Is Fintech creating Neo-Luddites demanding a “robot-tax”?


A (hypothetical) documentary titled “Software has been eating the world” about Microsoft, would have to cover the first decade (‘75-‘86) before the company went public and the stunning and difficult to replicate nowadays fact that about 12,000 Microsoft employees became millionaires, in addition to the 3 billionaires.

Software continues to eat the world, despite the frictions and obstacles that are mainly cultural but not only. However, the major difference with the ‘80s and ‘90s, is that

The Speed of innovation has accelerated

This is a result mainly of the huge reduction in the cost of technology, which continues and allows for fast prototyping and MVP design. We live in a world that could be described more like a

A venture production studio with 500 if not 5,000 Y-Combinators working fiercely around the globe.

Billionaires like Bill Gates, who have stepped down from the fast-paced business lane, are leading major philanthropic initiatives and are also sharing their concerns about the future of the world. Ethical and moral issues are commonly addressed by such billionaires and this in itself reduces often the effectiveness of their messaging.

So, when Bill Gates spoke in February about the idea of “the robot that takes your job should pay taxes”, the world reacted.


Market Reactions

Lawrence Summers argued in the FT article “Robots are wealth creators and taxing them is illogical” that should governments invest in education and retraining to offset the job loss due to the 4th industrial revolution

Just recently, the city of San Francisco announced a change in its public policy framework that will make it the first city to implement a robot tax (Business Insider May 2, San Francisco is considering a once unthinkable measure to offset the threat of job-killing robots). This is the city where robots already run food deliveries for Yelp’s Eat24 and make lattés at a mall coffee kiosk. This also the city (along with Los Angeles) with extremely high levels of income inequality, that could channel robot tax funds to low income residents.

In all justice, it wasn’t Bill Gates that first raised publicly this issue but rather the European commission and Parliament that has already recognized that there is a need for a legal framework around AI and robotics. Such framework is necessary to address issues especially around robot and AI liabilities. The initial robot-tax law proposal has already been rejected by EU parliament but IMHO it will be revisited. Addressing robot liabilities, is more urgent with the acceleration of innovation in the driverless car sector. IOT in the auto industry is giving rise to the urgent need of new insurance frameworks that need original legal thinking. This is not about originating and managing insurance contracts on the blockchain in order to keep costs down, improve risk management and customer service; it is about the need for new legal terminology and understanding of responsibilities and liabilities in the new world.

The EU will be drawing parallels to the carbon-dioxide environmental tax, when rethinking the robot-tax legal framework. It is true that the CO2 tax was implemented relatively late in the 3rd industrial revolution. Naturally, now we are all more preemptive and more concerned as the main differentiating factor with the 4th industrial revolution is the accelerated speed of change. Clearly, if the anticipated job losses from the current tech wave, where comparable with the job losses in the past 40yrs (1975-2016 = roughly Microsoft’s life) then we could sleep at night. But the inconvenient reality is that the pace of job losses is accelerating and most probably, what happened in the past 40yrs may happen now in the next 5yrs. PWC prediction statistics on job losses by continent, suggest considering policy changes and maybe adaptation of a Universal basic income scheme.

Clearly, there are issues that need to be addressed around the impending accelerating speed of innovation. There are multiple concerns:

·      Liabilities of robots

·      Defining “Robots”

·      Future wealth creation being very unevenly distributed

·      Reduction of aggregate income taxes for governments, due to job losses

·      Increase of Corporate profitability (better productivity due to reduction of labor costs) without a proportionate (to the previous reduction) increase in aggregate corporate taxes.

·      Avoiding a tax penalty to innovation; and maintaining R&D tax subsidies

The tech ecosystem continues to be concerned about these issues. In another Techcrunch article Is a “robot tax” really an “innovation penalty”? the suggestion was on eliminating corporate tax loopholes for US companies and not at all supporting, a “robot tax”.

