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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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.

China and India – bright spots in Corporate Venture Capital recovery


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Corporate Venture Capital (CVC) has seen a steady rise for the last few years. Between 2011 and 2016 the number of large corporates establishing their own Venture Capital capability nearly tripled. Last year CVCs participated in about 40% of VC deals that happened in Asia. With major global events such as Brexit and Trump dampening investor appetite in VC funds, CVC deal volumes saw a global dip of 2% last year. However, there are data points indicating its likely to take off in a big way this year.

The CVC world has had challenges due to the compensation structure for the Partners and lack of nimble decision making capabilities. Partners at CVCs have traditionally not been compensated as well as a Partner in an independent VC fund. Also, if the VC arm of a Corporate cannot make independent decisions in quick time, it affects both the startups and the corporates. Sometimes CVCs lose good deals due to their lack of agility, but often they hurt startups by making them wait for investment decisions, and turn them down after a few months of due diligence.

Global KPMG

The brighter side of the deal is that, once the deal has gone through, the Corporate can be a massive launchpad for the startup. And for this very reason, Startups seem to be more forgiving of the red tape and the bureaucracy that they have to go through to get the deal closed.

That said, there is no denying that CVCs have evolved their models over the last few years, and are here to stay. In Asia, Softbank announced the launch of their $100 Billion fund, with $25 Billion of their skin in the game and Apple contributing $1 Billion, the fund has seen good traction since launch. The other big announcements were Baidu’s $3 Billion fund and Samsung’s $1 Billion fund.


CVCs in India had a good year 2016, until Q4, where only 4 deals were closed. However the general trend last year was that the deal count went up, but the size of the deals came down compared to 2015. This is in contrast to most other top VC ecosystems in US, China and Europe where capital was moving towards more matured (growth stage) firms. VCs in India preferred smaller sized deals in early stage firms, resulting in a higher deal count. The only other region that had had CVC investments go up in the first half of last year was UK, but there was a slow down in H2 2016 post Brexit.

China on the other hand, had a slowdown in CVC investments last year after a strong 2015. This trend is expected to change because, between China and the US there were about 53 new CVCs that were launched last year. They are expected to get more active this year. Also, many VCs and CVCs are eyeing China for Fintech deals in a big way since the start of 2017.


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If CVCs in India perform anywhere close to what they did in Q1 and Q2 2016 and if the new CVCs in China start deploying, we are likely to see a CVC recovery. With VC investments shrinking globally over the last eight years, and CVC’s slice of the VC pie at an all time high (17%), the recovery of CVC might just be what the VC industry needs.

Arunkumar Krishnakumar is a Fintech thought leader and an investor. 

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Wrap of Week #24: Bitcoin, Bancor, Lykke, Colu, P2P insurance for crypto, Klarna

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When millions start thinking about what money is from first principles, the toothpaste is out of the tube


Bitcoin is uncontrolled and uncontrollable and is going through the classic Ghandian four phases – “First they ignore you, then they laugh at you, then they fight you, then you win”. We are sort of in phase 3, except many governments and big companies want to benefit from Bitcoin going mainstream, so there is no clear united opposition to Bitcoin. That was true for Ghandi as well – many in Britain also thought that India should be independent.

Whether it is Bitcoin or some other cybercurrency or some combination of cybercurrencies is not the issue. All will fuel and be fuelled by a change in thinking. Nor will Fiat currency go away, any more than newspapers, TV and physical stores went away.  The past and the future are always with us, even if unevenly distributed.

What is bigger than any single cyber currency is that millions of people are starting to think about what money is from first principles. The basic thought is that money is only worth what we all agree it is worth. Once that thought gets established in the minds of millions of people, the toothpaste is out of the tube and you won’t get it back in.

That thinking is fuelled by Blockchain, Bitcoin and Cybercurrency for sure. These innovations force us to think outside the box. The momentum behind Bitcoin creates lots of conversations where mainstream people ask early adopter to tell them about Bitcoin. That conversation may end in people just dismissing it as crazy, but enough people do start thinking a bit differently and then the next next time they look at Bitcoin they have a more open mind.

It is not just Bitcoin that changes how we think about money:

  • Consumer to consumer payments. Whether it is Venmo or Zelle or Square Cash or any number of alternatives, the idea that I can send cash as easily as email gets established in people’s mind. This has nothing to do with Blockchain, Bitcoin and Cybercurrency, but it does change thinking. It is then a short mental hop from sending cash in USD to sending cash in Bitcoin.
  • Initiatives to end Fractional Reserve Banking in many countries. It has already happened in Iceland, is going to referendum in Switzerland (where it is called Vollgeld) and has serious establishment figures (such as Lord Adair Turner and Martin Wolf) backing the idea in the UK (where it goes by the name Positive Money). The UK based Positive Money is also getting attention in other English-speaking countries like USA and NZ. The schemes vary in detail and obviously get vociferous and well-reasoned opposition from the banking lobby, but what is interesting is that when the schemes are explained to mainstream consumers the most common reaction is “that is how I thought banking worked”. It is the idea of Fractional Reserve Banking – how the world works today – that seems weird to ordinary people.
  • Fintech regulation. When companies can get regulated for all the different functions of a bank (see Swiss Fintech License as an example), you start to ask “what is a bank that is different from a licensed Fintech?”  The answer is something along the lines of “an institution that is allowed to do  Fractional Reserve Banking”.
  • Local currency use cases. See this post about Colu. This is a simple mental transition. The currency has a familiar name – Pound or Dollar for example – and pegged convertibility to your Fiat currency. Yet it is not Fiat currency as we normally think about it.
  • Heavy handed government action. Whether it is demonetisation in India or the Cyprus government taking money from your bank account, the idea that your money is your money becomes challenged in the Fiat currency realm. That makes people motivated to look for alternatives.
  • Doubts about silver and gold. Taking the long historical view, Fiat currency may be viewed as a blip. That is the view of many who like Silver and Gold. Yet there are doubts also about these markets. Is the Silver market manipulated. Is some physical gold really Tungsten with gold plate?

Crossing the Chasm inspired lots of entrepreneurs. It was written as a guide for teams planning the crossing. What is fascinating about Bitcoin, is that there is no team doing that planning. There is only what we often call community, but which could also be described as warring neighbours at times. That is a strength in my opinion. It makes Bitcoin AntiFragile (another book that has inspired so many).

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

Get fresh daily insights from an amazing team of Fintech thought leaders around the world. Ride the Fintech wave by reading us daily in your email.

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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