (# 2) and San Francisco (# 3). Or you can stay in Brooklyn but expand into other geeky games such as Go (# 2) and Battlestar Galactica (# 3).


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Half a dozen possibilities in automating asset management

By Efi Pylarinou

In an earlier post on Daily Fintech, titled “Fintechs chasing the Unadvised assets that are up for grabs” I addressed the issue of the current margins in the automated robo-advise business. The numbers reveal that there is actually a great potential to grab currently “unadvised assets” that are in the trillions.

However, the current fees charged (25bps for robo-advisors 1.0) are very low to support a standalone business. VCs are currently funding such growth but the business model is not sustainable. I totally agree with April Rudin, who shared her thoughts in an article titled “Ask Chuck? How About Ask Schwab’s C-3PO?” earlier this month: “It all boils down to AUM and whether the disruptors can gather billions of AUM to make the business meaningful”. In addition to the back of the envelope revenue calculations that show a low margin business, it also seems that the cost of customer acquisition is not negligible. The growth rates necessary to lead to a profitable business are in the neighborhood of hundreds of millions AUM increase per month.

Therefore, these businesses will have to:

  • Grow substantially in terms of AUM, to the trillions; with the issue being “what is the customer acquisition costs of the business strategy?”
  • Or partner with incumbents and use their trusted brand names and distribution channels. Like Fidelity who recently, partnered with Betterment on the B2B front, offering online tools to their financial advisor network. A May Morningstar report supports this scenario as mentioned in Robo-advisers will struggle to make profit, says Morningstar and states that robo-advisors need $16 billion to $40 billion of AUM at a fee of 25 bps to achieve break-even. Profitability calculations will have to take into account customer acquisition costs that vary.
  • Or shift to the “adjacent” markets: from pure online advice (robo-advisors 1.0) to more sophisticated (robo-advsiors 3.0 with more products beyond basic asset allocation to few ETFs) and also to hybrid services (partly human); that would allow higher fees.
  • Or separate investment management services that are being commoditized and focus on profitability in the areas of financial and estate planning like Personal Capital
  • Or get rid of the proportional fee model that has been the norm in the asset management business as Blake Ross suggests and reinvent a new business model.
    • A free service of online financial advice that charges fees for life insurance of the customers; ala Zenefits (Free to use HR software that is upsetting the health insurance brokers) maybe?
    • Or similar to the new SigFig model that after 7yrs and more than 3 major business strategy mutations, now offers portfolio analytics and risk management for free and then charges for investment management?
    • Or extracting value and ROI from the data collected by managing assets 100% for free?

Which business model or models will survive the work-in-progress in the space of automation in investment management: The standalone; the hand-in-hand; the hybrid services; the flat fee; or the freemium?

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.

Canadian crypto battle between Montreal with Sidechains & Toronto with Ethereum

What is it about Canada with its radical blockchain technology? Is it the need to think different to compete with its giant southern neighbor?

Within Canada, the two cities of Toronto and Montreal are in opposite sides of the big debate over whether blockchain technology can be separated from bitcoin the currency.

In Toronto, where Ethereum was conceived, the view is that yes you can have applications using blockchain without using bitcoin.

In Montreal, where Blockstream created the Sidechain technology, the view is that bitcoin is the currency to be used for all blockchain transactions.

Of course, that is over simplifying. There are people in Toronto who favor Sidechains and people in Montreal who are fans of Ethereum.

My 101 guide for those who don’t follow this debate closely;

Ethereum does not rely on bitcoin. In other words, there are no bitcoin miners verifying the transactions. This enables more complex applications to be created, not limited by things like bitcoin block size or the time taken for miners to verify transactions. Blockstream uses Sidechains as a two-way peg with bitcoin. Complex transactions go off to a different blockchain and then come back to the bitcoin network.

My take is simply that it is horses for courses. Some use cases will be more suited to Ethereum and others will be more suited to Blockstream.

I have one concern about Blockstream which is that they have raised $21m from VCs and yet they have not said how they plan to make money. There is debate in places like Reddit, but I cannot find any official company statement on this. I understand that in the social media phase, many ventures postponed even thinking about monetization until they reached scale. I understand that can work well if the monetization is some form of advertising. However in a tech platform that pitches to developers, entrepreneurs want to know before committing. In ye olden days it was simple – you just paid license fees. Blockstream has now released an open source version, but developers have learned to be wary of building apps on top of platforms such as Twitter that can unilaterally change the rules.

I am sure Blockstream will reveal their plans and will get traction with developers who believe that the best way to verify distributed transactions is to use the mining infrastructure that comes with bitcoin. The big picture is that developers are spoiled for choice and that is why we are starting to see more end user facing applications appear. We have covered two user centric blockchain ventures. One – Augur – uses Ethereum. The other – Lighthouse – uses bitcoin (although it is unclear whether they use Sidechains). This indicates that this is not a winner take all battle. Some use cases and some developers will favor Ethereum and other use cases/developers will favor Blockstream.

Everledger and the immutable protection of provenance through the block chain

By Rick Huckstep

It was only a quarter of a century ago that Tim Berners-Lee gave us the WorldWideWeb and changed the world forever. It is hard for the millennial generation to contemplate a world without the Internet, social media and an always-on culture. And how on earth could anyone buy or sell goods and services without an online store, let alone businesses trade or simply do the things they need to do.

But before the 1990’s, we wrote letters (email), we sent postcards (twitter), we made photo albums (Facebook). When we wanted to buy something, we wrote a cheque or swiped our credit card through a clunky imprinter device, aka “knuckle buster”, to leave the seller with “proof” that we’d paid using our card.

