The Daily Fintech Top 10 InsurTech predictions for 2016

By Rick Huckstep

2015 was the year that InsurTech emerged from the shadow of Fintech. This story has been told through my last 40 research notes published on DailyFintech.com over the past 8 months. Including 28 interviews with the CEOs and Founders of InsurTechs, this story spans the globe from the USA to China, from South Africa to Estonia, and a few stops in between.

 So, what does this tell us about the next chapter of this story? Here, I give you my Top 10 InsurTech predictions for 2016.

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In no particular order…

Prediction #1

Insurers will create lifestyle apps that provide additional consumer value on an ongoing basis. Continuous consumer engagement will start to replace price as the key buying criteria. This will be sticky insurance with strong brand loyalty.

Prediction #2

The P2P insurance business model will struggle to reach scale in its current form. This will drive the P2P insurers to find new ways to replace the traditional carrier model and we will see signs of the emergence of a completely new business model for insurance. That will scale.

Prediction #3

Much greater levels of personalised rating will become widely available using new sources of data from tech such as wearables, Internet of Things, smartphone apps. This will lead to variable premiums over the policy term to incentivize better behaviour (although insurers will hold back and not introduce corresponding punishments in 2016).

Prediction #4

All in one policy” cover (aka, all risks insurance) will emerge for consumer protection. Policyholders will be able to insure their lifestyle (their home, motor, dog, holidays, iphone, treasures, travel) in a single policy based on highly personalized risk assessment through a digital platform.

Prediction #5

All in one place” platforms (aka a concierge service) will replace traditional intermediaries with a digital broker. These services will consolidate multiple policies, converge with financial planning tools and provide robo-advice on gaps and duplication in cover.

Prediction #6

New entrants will come into the market with highly sophisticated data modeling and predictive analytics solutions. They will exploit mass-scale technologies, high performance computing and techniques developed in high frequency trading.

Prediction #7

Convenience and the ability to digitally turn insurance cover on and off as needed will be steadily accepted and adopted. As will microinsurance, sharing insurance and pay per mile. Unit premiums will be higher but this will be outweighed by Millennial attitudes towards insurance cover and paying a price for convenience.

Prediction #8

The poorest in our world are the one’s who need insurance the most. In 2016, the insurance industry will (finally) start to better serve the massively under-insured populations in developing countries. This will be driven by a combination of the massive market opportunity that exists for insurance, global economic forces and a socio-political agenda.

Prediction #9

There will be widespread deployment by traditional insurers of new digital solutions to reduce cost of claims and loss handling. Serving both ends of the insurance workflow, these tech solutions will enable better collection of data and evidence to improve risk rating at the front end and the claims handling processes, especially at FNOL, at the back.

Prediction #10

2017 will be the year of Blockchain and Insurance. No list of predictions would be complete without reference to Blockchain, but IMHO it is going to take all of 2016 for the insurance industry to get to grips with what Blockchain is, what it can really do for insurance and (most important) why they should do it with Blockchain as opposed to any other database or enabling technology.  Don’t get me wrong, for I am squarely in the camp that believes “Blockchain is the next Internet”.  And we will continue to see a lot of Blockchain insurance activity throughout the year. But adoption in insurance won’t take hold until we’ve seen 2016 out.

The author, Rick Huckstep is an InsurTech thought leader. Daily Fintech Advisers provide strategic consulting to organizations with business and investment interests in Fintech.

 

Top 10 Fintech Innovations from before the word Fintech was popularized.

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By Bernard Lunn

No, Millenials did not invent Fintech innovation although the pace of innovation has certainly accelerated recently. The difference is that the new wave of Fintech innovation has come from outside the existing Financial Services industry. That is what we normally write about on Daily Fintech. For a change, today we are celebrating all that old innovation that came from inside the existing Financial Services industry

  1. ATM. Self service before the Internet.
  1. FICO Consumer Credit Score. Lowered the cost of consumer loan origination.
  1. Credit Card. Made payment easier.
  1. Online brokers. Trade like a pro in your pajamas.
  1. Securitization. Spread risk (or hide it in some egregious cases).
  1. Microfinance. Breakthrough innovation for the Underbanked.
  1. Joint Stock Companies. OK that was a really long time ago.
  1. Double Entry Bookkeeping. Really, really ancient history.
  1. Stock Exchanges. Might have been analog in the really early days, but have been digitally efficient for decades.
  1. Digital market data feeds. Imagine Digital Wealth Management or modern Capital Markets without this baseline technology.

