Active trading is hazardous to our health! What to do?

Passive is the new black

“If a statue is ever erected to honor the person who has done the most for American investors, the hands-down choice should be Jack Bogle,” Buffett wrote in the famous annual letter of Berkshire Hathaway.

Yes, there is the innovation of the ETF financial structure that we shouldn’t forget was incubated in the womb of the nowadays-incumbent land. It was early 1993 that the first ETF, the S&P SPDR, began trading. This is was a time of financial engineering nirvana in the WTC. I was there, sitting at the desk that Myron Scholes ran, the fixed income structured products desk at Salomon Brothers.

Yes, there is also the innovation of robo-advisor investing that Wealthfront and Betterment led. Adam Nash and Jon Stein both merit substantial credit for advancing the idea that fees eat into returns in a significant way in the long-run, and designing a tech-enabled solution.

Vanguard’s passive investing cult comprises of mutual funds and ETFs. In 2016, Vanguard reports that net inflows into their funds amounted for $227 billion in new money, compared to $407 billion for the industry – more than half of the total assets (Source).

The ETF industry in the US showed record inflows: $284billion. Don’t miss the State of ETFs keynote given at InsideETFs in January, by Dave Nadig and Matt Hougan of ETF.com.

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The robo-advisory space has shown impressive growth, with Betterment and Wealthront amassing around $10bil (doesn’t mean they are profitable since the CAC remains very high). Vanguard’s robo (also not profitable yet) with $47billion, Schwab with $12+ billion and the rest of the US robo D2C space around $15.5billion.

I also need to point out an even stronger trend towards indexing vehicles, that relates to ETF Trading and its correlation to market volatility.

Flow numbers in the US into general passive vehicles of all sorts (mutual funds or ETFs) are even higher: $844 billion for 2016!

But it is not just flows, it is also the amount of ETF trading, that tells an even stronger story. ETF.com tracks the amounts and shows a fairly steady and significant trading activity over the past three years, around 30% of total value on the exchanges comes from ETF trading. They also report that the correlation of the ETF trading activity with volatile trading periods is significant but heading lower, from 70s to the 60s (VIX versus ETF trading).

Even Warren Buffet, echoed in this year’s annual letter for the first time, that when he buys a company it doesn’t mean that it is forever.

 “But we have made no commitment that Berkshire will hold any of its marketable securities forever.” (Annual Berkshire Hathaway shareholder letter)

Actively managing passive investments, is the puzzle

The passive low cost investing culture, is here to stay and the only valid question going forward is

“How can we make the best out of it, for the long run (of our life-time)?”

Given that we are embracing low-cost investing at various rates in different regions, the other major reason we manage poorly our money, is in a nutschell

All kinds of cognitive biases

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Source: TED talk by Victor Haghani, of Elm Partners, who uses the puzzle of the missing billionaires. This helps us explore how and why most of us fail to capture the returns offered by the market.

We are in dire need of an approach that combines the best features of low-cost index funds with the appealing and successful aspects of active management, all for a 1/10th the price that many of us currently pay.

Who else can help us on this front? Maybe Watson? One thing is for sure, we will be seeing more Deep Learning applications to managing portfolios that use low-cost financial structures and mitigate for the cognitive biases.

For now, here a few straightforward Fintechs to consider as an investor or an independent advisor.

Elm Partners, the US based Fintech can be an “advisor” to manage our assets Forever at a low cost (discretionary management only for accredited investors, 12bps per annum). Elm Partners, was founded and is run by Victor Haghani, a partner at LTCM, which gives an additional message as to where the industry thinking is heading to.

Logical Invest is a global Fintech that offers services using low-cost ingredients and sophisticated quant rebalancing but for self-managed accounts. They offer 13 strategies (monthly rebalancing signals provided) with a monthly subscription model (from $30 per month per strategy). These are used by DIY investors and financial advisors. They recently launched The Quant Trader application, coined as the Swiss army tool for investing. It allows optimization between the 13 existing strategies and customization. They also partnered with The Estate Planners Group (US investment advisor) to offer separately managed accounts based on the Logical Invest signals.

