Religare is the biggest exit so far in InsurTech and it is from India

venture-exit-strategy-7-638

 

The biggest Insurtech exit to date just happened. The news is public. This is no scoop or insider information; that is not our game at Daily Fintech. Yet despite the story “hiding in plain sight”, it did not receive much mainstream media attention. That is our mission at Daily Fintech – to find the needle of insight that is hiding in the public domain haystack.

In this post we look at the big trends behind this news.

First, a bit of deal background explanation is needed.

A Unicorn valuation funding round makes headlines, but what matters is realized value at exit.

It is no secret that VC money is pouring into InsurTech. As any deal guy knows, getting a big headline valuation (the “PR deal optics”) is easy. We will be getting a lot of InsurTech Unicorn headlines. What follows explains how some of those PR deal optics are constructed. Looking below the PR deal optics to the reality will help see why the Religare story is significant.

As an entrepreneur, if you want that Unicorn headline you simply give away egregious preference terms. Say an entrepreneur wants to sell 20% in that round and the investor really thinks you are worth $100m (keeping to round numbers to keep it simple) and the entrepreneur is asking for a $1 billion Unicorn headline. The investor is willing to put in $20m for a 20% stake. To get to your $1 billion valuation you either need the investor to put in $200m or to accept a 2% stake. Both are showstoppers. If the entrepreneur offers 10% Preferential Equity terms, the headline can say “Hot Venture x raises $yyy at $1 billion valuation from Hot Fund z”. When you look at funding valuation data, you see a lot of deals at exactly $1 billion for this reason. Entrepreneurs need to get the amount invested from $20m to more like $100m for the headline optics. Then the headline is “Hot Venture x raises $100 million at $1 billion valuation from Hot Fund z”. Naïve journalists may extrapolate a 10% stake from that headline. With 10% Preferential Equity terms and an exit in 10 years at $300m, the actual realized value at exit for that investor (keeping it really simple and only assuming one round) is 86%. Run a simple compound interest calculator to see that. That 86% looks bad, but it gets worse if you count the more egregious terms where investors get their $100m back before calculating the compound interest at 10%. If you factor that in, or factor in multiple rounds with a whole preference stack at different dates, you can quickly see how an entrepreneur has to build an incredible amount of value for their founding stake to be worth much and why many entrepreneurs walk away with zip after a headline that makes them look vastly wealthy.

Unless the entrepreneur gets to a really big valuation or does it really quickly. Yes, that is really, really hard to do and happens very rarely.

All of this kind of deal optics fancy dancing stops at exit. Then somebody is paying hard cash and what you read is a real number. That is why we track real exit value (whether by IPO by trade sale). This is when the tide goes out and you can see who has been swimming naked.

My reason for giving that lengthy explanation is to make sense of what is not a sensational story, but which is a big deal in real terms. The Religare exit is not a Unicorn – ho, hum, click away now. Yet it is the biggest exit in InsurTech to date and that is a real story. (If anybody knows of a bigger one please tell us in comments).

If my explanation saves any entrepreneur from 10 years of “blood, sweat, toil and tears” for minimal financial benefit, I am happy.

The News

On 9 April, Religare Enterprises Ltd sold an 80% stake in Religare Health Insurance Co. Ltd (a standalone health insurance company), to a consortium of investors led by True North, a private equity firm. Religare will get about Rs1,040 crore for the deal and the health insurance company is valued at Rs1,300 crore. Religare Health Insurance is owned by Religare Enterprises (80%), Corporation bank (5%), Union Bank of India (5%) and the remaining 10% is by the employees of Religare through employee stock options.

