Banks can learn from how Fintech Startups do Business Planning

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For a long time, startups had to learn how big companies do business planning. Now the flow is reversing and we see management consulting organizations pitch methodologies to big companies that have come from the start up world.

Now that software is eating the world, big companies seek to understand how such tiny young companies can have such big impact so quickly. 

I am deliberately using the word Business Planning rather than Strategic Planning because Strategic in a corporate setting has all too often had the connotation of being divorced from near term business priorities. Startups who need to hit KPIs in order to close the next funding round or meet payroll from revenue cannot afford to take their eye off near term priorities for long. Business Planning must have a long term view and a near term view – which brings us to Zoom Out Zoom In methodology. 

Zoom Out Zoom In methodology

When I heard Zoom Out Zoom In methodology being described at a conference, my instinctive reaction was:

This is how startups think.

Having been a startup guy for a much of my career, it just seemed intuitive and real. 

The problem with any methodology is that it quickly degenerates into a fad with magical thinking as in “all we need is a bit of Zoom Out Zoom In methodology”. So I hesitate to talk about methodology; it is the thinking behind it that matters and the integration with execution. 

The startup mantra is:

Focus on today and the big picture future, ignore the rest. 

It is a barbell approach. 

At one end of the barbell is today. Today is about the immediate stuff you have to get done to grow the business, to deliver to clients, collect cash and so on. In corporate term this means this quarter and next quarter.

If the next quarter looks bad, investors can dump your stock and you will be taken over – a strategic plan then gets thrown into the “round filing tray”.

The other end of the barbell is the big picture. The big picture is looking at how the world might look like 5-10 years from now and start building towards that. This is what Daily Fintech refers to as skating to where the puck is headed (not where it is now). 

The medium term external view that big companies have traditionally focussed on is tough to envisage. Another startup mantra is:

Change takes longer than we think but the eventual impact is bigger than we think.

That is the lesson we learned from the Dot Com era. Projections made c 1996-1999 were far too optimistic on timing but the eventual impact of the Internet going mainstream has been bigger than even the most wild forecasts from that era. It is the same with Blockchain technology – it will probably take longer than many think but the eventually impact will be much bigger than envisaged.

Zoom Out is not just Scenario Planning

A conventional strategic planning tool is Scenario Planning. The leader was an oil company – BP. Oil is a market where both demand and production are clearly understood. It is like post war manufacturing companies – you could easily forecast demand so then you could plan the manufacturing process. There are external factors influencing the price of oil (such as macro cycles and how cartels behave), but this is only one variable. 

In markets that are being disrupted (or facing digitization or undergoing a big shift or at an inflection point or whatever language you want to use), Future Scenario Planning is too rigid. 

John Hagel, one of my favorite management thinkers (who I finally got to meet in person at SIBOS in Geneva) describes this as planning based on trajectories not terrain.

During Zoom Out, one seeks answers to two questions:

 1. what will your current business look like in that future world?

 2. what does the profile of a market leader look like in that future world?

If profile of a market leader in that future world look looks like a minor evolution of your current business, then no strategic action is needed, it will be business as usual. If however, the profile of a market leader in that future world look looks fundamentally different to your current business, then the business needs to look at strategic options.

Zoom In, looks at the immediate things that could be done that a) bring in near term revenue and b) move towards the profile of a market leader in that future world.

Strategy every day
Startups don’t see strategic planning as a one time activity. They do a bit of strategic planning every day. The plan is constantly being evaluated based on market feedback. Every action is seen as an experiment on the market. There is no success or failure in an experiment on the market. You might have a thesis, but you are not attached to that thesis. Like a scientist running an experiment, you seek truth even if it invalidates a thesis. From that truth, you adapt the plan.