Alpima, is a UK based Fintech but a global Fintech, that offers multiple strategies (coined Bricks) that can be used independently or to create a multi-strategy portfolio (coined as Stack). There is an extensive menu of Bricks (e.g. from Multi-asset, to others Equity focused) that can be customized and can be used to create a personalized Stack that is dynamically optimized and rebalanced. The advisory fee is 40bps per annum and combined with low cost execution (e.g. Interactive Brokers) can compete in solving the missing billionaire puzzle. The audience is DIY investors, financial advisors and private bankers with discretionary assets under management.

Which other Fintech is competing to solve the “missing billionaire puzzle” in a simple way?

Disclosure: I am a subscriber to the Logical Invest strategy signals.

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.

Choose your Boxcar on the Fintech Freight Train

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There are 7 boxcars on the Fintech Freight Train. You need to decide which car you want to jump on.

The engine of the train that is pulling all the cars is the technology that emerged around 1994 when the Netscape browser launched and turned the Internet into a platform for media, communication and shopping. That was 23 years ago. Let’s call that the “content exchange Internet”. That is the engine pulling all the boxcars. It is a steam train compared to what is coming next.

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At some point in the not too distant future, the steam train will become a bullet train. This is when the technology that emerged around 2009, Bitcoin & Blockchain, turns the Internet into a value exchange platform.  When that happens all those boxcars get replaced – today’s disrupters will be disrupted along with the incumbents. In two years, Bitcoin will be 10 years old. In comparison, the content exchange Internet was in a deep slump after about 10 years (cast your mind back to around 2004 when conventional wisdom was that the Internet was over and Facebook was just getting started). Let’s call this new engine the “value exchange Internet”.

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Both engines – the content exchange Internet and the value exchange Internet –  are available to all. It is like open source. You can understand it and use it but you cannot own it.

The train is already moving. Deciding which car you want to jump on depends on how fast you can run. The ones at the back are the easiest to jump on and the ones at the front are the hardest.

The cars at the front are markets that are already fairly mature. These are Red Ocean Markets, with lots of sharks circling and blood in the water – sorry about mixing my metaphors. Even in these there are niche opportunities – bolt on acquisitions in i-banker speak. But you won’t be able to create a new platform company. In these leading cars we read about consolidation M&A and about public companies and their quarterly reports and about big, high profile failures. It is a game with a few really, really big winners and an awful lot of losers.

It is easier for a new team to jump into the cars at the back.

The 7 boxcars – looking from the front are:

  • Payments
  • Lending
  • Wealth Management
  • Insurance
  • Consumer Banking
  • Small Business Finance
  • Corporate Banking

Boxcar 1: Payments.

Payments is the boulevard of broken dreams.

You can see why entrepreneurs dream about this market – it is massive. According to Boston Consulting Group:

“In 2013, payments businesses generated $425 billion in transaction revenues, $336 billion in account-related revenues, and $248 billion in net interest income and penalty fees related to credit cards.”

Yet dreams of disrupting the current payment rails are regularly dashed against the rocks of reality.

The payments market has already seen some big blowups. Lots of little young ventures fail. That is the norm. It is more significant when a venture fails having taken in a lot of cash. Two of the biggest ones in Fintech – Powa and Monitise – are both payments ventures.

Two new Payments companies have emerged post Internet, got to scale and gone public – PayPal and Square and it looks like Stripe will soon be another public market comparable. Meanwhile the stock market continues to value Visa and Mastercard very highly; investors are voting with their wallets that credit cards won’t be disrupted any time soon. One successful formula is to add value within the existing credit card rails for a big pain point; Adyen is an example.

A few highly valued ventures such as Transferwise, WorldRemit and Ripple are battling it out in the cross border arena. Alibaba buying Moneygram was a big cat landing among the consumer cross border pigeons.

At the high value end of payments – corporates and capital markets – the big elephant, SWIFT, is pretty focused on not being disrupted and is working with the new bullet train Blockchain engine.