Decrypted. Converting Indian Rupees to a well-known global currency like USD, EUR or Bitcoin is simple. But then you have to deal with Lakhs and Crores. When I negotiated my first deal in India that threw me for a loop momentarily (I had my pricing in GBP and was used to negotiating in USD and had the conversion to INR figured out but when the buyer started talking Lakhs and Crores I was blindsided for a moment). A Lakh is 100,000 and a Crore is 10,000,000. To really confuse non-Indians, a Lakh is written numerically as 1,00,000 and a Crore is written numerically as 10,00,00,000. The USD to INR conversion as I write is 64.47. So (rounding to nearest million) that makes the cash portion of the deal worth USD 161m (Rs1,040 crore) and the realized exit valuation worth USD 202m (Rs1,300). Those calculations throw algo-driven reporting for a loop. I saw this reported as a deal worth $10 billion and knowing that Indians don’t tend to pay bubble value this surprised me. So I dug in and I found that the data was incorrect as reported.

In the future, when Bitcoin is mainstream, we will convert Indian Rupees to Satoshis and Crore Rupees to Bitcoin; but that is another story!

Religare Healthcare is what we categorize as Full Stack HealthInsurTech. They offer Health Insurance policies to consumers.

News link is here.

Why mainstream business media missed the significance of this news

We are now accustomed to looking for mega funding events from China. We also look for mega HealthInsurTech deals from America. We have reported on both. These trends jump out of the data. This was a big exit, but it was from India and so it is not a story unless you are in India, or from India (as my fellow Author Arun is) or into India having done a lot of business there (as I am).

And on top of that you would have to decrypt Lakhs and Crores. In short, the story was ignored outside India.

The Three MegaTrends behind this news

  • First the Rest then the West.
  • Corporate (aka Strategic) Funding is getting more prominent.
  • Innovation capital formation is starting in the Rest

MegaTrend 1. First the Rest then the West.

This is a theme that we have been writing about for years (example post here). For most of the 20th century, technology was limited to the West. Countries in the Rest (formerly known as developing, then emerging, then rapid growth economies) were “tech deserts” until those economies started to open up (first China, then India, then Africa). Then technology adoption started to flow from the West to the Rest; the last decade has been a boom time for Western tech firms selling to the Rest.

Now the flow is reversing as technology adoption starts in the Rest and then goes to the West. For example, look at Xiaomi to see the future of mobile phones and Alibaba for the future of e-commerce or PayTM or M-Pesa for the future of mobile money.

This megatrend is not limited to Fintech, but within Fintech mobile payments and mobile e-commerce is the big disruption and that is happening first in the Rest and then will flow to the West.

Technology adoption flowing from the Rest to the West is one of the big 21st century megatrend stories.

Note that I am referring to technology adoptionWhere something is invented matters a lot less than where and how it is adopted, as Steve Jobs taught us after wandering around Xerox Parc and seeing the first graphical user interface and using that insight to change how we used personal computers. Adoption, whether through network effect or any other customer acquisition technique, has replaced patents as the technology moat and competitive advantage.

Adoption drives value creation and adoption is happening faster in the Rest.

Now look at Healthcare and HealthInsurTech within this context. Where would you prefer to build value:

  • Option 1: a Red Ocean market where there is a lot of entrenched competition (such as America).
  • Option 2: a Blue Ocean market where demand is small compared to established markets but is growing very fast and where there is very little entrenched competition (such as China, India, Africa and the other Rest).

Corporate (aka Strategic) Funding is getting more prominent

This is particularly true in China, where we see massive rounds done by corporate parents. For example, Zhong An (see our post where we describe their upcoming IPO as the Netscape moment for InsurTech). For more, see our Fintech China Week coverage. We are also seeing this trend in Europe where a lot of the InsurTech ventures are being funded by Insurance or Reinsurance companies rather than traditional Financial VC. This is what we have observed as Reinsurance As A Service. The old idea that the Corporate or Strategic investor is always the dumb money at the table that signals a bubble phase, needs to be re-evaluated.

The Religare story shows this. There are no VCs benefiting from this exit.

The Religare Healthcare exit beneficiary, the company that created the value, is called Religare Enterprises Limited (REL). This is a holding company/conglomerate. The mantra in the West for decades was that the holding company/conglomerate model is dead (core competency focus was the mantra). This deal makes one re-evaluate that mantra (as do other deals in China and India). REL got $160m in cash by selling 80% and kept 20% to ride for future upside. That is value creation.

