Bitcoin Blockchain could solve the cyber security challenge for Banks 

By Bernard Lunn

To libertarian Bitcoin fans,  this sounds boring. Bitcoin was supposed to change the world, not be just another tool in the IT toolbox.

They should chill. Change happens in strange ways. Solving the cyber security challenge for Banks could bring the Internet back to its decentralized roots and that is more important than just another currency.

Returning to a decentralized Internet changes everything including currency. That will only happen when it becomes accepted that decentralized is safer than centralized.

Change happens at the enterprise level when new technology solves an A List challenge. Cyber security is an A List challenge. It is a Board priority and yet despite ever increasing investment in a bewildering array of super smart cyber security startups, this looks like one arms race that the bad guys are winning.

Contrast that with Bitcoin. Despite an obvious prize and years to try, hackers have not cracked the prize. Bitcoin has been hacker proof to date. Contrast that history with most Global 2000 firms. No matter how big, no matter how much money they throw at cyber security, they get backed. Regularly.

The difference is simple. Centralization is the problem, decentralization is the solution. If you bring it all into one place, you invite hackers no matter how big you build the walls.

Like a lot of people I have been looking for that Bitcoin killer app. I have indulged in science fiction fantasies and debunked many of the possibilities such as an alternative currency in failing states or using Bitcoin as an interim store of value for remittances. The simple reality is that today, Bitcoin is still a brilliant solution looking for a problem to solve.

However one problem that decentralized ledger technology solves is cyber security. If you want a scary view on just how bad the cyber security risk is for banks read this article which argues that cyber security is the systemic risk we should really be worried about.

For Banks to seize this opportunity, they have to discard the notion that centralization = secure. Putting it all in one place with a great big lock has been the accepted way since banks started. Decentralization sounds wild, almost hippy, with echoes of anarchic P2P services such as Napster.

Decentralization reduces server costs. Given Moore’s Law and economies of scale, server cost is not a problem for banks. Cyber security is a problem for banks.

This would return the Internet to its decentralized roots. Then people will trust decentralized money. To the end user there is no change. Whether their service comes from a centralized data center or from a network of peers is irrelevant to the end user.

In the headline, I said Bitcoin Blockchain. This works because of the miners. Without the miners, Bitcoin is not secure. Yes we need to ensure that nobody gets 51% control, but that seems a more solvable challenge than cyber security. Simply replicating databases is not enough.

This maybe too big a leap for a big established bank to take – to distribute account data across a decentralized network feels scary. It might be logical,  but it is counter intuitive and scary.

If there is a systemic banking failure created by cyber security, something as scary as the Lehman moment, this crisis will move people towards the more radical alternative of decentralization. I hope that we can move to a safer decentralized world without a crisis, but history does not give much credence to that hope.

So it is more likely that this opportunity will be seized by a startup. Once they prove it works, others will follow. This would be like teaching us that the Cloud can be trusted. I doubt this will come from the West. Such massive replacement projects almost never happen. Imagine a project getting approved that starts with “lets move our most precious asset, our millions of accounts, from a data center that we control to a decentralized network of millions of computers that we don’t control”. Take that one to the Board!

So I think this is likely to come from the Rest of the World (“countries formerly known as emerging” such as China, India, Indonesia and Africa). Blockchain based identity could be the on ramp to financial inclusion and there is no legacy centralized account systems to protect. This could be a First the Rest, then the West story that we are already seeing with mobile money adoption.

Daily Fintech Advisers provide strategic consulting to organizations with business and investment interests in Fintech.

Startupbootcamp prepares for the first InsuranceTech cohort – Part 2

By Rick Huckstep

Yesterday I attended my second of Startupbootcamp’s Insurance fast track days in their London Rainmaker Loft (See here for review of the first one).

If anyone has any doubt about InsuranceTech as a highly active and sustainable sector in Fintech, then they should get themselves down to SBC and see it in action for themselves. What you see at SBC are the emerging InsuranceTech startups in the early and emerging stages of their development.