Your Zoom Out thesis has to be correct, but that can be totally vague in terms of timing and scope. It can be something like “at some point in the future”:

– people will shop online to save money and time
– people like to communicate with each other online
– people will exchange value online in real time using Blockchain technology

As you grow, the experiments become bigger and have more impact. The problem for big companies is that any experiment has to be on a massive scale and the cost (in terms of brand damage and management bandwidth more than financial) of getting your thesis wrong is too high. That is what leads to plans that take 6 months and a Minimum Viable Product that takes 2 years and only then do you find that the market is not interested. In those 30 months, the market has changed and some startups have got to Product Market Fit and are starting to scale.

The only way for big companies to fix that is with skunk works type intrapreneurial ventures within the company that operate without brand or other company resources other than small amount of capital (which increases as the startup hits metrics). The big capital decision is when to use the brand (at the scaling phase).

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge platform.

Wrap of Week #43: Marketplace Lending, Simplesurance, Market Data feeds, Tink, ICOs

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IPO or ICO or IEO (briefing on Colored Coins):

The last day of the week focused on Innovations in capital funding and particularly on the Initial Currency Offerings (ICOs) and demystifying the Fintech jargon around. Lots of commentary to indulge in, too.

Why did Allianz invest in Berlin InsurTech startup Simplesurance?

A post around the questions of Why did Allianz, Germany’s largest insurance group, buy a minority stake in Berlin based startup Simplesurance? And will this be a good experience for the founders of Simplesurance and the shareholders of Allianz?

Creating the virtual bank – Tink makes the Fintech 100

Picking from the Fintech 100 KPMG report, one possible candidate for becoming a virtual bank, Tink.

Stock exchanges are aggregators of market data feeds, not playing to the Fintech rhythm

When and why did stock exchanges become profits centers? And did you know that they have been increasing the price on real-time market data feeds?

Market Place Lending is simply automated Asset Liability Management and that is a big deal.

MPLs are not like banks that have an asset liability mismatch when lending out out deposits. Asset Liability Management 101 and the value in MPLs.

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Briefing on Colored Coins – IPO, ICO, IEO

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The new kid on the block is IEO (Initial Equity Offering). I coined that phrase because neither IPO or ICO fits.

– IPO (Initial Public Offering) implies listing shares on a regulated Stock Market such as NYSE, Nasdaq, LSE, SIX etc. 

– ICO (Initial Currency Offering) implies issuing a new Alt Coin. The problem is that Alt Coin are not getting any serious market capitalization. For students of exotica, here is the market cap of the top Alt Coins. The last thing the world needs right now is another AltCoin.

If it is broke, do fix it

A regulated Stock Market is how the market works today. The old saw is if it ain’t broke, don’t fix it. The corollary is if it is broke, do fix it.  Here are the 4 big flaws with these legacy Stock Markets: 

  • legacy listing processes: post Enron, the SEC (followed by other Exchanges) layered on lots of expensive process to protect investors from scams, all of which were based on manual processes (which later got automated but they were still not native digital ie they were expensive and inefficient).
  • national boundaries: it is too hard to discover stocks on exchanges in local markets, so they either suffer a valuation discount or seek a listing on one of the global exchanges (where only mega-sized companies can do an IPO). (See here for our other coverage of this issue).  
  • declining revenue line from listing fees: Stock Exchanges increasingly make their money from selling data, co-located servers for HFT and payment for order flow. This leads to misalignment of interest with the two customers who matter – issuers and long term investors.    

This post, earlier this week by Efi, describes how things went wrong at traditional regulated stock exchanges.

Why Microsoft did an IPO

They did not need to raise money – they were already profitable. They wanted liquidity and price discovery so that they could motivate employees with stock. That is the function of a public market. Any public market 2.0 initiative has to bear that in mind. Investors want to buy shares of profitable business. Uber’s $66 billion valuation in private markets is being questioned because investors cannot figure out how they still lose money after having got to such scale. Then consider a bootstrapped business such as Microsoft at their IPO 25 years ago or a Mittlestand company in Germany. As an investor, which do you prefer to own? That is what the Innovation Capital business should be serving and is not.