Companies like Klarna are creating value around the mobile payments pain points.

So there are pockets of opportunity in payments, but you will face huge, well-funded, agile and determined competition. The good news is that payments innovation enables lots of other innovation. When payments are 10x cheaper and faster, lots of value add innovation becomes possible. You may not be a payments venture, but you will almost certainly use payments innovation.

It is possible that mass adoption of mobile wallets (with wallets that can hold both digital Fiat and Bitcoin) will change the Payments game. However, that is speculating on mass adoption and when mass adoption does happen, it will also be a game for big players. One market where we can see this is India, where Snapdeal looks like it is getting crushed and Paytm looks like it is crushing it. We view e-commerce and sharing economy as a payments business with some content (Alibaba and Uber seems to agree judging by their actions).

Unless you have easy access to a billion or more dollars and a disruptive proposition that meets a big need today, you may want to let this boxcar pass go past and look at the next one.

Boxcar 2: Lending

Like Payments, Lending is a massive market. Banks make money by lending and Banks are big (said Captain Obvious).

The first real account innovation since modern banking started hundreds of years ago, is the Lending Account from Market Places like Lending Club, Prosper, Funding Circle and Lufax. As we don’t know whether to call this market P2P Lending or AltFi or Market Place Lending we refer to it simply as Lending.

It is unlikely that we will see any new entrants in the core matching functions of a Lending Market. This is a 4 horse race – Lending Club, Prosper, Funding Circle and Lufax. In this post we look at what happens after Market Place Lending goes mainstream – what innovation is coming down the pike. Innovation is needed because the way that Market Place Lenders find borrowers is remarkably old-fashioned. There is a lot of direct mail and search engine marketing to find consumers who want to refinance expensive credit card debt. That is valuable but hardly innovative or disruptive.

There have been a lot of AltFi Lenders that are very old fashioned at their core. They raise a credit fund and apply some Internet search and social marketing and online credit scoring algos and lend to the riskier end of the credit spectrum. They will mostly get squeezed by banks at one end and Market Place Lenders at the other end.

One company – Sofi – is using the lending account to become a major financial institution as Efi Pylarinou tells us here.

We don’t see any big new plays in AltFi until the Blockchain bullet train comes along, but we do see a lot of opportunity to create value within the ecosystem. These maybe smaller niche bolt on acquisitions for the big platforms. The opportunity created by the Lending Account is so massive. Whether these niche innovators get bought by Market Place Lenders or stay independent and partner with Market Place Lenders does not matter.

This Boxcar looks big and full of opportunity.

Boxcar 3: Wealth Management

The first phase of innovation – Robo Advisers for the Unadvised – is game over. This boxcar has left and the doors are closed. You have some big new ventures – Betterment and Wealthfront – and huge incumbents such as Vanguard, Blackrock and Charles Schwab.

Efi Pylarinou runs the numbers in this very accessible videoinfographic.

That is only the first wave of innovation in Wealth Management. Every Tuesday, Efi Pylarinou uses her deep knowledge about how the global capital markets really work to look at the next wave of innovation.

We define Wealth broadly as being any amount of capital, small or large, that is allocated to financial assets (private equity, public stocks, bonds, currencies, real estate, precious metals, art etc). We include both short-term trading as well as long-term investment. Customers wanting their capital to grow can be passive (leaving it to professionals) or active (sending time to find assets to trade/invest).

Exchanges, brokers & dealers, investment banks, asset managers, private banks, retail and commercial banks, and the entire world within and behind all these front end scenes (such as research, custody & compliance); are all serving wealth creation needs of all sorts and at all levels, ranging from millennials to corporates.

Digital Wealth Management is so intrusive that in a few years we won’t be able to distinguish it from all other basic lifestyle needs. The digitization of Wealth Management affects developed societies and underserved ones.

Boxcar 4: Consumer Banking

We cover Consumer Banking every Friday.

Consumer Banking is being Unbundled today. Ventures do one job and only one job – cherry picking the parts of banking most exposed to disruption, typically in payments and lending.