In financial services, there were no such issues raised when ATMs, online brokerage and e-banking transformed the financial industry. In this second wave that follows the accelerated pace of tech innovation of other sectors, we all agree that we don’t want a world in which no bank submits candidacy for the Global Finance awards  Call For Entries: Digital Bank Awards 2017. Or a world that has an increased tax for the winner and those shortlisted in the Euromoney Best Digital bank awards: for 2016, Singapore’s DBS Bank, and the short list included BBVA, Citi, and ING.  Or a world that taxes more startups providing the “picks and shovels” for the future of Invisible Finance, like:

–       Cloud banking platforms offering Banking as a Service, like Mambu

–       Cloud based investment financial app stores, like Investcloud

–       AI chatbot technology providers like Kasisto

–       Self-Sovereign identity solutions, like Uport

–       Mortgage enterprise solutions providers like Roostify

The Fintech ecosystem is still relatively un-bundled and it would seem even more problematic to develop and apply a framework for a “robot tax” for the Fintech space. Where do we start? Do we aim at the incubments who are contemplating digitization, because they have a large size personnel that are at risk in the 4th industrial revolution? Do we aim at scale-up Fintechs and maybe start with profitable unicorns but grew up based on a very lean corporate model (small size of personnel)? Do we aim at those providing the “picks and shovels” because they also “own” the network effects? How do we make sure that we are not fostering a new generation of Luddites against robots / AI / IOT that seem to be threatening not only the back and middle office finance services jobs but also higher level jobs, like the packs of financial analysts, investment bankers, asset managers etc.?

Fintech is not exempt from the 4th industrial revolution accelerated pace of innovation. Its side-effects include the rise of Neo-Luddites demanding some kind of  “robot-tax”. We will be watching public policy developments and the positioning of self-regulatory bodies and Financial or Fintech associations, facing this new reality.

Efi Pylarinou is a Fintech thought-leader. 

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The woman in the global Fintech arena


When Theodore Roosevelt was writing this ode to entrepreneurialism, I assume he never thought about writing woman instead of man and that he never imagined anybody with a different skin colour or religion.

His main point is one that we can all agree with. There are only two players in arena:

  1. The Entrepreneur
  1. The Customer/User

Arena implies conflict and the interactions between Entrepreneur and Customer/User should not be about conflict. So here the analogy breaks down and we should talk about actors on stage. The key point – whether it is an arena or a stage – is that there are only two types of people who matter.

Everybody else is a spectator, with maybe a minor role – handing body armor to a gladiator counts as a minor role. Many of these spectators are entrepreneurs in their own domain. For example, a VC is a business like any other and creating a startup VC Fund is as tough as any startup, even though it may not seem like that to an entrepreneur pitching for investment (they just see the piles of money not what it took to create those piles). Speaking from experience, Daily Fintech is a spectator and analyst in the Fintech business, but in the media business we are in the arena/stage as entrepreneurs.

However, leaving aside the definition of who is in the arena/stage and who is a spectator, this post is about updating our view of who an entrepreneur is.

Sexism is dumb business

Silicon Valley gave a great gift to the world, which is the art of starting and scaling a business, but Silicon Valley also gave us a rampantly sexist culture, as the Uber story reminds us yet again. The VCs have too few women partners and they invest in too many entrepreneurs who build businesses where women are second class citizens at best.

This is not just about being politically correct. I think that sexism is wrong, but my concern here is business, not Corporate Social Responsibility PR.

When 50% of your market is not represented in your decision-making, you have a problem. You will be selling to a world that disappeared around the time of Mad Men and Archie Bunker. That is not smart.

The Family CFO is often a woman. If you want to sell lending or other financial tools you will be doing yourself a major disservice if your company culture blinds you to the nuances of marketing financial services to women.

I am pleased to say that with Efi, Jessica and Julia on the Daily Fintech team, we have almost the opposite problem – not enough men.

Countries where men and women operate more equally in the workplace tend to also be places where  a lot of innovation takes place. The Nordic economies come to mind.

It is not just about engineering any more

The defense of the Silicon Valley VCs and entrepreneurs is “of course we would hire/fund more women, if there were more women engineers”.

That puts the problem back with education and society. Everybody on the Board can agree to move onto the next item on the agenda. Sadly, there is a cultural and educational problem, where at an early age girls are encouraged to give up on math and chess and other things that would position them well for an engineering career. There is some truth to that defense.

There are exceptions. There are great women engineers who ignored social convention when they were young and continued to focus on the math and chess that they loved.

However, they are the exceptions that prove the rule. While we can and should bemoan this and seek to change it, that change will take time. Today there are not enough women engineers.

However, the “not enough women engineers” defence is baloney. You do not need an engineering degree to become a great entrepreneur.

Steve Jobs was not an engineer.