Colored Coins 101 for business people

Part of our mission at Daily Fintech is to demystify jargon that obfuscates. We translate Fin for Tech and Tech for Fin. In this case we are translating Tech for Fin. There is so much innovation around Blockchain that it is hard for business executives to keep up to date. Our job is to find the stuff that matters and bring it to your attention.

We think Colored Coins is an important development in the Blockchain world. We will parse the tag line on their front page to explain why: 

The Open Source Protocol for Creating Digital Assets On The Bitcoin Blockchain

  • Open Source Protocol. This is like TCP/IP or HTML. No company controls it or makes money directly from Colored Coins. You make money by adding value on top.
  • Creating Digital Assets. You don’t buy an Alt Coin. Let me repeat that. You don’t buy an Alt Coin. You “color” an existing Bitcoin ( % of a Bitcoin or number of Satoshi, which is the smallest divisible unit of a Bitcoin) to represent an asset (stock in a company, a house or car or painting or whatever). Then you can buy and sell those assets frictionlessly across borders. 
  • Bitcoin Blockchain. This is about the public Blockchain. You can also use Colored Coins on Ethereum (another popular public Blockchain). If you believe that all Blockchains will be private, this is not for you. Using the analogy with the development of the Internet, this is about the Internet not a collection of Intranets. Open Coin transactions are validated by a consensus network (either Proof Of Work by Bitcoin Miners or Proof Of Stake or whatever Ethereum uses). 

Of course, an open source protocol is only as good as the use cases created by entrepreneurs. That is the subject of a future research note.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge platform.

Why did Allianz invest in Berlin InsurTech startup Simplesurance?

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According to leading VC and daily blogger since blogging began – Fred Wilson:

“There are two kinds of corporate investments in startups; passive corporate VC arms and active strategic investments.

The former is made by well established investment groups like Google Ventures, Intel Ventures, SAP Ventures, Comcast Ventures, and many many more. For the most part, they don’t “suck”. They can be a good source of capital for your company, they can be supportive investors who follow on when the rest of the syndicate does, and they generally have good reputations, including with me.

The latter is when a company sees a business they want to get closer to, they take a big stake, a board seat, and they make a ton of promises about how much they are going to help the company. These type of investments and relationships have almost universally “sucked” for our portfolio companies. The corporate strategic investor’s objectives are generally at odds with the objectives of the entrepreneur, the company, and the financial investors. I strongly advise against entering into these kinds of relationships.”

Which prompts the question, why did Allianz, Germany’s largest insurance group, buy a minority stake in Berlin based startup Simplesurance? In other words, will this be a good experience for the founders of Simplesurance and the shareholders of Allianz? Lets read between the PR lines to find out.

Simplesurance is a “we bring you lunch” startup

We categorize Fintech startups as we eat your lunch or bring your lunch:

A. We eat your lunch. They take business away from Incumbents. For example, Market Place Lenders and Robo Advisers. Note: they can also do cooperative deals with incumbents, but the startup usually owns the customer relationship and that makes it a fundamentally different deal. Quite often the startup first gets traction in a market that the Incumbent does not care about but eventually there is a market share battle.

B.  We bring you lunch. This describes both Traditional Fintech as well as ventures building B2B2C revenue share partnerships with  Incumbents. 

It makes no sense for an active strategic VC to invest in a eat your lunch type of startup. They should leave that to purely financial VC. There is no strategic alignement possible between Corporate VC and an eat your lunch startup.

So far so good. Simplesurance is clearly a bring you lunch type of startup. Their  software enables a customer to buy insurance products online. That is technology that an incumbent can use. 

That puts Simplesurance in the category that we call Robo Brokers.

The PR makes it clear that Simplesurance will not only sell Allianz products, so they can act in the customer’s best interest.

Allianz is huge, with operating income over  EUR 10 billion. This deal is a rounding error for them. It is a cheap way to get a front seat at the Creative Destruction 7 Act Play and the right to go back stage and talk to the actors. They get to see how to attract customers online and figure out how to apply that at scale.

Allianz will probably buy Simplesurance at some future date. 