In the next phase, we see Rebundling when startup banks offer the full service and compete head on with existing banks. Some are incubated within a big bank – we profiled a few leaders in our Pirates With Ties interview series.  Some are venture backed and usually referred to as Challenger Banks or Neobanks. We also see innovation coming from PFM and PSD2.

We see change coming from two extremes, in both cases driven by a move to a cashless society. One extreme is wealthy and hyper efficient economies such as the Nordics and Switzerland. At the other extreme are countries such as India that are leapfrogging over credit cards and going direct from paper cash to mobile wallet cash.

Two areas of nascent innovation are Mortgages and Deposit Accounts.

Boxcar 5: Small Business Finance

Jessica Ellerm tracks this market every Wednesday.

This is a massive opportunity, because banks have ignored small business for so long. Small Business is like a middle child – neither the oldest (big business) nor the youngest (consumer). This illustrates the old adage that innovation comes from those who have been excluded from the old way of doing things. Small business needs the same Corporate Finance products that big business needs (such as debt, equity, payments, foreign exchange) but to serve these efficiently to millions of small businesses requires a far higher degree of automation and different business models. The models for a small business service are just as likely to come from Consumer Finance as they are from Corporate Finance.

Another reason why we see Small Business Finance as such a big window of opportunity is that globally in the digital age we are mostly entrepreneurs. The idea of a world that mainly comprised big companies with lots of employees aka consumers looks now like a construct of the post war era in America and Europe. A world with billions of entrepreneurs needs a whole lot of financing innovation – that is the big story we track every Wednesday.

Boxcar 6: Insurance

This was the market that emerged in 2015. We started tracking this market in March 2015 with the headline Not That Many InsuranceTech Startups – Yet and have been posting every Thursday on InsurTech since then. This is a market in it’s Cambrian explosion phase, with lots of early stage innovation getting funded and coming to market.

One caution for entrepreneurs is that, unlike the banks when Lending and Payments first started getting disrupted around 2009, the Insurance incumbents were hardly asleep at the switch when Insurtech started to emerge in 2015. In fact the big story here maybe Reinsurance As A Service.

Boxcar 7: Corporate Banking

This is a nascent area with very little disruption so far. Traditional services that Fintech will change include M&A, IPO, Treasury, Trade Finance, Money Markets, Credit Ratings.

To go into this nascent area you will need:

  • Deep domain knowledge as these are complex functionally
  • To be comfortable selling to big enterprises.

We see Corporate Banking the way we saw Insurance in March 2015, under the radar, understood by very few and about to explode.

Which Boxcars will benefit most from the new Blockchain bullet train engine?

This is where the order is quite different:

  1. Insurance – getting claim to cash from 4 months to days or even hours
  2. Wealth Management – getting asset settlement from days to minutes
  3. Corporate Banking – permissioned networks across multiple parties without a traditional intermediary

The other markets will have to wait until Bitcoin goes mainstream and while that is inevitable in my opinion it is not imminent and the timing is very hard to determine.

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Wrap of Week #8: Innovation in Marketplace lending, Software systems, for Generation rent; Sofi, Insurtech stories

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This week we covered a broad variety of themes around innovations. We started the week with an inquiry into the next phase of innovation in the market place lending space: What comes after MarketPlace Lending?

We ended the week looking at the issues of software system innovations in enterprises: Applying Loose Coupling software principles to enterprise digital transformation.

In Insurtech we highlighted the globalization theme through 5 Insurtech stories.

We zoomed into a few Fintech solutions in property, as an asset class, especially designed for Generation Rent: Can proptech mixed with fintech save Generation Rent?

We continued our coverage of Sofi, with a focus this time on their growing mortgage focus: The vertical integration of SoFi has the core entry point right!

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What comes after MarketPlace Lending?

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Now that Lending Club is past its crisis mode and is just another mature company that has to impress investors with predictable growth in financials on a quarterly basis, we look at where the puck is headed in Lending.

What innovation will change the Lending game and create companies as big as Lending Club ten years from now?