India innovation capital formation

For a long time, Venture Capital fundamentally meant Silicon Valley. Entrepreneurs everywhere else had three lousy options:

  • Move to Silicon Valley where your costs are far higher and you don’t have a network and where you don’t understand the culture that you are selling into.
  • Find the local subsidiary of a Silicon Valley VC fund. Many Silicon Valley VC funds don’t even bother globalizing, because it is too hard and there are plenty of deals at home. The ones that do have a local Fund often lead to long decision cycles that kill a deal – first you convince the local guys, then you fly to Silicon Valley to convince the global Partners.
  • Find a small local VC that has very little expertise and/or only a small fund.

What the Religare story indicates is pretty significant which is the formation of more Innovation Capital locally. REL will have $160m in cash from the deal and a successful formula to follow. One assumes they will be hungry for more. That is one part of the story. The other part of the story is about the True North private equity fund that bought Religare Healthcare. True North, formerly India Value Fund Advisors, is a local Private Equity fund that started in 2000.  You can see their Fund size growth below:

Screen Shot 2017-04-15 at 11.29.04

The history, as per their site is interesting:

“True North came into existence with the power of one crucial decision. Mr. Gary Wendt, then Chairman and CEO of General Electric Capital Corporation (GECC), decided to set up a US$ 2 billion private equity fund with a focus on transforming businesses in a variety of global markets, one of which was India. Impala Partners, a US-based boutique investment and M & A advisory firm founded by former senior GECC executives, was chosen as a global partner for the venture.

The fund was focused on investments in Japan, India, Israel, Poland and Mexico, and sought local partners in each country. In India, Mr. Wendt tied up with Ambit Corporate Finance and subsequently HDFC to form GW Capital with Vishal Nevatia as CEO. Later, Mr. Wendt took up other responsibilities, and though he and Impala remained as investors, the new company developed a strong local identity, and was reborn as TRUE NORTH in 2004. With its new identity in 2016, True North will continue the company’s journey in transforming businesses.”

It will be interesting to track the value creation of Religare Healthcare after the acquisition by True North.

Note: I use the term Innovation Capital rather than Venture Capital because the term VC implies only one business model (2 and 20, LP and GP) and a lot of the action today is in areas such as Corporate funding, ICOs, Family Office Club deals and so on. All these can be called Innovation Capital, but calling them Venture Capital would be confusing.

American investment bank J.P. Morgan acted as the exclusive financial adviser to Religare Enterprises.

Image Source

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

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.

Goldfields Money makes Australian BaaS play with Singapore’s Instarem

Listed Australian deposit taking institution Goldfields Money (ASX:GMY) looks to be making good on its intention to become a leading player in the digital banking product distribution and BaaS market in Australia, announcing last week that it had signed an MoU with Singapore headquartered remittance fintech Instarem.

Goldfields will be using a Temenos off the shelf core banking system as part of its refreshed BaaS offering.

What is interesting about the MoU is the intent to move beyond remittance towards a broader banking play for cross-border SMEs and products orientated towards visa holders visiting or living in Australia.

Given Instarem’s origin, there is no doubt the company is looking to capitalise on the ever-increasing influx of high net-worth immigrants from the Asia-Pacific region into Australia, many of whom may not be getting the best deal or banking experience from a local Australian provider. If you happen to be a migrant yourself, you’ll probably empathise with just how cumbersome and difficult it is to manage multiple banking and financial arrangements between two jurisdictions.

The two companies should have a healthy market ready to capitalise on. According to the Australian Bureau of Statistics, over the last 10 years the proportion of the Australian population born in China alone has increased from 1.2% to 2.2%, coming in just behind New Zealanders and British immigrants. Those born in India currently make up 1.9% of the population, while citizens from the Philippines, Vietnam and Malaysia collectively add up to further 2.7%.