While there are huge engineering challenges, in areas such as transportation and energy, there are also lots of challenges which are not primarily about engineering.

Much of the focus on engineering is myth. The founding engineering in ventures such as Facebook, Uber, Twitter, AirBnB and Snapchat was trivial. As the old saying goes – this is not rocket science.

Is it that entrepreneurs such as Mark Zuckerberg and Travis Kalanick are so obviously male?  Is a testosterone fuelled combative attitude essential to success?

The great digital success stories are about building ecosystems of value. That sounds like something that requires more than combative skills – attributes such as empathy and ability to listen that we tend to associate more with the female of the species.

The degree to which engineering is critical depends on where in the stack you focus.

Consider the Blockchain revolution, the transition from the “content exchange Internet” (that started c 1994 with the Netscape browser) to the “value exchange Internet” (that started c 2009 with Bitcoin).

Although there are plenty of hard core engineering challenges at the bottom of the Blockchain stack to do with with scaling (such as SegWit and Lightning Network and Proof Of Stake ), if Blockchain is to have the huge business and societal impact that many (including myself) expect, it has to become as easy as using a service such as WordPress or writing some basic scripts.

The other big disruptive technology is AI This is mostly now available as open source and through cloud based services.

All of these underlying hard core technologies are available through the Open API revolution. This makes all this underlying technology readily available to entrepreneurs working at the Customer Experience layer using social, media, analytics, cloud (SMAC).

The mantra now is “write less code”.

At the Customer Experience layer what matters is delivering service that truly engages and delivers value to the customer – including the 50% of customers who are women.

Huge opportunities are not constrained by technology. The technology is there. What we need are solutions that solve real problems for people. That is an equal opportunity challenge. No engineering degree is needed. Being totally comfortable with technology as a power user is part of the job description but that is hardly a rare skill set these days.

Sorry Archie, you are a minority

When Archie Bunker was on TV, the idea of a world controlled by a white, Christian population was already absurd enough to make good comedy.

Over 40 years later, it is more than absurd. As we look out at where Fintech innovation is coming from we increasingly see it coming from China, India, Africa and other countries where people look, act and think differently (aka the Rest of The World). This is what we have tagged “first the Rest then the West” trend. The combination of huge populations with unmet needs and ability to leapfrog over legacy technologies, makes the Rest the locus of innovation today.

The whole Silicon Valley VC model is at threat from this big shift, because VC Funds have not found a way to scale geographically. While they have nailed how to scale their portfolio businesses, their own business is defiantly artisanal. They can only invest in ventures that can be reached on “less than half a tank of gas in a Ferrari”.

It is no longer enough to invest in immigrants in the West. That is OK as an interim step, but now the challenge is how to invest in the person who decided to stay in China, India, Africa and the Rest or to relocate back there because that is where they see the most opportunity. As these countries get better at capital formation and capital allocation, the innovation capital business will change forever (and for good).

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Choose your Boxcar on the Fintech Freight Train


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.


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”.


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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Applying Loose Coupling software principles to enterprise digital transformation


Loosely coupled vs tightly coupled is no longer much of a debate in software. There are debates about how to do it well, but it is generally recognized that loose coupling is more robust to failure (even anti-fragile) and more scalable. The best example is the Internet itself. Imagine a version of the Internet controlled by a single big company or government. You would get something like Prestel or Minitel. If you have not heard of either, I rest my case.

This debate becomes relevant to business strategy and digital transformation, as many of the most valuable companies are simply software systems with an economic model attached – think of Google, Facebook, Alibaba, Amazon etc. When we talk about digital transformation of incumbents, we are really talking about turning industrial era companies into software systems with an economic model attached.

The question then is how should the components in that software system interact with each other? Or to put it in more MBA terms, how do business units work together to create synergistic value (aka one plus one is more than two).

This is not an academic debate for bankers. The question today is less about “too big to fail”. Governments do not have the cash for a bailout (with the possible exception of China). The debate is now more about “too big to manage”, or to put it more accurately “too complex to manage” (because big is good as long as it is robust). Tightly coupled is complex and fragile.

To understand how bad tight coupling is, try fixing one line of code in a legacy system. For the non-technical subscribers let me walk you through that one.