 

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

 

Top 10 Fintech Predictions for 2016

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By Bernard Lunn

  1. Bitcoin price will be volatile (no duh) but will end 2016 not much different from 2015. Bitcoin will fall deep into the slough of despond and entrepreneurs will avoid any mention of Bitcoin when fund raising.
  1. XBRL will start climbing out of the slough of despond but won’t be recognized yet as moving into the plateau of productivity.
  1. Momentum Capital (short term hype chasing) into Fintech will slow down but Innovation Capital (funding long term value creation) will increase because the reality of the opportunity is not impacted by the hype cycle.
  1. More investment will flow into Underbanked as investors see the scale of the opportunity.
  1. Consolidation will start in Lending Marketplaces. There will be a fierce battle for a winner takes most network effects market (similar to what we saw in ride sharing in 2015).
  1. The strange inversion we saw in 2015, when private companies were valued higher (on paper at least) than public companies, will end in 2016.The headlines will refer to Unicorpses.
  1. Analysts covering Banks will start referencing Fintech disruption when referring to a drop in profits at a major bank.
  1. Moves by Big Tech and Big Retail into Financial Services will eclipse moves by Fintech startups and will worry bankers a lot more.
  1. Calls for regulating Fintech startups more intensely will follow at least one high profile blow up.
  1. The Great Convergence between Banks and Fintechs commences, as both get judged on the same metrics by consumers,regulators and investors.

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

Digital Wealth management in 2016: The year of re-shaping

By Efi Pylarinou

 Innovation

Digital Wealth management will take off in 2016. Fintechs, Financial institutions, IT firms and Regulators; will all contribute to the reshaping and acceleration of this process.

As more than 80% of our readership will be accessing my last post for 2015 from their smartphones (on the ski slopes, in another city or their hometown), I’d like to share an outline of the themes that I foresee dominating:

  • Regulators will innovate to stay in business. Singapore, UK, and Australia, seem to be the most likely frontrunners.
  • Regulatory risk for Fintechs will increase in 2016 in a few verticals (asset mgt, origination, private markets, Sovereignty of data). Regulating Innovation is in the 2016 Fintech constellation.
  • Financial institutions and their suppliers, will be confronted with the reality that “Doing nothing is not Safe any more” (The Icarus deception).
  • Central Banks have been the least involved stakeholders in the Financial transformation underway. In 2016, they will publicly join in some lite way, as their ties with regulators tighten and citizens become even more mobile. Singapore and India, seem already leading the way.
  • More Supranationals, like the Financial Innovation Now (FIN), will be born. Maybe JP Morgan will consider joining the FIN coalition by the end of 2016. Huy Nguyet Trieu elaborates on the inexorable nature this coalition.
  • Micro multinationals will become more common from launch as scaling geographically but also into adjacent product/services will be vital.
  • The Freeway for stock trading will become busier. Robinhood is leading the way to free online brokerage of stocks and ETFs. Online asset managers, investment advisors, social trading platforms will start integrating free brokerage into their offering.
  • % of DIY investors will increase; % of passive investors will remain stable; Alpha robo-advisory will be the focus instead of Beta robo-advisory. The new norm for fees will be around 50bps, and 12bps respectively (e.g. Quantopian is one leading example the DIY space; Motif Investing in the Alpha advisory space)
  • Picks and shovels & Home Depot style stores for wealth management B2B solutions, will open everywhere. We will see growth in this space as part of the scaling up sprint process (e.g. SigFig is one example; and Investcloud is another type).
  • More Buy side and Sell side bridges will be built in 2016, to solve liquidity and market making problems that will become more acute (e.g. Algomi is one leader in this space).
  • Conventional wealth managers will shift from experimenting with incremental innovation (PA consulting reports that roughly 2/3s of financial services globally focus on incremental innovation rather than radical) to a more strategic adaptation of the new business practices.