The outflow of wealth from China, a large portion of which is making its way into the local Australian property market in Melbourne and Sydney via these immigrants, is also increasing the demand for financing solutions for those that have a mix of local and foreign income. This demand can only have increased since major retail banks tightened their requirements for offshore buyers, some refusing loan applications based solely on foreign income altogether. Recent reports suggest PE and debt firms may be looking to plug this gap. Instarem and Goldfields may or may not have aspirations here as well.

Migration isn’t going away. And the degree to which an individual’s assets are spread across countries is also on the increase thanks to globalization. Despite the protestations of certain populist politicians, it is hard to see cross-border trade regressing – economies just won’t survive under protectionism. All of which makes partnerships like these, those that remove frictions and enable business, all the more interesting to watch.

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

ClearBank: a MSFT Azure B2B Fintech

Screen Shot 2017-04-17 at 18.30.50.png

A well kept secret of the UK B2B banking sector, is now public. Clear Bank, a clearing Bank in the UK, is ready to compete with the four UK clearing banks,

  • Barclays
  • HSBC
  • Lloyds
  • Royal Bank of Scotland (RBS).

Clear Bank is the fifth UK clearing bank and the only one that is pure B2B since it does not offer services direct to the consumer.

Don’t confuse Clear Bank in the UK, with Clear in the US an early stage startup offering banking services to startups. Or Bank Clearly, a digital banking start-up in the Middle East similar to Moven (i.e. no banking license but offering banking services to startups by partnering with CBW Bank).

Back in the 60s there were 16 clearing banks in the UK. Consolidation in this part of transactional banking has left the UK currently with 4 clearing banks that process over 80 Trillion pounds annually worth of payments in the UK. This is a fee business for settling payments between institutions and individuals.

Clear Bank has no plans to offer services directly to consumers. Clear Bank’s value proposition is to make processing payments in the UK via systems like Bacs, Chaps etc, Faster & Cheaper.

Screen Shot 2017-04-14 at 08.10.41.png

Source

Who cares?

Clear Bank will be helping Challenger banks to access the payment system at the Bank of England level, at the same level as incumbents.

Clear Bank will help the 44 UK Building societies offer current account services in a cost effective way. Right now, only 2 out of the 44 offer such capabilities to their members due to prohibitive costs.

Clear Bank will boost indirectly retail banking by reducing the substantially processing costs, which will facilitate competition for incumbents in the UK.

Clear Bank will help Fintechs by providing Banking as a service through the Cloud at a very low cost. Clear Bank will be offering an API so that Fintechs can interconnect to the ClearBank Fabric.

Who is behind this innovation?

Clear Bank has been built on the Microsoft Azure Cloud. I spoke to Richard Peers, Director of Financial services at MSFT in the UK, last week and he clarified the hybrid approach: “The application and business logic of Clear Bank is in the public cloud; connectivity to payment schemes and customer data is local in the private cloud.”

Clear Bank is built on the Azure public cloud and the Azure Service Fabric (hybrid approach). No need to understand the technical details here. What is important to know is that Clear Bank’s business model is in the category known as PaaS (Platform as a service). Most of us are mainly familiar with Saas. Microsoft has been working with financial services providers on various projects whose value proposition is delivered via Paas or Iaas. The infographic below captures the main differences. This is where we start understanding how the technology has lowered the cost and also how the Banking As a service offering is secure.

Screen Shot 2017-04-14 at 09.02.01.png

Source

Clear Bank’s platform includes authentication of the parties involved using a combination of voice, biometrics and face recognition. As Richard pointed out “The Iaas is a technical model that delivers a business model that allows a different scale, agility, security, cost model.”

He also explained in clear business language about Azure Service Fabric, the micro services “kitchen” of MSFT:

“The current world has been operating with applications that are still client/server many tiered and typically needing significant engineering and testing across the full stack before they can be deployed, with huge dependencies between layers. So think about having to get everyone in a company as complex as Microsoft on board with a decision before you can act. In the microservices world, you can focus on a component, get it right and deploy without total dependency on everything else.”