Try fixing one line of code in a legacy system

Many enterprise systems have thousands of components. If you ever wondered why big banks with lots of legacy systems are not agile, try fixing one line of code in one of those legacy systems. You will see what it looks like when a butterfly flapping its wings in China creates a hurricane in Florida. Developers have a term for how to deal with this – dependency management. If you fix one component you must know how it will impact related components and any change needs lots and lots of testing (failure to do so is career threatening).

Stack, platform, ecosystem and other faulty analogies

This is from one of my favorite thinkers about the future of software called Jon Udell:

“Here are some analogies we use when talking about software:

Construction: Programs are houses built on foundations called platforms.

Ecology: Programs are organisms that depend on ecosystem services provided by platforms.

Community: Programs work together in accordance with rules defined by platforms.

Architecture: Programs are planned, designed, and built according to architectural plans.

Economics: Programs are producers and consumers of services.

Computer hardware: Programs are components that attach to a shared bus.”

Analogies are useful to introduce a subject to a lay audience, but they can get in the way when trying to get to the next level. I tend to prefer “Ecosystem” as the analogy because the APIs do not only work up or down the stack. For example, one consumer-facing application could interact with another consumer-facing application without necessarily going through a layer below them in the “Stack”. I also try to avoid the Architecture analogy because that implies a level of rigidity which is dangerous. In an ecosystem we have emergent behavior. When one releases an Open API to the outside world, a good result is the unexpected, serendipitous application that nobody had planned for but which totally changes the game.

Applied to digital transformation, all of these are a form of systemic innovation.

Systemic innovation

Back in the summer of 2015, we interviewed Haydn Shaughnessy, co-founder of the consultancy The Disruption House, whose book Shift, A User’s Guide to the New Economy is a look at systemic innovation.

He told us:

“The system threatening innovation is coming from outside the industry, from China tech companies, which have quite different balance sheet constraints, and as ever the open source community. Banks don’t understand system innovation. They think in terms of product. Compare this to what the Chinese technology platforms are doing.  I think western banks will be swamped by system level innovation soon and FinTech investments won’t provide an answer to that. The change is not just about digital and the start ups we see right now are just not scaling fast enough. The change is about new skills, new processes, new services and new business models. Digital is the wrong war cry and the start-up is not a big enough axe.”

The way Steve Jobs created a product like the iPod is by assembling it from lots of loosely coupled components. Of course they were tightly integrated within the product, but via well-defined interfaces so that one vendor can easily be replaced by another vendor. Apple is the opposite of open. They like secrecy and control. Today’s consumer electronics business in China works more like an open ecosystem. Branded, consumer facing companies such as Xiaomi emerge from this ecosystem, but it is the ecosystem that is more interesting than any single company. Like Silicon Valley, this is an ecosystem that rapidly creates big companies, but it is a fundamentally different ecosystem.

Chinese business ecosystems

John Hagel, one of the leading business strategists, is author of The Only Sustainable Edge where he describes how Chinese tech companies are partnering to build products way more efficiently than they could by creating everything in-house.

This is an example of necessity being the mother of invention. Chinese companies have grown despite lacking two critical things that we take totally for granted in the West:

  • Intellectual Property (IP) protection
  • Well-developed capital markets.

The Chinese firms turned these weaknesses into advantages through their approach to partnering – classic Jiu Jitsu.

Enterprise vs Silicon Valley vs Shanzhai

Traditional 20th century enterprises are tightly coupled. That is the essence of vertical integration and it worked well when the challenge was the manufacturing and distribution of physical products. This changes in the digital era, when the winners are companies that create digital ecosystems such as Google, Amazon, Alibaba and AirBnB.

Digital transformation does not just mean adding a digital front end – however mobile savvy it is. It means re-engineering the company from the ground up to create a digital ecosystem. That re-engineering has to be based on loose-coupling.

The Silicon Valley ecosystem has been much studied. The Chinese electronics ecosystem dubbed Shanzhai is less well known. For a good description of Shanzhai, go to this article in The Atlantic.

Both Silicon Valley and Shanzhai ecosystems work on loosely coupled principles and that means that the companies that emerge from those ecosystems are loosely coupled in their DNA. Partnering is not an add-on, it is a core competency.