How Allianz figure out the cannibalization challenge with their existing agents remains to be seen. No amount of digital tech can make that problem go away.

The other game play for Allianz can be be to use Simplesurance as a digital only entry to new high growth markets. The PR mentions India as a country and that makes sense as it is mostly a blue ocean market for Insurance.

Allianz is not alone. Incumbent insurers such as Munich Re and Axa have also been active in Corporate VC.  Munich Re is taking the indirect route by investing in a Berlin-based Fintech incubator called Finleap.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge platform.

Creating the virtual bank – Tink makes the Fintech 100

This week saw the release of The Fintech 100, a collaborative report put together by H2 Ventures and KPMG. The report takes a global look at the 50 established fintech businesses and 50 emerging stars and is a must read for anyone wanting to understand the industry landscape.

Behind lending and payments, it won’t surprise many to see insurance start-ups now make up the third largest industry category on the list. The report also highlights the fact 92 percent of companies covered consider themselves disruptors, rather than enablers. The growing confidence in the sector by investors and the traction some of the bigger players are achieving is clearly helping embolden new entrants.

One company that stood out in the report was Tink, a Sweedish startup looking to create a virtual bank off the back of its personal finance app. The company is hoping the new Payment Service Directive (PSD2) will eventually give them the authority to initiate payments into a bank directly. Daily Fintech took a deep dive into PSD2 back in June, and it is well worth a read.  If Tink can indeed leverage PSD2 to become a virtual bank, it will be a huge fintech game changer.

European regulators are no doubt hoping the PSD2 initiative will be the start of many ‘Tink like’ enterprises. If this is the case, then by 2020 some analysts predict up to 9 percent of retail payments revenues could be stolen from banks by companies leveraging this type of payment framework.

So, if Tink does achieve virtual bank like status, and they chose to extend their offering to businesses, how could small enterprises benefit compared to what they have today?

Here are some thoughts.

  • Many businesses today deal with more than one bank. Executing instructions on these multiple bank accounts would be much easier from one interface, rather than 3+ apps
  • Today business logic around payment instructions is rudimentary, with some basic workflow capability available in cloud accounting systems that connect to banking services. However if apps like Tink could offer simple If This Then That (IFTTT) logic and recipes from one interface, this would be highly advantageous
  • Settlement between different financial providers is generally ad-hoc and different. If a virtual bank could aggregate this and smooth cash flow, this would be a highly attractive solution

Finally, if a virtual bank could provide a centralised KYC layer, that made applying for new bank accounts and products more easily, this would be a hugely attractive feature for businesses who are tired of jumping through compliance hoops, and fintech providers who are wary of ever increasing compliance costs.

Tink could be a true disruptor, changing the way we interact with our banking providers entirely. They will own the customer, with banks simply providing a wholesale service in the background. Tink and its success in leveraging PSD2 will certainly be interesting to watch.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Jessica Ellerm is a thought leader specializing in Small Business.

 

 

 

 

Stock exchanges are aggregators of market data feeds, not playing to the Fintech rhythm

A check on stock exchanges before Halloween makes sense. We covered stock exchanges in a two part series in May, with a focus more on Fintech innovation and naturally, we found Blockchain parties and concerts all over the planet. These activities continue to spread but today I want to highlight the major source of the extended revenue growth over the past 5yrs of Stock exchanges. Lets not fool ourselves by believing that the revenue growth is due to some innovation. It is heavily due to a government created oligopoly that exploits customer transactions data!

When and why did exchanges transform into profit centers?

Exchanges before the turn of the century were serving a global service and were operating very much like utility companies or social servicers. They were scaled versions of Jonathan’s Coffee house in London (original site of LSE) and the Button wood tree in New York (agreement that started the NYSE).

It all changed in the very first few years of the 21st century, not because they were waiting to make sure that computers could overcome the Y2K problem. It was mainly due to the wide adaptation of electronic trading for stocks at least, which led to setting up clearing and settlement businesses like DTCC. These for profit businesses post trade companies led the way to raising capital by accessing the public markets. In the US, it was NYSE In 2005; and in Europe, Deutsche Börse and LSE, in 2001.