Disclosure: I sold shares in Lending Club just before their recent quarterly earnings (Q4), having been fortunate enough to buy in at 3.51 after writing this post. Although I expect Lending Club to do well, the shares no longer have the great margin of safety that they did right after the crisis in May.

This post looks at four innovations that focus on two big imperatives facing any Lending entrepreneur – reducing Customer Acquisition Cost (where Customer = Borrower) and reducing Cost Of Capital (reducing the intermediary cost):

  • The next generation Deposit Account
  • Just in time Borrowing by consumers
  • Big Data for the lending to Micro Entrepreneurs
  • Automated working capital financing for SME

The next generation Deposit Account.

One big reason Banks have a low cost of capital is that consumers are willing to put up with lousy interest rates in order to get safety i.e. to know that their money is not at risk. The next generation Deposit Account could change that and our thesis is that the next generation Deposit Account will be based on the Lending Account.

Market Place Lending has created the first real banking innovation in hundreds of years which is the Lending Account. Until the likes of Prosper, Lending Club, Funding Circle and Lufax came along, consumers could have a Deposit Account (lend money to a bank) and a Loan Account (borrow money from a Bank) but could not directly lend in any simple scalable way.

This post shows how one Consumer has used Lending Accounts to make good money, much better than Lending to a Bank via a Deposit Account.

Most people don’t want to a) work that hard b) take that much risk. This is where the next generation Deposit Account is awaiting a great entrepreneur. The next generation Deposit Account will be a Lending Account that is ultra low risk and short tenor. Let’s start with tenor. If you are willing to lock up your capital for a few years, you can use existing Market Place Lending accounts. Compare the risk-adjusted return over 3 years compared to locking up your money in a 3 year Deposit account or a AAA Sovereign Bond and the Market Place Lending account looks pretty good.

However, most people want to have cash available at short notice for emergencies. They might want the notice/tenor to be weeks or at most months. That is hard to do using Market Place Lending accounts because the Borrower needs longer to repay. Unless you work hard to resell on a Secondary Market such as Foliofn, this is not an option.

This requires some financial engineering – the sort of thing that Wall Street has always done well. Through a mix of securitization, secondary markets and a cap & floor based guaranty, this is feasible. The arbitrage between lending to bank (Deposit account) and lending directly is big enough to give any entrepreneur enough to play with.

A note on securitization. Although securitization is seen as the villain of the Great Financial Crisis of 2008, there is nothing wrong with securitization per se. The issue is transparency. If you can hide a bunch of dodgy BBB loans in a shiny AAA package that is bad. If BBB loans are sold to those who know how to manage the risk/reward trade off, then markets are working as they should.

In addition to financial engineering, some UX magic is needed to make this as  simple for consumers as opening a Deposit Account.

If anybody is working on this, please let us know in comments.

Just in time Borrowing by consumers

The way a Market Place Lender like Lending Club or Prosper finds borrowers is remarkably old-fashioned. There is a lot of direct mail and search engine marketing to find consumers who want to refinance expensive credit card debt.

What if you eliminated the credit card phase and the Market Place Lender could acquire customers at the point of sale? That is what Klarna is doing for example; the proposition is bill me and I promise to pay. That can work in small, homogenous and relatively wealthy countries (eg Nordics, Switzerland) where the default rates will be relatively low.

This can also work at the opposite end of the spectrum in huge and relatively poor countries (such as China, India, Africa) where Credit Card penetration is low ie new models can appear at the point of sale to deliver lower cost borrowing to consumers at the point of purchase.

What is unclear is whether these new borrower acquisition models at the point of purchase will be part of a Lending Marketplace or part of an ecosystem that delivers customers to the Lending Marketplaces.

Big Data for the lending to Micro Entrepreneurs

You can lend to business or consumer or to the grey area in between of the self-employed “micro entrepreneur” where companies like Iwoca operate. The key here is that the revenue sources for these self-employed micro entrepreneurs are data rich services such as Uber, AirBnB, Amazon, Alibaba, eBay etc and data is the key to assessing lending risk.