A bank is a tightly coupled enterprise ecosystem

A traditional Bank is a tightly coupled enterprise ecosystem comprising these 4 different accounts each serving a different need:

  • Current/Checking account (payments in and out).
  • Deposit/Savings account (having some spare cash for emergencies without any risk to capital).
  • Wealth Management Account (earning money on longer term savings using fixed income, equities and other assets, earning more return by taking some risk).
  • Loan account (borrowing money).

The only new account innovation in hundreds years is the Lending Account from Marketplace Lending. This the Loan account in reverse.

Startups are unbundling this tightly coupled enterprise ecosystem of accounts. They do one thing and one thing only. Regulatory innovation is keeping up, so that you can now for example just get a Payment License to use as Current/Checking account and a different license for a Deposit Account.

This is great for innovation. It does however leave the consumer to become their own systems integrator, using a lot of sneaker net and spreadsheets. As most consumers don’t want to do this, traditional banks are OK for now with their tightly integrated offerings.

The next wave of innovation is about “rebundling” and this is done using loose coupling.  The Fintech Rebundling can be done by startups or by Banks. It is a genuinely level playing field enabled by Open APIs. It is perfectly suited to Red Ocean markets. In Blue Ocean markets, the “do one thing and one thing only” startup mantra is more appropriate.  Startups tend to go for Blue Ocean markets and banks tend to fail at Blue Ocean markets due to organizational forces that attack such a radical idea. So Banks tend to operate in Red Ocean markets where they need to innovate in order to counter moves by traditional competitors and Fintech ventures to capture Millenials and other parts of the market that are up for grabs.  Rebundling is a strategic response by Banks in these Red Ocean markets and a way to create new competitive moat.

The Unbundled Bank looks like this (replace those HiFi components with standalone accounts):


Digital transformation is about building something more like this:


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Fintech is entering the third wave and this will be a wild ride



Disruptive change typically goes through three waves:

Wave 1: Everybody says that this is revolutionary. This is the initial hype wave. The basic ideas are right, but the timing is way off.

Wave 2: Everybody agrees that this is evolutionary. This is when realists point out that change takes a lot longer than the original promoters of change led us to believe and this leads to the Wave 1 ideas being discredited.

Wave 3: Everything changes. Some incumbents fail, some transform and thrive and a new power structure emerges with some new players.

The Internet went through these 3 Waves

Wave 1: This is revolutionary. From about 1994 to the peak of the bubble in late 1999.

Wave 2: This is evolutionary. From mid 2000 to around 2004. After the dot com bubble burst, everything digital was declared dead and the only tech was enterprise tech and that needed to be incremental and very low-risk. Remember Intranets and brochureware websites?

Wave 3: Everything changes. From 2004 to today, when the search and social era of GAFA and BAT emerged. The change envisaged in Wave 1 took longer than forecast, but the eventual impact was far bigger than even the most wild-eyed visionaries had forecast.

The 3 Waves look like this in Fintech:

Wave 1: This is revolutionary. After the Global Financial Crisis in late 2008 to the Lending Club IPO in December 2014 and an acceleration in VC funding in 2015.

Wave 2: This is evolutionary. This is what we saw in 2016, when Bitcoin became totally discredited and the bellwether Fintech stock, Lending Club, blew up. The key belief in this wave is that incumbents control the pace of change. Nobody debates that change is needed and change is good, but entrepreneurs are told to knock politely on the doors of the incumbents and sell technology to them.

Wave 3: Everything changes. From 2017 onwards. This post explains why.


Why Fintech is a big deal and will meet a lot of resistance

Financial Services is a big % of GDP, of employment and of corporate profits. Many big companies, that are not labelled as Financial Services, make a lot of their profit from Financial Services. By some estimates, Financial Services accounts for as much as 40% of corporate profits in the Fortune 500.

This article on Bloomberg does a good job describing how finance came to dominate-the US economy and you could write a similar story about the UK and Switzerland.

Almost all of this can be digitized and is therefore susceptible to disruption.

In short, there is a lot of money at stake.

That also means that a lot of money is spent to persuade people that nothing will change and the status quo will remain. Perception does impact reality (aka mindshare leads to marketshare).

However, this is PR. The reality is that incumbents can no longer dictate the pace of change. They can benefit from change or be hurt by change, but what they cannot do any longer is dictate the pace of change.


Why incumbents can no longer dictate the pace of change

Imagine Blockbuster saying “we will decide when and how streaming video will roll out”. Or Kodak saying that about digital photography or Borders saying that about book retailing. Disruption does not happen like that, particularly if it is Big Bang Disruption.