From here, many will fall by the wayside early, some will get further and then stagnate or be consumed by another entity, and a few will go onto achieve great things, even Unicorn status. More often than not, the difference between success and failure in a startup is the team, not the idea.

Of course, the market has to exist too, and at around $5trillion, the global insurance market definitely exists and is very definitely crying out for modernization.

Which is why we have seen over $1.3bn raised by InsuranceTech startups since the beginning of last year.

Yesterday, I met with six InsuranceTech businesses that are all pitching for a place in the inaugural Startupbootcamp Insurance cohort starting in January. Like before, the format of the day was a short 5-minute pitch followed by 15 minute one on one sessions with the dozen or so mentors from the insurance industry.

When I look across the InsuranceTech space at all the new businesses, they pretty much all fall into two camps for me – Data or Distribution. Without naming the businesses, because I don’t want to break any confidences and besides, Nektarios and his team have not yet selected the final cohort, I have summarized the six under these two headings – Data and Distribution.


– an Internet of Things solution for the home. This app brings together all the home solutions deployed to manage security, heating, lighting etc. It allows the user to build rules, such as adjusting light settings to change according to the time of day or turning on the radio as the front door is opened. For insurers, this tech works for home insurance in the same way that telematics works for motor or wearables works for health.

– a SaaS operations platform that integrates the silo’ed and heterogeneous systems for underwriting, claims, policy, sales, finance etc. The platform aims to enable insurers to remove the inherent barriers and inefficiencies that result from their legacy architectures. The key benefit is realized by the COO and goes after the huge inefficiencies that exist within the insurance operations.

– a Solvency II solution that reduces the amount of time, cost and effort an insurance firm spends on compliance. Today, it is estimated that the UK insurance industry has spent $3bn on Solvency II but with very little direct benefit. This platform provides operational benefits by reducing the levels of effort, duplication and re working performed to meet Solvency II obligations.


– a digital insurance platform that makes buying insurance easier and simpler for the consumer. The model is simple…the platform takes your profile information at registration. It then builds a personalized risk profile and assesses the insurance cover you need for everything (home, motor, pet, travel, sports, health etc. etc.). Once it has this profile, the app trawls the web and finds the best products to meet your complete needs. The end game is that a consumer can buy all of their insurances through a single platform. The platform can guide the buyer to understand their risk profile and ways to buy better cover, in other words, to be the Nutmeg for insurance.

– an insurance aggregator with a model based on a cash back offer to the SME and the personal lines markets. Currently the big 4 UK price comparison sites spend around £100m a year on advertising and giveaways to get market share (which shows that there’s money in this model). The premise for this startup is that the primary buying criteria for protection insurance is price… and that a price promise to reward customer loyalty is the way to disrupt the aggregators.

– a distribution startup at a very early stage that aims to provide a single brand for the consumer to buy all their insurance cover. The digital, mobile platform would aggregate all insurance cover and make it easy and simple for consumers to buy insurance. They also have plans for their own insurance products based on a P2P alternative finance model to provide the capital to underwrite the exposure. sbc_insurance_logo

Applications for the Insurance cohort are about to close in 3 days time. If you see this article and want to get in to Startupbootcamp, go here and get your application before it closes!

FinTech-Ing in ETF space: Growing AUM, shrinking fees, and crypto-currencies

By Efi Pylarinou

The first major ETF was launched in the early 90s with a tracker of S&P500 on the NYSE. This wrapper has since grown immensely and the global ETF market is close to $3trillion. It was a disruption to the mutual fund world and continues to grow. There are over 5000 ETFs on over 60 exchanges worldwide. The major providers of ETFs are State Street, Lyxor Asset Management, iShares, Vanguard and ETF Securities. I wont go into the variety of advantages that different types of ETFs offer to investors (lower fees, tax efficiencies, liquidity etc) because I am mainly interested in the ETF space as it relates to Fintech disruptions.
The ETF space in Fintech time warp, is actually a mature conventional financial structure. I am looking for Fintech elements in ETF land:

  • The BATS exchange in Kansas, is a privately owned US exchange which handles a lot of ETF trading (and maybe ¼ of the listings of US ETFs) and is the third largest one in the US. BATS created a marketplace, the ETFs BATS ETF Marketplace, which will pay ETF providers to list on their exchange (depending on volume traded)! ETF providers usually, have had to pay between $5,000 and $55,000 a year to list on a stock exchange. Is this a wrapper of a kick-back scheme?
  • The first ETF, ARK Web x.0 ETF (ARKW | D-30) that has invested in Bitcoin with an allocation to bitcoins obtained through publicly traded shares of Grayscale’s Bitcoin Investment Trust (OTCQX: GBTC); is offered by Ark-Invest (a NY startup focused on thematic investing).
  • Motifs via Motif investing could be considered as a disruption to ETFs because:
    • Motifs are alternatives to thematic ETFs or mutual funds
    • Motifs entail no management fees
    • Motifs entail a marketplace element
  • Retail investing in ETFs has been growing along with Fintech startup growth; especially DIY investors are heavy users of ETFs.
  • 99% of Robo-advisors (1.0 and 2.0) promote investing in ETF land. In the US this is already a $25billion business that is captive in ETF investing.
  • Mebane Faber, founder of Cambria, an independent asset manager, created this year the first no-fee global allocation ETF that is an actively managed portfolio across countries and asset classes and is ideal for those that don’t want to follow the markets at all. With no fee at all – the underlying ETFs however, do have a 29bps fee – the Cambria Global allocation ETF, should be compared to the alternative of holding some type of Vanguard lower fee global asset allocation ETF. Such ETFs entail 16-18bps fee but require that the investor manage over time the type of global asset allocation fund. Most ETF or fund providers of these products offer half a dozen of them (from those with larger holdings in bonds and less in stocks all the way to mostly stock holdings) and let investors shift between them; typically resulting in increased fees and suboptimal timing.
  • Financial advisors for the most part, are not promoting ETFs (synonym with low cost alpha) because they feel it threatens their image of “adding value”. The majority of investors that use financial advisors and private bankers, have a taboo around discussing ETFs with their relationship managers. Switzerland for example, the private banking land, is a lite ETF user.

There is more room for AUM growth in the ETF space as investors become more DIY or more hands on with regards to their financial decisions.

Special ETFs will grow. More ETFs will focus on new crypto-currencies but the fees will remain on the high end for these “gourmet” wrappers (100bps-200bps). The ETF space will remain dominated by a dozen low cost ETFs. Over 99% of AUM in ETFs are with the basic buildings blocks: SPY, IWF, QQQ, IWM, GLD, etc.

Fees of ETFs will shrink to zero, as issuers compete and as exchanges compete for the business too. Robo advisors will offer services to investors that need to dynamically optimize their ETF holdings.

If Citi’s projections on the growth of robo-advised AUM in the US prove to be fairly accurate; then in 10yrs the $13trilllion of US unadvised assets will be captured by robos. If more than half of that, becomes captive to the ETF market, that will result in an estimated growth rate of over x25 times from current levels.

In 10yrs Robo-advisors could push ETF AUM from $3 trillion Globally to $75trillion.


Daily Fintech Advisers provide strategic consulting to organizations with business and investment interests in Fintech.

Funding Circle is a “company from here doing rather well over there”.


By Bernard Lunn

If that headline resonates, you have been carbon dated. You must be old enough to remember Hanson Trust (or enjoy business history). This BBC obituary for Lord Hanson explains why that was Hanson Trust’s advertising slogan.

“CBI director general Digby Jones said Lord Hanson’s cross investments in the US, with Lord White, would be his “lasting legacy”.

“The two of them really did do something very special about investing in America,” he told BBC Radio Five Live.

“Today we invest more in America than the rest of Europe put together and a lot of that was down to this pioneering spirit.

“The old advertising slogan was ‘ A company from here doing rather well over there’ – and I think that really does epitomise the trend he set.”

Look at the Crunchbase profile to see why this applies to Funding Circle. You see San Francisco listed as the Head Office.

On the company’s own website you see San Francisco listed before the London office.