Automated working capital financing for SME

Approved Payables Finance when the SME sells to Global 2000 type Corporates is working well. The APR is far lower than the SME would get from traditional finance or AltFi and Lenders get short tenor, self-liquidating high grade debt at far better interest rates than Sovereign Bond lending.

To date this has remained a niche play, despite working so well. This will scale when two things happen:

– An open standard drives e-invoicing to 90% plus adoption (the remaining 10% can be forced, enabing huge cuts in AR and AP processes). Once AR and AP is entirely digital, inserting just in time working capital financing options is easy.

– A credit rating for SME; today this only works when buyer is “investment grade”i.e. a corporate with a credit rating from an agency such as Moody’s, S&P or Fitch . If a butcher selling to a baker or candlestick maker could evaluate the credit rating of the  baker or candlestick maker, pricing credit would be simple and thus the APR would come down a lot. This is not rocket science and as always it is a data problem. All you need to know is does the baker or candlestick maker pay their bills on time.

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If anybody is working on solutions for the kind of innovation profiled here that we have not already mentioned, please tell us in comments.

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This week in InsurTech shows how fast the market is globalizing

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It is hard to sip from a firehose and the InsurTech innovation pipeline in 2017 is a major gusher. As we parse this week’s news stories, one theme jumps out and this theme goes a long way to explain why the InsurTech innovation pipeline is such a gusher.

The theme is globalization.

5 InsurTech stories this week illustrate the globalization theme:  

  • Digital Fine Print goes from Seed to Asia via America and London
  • Australian insurer IAG establishes an Insurtech hub in Singapore
  • Youse is the very first Brazilian InsurTech brand
  • The first InsurTech conference in Quebec City
  • The first InsurTech VC fund in flyover country

Digital Fine Print goes from Seed to Asia via America and London

The news: the story broke on CrowdFund Insider. This one is as global as it gets. An American Insurance Company (MetLife) partners with an early stage London based InsurTech startup (Digital Fine Print) to move into Asia.

This story also shows the capital efficiency value of Incumbent partnerships and social media. Digital Fine Print is going into Asia having raised only $400k. Conventional wisdom was that you should wait until your $400m round before going global. However if you can use the back end platform of an incumbent and use social media at the front end, it is time to challenge that conventional wisdom. (Daily Fintech is totally global, with subscribers in 130 countries and we have not yet raised any outside capital).

Australian insurer IAG establishes an Insurtech incubator in Singapore

The news: It will be called Firemark Labs and was reported in multiple venues, here is one. IAG = Insurance Australia Group. It underwrites over $11.4 billion of premium per annum and is active in many Asian countries. The incubator (do we call them “hubs” or accelerators today?) has the usual job of scouting for innovation.

Score another one for Singapore – see here for our story about CXA. This story also illustrates the value brought by the very proactive Monetary Authority of Singapore (MAS) and its Chief FinTech Officer, Sopnendu Mohanty.

This is an inter Asia story – no American or European ventures. The Australia Singapore nexus makes sense as the Australian economy is tied to Asia.

The Incubator has access to cash through IAG’s $ 75 million venture fund.

The trend looks clear. MetLife already has an active Singapore-based innovation center called LumenLab. One can envisage each global insurance company having an InsurTech incubator in the 20 or more global cities with an active Fintech scene.

Youse is the first Brazilian InsurTech brand

The news: It is really only a “we are here” announcement with a lot of big picture data about how big InsurTech is.

Youse was created by Grupo Caixa Seguradora as a digital venture within a big company. We have seen some of these become successful in banking (see our Pirates With Ties interview series for some good success stories), even though cultural mismatch kills most intrapreneurial ventures.

Nubank in banking is a Brazilian specific example of a digital Neobank (but VC funded unlike Youse).

The first InsurTech conference in Quebec City

The news: InsurtechQC is the first conference dedicated to Insurtech in Quebec City. It takes place on April 3rd and has both local and international speakers.