Straws in the wind indicating change

You can wait until the change is obvious, or you can try to get ahead of the herd. To do the latter, you need to get comfortable with incomplete data that I call “straws in the wind”.  It takes guts to see a few straws blowing about and bet that this is caused by an invisible wind, but that is what the best early stage investors do. The signs of change are far from obvious, but “the answer my friend is blowing in the wind”. We see 5 of these straws in the Fintech wind today:

  • Wells Fargo fake accounts scandal. This was what happens when organic growth slows because of a secular wave of change and managers pile on the pressure to maintain the illusion of growth.
  • Funding Circle raising $100m. This indicates that P2P Lending is alive and well. P2P Lending is a disruptive model where banks don’t dictate the pace of change.
  • Lending Club stock recovering. Since the ouster of the CEO in May 2016, the stock has recovered from a low of 3.51 to around 5.50 which is an annualized return of over 100% (which makes it one of the best performing stocks of 2016). Of course you can also measure from the peak (bad) or from the pre IPO early stage days (very good). The key point is that the P2P Lending bellwether is alive and well. Disclosure, I was fortunate to buy some shares at 3.51 after writing this post. You can get insights like this in your inbox every day – its free and all we need is your email.
  • Defections from the R3CEV blockchain consortium. This indicates that a bank-led consortium may not dictate the pace of change in blockchain deployment. An analogy would a consortium of camera makers doing something with digital photography. Looking at past waves of disruption it is much more likely that a startup harnesses the pace of change that consumers want and that individual banks figure out how to transform themselves for this new reality.


Expect a lot of PR that it is business as usual

During the evolutionary wave, the incumbents see an opportunity to slow things down and control the pace of change.  They do this through both acquisitions (buying and closing down a competitor or changing how they operate) and PR.

The PR works, because people have an instinctive reaction to believe that the status quo will remain. Banks have not fundamentally changed for hundreds of years, so it is really hard to imagine a world where Banks are not at the center of Financial Services.

For example, read this view by Goldman Sachs that the third wave of Fintech will be all about “partnerships between big banks and startups.  

I don’t mean to pick on Goldman Sachs, but I think this is PR and not reflective of reality. Some incumbents will make the transition after Big Bang Disruption and I think Goldman Sachs will be one of them. From personal experience of selling technology to them, I know that they were Fintech before it was called that and that they fully understand the level of disruption that is coming.

Partnerships between Banks and Tech Startups are real and a key feature in how Fintech evolves, but what is different this time is how the world has changed from Traditional Fintech when Banks controlled the pace of change.

Today , both Banks and Tech Startups need a reality check before a real partnership can be negotiated.


Partnerships require a reality check by both parties

When Banks and Fintechs first date, it is a Venus and Mars story. If the relationship continues, it goes through three levels of maturity:

  • Level 1: Incomprehension. The other party just looks strange and it is hard to imagine a productive conversation. Whether the emotion is fear or disdain, the reaction is the same – inertia. Banks seek to overcome the incomprehension problem by funding Accelerators and Hackathons.
  • Level 2: Funding. Banks take minority equity stakes in Fintech ventures through their Corporate Venture Capital (CVC) unit. This is the level that most relationships have reached. Funding while still in Incomprehension mode is clearly dangerous.
  • Level 3: Strategic. This is where the relationship drives needle-moving revenues and profits for both parties. This may or may not include an equity relationship; the strategic relationship comes first.

As Fintech entrepreneurs and Banks seek strategic win/win relationships, they will move beyond Level 2. The Corporate VC wave of funding into late stage Fintech that we saw in 2015 was a classic sign of an overheated market. The real win/win deals will be at Level 3 and equity will not be a primary feature of those deals; they will be straightforward revenue share deals. Big Banks will have to gain the trust of entrepreneurs who might worry that Big Banks want to learn from them and then build in house or buy a struggling competitor. In other words, Big Banks could be competitors or partners. Smaller Banks don’t have an option to be competitors; they are partners that entrepreneurs can feel comfortable with.