Yet Funding Circle was founded in the UK.

Israeli ventures, such as Checkpoint, pioneered this strategy. They appeared in America like an American company with an R&D center in Israel.

When you look at GDP per country you can see why this makes sense (in $ billions):

Israel 299
UK 2,864
USA 17,968

UK maybe a lot bigger than Israel, but it is still tiny compared to USA.

Sure, this is the Asian Century, but you still need to make it in America first because America is where the expertise lies to scale companies. With that expertise comes the capital. If you conquer the US market you will have the capital and expertise to take on the much more complex markets in Asia. The US market is relatively homogenous (the differences between States are very minor compared to the differences between countries in Asia).

Funding Circle has Temasek as an investor, so when the time comes to move into Asia, they will be well connected.

Funding Circle looks like it is joining the really big Lending Marketplaces such as Prosper and Lending Club. As this marketplace is in hyper growth phase with maybe 5-10% penetration of a massive market, this is a huge opportunity for Funding Circle. They have one big advantage – Funding Circle focus has always been on small business lending rather than consumer and as our research showed in November 2014, that is were the action is.

So it looks like Funding Circle could be one of those big winners that London needs in order to earn its coveted Fintech Capital of the World status. Lots of exciting new ventures is not enough. London needs a couple that scale to be global winners (like Hanson Trust). To do that, they need to win big in America.

Funding Circle is already using acquisitions to scale in Europe (buying the German marketplace Zencap)

The question for Funding Circle is, when they get to that stage, do they IPO in America or the UK? In the days when Israeli ventures pioneered the “American flip” (switch to look like an American company) there was no choice – you did your IPO in America. Since Worldpay did their IPO in America, the choice has opened up.

Daily Fintech Advisers provide strategic consulting to organizations with business and investment interests in Fintech.

Which geeky Transaction Banker will become CEO of a big global bank and turn it into a mega Fintech?

By Bernard Lunn

Criteria for this elite job will include a passion for discussing the finer nuances of SWIFT Message Types, ISO 20022 standard and different types of Blockchains (permissioned vs permissionless, Altcoin vs Sidechains).


Before laughing at the question, consider the fact the world has already seen a geeky transaction banker as CEO – John Reed of Citibank who we profiled here.

This new CEO of a mega Fintech dressed like a Bank will explain to the Board that:

ISO 20022 “describes a metadata repository containing descriptions of messages and business processes, and a maintenance process for the repository content.”

As he watches the bored incomprehension of the Board members, he will also explain that the only way to reach scale in Fintech and the only way to build a moat against the the Fintechs that want to “eat our lunch” is to build a platform that Fintech innovators use. That will probably get their attention.

That platform could be called a Bank or a Fintech – the label is unimportant. What matters is quality of revenue and barriers against disruption.

I should have written he or she above, but the chances of such a double revolution in a bank  (woman who is techie and becomes CEO of a big bank) is too implausible. That is the subject of a future post.

One hears that the only transformative innovation created by a Banker in recent years was the ATM (created by John Reed). I think that is unfair. I would add Securitization (pioneered by Salomon Brothers around the same time). However, much more innovation is coming from Fintech startups today. Only a geeky Transaction Banker who becomes CEO of a big global bank can change that.

Daily Fintech Advisers provide strategic consulting to organizations with business and investment interests in Fintech.

Branch closures will soon pass the Wile E Coyote moment

By Bernard Lunn


To avoid the Blockbuster/Borders/HMV fate, there are only 3 possible strategies:

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

(LTV = Life Time Value and CAC = Customer Acquisition Cost).

2 and 3 are compatible strategies. You close some branches and you double down on others.

As of time of writing Apple has 460 stores in 17 countries serving a $283 billion global consumer electronics industry. Contrast that with retail banking:

  • The market is about 4x bigger – over $1,200 billion.
  • There are a lot more than 4x more retail bank branches. 4x would mean 460*4 is 1,840. How many bank retail branches are there globally? The data is a bit hard to track but we can see something like 8,000 in the US alone, so globally it is probably 3x to 4x that. Keep to the low end and assume 3x – that is 24,000 branches.