I look forward to elaborating on each of these themes during the upcoming year and interacting with you all on our open source research platform.

It has been a fantastic year for the Daily Fintech platform and I wish to send wishes and thanks to all those that have contributed to us developing a global and comprehensive perspective of the Financial ecosystem developments.

We look forward to growing our network and supporting the stakeholders in this evolution.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Efi Pylarinou is a Digital Wealth Management thought leader.

 

Guevara, moral hazard and the future of P2P Insurance

By Rick Huckstep

In a two-part research note, I review the current crop of InsurTech startups in Peer-to-Peer Insurance. Part 1 yesterday positioned P2P Insurance, the protagonists and reviewed an alternative approach to protection insurance in China. Part 2 today looks at the role of P2P Insurance in addressing moral hazard and features Guevara, the UK motor P2P insurer.

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Moral Hazard

Picking up the thread of yesterday’s Part 1, a common theme when talking to InsurTech firms is “the moral hazard”. The long form definition of moral hazard can be found here on Wikipedia.

Wikipedia explain how the term was widely used in the late 19th century by English insurance companies, implying fraud or immoral behavior by the insured party.

In the modern context, the term is used to define the actions and choices of the protected party when they don’t carry the financial consequences of those actions. If an insured party knows they are protected financially should they crash their car or drop their iPhone in the street, do they act with the same level of precaution as they would without any financial cover?

And why should they? That’s what they’ve bought insurance cover for, isn’t it?

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(Source: http://www.lifetonic.co.uk/articles/moral-hazard)

Leaving personal responsibility and the moral dimension of this debate to one side, the fact is that a riskier attitude ultimately leads to higher premiums for everyone.

Which is why P2P Insurance offers the potential for lower cost insurance. By joining groups or communities that you have an affinity with, whether that be family, friends or common interests, the business model relies on a socially responsible attitude to risk taking, as well as a financial one.

If the insured knows that the deductible (aka excess) is going to be funded by their family members are they less likely to make an exaggerated claim? Especially, when they are also taking it from their own pot (read pocket!).Guevara_Logo_black

Hanging out with Guevara

One sign of success is when your name is regularly dropped as a pioneer in your field. As was the case a couple of weeks ago when both Guevara and Friendsurance were prominently named as the Lemonade story hit the press. (If you haven’t seen it, Lemonade just raised $13m seed to build an a full service P2P insurance business.)

So it was my absolute pleasure to spend time recently with three of the four founders of Guevara at their London HQ – Paul Anderson, Rich Philip, and Mike Greer, (the fourth co-founder is Kim Miller).

Anyone who spends time in the investor community, especially early stage investing, will tell you that “it’s all about the team!”. And there’s no better example than the team here at Guevara, with a wide range of different backgrounds, skill sets and experiences.

Everything about Guevara is super professional, which cannot be said for every new startup. From the cool branding and young turks’ positioning to the grey haired underwriting and pricing experience they’ve employed in the back office.

Formed in 2013, Guevara started offering motor insurance in late 2014. As they explained the origins of this digital insurance business, all three of the founders relayed their own personal experiences of buying insurance, from paying high premiums to having no idea who they were insured with.

But the best story came from Paul. Originally from Australia, when Paul first came to the UK he bought car insurance based on having an Australian driver’s license. It cost him £1,000.

Close to renewal time, his insurance provider reminded him that his Australian driver’s license was only valid for a year and he must switch to a UK one. However, there was an unintended consequence of swapping…he was re-categorised as a new/inexperienced driver of less than a year! As a result, his premium shot up to £4,000!

Same driver, same car, same location!

Sadly, this is an all-too-real illustration of how motor insurance works today and why there is a real market opportunity for a new approach.

“Old Insurance is rubbish”

Guevara offers a standard motor insurance policy that is underwritten
using traditional rating factors (ABI rating, driver history, location). The premiums are market competitive, although drivers are unlikely to find Guevara on the aggregator sites.

This is because Guevara are different. And here’s why.