A real partnership only happens when both parties have a clear answer to one strategic question:

  • The one question that banks need to answer is where in the stack do you want to excel? Do you want to be a platform for consumer-facing businesses? Or do you want own the customer experience? Both are great strategies, but it is a choice – it’s very, very hard to be both.
  • The one question startups need to answer is do you want to market direct (B2C) or via channels (B2B2C)? The answer can be “both”, but only if the startup is getting real traction in B2C. Without that, startups are really doing B2B, meaning they are selling technology to Banks (aka Traditional Fintech).

The difference between inevitable and imminent

During wave 2, realists point out the difference between inevitable and imminent. This has killed many startups. They understood what change was coming and how to position for it, but underestimated how long it would take – and that means running out of cash and that is the end for a startup. That is one reason startups are so hard. However, that is no consolation for incumbents. They face a relay race where the runners who give up exhausted can pass the baton (IP & team) to a new runner. Investors lose money on one runner and invest in the next one.

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The Daily Fintech Top 10 Fintech Predictions for 2017


  1. The end of the bank-driven phase of blockchain. The attempts by banks to coopt blockchain were like music CD retailers getting together to run MP3 music sharing sites or Post Offices setting up email services. Disruption means pain for some. Blockchain is disruptive to the current Financial Services world. The defections from the R3CEV consortium signals the end of this phase.
  2. We will see blockchain based real time settlement in equities markets move from R&D to live deployments. This may appear to contradict #1. However the disruption will come from a startup, not an existing Bank or consortium of banks. Banks will do well from the move to real time settlement (lower post trade costs) but they won’t drive this change.
  3. The InsurTech funding surge will slow down. This is because the early pioneers have to prove real customer metrics to get Series B & C rounds and as it becomes clear that Insurance incumbents are not asleep at the switch.
  4. Bitcoin price will go past its all-time peak of $1,242 (from 2014). It will then settle back just below $1,000 for most of 2017. Unlike 2014, we won’t see a major price crash because of # 5 below.
  5. Bitcoin moves from its Darknet phase (illegal) to the early adopter Clearnet phase. This is when legitimate people charge in Bitcoin for legal transactions. This will start with cross border digital products. Because this brings new bitcoins into “circulation” with owners who also then want to pay in bitcoin, this starts a sustainable move to mainstream use which supports the price.
  6. Analysts covering Banks will start referencing Fintech disruption when referring to a drop in profits at a major bank. Carried over from 2016. I believe Fintech disruption was the root cause of the Wells Fargo scandal, but this was not a generally held opinion.
  7. Uber will not do an IPO and may do a private down round. This will signal the dramatic end of the public private valuation inversion (private higher than public valuations). This started in 2016 and will have its dramatic end in 2017.
  8. VC Fintech Funding in China, India, Africa and Latin America (the Rest) will be double VC Funding in America and Europe (the West). Even deals in the West will highlight growth in the Rest. Growth is the prize and growth is supported by a) middle class income growth b) no legacy technology constraints (“leapfrogging”).
  9. Most startup digital banks (“challenger” or “full stack” or “neobanks” will fail to get follow on financing. Investors will see more Incumbents get traction with their digital only spin offs and so they won’t see digital innovation as such a competitive moat.
  10. This one left blank for the big surprise. The big surprise may be triggered by macroeconomics and politics (as if we didn’t have enough of these in 2016), but will have a bitcoin element to the story.

How did we do on last year’s predictions? Here are our predictions from last year with a yes, no, maybe self-assessment score:

  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. No. Got that one totally wrong about price (but right about slough of despond).
  2. XBRL will start climbing out of the slough of despond but won’t be recognized yet as moving into the plateau of productivity. Maybe. Saw a lot of real progress, but it is certainly not on most people’s radar. Maybe 2017 will see a breakout product.
  3. 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. Yes. This was triggered by the Lending Club meltdown. You can pretty much track VC flows into Fintech based on Lending Club stock price. VCs liked the price decline as they could get into good companies at better prices
  4. More investment will flow into Underbanked as investors see the scale of the opportunity.Yes.  The biggest beneficiaries are in India (eg Paytm) and China (which overtook the US for VC funding into Fintech).
  5. 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).No. This may still happen in 2017 as the market globalizes.
  6. 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. Yes.This will reach an ugly finale in 2017 with Uber (see 2017 Predictions).   
  7. Analysts covering Banks will start referencing Fintech disruption when referring to a drop in profits at a major bank. No. I believe Fintech disruption was the root cause of the Wells Fargo scandal, but this is not a commonly held view. 
  8. Moves by Big Tech and Big Retail into Financial Services will eclipse moves by Fintech startups and will worry bankers a lot more. Lots of talk about moves by GAFA (Google, Apple, Facebook Amazon) and BAT (Baidu Alibaba Tencent).
  9. Calls for regulating Fintech startups more intensely will follow at least one high profile blow up. Yes. Happened after Lending Club CEO ouster in May. But the reverse happened as well – easier Bank Charters in many jurisdictions.
  10. The Great Convergence between Banks and Fintechs commences, as both get judged on the same metrics by consumers,regulators and investors.   Yes. We can see this in analysis of both Lending Club and Goldman Sachs Marcus.