The first InsurTech VC fund in flyover country

I know, I know, I should not refer to flyover country. It’s an old habit from living in New York and flying a lot to California. It sounds elitist and I apologize for that. The significant trend is that the Silicon Valley model of innovation has gone global and global does not just mean places like London, Zurich and Singapore. It also means places like Des Moines, Iowa.

The news: A Des Moines, Iowa-based VC fund called ManchesterStory Group backed by a consortium of insurance companies is looking for Insurtech deals.

“The new firm said it cannot disclose the insurance carriers behind it until the fund closes.”

They have company in Des Moines.  The Global Insurance Accelerator was launched in 2013 with backing from seven insurance companies and has since added 3 more.

Closer to mainstream customers and lower cost base sound like good ingredients for venture success.

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Can proptech mixed with fintech save Generation Rent?

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Thanks in part to low interest rates and globalisation, property markets in many urban centres across the world seem to be spiraling out of control. Sydney’s median house price has shot past the AU$1.12M mark, surpassing even that of New York, while across the Tasman New Zealand’s largest city, Auckland, has seen median dwelling prices drift close to NZ$1M.

The market dynamics are similar in the UK, with research from the Resolution Foundation indicating there is a significant ground shift occurring, from owning a home to renting one instead, amongst working-age households. In the year 2000 around 55 per cent of households lived in an owned, mortgaged property, a figure that has since dropped to 41 per cent in 2015. Over the same period, those in private rentals climbed from 11 per cent to 25 per cent. The social ramifications of this shift are profound.

Generation Rent, as they have come to be known, now find themselves stuck between a rock and a hard place, facing a potent mix of stagnant wage growth and skyrocketing house prices. Perversely those that have scraped together a deposit face the risk of long-term low inflation, potentially locking them into a possible debt trap for years to come.

Once, owning a home was considered a safe and sure bet for building long-term wealth for the middle class. However with this asset now out of reach for most, some fintech start-ups have spotted an opportunity to service the appetite for property via a range of more accessible and affordable vehicles.

BRICKX in Sydney is one such fintech (or proptech) startup. Via fractional property investment, the company allows investors to purchase units, or ‘Bricks’ of a home. The investment also entitles investors to a fixed share of any rental income generated.  The upside of fractional investing is that investors can spread their risk across a basket of rental properties, plus cash in on capital gains at any time by selling their Bricks to another buyer.

For those lucky enough to have significant equity stashed away in a home today, fintech startups like Point in the US are providing an alternative to the traditional banks when it comes to accessing stored wealth, specifically for reinvestment back into the property market. Point, an Andreessen Horowitz backed startup, purchase’s a fraction of a homeowner’s dwelling, only collecting this back (plus capital gains) when the original property is sold. Homeowners also have the option to buy out Point at any time.

While Generation Rent might not be able to access services like Point directly, parents, who are increasingly financing children into their first home, could. Data from the Reserve Bank of Australia shows the proportion of first-home buyers borrowing from their parents to finance their first property purchase has more than doubled since the 1970s. With many in the Baby Boomer generation under financial pressure themselves through tech driven workplace disruption, any financial solution that doesn’t impact monthly cash flow is a bonus.

Building societies and small banks have a great opportunity to partner with fintech startups in the proptech sector to propel innovations like these forward, scale and bring them to the mass market. These types of partnerships can have real social impact if executed correctly – there is even scope for government involvement. One thing is for sure, we need to creatively rethink how home ownership works and take this opportunity to address the real long term problems uncertainty and insecurity around housing can cause.

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.

The vertical integration of SoFi has the core entry point right!

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There is a question that beckons for an answer.

In this fluid world, owning the customer is the challenge.

Each individual is managing a balance sheet, e.g. assets and liabilities.

Serving which side of the balance sheet, will prove to be the best entry point to develop a long lasting relationship with the end-customer?