That implies something like a 10x reduction in retail bank branches. The remaining ones maybe a lot bigger and fancier along the lines of Apple flagship stores, but 10x is a huge cut. We don’t see it yet but everybody knows we will see it. That is why we are at the Wile E Coyote moment right now.

One place to observe this is Switzerland where high labor costs forces banks to cut when the profitability looks questionable. This is one place where we can observe how the Wile E Coyote moment works. Lots of individual bank decisions changes consumer behavior.

For example, if a bank reduces headcount in a branch (a perfectly sensible strategy) the remaining staff know less and really just show you how to use e-banking or ATM. The consumer takeaway is don’t bother going to retail branches.

In another example, in remote areas where one bank has a monopoly, they can close a branch without losing customers at least in the early days. The consumer takeaway, after a period of aggravation, is that they don’t need a retail branch.

Those individual bank decisions in aggregate change consumer behavior. This is not just for Millenials who never went to the branch anyway. This changes behavior for Gen X and Baby Boomer as well.

This makes those consumers more receptive to digital only offerings from challengers/attackers/ full stack Fintech.

Another place to observe this is in the “countries formerly known as emerging” where new banks are being licensed that are mobile only. India may lead the way in this. Nobody is seriously investing in new bank branches in those low GDP per person countries because the value per transaction means that only a digital only solution is viable.

The movement across both ends of the bar bell – high GDP per person in Switzerland and low GDP per person in India – converges at the same point which is a far smaller number of bank branches per GDP.

In the middle – for example a country like Poland – branches may do better and we observed that when the Fintech Global Tour went to Poland.

Wile E Coyote needs a parachute.

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.

After Volvo put their money where their mouth is, does this mean the end of motor insurance? I don’t think so!

By Rick Huckstep

Back in 2008, Volvo’s lead safety expert, Anders Eugensson made this statement;

“By 2020, nobody shall be seriously injured or killed in a new Volvo”.

Earlier this year, the car manufacturer that invented the three point seat belt and made safety its core brand value, restated its commitment to the vision. “We’re trending towards zero (deaths)” and “Our vision is to make it next to near impossible (to die in a new Volvo)”.

I remember thinking “Wow” the first time I heard the Volvo 2020 mission statement. It was bold, clear and powerful. All the best corporate mission statements are just that. Customers are in no doubt what is most important to Volvo. Nor are the 110,000 employees who work for them. Nor are the shareholders of this $21bn corporation.

Then I saw this and thought triple “Wow”…

“Volvo will accept full liability whenever one its cars are in autonomous mode”.

Switzerland Geneva Auto ShowThe boss of Volvo, CEO Haken Sammuelsson, made this statement in Washington on October 8th. Again, it is bold, clear and powerful.…and demonstrates Volvo are ready to put their money where their mouth is when it comes to liability.

Both Mercedes and Google have made similar statements, although, IMHO, they are not as clear and unequivocal as Volvo.

Now, it’s worth making sure that we’re clear about terminology here. Volvo are talking about autonomous cars, not driverless cars. There is a fundamental difference between the two.

Autonomous cars look like every day cars. They have a steering wheel, pedals and a rear view mirror to hang your furry dice from. Autonomous cars use technology to take over from the driver in certain circumstances. Autonomous technology is already employed today with self-parking, lane assistance, automatic breaking, collision avoidance, and adaptive cruise control.

Driverless or self-driving or robot (take your pick) cars are very different. They don’t look like conventional cars and have no steering wheel, pedals or rear view mirror to hang furry dice from. The front seats can face backwards towards the back seats facing forwards.

Here, the “car” does all the driving from A to B, albeit using the same technology as the autonomous car.

In the autonomous car, the driver has an autopilot to share the driving. In the driverless car everyone is a passenger.


What does this all mean for insurance?