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Regtech thrives on change: welcoming Trump, Brexit and China


Heraclitus, a Greek philosopher of the 5th century BC, is quoted as saying

“Change is the only constant in life.”

His doctrine was around change being central in the universe. This has also been translated to “the only constant is change.” And this exactly why Regtech, the cross-sector Fintech category, thrives and will continue to do so.

Whether one regulatory body is becoming lighter or stricter, change is what Regtech needs to be able to serve. A modular Fintech design of Regtech services, is key in both of these cases. For example, if the US changes its strict and complex multi-layer regulatory structure as a result of the Trump administration, the Regtech sector will not be affected; neither the size of the sector, nor its significance in the multi-carriage train of financial innovation. The train has left the station and there is no turning back. In every compartment, there is a place (albeit a moving target) for Regtech and this will not change.

Regtech companies will continue to serve the huge market need of integrating legacy systems of the incumbents and at the same time offering these services in a dynamic (quick and cheap time to market) way as regulations change. Regtech will always have new clients and areas to serve, as a result of regulatory changes. The recent announcement of the Office of the Comptroller of the Currency (OCC) in the US to offer an opening to the US federal banking system to Fintechs; is an example, of how new clientele will be flocking to Regtechs can serve the new business needs of Charter Fintech Banks.

“A top regulator said Friday that his agency would for the first time start granting banking licenses to “fintech” firms, giving them greater freedom to operate across the country without seeking state-by-state permission or joining with brick-and-mortar banks.” By  WSJ Regulator Will Start Issuing Bank Charters for Fintech Firms.

The US Regtech Fintechs have been different than the European in two main ways. First, the number of European fintechs is much larger basically because of there are more regulations (e.g. MIFID, EMIR, MAR, CRDIV, PSD2, REMIT etc) that apply to all EU countries and second because in Europe bootstrapping and growing businesses without strong VC support, is more common than in the US. On the other hand, in the US the complexity of regulations is mainly due to cross-state differences and incumbents have tried to find other ways to circumvent these frictions; plus, entrepreneurs prefer naturally to pick naturally businesses that have a higher probability of being funded by VCs. Regtech overall hasn’t been the favorite baby of VCs.

The US Regtech sector will not be hurt, in case of lighter regulations by the new US administration, simply because any type of change will create new opportunities and clientele. Regtech Fintechs have an advantage compared to the Regtech offerings by incumbents (and there are many) like Thomson Reuters, Bloomberg, IBM, Oracle etc. only because they can adapt faster. Whether they will able to execute on this advantage is yet to be seen. We will be monitoring how the acquisition of Promontory by IBM plays out, what market share Accenture and Bloomberg gain as they all have no procurement issues, which is an important friction for Fintechs. FundApps, the UK based Regtech focused on serving the investment management sector, just announced that they will be opening a NY office in the Flatiron district. This is the first international Regtech move from Europe over to the US. Regtech is less local than it looks at first site. I foresee, more moves from Europe towards the US in 2017, rather than in the other direction.

“The only constant is change, in regional and cross-border Regulations”.

The increased fragmentation and complexity, resulting from Brexit, will also open up more opportunities for Regtech services. The pain points are simply changing.

Similarly, in Switzerland and the East, we are seeing new regulations that will also need to be served. All these changes, are great opportunities for Regtech companies to show incumbents especially, that Regtech should be seen as an enabler rather than an expenditure.

Regulations lighter or stricter, new regulations, more or less complex, fragmenting or integrating; are great market opportunities for Regtech Fintechs and for incumbents with Regtech services. The biggest threat to Regtech Fintechs is rather the incumbent Regtech offerings.

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.