The next pivot in their business model of these publicly traded ex-social servicers happened 100% because of regulation. SIP (Securities Information Processor) resulted in an unintended consequence that many believe as a government-led oligopoly of stock exchanges. SIP was conceived to protect end-investors from being taken advantage from those operating the electronic trading circuits. It created a filter, operated by the exchanges, in order to ensure that the best quotes get fed to the broker dealers. Simply said, exchanges which act as aggregators were also crowned with another role, the filtering SIP role.

In addition, the subprime crisis resulted in reduced trading activity and shrunk the market-maker activities. The revenues from trading volume shrank and the business shifted its focus to increasing charges on Market Data feeds. This was and is a captive market – Real-time access to Market Data feeds – is absolutely necessary for brokers, and market makers etc.

Stock exchanges are the aggregators and are continuing to charge an arm and a leg for real-time access to these feeds. In fact, they are the only aggregators that have increasing these charges.

Tabb group reports that the revenues from US stock exchanges have climbed 16% over the past 5yrs, largely due to data revenue. Of course, the acquisition spree that has been happening is very much contributing to these figures too.

 

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From “Costly data battle heats up between traders and equity exchanges

 Lawsuits on Market data feeds are dragging

 There have been multiple lawsuits around this issue. However, the rulings take very long and in the meantime, the exchange sector continues to consolidate, leading to further strengthen of the oligopoly and resulting in fewer and fewer players. The most recent announcement of the BATS exchange acquisition from CBOE takes an innovator out of independent action. ICE is a huge conglomerate with a global web that makes the space very tough to disrupt.

The most significant lawsuit saga continues for more than 10yrs. SIFMA (Securities Industry and Financial Markets Association) and a coalition of Internet companies filed a lawsuit against the exchanges in 2006. In 2013, the U.S. Court of Appeals for the District of Columbia instructed the SEC to reexamine its approval of data fee increases and require the exchanges to justify the price hikes. Since then, the case was  awaiting review by the SEC’s own administrative court. This summer, the SEC judge threw out the case and SIFMA has stated that they will appeal the ruling.

The double disruption from IEX: speed bumps and free real-time data

IEX, the sole disruptive force left in the stock exchange space, got approval to operate just 3months ago.

Remember this is the only such business that isn’t heavily influenced and tied to the Sell-side; contrary to all others who came out of a Sell-side membership type of organization before becoming public. IEX is a membership held organization but from the Buy-side! It’s first positioning was-is to use a speed-bump in the way it operates the electronic circuits of the IEX exchange. The purpose is to protect the market from HFT rigging and serve the interests of the Buy side.

The second move, which is upcoming will be-is to offer free access to real-time data to its customers (Kurt Dew, an industry veteran has been covering these issues in Seeking Alpha as they unfold). This is a direct and major disruption to the other players that count on such data feeds constituting a major source of their revenues.

How soon will the data source of revenue disappear for exchanges? Will technology solutions and private markets become the areas of revenues for the exchanges?

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge Network.  Efi Pylarinou is a Digital Wealth Management thought leader.

 

Market Place Lending is simply automated Asset Liability Management and that is a big deal. 

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Eons ago I managed a sales team that sold core banking systems to global banks. One sales guy was consistently the best performer. I decided to find out his secret to teach it to the rest of the sales team. 

He had found a report that senior managers really wanted and that was easy to create in our system and that was hard to create for our competitors. He had senior management attention and a moat against competition – simple and brilliant.

The report related to Asset Liability Management. So I took a crash course to understand the rather dry subject of Asset Liability Management (ALM). Despite being a dry (read boring) subject, it is key to banking. In short, a bank with good ALM has very low risk and makes good profit and vice versa. 