In this recent article on for the 60 Minutes show (where the reporter is taken for a drive in an autonomous Mercedes S500), the piece opens with;

“Car accidents cost us much more than time and money. They also take a staggering number of lives. Every year on American roads, nearly 33,000 people die, almost all because of driver error. That’s the equivalent of a 747 full of passengers crashing once a week for a year. Self-driving cars could save more than two-thirds of those lives. That’s what the nation’s top auto regulator told us.”

Pause for a second.

The number of driver error related deaths on American roads is equivalent to a full 747 crashing every week of the year!

In Europe, whilst there has been a steady decline in the number of fatalities caused by road traffic accidents (and by as much as 50% since 2001 in a few countries), it is still a very sad fact that traffic fatalities still constitute the most common cause of death amongst youth and young adults (source: GenRe).

1) Lower claims and lower premiums

With cost of claims accounting for around 70% of premiums, it is easy to see how any measure that radically reduces motor accidents with have a major impact on combined ratios.

In the US, motor accounts for around $175bn of the P&C market where the frequency of both Liability and Physical Damage claims resulting from motor accidents have broadly stayed that same for the 10 year to 2014. Although bodily injury average cost per claim has risen by around 30% over that time (see detailed breakdown for US market here).

In the UK market, the combined ratios for both private and commercial motor insurance have been in the doldrums for two decades.

Deloitte reported back in May that gross written premiums were down at £13bn but combined ratios had improved to 101% (this means that the industry spent £101 for every £100 is received in premium, i.e. a loss). For an alternative view and detailed breakdown, go here to request an excellent review of the UK motor industry from Towers Watson.

Of course, the flip side of lower cost of claims is that premiums will also decline as the same rate. What this means for combined ratios in the future, no one really knows. When researching this subject, I see speculation and attention seeking headlines, often on the doom and gloom side, but I’m not convinced this is a bad thing.

It will mean a smaller motor class of insurance for sure, but it might also give the carriers the opportunity to correct the out of kilter market dynamics and return to profitability. That’s a good thing in my book!

2) Shift of liability from drivers to manufacturers

Coming back to Volvo (and the other manufacturers who will follow suit), insurance protection for the motor industry will see a big shift from individual liability to corporate.

For autonomous cars, individual drivers will still require insurance protection for when they are in control. But the policy construct will change to shift liability to the car manufacturer when it is switched into autopilot mode.

Now, how that is defined, tracked, reported and unequivocally proven in a court of law has yet to be made clear by Volvo and Mercedes.

And the legislators have a lot of work to do to figure out how to prepare for this new world. They are not prepared for the changes to the insurance industry that are being driven by the motor industry. Which is why I believe we are some way off from this new world and more than the 5 years until we hit Volvo’s 2020 timeline.

But the principle will be that when you are driving, you are liable and when the car takes control, the car manufacturer is liable (subject to the car being properly maintained, updated and so on).

In this model, we have to assume that Volvo will have software in the car that will “know” if a car has been maintained regularly and if the software controlling the car is current and up to date.

Which begs yet another question; what would Volvo do if the owner doesn’t take the car for its service at the regular intervals? Would they cancel the policy? Would they disable the car? Would they insist on a punitive additional charge for non-compliance?

And then, what if there is an accident. You can just imagine the headlines when the manufacturer refuses a claim because the driver is just over the service interval at time of accident, but over it nonetheless.

The beginning of the end?

I’ve seen a few reports calling this the beginning of the end for motor insurance. I don’t see it that way. To me, I see a substitution of cover from one form to another. There will still be motor insurance; it will just be in a very different form.

And it makes sense too. Insurance is about risk. And risk is best placed with those who can exert the most control over managing that risk. And right now, the biggest risk on the road is us, the drivers, not the cars themselves.

By shifting liability from the driver to the manufacturer, the risk of a driver causing an accident is replaced by consistently reliable and dependable technology.

What I do see though, is that the volume of carriers and intermediaries providing motor cover will reduce in numbers. The size of the motor insurance class will reduce significantly as risk is taken out of the getting from A to B. And the roads will continue to get safer to travel on!

Daily Fintech Advisers provide strategic consulting to organisations with business and investment interests in Fintech.