It is just as hard to believe how the world has changed in such a relatively short period of time as it is to appreciate that in the beginning, not even Berners-Lee could have predicted the impact of his creation.

Which would explain the growing excitement about block chain and the massive potential this emerging technology offers.

As the underlying technology that supports Bitcoin and the other 740 or so cryptocurrencies, block chain is “a distributed data store that maintains a continuously growing list of data records that are hardened against tampering and revision, even by operators of the data store’s nodes.”

The block chain can be used to store information on a decentralized ledger, i.e., not owned or controlled by any one institution or body, and it has four primary characteristics that define it for this purpose.

First, it’s immutable, which means that the records placed on the block chain cannot be changed. Second, it’s secure, which means it can be trusted. Third, it’s fast because it’s automated and digital. And fourth, it’s scalable with no limit to how many records can be stored on it.

The banking industry has been quick to see the potential for massive and wholesale disruption to the global infrastructure. Last week, the Independent reported a quote in BNP Paribas’s magazine that block chain “should be considered as an invention like the steam or combustion engine.”

What about Block chain for the Insurance industry?

I recently Skype’d with Leanne Kemp at her home in Brisbane to learn about her journey as a pioneer in this space. Leanne is CEO of Everledger and a serial entrepreneur with a strong interest in emerging tech. Ten years ago, she invested in a jewelry business and struggled with the traditional bricks and mortar approach to luxury goods and insurance, especially when it comes to diamonds.beautiful_diamond2

The diamond and jewelry market offers a lot of opportunity for fraudsters, thieves and unlawful activity which costs the insurance industry around $50 billion a year. And the problem all comes down to provenance, which is the “chronology or ownership, custody or location” of an object.

For the insurance companies and the law enforcement agencies alike, there is not a central, trusted database to turn to. The traditional approach for insurance firms is to focus on the policyholder, more then the object being insured, when assessing risk. Unlike high volume objects, such as cars that are all registered on central databases, the provenance of diamonds and high end jewelry is all paper based.

And over time, buried in all this paper, provenance gets lost. When reviewing a claim, it is near impossible for an insurer to accurately assess both the quantum and the peril (how many times have I seen this diamond and how come it keeps being stolen?)

Leanne saw that this massive industry problem could be solved with innovative technology. So, with nothing but her backpack, Leanne left Australia and headed to London, the epicenter of the insurance market and a hive of activity for Fintech and technology innovation.

In November last year, Leanne took part in the Aviva hackathon and 48 hours later, Leanne and her team gave the winning pitch to clinch the Aviva Insurance Innovation Award. This led to an approach by Techstars to stay in London and join their accelerator program where she formed her team. Gaurav Rana is an expert in block chain technology and Marc-Antoine Trehin is an expert in data focused on delivering a working platform for industry.

This is how Everledger came into being ! And earlier this month, Leanne presented Everledger at the Barclays Accelerator demo day. You can watch the pitch here.

How it works

Everledger is a digital global ledger that tracks and protects items of value. With the introduction of the ‘op_return’ functionality into block chain, the ability to bind or add data into the block chain ledger was enabled for the purpose of being able to add contract or asset data to a transaction. Everledger are using this functionality and the 40 bytes of arbitrary data that is available to bind transaction data as part of the hash, thereby securing the information into the ledger and making it immutable.

This immediately addresses one of the major issues of document tampering. With Everledger, the record is tamper-free…it is immutable and can therefore be trusted!

Everledger have established relationships with the major certificate houses in the US, Israel, India, and Antwerp. These houses grade and certify each diamond for the market. Everledger take this data and create a digital “DNA” record comprising the 4 “C’s”, 14 meta data reference points and the unique identification code for each stone.

With this information, Everledger knows who owns what diamond and where it is. They can even trace the movement of diamonds on platforms like eBay and Amazon as they are bought and sold. Everledger work with insurance companies when diamonds are reported stolen, and alongside Interpol and Europol where diamonds are crossing borders and entering black markets.

Everledger has recently constructed a consumer app that enables users to add their own diamonds and any other valuable items to the Everledger block chain.

Everledger also provides a Smart Contracts platform to facilitate the transfer of ownership of diamonds to assist insurers in the recovery of items reported as lost and/or stolen. Smart Contracts will also enable a fundamental change in the diamond marketplace and the way they are financed.

The acceleration of Everledger in around 4 months from a fledgling idea to a production platform is astounding. Everledger already have over 300,000 diamonds registered and when you go to their website, you can see the workflow in action, real-time, as batches of 1,000 diamonds at a time are embedded in the block chain.

Barclays have played a large part in this acceleration of Everledger from concept to production. Barclays, as a partner at Techstars, are not usually associated with the insurance industry although they do have an insurance business in South Africa with ABSA. As part of the Techstars program, they facilitated Leanne going to South Africa, the heart of the diamond mining industry, and work with the ABSA to support the build of Everledger.

There is no doubt in my mind that the block chain technology will, one day, become ubiquitous in insurance as it will across all of financial services. And whilst the use case for Everledger is the provenance of diamonds, the technology that Leanne and the team have built can be applied to many other asset classes in the exactly the same way. Extending Everledger beyond diamonds is an important milestone for the company and she hopes to achieve this before the end of this year. A bold and brave target but surely with the evidence of her already impressive build, this will be a ‘one to watch’.

Twenty-five years ago, nobody really saw the extent to which the WorldWideWeb would change our lives. I wonder how long it will be before we are looking back to this decade and the saying the same about the origins of the block chain?