Asset Liability Management 101

ALM is simply matching the Bank’s Deposits (aka what a bank borrowers from Consumers aka a Liability as seen on the Bank’s balance sheet) with with their Loans (aka what a Bank Lends to a consumer or other entity aka an Asset as seen on the Bank’s balance sheet). If Assets and Liabilities get out of alignment, the Bank has high risk. For example if a Bank gets Deposits on a 3 Month Term and Lends them on a 3 Year Term, something could go badly wrong. 

Of course, if Banks can borrow on a 3 Month Term and Lend on a 3 Year Term, everything is peachy until too many Consumers ask for their money back at the same time. When that happens it is called a “run on the bank” or systemic risk; Governments and their taxpayers are signaling that they don’t like spending taxpayers money to bail out banks when that happens.

A bank with good ALM poses no systemic risk. 

Which brings us to Market Place Lending. People have pointed out that Market Place Lenders don’t pose systemic risk. If a borrower has a 3 year term then the Lender has to have a 3 year term; they have to match or the transaction does not close.

Market Place Lending has perfect ALM.

When you look at Market Place Lending in those terms you can see how powerful it is. In the original P2P Lending model Consumer A Borrows and Consumer B Lends. The marketplace simply matches them. There cannot be any ALM mismatch. If the Borrower wants a 3 Year Term, the Lender has to accept a 3 Year Term or decline the transaction. 

As the Market Place Lending market grew, intermediaries such as Banks and Hedge Funds jumped into the Transaction. Now the value chain is Consumer A Lends to a Bank or Hedge Fund who then lends to Consumer B. Of course in our complex Financial System that chain can be longer – Consumer A Lends to Insurance or Pension Fund who lends to Bank or Hedge Fund who then lends to Consumer B. However, as long and complex as that value chain gets, it is still Consumer A lending to Consumer B.

The problem for all the intermediaries in that value chain is when Consumer A and Consumer B figure that out at scale. 

“My excess cash flow goes straight to my deposit account”

That is an actual comment from a Pensioner who is living well within his means. He has an old fashioned Defined Benefits Pension that is inflation adjusted. He earns more than he needs to spend.  

 This is enabled by a  Sweep Account – well known to anybody who uses Banks prudently. That Pensioner has his bank automatically transfer money from his “Current Account” to his Deposit Account. (The Pensioner was British, if he was American he would have referred to his “Checking Account”). He knew he was getting a lousy deal on that Deposit Account, but did not fancy the hard work of figuring out how to make good risk adjusted loans via a Market Place Lending platform.

Post PSD2, a Fintech startup could sweep that into a Lending Account based on risk/return profile. That is is the sort of “take something complex and make it easy and intuitive with some UX magic” that digital startups excel at. The prize is big. It could be one of the Deposit Innovators that we profiled back in July who seizes this prize. Or an existing Market Place Lender. This is still a nascent wide open opportunity.

Sweep Accounts into Market Place Lending could eliminate the cost of funds advantage that banks have today and that is a really big deal.

To see the real spread enjoyed by Banks, look at this analysis on Nerd Wallet of the best term deposit rates and then contrast that with the Average Net Annualized Returns on Lending Club.

Dear Mr Treasurer, how much do you love your ZIRP and NIRP?

The first to break the dam might be Corporate Treasurers. Like the Pensioner, they know that they are getting a lousy deal on Bank Deposits. Unlike the Pensioner, they have the resources to do something about it. Corporate Treasurers are already doing something about it by lending to their vendors through Supply Chain Finance (SCF). When SCF connects with MPL, the change will come very fast.

Today Corporate Treasurers use sweep accounts to get excess cash into Money Market investments, such as repurchase agreements or commercial paper. SCF is another short-duration investment. However Corporates have excess cash that they don’t need for longer durations so could easily Lend to Consumers or Small Biz for a 1,2, or 3 year terms. 

That is why we believe that Market Place Lending is still in its infancy and will fundamentally change the world and why Lending Club could the Priceline of Fintech. (Disclosure I was fortunate enough to buy Lending Club stock at 3.51).

 Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge platform.