New Guevara customers are offered a choice of groups to join when they take an insurance policy. Their Base Price (which is what Guevara call the premium) is then split in two with one portion going into the individual group (this is called the Protection Pool) and the rest going into a single collective pot that supports all of the individual groups (Guevara call this Insurance Fees).

The amount of the split is anything up to 50% and depends on the number of members in the group. For groups of less than 10, the pool contribution is 20%, with 80% going into Insurance Fees. But when groups get to be larger than 100 members, then the Base Price is split 50:50 between the two pots.

Claims are first paid from the money collected in the Protection Pool associated with each group, until it runs out (or doesn’t, in which case there is a surplus). In the event that the Protection Pool runs out, then claims are covered out of the collective pot (Insurance Fees).

And in the event that the collective pot runs out, i.e. the combined ratio exceeds 100%, then Guevara are reinsured by a traditional carrier.

The key here is that any surplus is redistributed back to the members. At renewal time, all money in the Protection Pool stays where it is and the renewal premium is discounted accordingly.

The model works so that members could achieve 100% discount on their Protection Pot contribution and only pay the Insurance Fees element if everyone in their group does not make a claim. For the larger groups, this is 50% of their originally quoted motor premium!

To Affinity and Beyond!

What makes Guevara works is affinity. Having an association with the group is really important because this model relies on keeping claims expenses down. Even if there has been an accident and a claim needs to be made, the member is now directly incentivized to minimize the claims expense.

Guevara screenFor example, following an incident, how often does the insured go and arrange their own hire car instead of letting the insurer do it for them at a much lower expense.

And going back to the question of moral hazard; if the Guevara customer knows that their claim will directly impact friend or family, or negatively impact their affinity group, they are more likely to only claim what is necessary.

What this all comes down to is this. Guevara’s model seeks to rebalance the fundamental conflict that exists in traditional insurance. The insurer sells insurance because they bet the insured won’t claim. Whereas the insured buys insurance because they bet that they will. Both insurer and insured are betting that the other one is wrong.

What you see is what you get

A continued complaint of customers is that they there is no transparency with motor premiums. How they are calculated? Why they vary so much from one insurer to another? Why do they go up from one year to the next?

The aggregators have not helped as they focus all their marketing dollars on building an ecommerce brand that disconnects insurers from consumers. And is so doing, have created a price race to the bottom that has contributed to over a decade of loss making in motor insurance.

When the consumer gets no value add and buys solely on price, then it is no wonder, with human behavior being what it is, that a disconnected, disinterested insurance customer will maximize their insurance claim at every opportunity.

Guevara want to change this dynamic and it starts with transparency. Customers can make their own choices about the group to join. They can always see who is in the group, how much money is in the protection pot, who is making a claim. And importantly, how much is left at renewal time.

 

“Our aim is to encourage customers to engage and understand our insurance product”, said Rich (who has the responsibility in the team for marketing). “Insurance is such a large proportion of household discretionary spending. By giving our customers accountability within their groups and making that transparent for everyone, we can reduce the cost of motor insurance for everyone.”

What next for Guevara

For now, the team are totally focused on the UK motor market but I could sense that they won’t stop there. And this is more than a distribution play. Guevara are building a full stack insurance model. Although building an insurance business is no small feat. It takes time and a lot of capital to do that. Plus there is the whole subject of regulation, which just has to be embraced and fully adopted into the business model.

To date, Guevara have relied on social media, word of mouth and the network effect to build it’s customer base. Plus some really cool branding courtesy of founder Mike.

The product is ultra sticky because the upsides come at renewal time, just when buying decisions are being made. For Guevara to succeed, then it has to show over time that it can deliver a better trust engagement, a change in driving behavior and ultimately lower, fairer premiums for group members.

Which is the goal for all of the P2P InsurTechs covered over these two articles.

Insurance Evolution

Evolution-Of-Travel-Insurance1Jeff Bezos is credited with saying, “what is dangerous, is not to evolve”. The traditional insurance model is not in good health and this is creating the dynamic for change. The emergence of P2P insurance is evolution in action, even if it is taking us back to the roots of the industry!

The author, Rick Huckstep is an InsurTech thought leader. Daily Fintech Advisers provide strategic consulting to organizations with business and investment interests in Fintech.

