Wrap of Week #32: Bitcoin, Fidor, Starling, Revolut, Nesta, Kin, Cleo, Onfido, Tractable, Habito, Aire

 

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Wrap of Week #31: Bitcoin cash, Billon, Tezos, Crypto Hedge funds, ZipMoney, Jarvish, Fintech M&A, Steemit, EOS

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Wrap of Week #30: Abra, SEC, Open, Aigang, PSD2, GDPR, Veristart, ArtByte, SingularDTV

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Why the Third Wave of Fintech is fundamentally different

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Copyright Daily Fintech Advisers Ltd.

My career began in the middle of Wave 1. It is hard to see this as exciting and disruptive today, but it was at the time. We were replacing paper process with computerised processes and the payoff was huge. The business model was KISS – develop software and license it to banks. All the risk/reward went to banks. There was not much VC in those days, so we bootstrapped from customer revenues.

Wave 2 is what we have been calling Emergent Fintech(vs Traditional Fintech = Wave 1). Wave 2 leveraged the SMAC technologies (Social Mobile Analytics Cloud) that had reached mainstream adoption. Startups beat incumbents by creating better User Experience (UX). It was only a question of time before incumbents caught up by creating better UX. During the time when incumbents were playing catchup, some Fintech startups got to critical mass and network effects and so become long term winners. However, many Emergent Fintech startups do not have any major moat against incumbents.

I use 2014 as the watershed year as a) 2014 was the year of the Lending Club IPO which was high water mark of Wave 2 and b) 2014 was when Ethereum was born, and Ethereum is a big enabler of Wave 3.

Wave 2 could be easily coopted by incumbents. It was an era of pugnacious public talk, but with private negotiations around partnership and collaboration. Banks needed startups and vice versa. Wave 3 is harder for incumbents to control. It is not being financed by incumbent VCs and this wave of ventures need less capital, because they  don’t need to buy giant server farms in order to scale (the user’s machines are the servers).  There is still a lot of opportunity for incumbents to add value, but they do not control the pace of change.

A lot of the activity around “enterprise blockchain” is an attempt by incumbents to get back to the “good old days” of Wave 1 when they controlled the pace of change. As Andreas Antonopolous points out, the conversation with Banks starts with “we are not interested in Bitcoin, more in the underlying Blockchain technology”. Then when Blockchain technology becomes divided into permissioned and permissionless, the conversation shifts to ““we are not interested in Blockchain, more in the underlying Distributed Ledger Technology (DLT)”. At that point they take a call from their favoured enterprise software vendor about their latest version with its DLT features. This would be like Kodak upgrading their ERP system to deal with the disruption from digital photography.

The ICO innovation was to raise money without selling securities. You get customers to buy your coins which they can use to buy your products. That is a “back to the future” world. It is like Wave 1 when we financed from customer revenue. This puts entrepreneurs fully in control. The incumbent can no longer call a VC and say “we would like to buy Company X in your portfolio”.

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Bernard Lunn is a Fintech deal-maker, author, investor and thought-leader. 

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Wrap of Week #29: Bitcoin, digital wallets, agile auditing, Zhong An IPO, AI Fraud Detection

Monday –  The Blockchain Bitcoin & Crypto Weekly CXO Briefing – South Korea Officially Legalizes Bitcoin, $7 Million Lost in CoinDash ICO Hack, Interview with Vinny Lingham of Civic.

Tuesday – Wealthtech – are digital wallets fashion accessories or platforms for innovation?

Wednesday – SME Finance – Michelle Moffatt the agile fintech auditor from Australia

Thursday – Insurtech – Will Zhong An follow the same post ipo trajectory as lending club

Friday – Consumer Banking/Finance – Fraud detection using AI and Mastercards acquisition spree

The 10 most active conversations on the Fintech Genome platform

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Michelle Moffatt – the agile fintech auditor

Regulatory pressure, new regulatory models, cyber security, big data, small data, new payments platforms and standards, digital identity – there is no question the risk landscape is increasingly mottled with potholes for both traditional financial institutions and fintech startups. Potholes big enough to cause a business a serious flat tire, or at least make the ride somewhat uncomfortable.

This week I spoke at the International Auditors Conference in Sydney, Australia, sharing the stage with a friend and ex-colleague of mine, Michelle Moffatt. We took attendees on a mobile payments discovery journey – from where we are today to the new emerging voice activated platforms and forays into virtual reality payments. The message we had for the audience was simple. To effectively audit these sorts of innovations you have to be across the fundamentals of the technology and be part of the product journey – from inception to launch.

Michelle previously headed up the internal audit function at Tyro – an SME neobank/challenger bank in Australia, Michelle now holds the title of Chief Risk Officer at a fintech startup Spaceship.

Michelle has long been a practitioner and advocate of ‘agile auditing’. She, like a growing number of auditors in the fintech space, is acutely aware of the rapidly changing risk landscape, not to mention the increasing pace of change.

There is nothing worse for an organization when one agile arm (often the development side of the house) comes up against a non-agile one. This has huge implications on the traditional internal auditors role – a function which historically is only introduced at the end of the project.

However there is a growing need for more auditors like Michelle in the space. Auditors that are willing to come on the journey with the team, yet retain their independence. While this type of cultural shift will be notoriously difficult for an incumbent, there is no reason why a startup can’t adopt this approach with their internal audit function from day one. This is one more way the incumbents’ benefit of scale can be eroded by smart technology and alternative cultural thinking.

After the conference I asked Michelle for some feedback on a number of themes that cropped up throughout her presentation. Here are her high level take-away’s.

Audit processes must mirror startup processes – so agile is key

Starts ups are moving quickly so to keep pace internal audit has to mirror the way they work. Agile audit allows you to give feedback early in the product creation piece so that what matters most is taken into account.

Audit culture in startup land verses big financial institutions has fundamental differences

Starts ups are generally more nimble, flexible and have a greater need for pragmatism and commerciality. They are typically flatter structures, and easy access to key decision makers ensures audit feedback & findings are implemented faster.

On the flipside, larger organizations have the corporate support and access to resources that startups typically don’t have.

Both cultures can learn from one another, or find leverage.

Adopting a learning mindset to emerging technologies is critical to the risk and audit function in fintech

Apart from key technical skills and a base level of proficiency yourself, whatever niche you operate in, you can’t afford to sit back and not engage or understand the technologies you are auditing. This includes potential competitive technologies.

Aside from emerging technologies, you need to understand the emerging micro-cultures of the teams you are auditing. I strongly suggest internal auditors attend meet-ups in their space and network internally. It’s a constant education process with the subject matter experts. What is great about this is it builds your own sphere of influence.

What advice would you give to other auditors working at challengers/neobanks, given your time working at Tyro?

1) Don’t freak out, figure it out.

2) Have an open learning mindset

3) Go back to basics – auditing 101

4) Apply common sense, be part of the solution and trust your gut.

What is the internal auditor doing differently 5 or 10 years from now?

Much of the routine work is already being replaced by scripts, with auditors providing the valuable analysis of the results in a commercial solutions orientated way. All internal auditors will have both commercial and technology as technical skills and will be able to plug and play into any audit, any time anywhere with the freelance model on the rise.

Wrap of Week #28: Bitcoin, Riskalyze, Uport, Nigeria, Eos Venture Partners, Corporate Venture Capital

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