Tech-enabled financial services are not a dream anymore. From telcos, to internet providers, to social networks, they can all aspire to offer financial type of services. Starting with basic personal financial management tools (PFM), to transactions services, all the way to investments. Most PFM and transaction related services are already very low margin services and heading to zero. The remaining higher margin services are further down the value chain and mainly related to investments. Despite the fact that margins in some segment of investment services, are being squeezed from low cost online offerings (robo-advisors), there are still substantial margins that remain. Even though they are decreasing also, they don’t seem to be heading to zero.

Markets are efficient but the time needed to reach this equilibrium type of state, is uncertain. Technology is altering the investment segment of financial markets and creating havoc for financial advisors and asset managers alike.

Seems like there is a new segmentation being formed in the investment segment of the market, with one part of it being cannibalized and another part not. But the latter one, has no other option but to redefine its value proposition and is being pushed towards some kind of Vertical Integration.

At the same time, we have to admit that technology has not been able to sweep the unadvised assets, still sitting around despite the negative deposit rates in most of the world and despite the old-fashioned vault keeping services that deposit taking institutions offer. We have been pointing to this fact,

The Unadvised Assets, and the quarterly data that we collect show no significant change in the “Lazy Cash” figures.

(Read Oh, the things you could do with the enormous Cash pile!). That covers the asset side of most balance sheets of individuals.

On the other side of the balance sheet, there are our liabilities or our debt. This is the part that actually weighs more than saving and investing. From a more holistic perspective, the debt side of our balance sheet is heavily defining our decision making, our life-style and is more sticky. Debt decisions and debt management, affect much more our life. They not only are typically, larger in size, both absolute and percentage wise, but our life is much more sensitive to these factors.

In other words,

allocating capital and managing the risk on the debt side of our balance sheet is larger, more complex, and determines whether we reach our goals or how far away do we end up. This is primarily where we all need advice (human, bionic, hybrid) in the first place, and subsequently in the investment segment of our finances.

Incumbents and Fintechs, for the most part, have got this order of priorities wrong!

Incumbents have a long history of silos between business units, segmentation by product areas, and very low cross-selling rates. The large ones are struggling with the daunting task of integration, platformification, or a holistic approach to the existing large customer base.

Lets watch and see, whether Marcus for example, the consumer lending innovation from Goldman Sachs truly succeeds in destigmatizing personal debt (check out Will Goldman become a verb? Watch the Marcus ads!)? And then, in an invisible way, manages to simplify your first mortgage. And create a full stack for the customer, by integrating their deposit taking offering, their debt offering and management, and their investment capabilities.

On the Fintech side, will it be Betterment which is investing its recent large (for the robo space) funding round into the investment segment of our financial needs, that will invisibly move from its current Home improvement loan offering in certain states, to a full fledged mortgage offering?

Or will it be SoFi, who is investing its ten fold recent funding, into the mortgage segment already, that will easily move into the investment robo-offering later?

SoFi has been growing through the refinancing part of the value chain starting from student loans. From that same niche, they have been growing for more than 3yrs, their mortgage business. In other words, they have been advising their customers on how to manage their debt, from student loans to mortgages! In November, SoFi announced a partnership with Fannie Mae and a new offering, the Student Loan Payoff ReFi.

With SoFi’s new offering, the Student Loan Payoff ReFi, homeowners will have the ability to refinance mortgages at a lower rate and pay down the balance of an existing student loan. With its cash-out refinance student loan payoff plan, SoFi will pay down the student loan by disbursing payment directly to the servicer of the student debt. SoFi is a Fannie Mae approved seller servicer. Source

 This is not just another offering that is cheaper and faster. This is about parents who have co-signed student loans, that will be able to free up their digital assets. It is also about homeowners that manage student debt, being able to optimize the way they manage their capital and risk.

While the headlines are focused on the Zenbanx acquisition (covered in SoFi buying Zenbanx either signals the first Mega NeoBank or a unicorn losing the plot), what is really happening is

the creation of a platform business that is about managing both sides of the balance sheet for retail customers, that has been built around the core business of advising retail on the debt side.

SoFi is a business innovator because it has the priorities right in building a successful business to serve retail customers.

SoFi has realized early on, that the value lies in managing the debt side of the balance sheet for retail customers.

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.