Peer 2 Peer Insurance is taking the industry back to its roots!

By Rick Huckstep

In a two-part research note, I review the current crop of InsurTech startups in Peer-to-Peer Insurance. Part 1 positions P2P Insurance, the protagonists and reviews an alternative approach to protection insurance in China. Part 2 looks at the role of P2P Insurance in addressing moral hazard and features Guevara, the UK motor P2P insurer.

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Before the advent of underwriting in London’s coffee houses in the 1600’s, civilizations used various mechanisms to provide financial protection within their communities. For example, in the middle ages, tradesmen learnt their skills through apprenticeships in the guild system. These guilds collected fees and the wealthier guilds would use these fees as a kind of insurance safety net.

If a member was robbed or their house burnt down or they were to die, the guild would use money from the safety net to rebuild the house, support the family or settle any financial obligations.

The world of insurance has changed a lot since those times, but the fundamental definition of insurance as, “the mutuality in the sharing of losses”, hasn’t.

Which brings us to emergence of the new generation of P2P Insurance firms. These are InsurTech startups that want to change the relationship between the insured and insurer. They want to address the conflict dynamic that exists between both parties because the Insurer is betting on the Insured not making a claim. And the Insured is betting that they will.

The P2P InsurTechs also want to address human behavior and the moral hazard (see part 2 on this subject tomorrow).

Over the next two days, I will publish a two part research note that explains P2P insurance, identifies the P2P InsurTechs in play today and illustrates two very different business models through interviews with Founders.

P2P Insurance protagonists around the world

Friendsurance – Germany

The pioneer of P2P insurance from 2010, Friendsurance pools its users into small groups and gives its customers a cash-back bonus at the end of each year if they remain claimless. Friendsurance operates as an independent broker in Germany. See here for an interview with CEO and Founder, Tim Kunde.

Lemonade – US

Claiming to be the “world’s first P2P insurance carrier”, little is know about Lemonade other than “it is coming soon”. They hit the press two weeks ago when it was reported they had raised a massive $13m in seed funding (a strong indication where the puck is heading!).

Inspeer – France

Customers form friends and family groups to share the deductible (aka excess) element of a claim. This enables high deductibles, thereby reducing premiums from the insurance carrier. The group shares the benefit of lower premiums and provides each other with financial cover for the higher deductible if there is a claim.

PeerCover – New Zealand

This is a friend and family savings scheme to provide financial cover for deductibles in the event of a claim. Like Inspeer, the higher deductibles result in lower premiums for everyone in the group. However, unlike Inspeer, in the event of a claim, members get up to 3x their initial contribution back to cover their excess.

Guevara – UK

TongJuBao – China

For these last two InsurTechs listed, I spoke with the founders on both teams to find out more about how P2P insurance works and why it is different to traditional insurance.

And these are two very contrasting stories. Tomorrow, I feature Guevara after spending time with 3 of the founders here in the UK.

But for now, I start in China, or Shanghai and Hong Kong to be precise. Recently, I skyped with Tang Loaec, founder of the Community Risk Sharing platform, TongJuBao (aka P2Pprotect).

Tang is on his 3rd new financial business launch after a career in banking TONGJUBAO EN+CNand risk management. And in his spare time he writes fiction books!

Like most InsurTech start-ups, Tang wants to disrupt insurance.

Tang explained, “We all want protection but nobody loves insurance. And our insurance providers have not done a good job. In China, customer satisfaction is low at around 19%. Something needs to be done because the market problem does exists and people are frustrated.   

“And people think the process is unfair, consumers pay premiums regularly and on time, but when it comes to the claim, insurers often delay and deny the amount to be paid out. This just leads to a break down of trust.”

Often, the InsurTech startup builds a business model that relies on a traditional underlying insurance business model to support it. Tang’s model is to build a P2P insurance model that is more than a social group sharing each other’s exposure to deductibles (or ‘excess’ as we call it in the UK).

TongJuBao, like Guevara and recently announced Lemonade, plan to go further and completely redefine the end-to-end insurance model.

This is not just a distribution play built on some social novelty factor. This is the start of a new wave of insurance business!

With TongJuBao, there is no underlying insurance carrier. Their model separates the underwriting process from the claims process, thereby removing any conflict of interest. First TongJuBao create social communities or groups that customers join as members. They then create a deposit account for every member, which TangJuBao has delegated authority to operate each of their accounts.

All members pay two sums of money into their deposit account. One is the fee for administration. The other is effectively a guarantee deposit to cover the risk being insured. All members pay the same amount into the deposit account to buy units of protection.

This approach, in Tang’s words, is “embedded community level risk-based pricing and all members are treated equal”. To illustrate the point using made-up numbers, if one unit provides £10k of cover and I want £50k of cover, then I buy 5 units.

Tang explained that his first year focus is on launching a range of social risk products into the Chinese market.

– Marriage cover is typically not insurable because divorce is a human, not event based decision. TongJuBao’s product will launch with a flat rate premium and a short term no claims period (to guard against early payout on someone buying, marrying, divorcing and claiming in a very short period of time). Effectively this is selling an insurance product as an alternative to a pre-nup.

There is a similar product in the US market from Safeguard Guaranty and they claim to offer the “world’s first divorce probability calculator.”

– In China, child abduction is a massive social problem (see recent report from the Guardian). Nobody knows the true scale of the issue but it has been a problem since the 1980s and possibly an unintended consequence of the “one child” policy.

TongJuBao’s policy will provide immediate support to the family through an agency that will offer emotional support to the family as well as initiating search and rescue activity in the critical early hours after abduction.

– The third product provides family unit cover for when one spouse has to TongJuBao.com_iPhone-en-3leave their job to support the family. This is a surprisingly common problem in China where one family member has little choice but to up sticks and move to another city for employment reasons. And the consequence is that their partner has to give up their job as a result.

How does TongJuBao work?

Tang explained, “The members of each community pay premiums into a large pot and then members draw on the pot when they claim. Essentially, everyone in the community signs a contract with everyone else. The members all share the risk and reward.“

This is a mutualization model where everyone puts into the pot and anyone can draw from it. But there is a capital limitation with this model and so all payouts are restricted to a capped amount. In many ways, you could look at the TongJuBao model as a marketplace more than as an insurance carrier. However, unlike the Uvamo model, the members are not speculative investors looking to get a return on their investment.

And as for regulation, TongJuBao operates under a civil law contract and not as a regulated insurance business. This is the model that has been working for P2P lending for the past 8 years and Tang expects it to work just as well for P2P insurance.

Can this business model scale?

Tang believes he can get the same rates of growth in protection as China has seen in lending. He told me, “the model will scale. Just look at P2P lending in China, which has scaled to over 2,000 platforms and total volume of lending is 4 times more than rest of the world put together! And how did this happen? Because in China, Banks were not meeting customer needs. It’s the same story for insurance, they are not serving customer needs.”

In many ways, TongJuBao’s business model takes us back to the roots of insurance. Back in 1696, Hand in Hand, the predecessor to the UK’s largest insurer Aviva, was created to provide everyone in the community with protection in the event of fire. Members paid in a subscription and Hand in Hand owned their own fire brigade. And everyone in the community enjoyed the collective support of all members in the event of a fire.

More to come…

In Part 2 tomorrow,  I continue this feature on P2P Insurance, how it addresses the moral hazard and my discussion with the founding members of UK motor insurer, Guevara.

The author, Rick Huckstep is an InsurTech thought leader. Daily Fintech Advisers provide strategic consulting to organizations with business and investment interests in Fintech.

Which Fintechs and bankers have been naughty or nice?

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By Bernard Lunn

Jokes about evil bankers got a new lease of life after the financial crisis. Bankers were evil and old and tech startups were good and young. PR milked this for all it was worth.

However when big money rushes in to Fintech, it is worth paying attention to the reality below the hype.

The act of founding a startup is fundamentally a creative act. A founder is like a painter standing in front of a blank canvas. You have to be idealistic (in the non-moral sense). You have to imagine/ideate a new world (where the puck is headed to) and how your venture can add value in that new world.

For some entrepreneurs there is also a moral dimension. The desire to change the world for the better does animate many entrepreneurs. This is often the desire that gets extraordinary amounts of energy and commitment from the founding team. Most people are not purely economic animals at heart. Once the basic layers of Maslow’s hierarchy of needs are taken care of, most people aspire to something more

Humans have a moral dimension.  Corporations do not have a moral dimension.

Nor should they. I put my money with a bank/fund because I want the bank/fund to keep it safe and make a return. Same thing with investing in a public company or via a PE Fund into a Fintech venture. Unless I specifically exclude what I find abhorrent (e.g war profiteering) or decide to invest for social impact, I am not giving the bank/fund a moral mandate; I simply want the bank/fund to make money for me.

Many of the Fintech ventures that are hitting headlines today were conceived in the wake of the Global Financial Crisis that hit in September 2008. At the time, I heard a wise person proclaim:

“This debt crisis wave is huge but the tech wave that is following will be much bigger”.

How true.

A few years later we witnessed the rage of people expressed in the 99% movement. What I noted at the time was how tech savvy many of revolutionaries in Zucotti Park were. Some of that energy has gone into Fintech startups. It was a short subway ride from Zucotti Park to Union Square (to see Union Square Ventures).

The mantra was “don’t get mad, get even”. That animated the founder of Lending Club and many others.

However there is so much money to be made by the startups jumping into the void left by the banks. So big money is rushing in. We are now in the scale phase in many markets and the Fintech startups funded by big capital are no more inherently good or evil than the banks.

For example, a Wonga loan is no better or worse than overdraft fees from a Bank. The reality is that short-term lending to the imprudent (at the personal, company or sovereign level) has to use very high % interest rates to compensate for the risk.

There are startups that aim to “help those who help themselves” by making it easier to “save for a rainy day”, such as:

In the developing world we see services like Zidisha, which combine the philanthropic (people with money willing to loan money on easy terms to poor people) with Peer to Peer (poor people lending to other poor people or borrowing from other poor people).

One can imagine a genuinely Peer to Peer way of doing Pay Day Lending. Joe who gets paid on Friday lends money to Fred who gets paid on Monday so that Fred can have a good weekend.

The problem is that I cannot imagine any VC salivating over a business such as that. It would have to be a utility and we all “know” that utilities are low margin businesses that have no value.

Tell that to the founder of Craigslist. He runs a utility and it is very profitable. In digital economics, utility has a totally different meaning. Google and Facebook are utilities.

This is where it gets interesting because redecentralization platforms move us from “Don’t be evil” to “cannot be evil”.

The Google founders writing Don’t be evil into their mission has been mocked, but it does at least offer an intent and a benchmark against which the founders invite to be judged. However “cannot be evil” is quite different. If the code in a DAO (Distributed Autonomous Organization) does not allow more than 10bp interest over some benchmark rate, it simply can never be more than that.

Few VC would fund a venture with only a 10bp spread. There can be no Board Meeting to raise it to 15bp. However VC may not need to fund these new ultra cheap financial utilities. A DAO will be incredibly cheap to set up and run – write some code on Ethereum and deploy to a cloud that does not cost you anything. Users will pay transaction costs (“Gas” in Ethereum parlance).

Of course we are still in the really, really early days of Ethereum (about Home Brew Club days in the PC wave or pre Netscape in Internet wave). However I do believe that redecentralizaion platforms such as Ethereum will be a big part of Fintech 2.0.

If the much hyped Fintech revolution has any value (I think it does but am happy with the label of “least hysterical” commenter on Fintech) then it will be in decimating the cost of finance. Decimate means 10x less than now. Or to put it in numbers, a $1 fee will become a $0.10 fee. Volumes will then probably go up 10x so all is good for those on the right side of the wave.

Despite all the hype, I think we are now only in Fintech 1.0 and we can only see a few wild experiments that we can label Fintech 2.0 that will truly make a difference to billions of people.

Nice can be anything. It can be grand scale impact for the Underbanked. Or it can be as simple as doing good quality work and being a good place to work and being reasonable with contractors.

We hope you have all been nice, whether you are a Fintecher or a Banker, and that Santa delivers something lovely on Friday.

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