 My last question to Richard, was about the nature of the True innovation in Clear Bank’s case? I always thought of MSFT as a cloud computing player focused more on the Blockchain tech potential and now I realize that is has been instrumental in launching a clearing bank (we all expected blockchain to be the tech disrupting this part of the stack) that is NOT Blockchain powered?

The true innovation is in the fundamentals of the business model and the scalability of the cloud when applied at its highest potential.   Banks need to operate at real-time, based on an API model with the ability to reason over data at low cost, resiliently and securely.  Their use of the cloud allows this, delivering a faster and more cost efficient model with the agility to add new services as the market moves. ClearBank provides a Banking as a Service (BaaS) model to other Financial institutions and Fintechs, allowing them to focus on their own products and core businesses. ClearBank provides the underlying banking infrastructure and software all as a service.”

 On our radar screen

We will be watching Clear Bank’s role in the digitization of financial services. What microservices will be built on it, how much will the UK payment system save, how much will the global system interact through Clear Bank? Which of the multiple banking services that ClearBank offers, will prove to be the key by impacting the payment ecosystem?

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.

Wrap of Week #15: Bitcoin, Fintech in Art, Fintech for SMEs, Insurtech via Venture Scanner, AI & Banks

The 15th week of 2017 (packed with religious holidays) was rich in terms of insights:

The Fintech Genome platform

Join any of the conversations on the Fintech Genome. The global community is sharing insights, creating great conversations, and business is starting to happen.

Check the latest topics that include bitcoin & blockchain, Web 3.0, API, ICOs etc.

Screen Shot 2017-04-17 at 10.25.18.png

If you enjoy reading the Daily Fintech insights by our experts è Subscribe to this newsletter.

If you want to engage and converse with the Fintech community è Register on Fintech Genome. 

 

Introducing The Blockchain Bitcoin & Crypto Weekly CXO Briefing

The Blockchain Bitcoin & Crypto Weekly CXO Briefing is all you need to know, each week, jargon free for CXO level business leaders and investors who will use this technology to change the world.

Start your week with The Blockchain Bitcoin & Crypto Weekly CXO Briefing in your email by 7am CET. It should take you 5-10 minutes to read properly (and a minute or less to skim if it is one of those crazy Mondays).

You owe it to yourself to invest 5-10 minutes a week to learn about the technology that will change your company, your career and your world. Don’t get blindsided by important news from the Blockchain Bitcoin & Crypto world. Be in the know and in the flow – without getting stuck in the weeds.

Each week we select 3 news items that matter. We keep it to 3 because we know that you are busy. If it is a big news week, it is our job to find the 3 news stories that matter so that you get a high signal to noise ratio. We give you the news in one sentence and link to the announcement.

For each news item we offer News Decrypted,  which explains why investors, bankers and entrepreneurs should take notice. We include a Glossary if we have to mention some critical jargon (which will be marked in red like this). Finally we offer Our Take on the underlying trends represented by this news and “where the puck is headed”.

In addition to 3 news items, we select one analysis/opinion/insight piece each week that we think is excellent or a controversial subject that is being debated in some forum.

Our point of view is that all three are important – Blockchain Bitcoin & Crypto. There can be private, permissioned Blockchains without any Bitcoin or any other Cryptocurrency. There can also be Cryptocurrencies other than Bitcoin (Altcoins) and distributed ledgers that use some form of Crypto other than Blockchain. We cover them all.

In this first post, we are tracking news for a bit longer than a week as we are in catch up mode:

News Item 1: Is a Mining Manufacturer Blocking SegWit to Benefit from ASICBOOST?

News Decrypted: This could be the last bloody battle in the Bitcoin Civil War. A major Bitcoin miner (Bitmain) who has been backing the breakaway group (called Bitcoin Unlimited) has filed for a patent to a technology called ASICBOOST that would be harmed if Bitcoin used a technology called SegWit.

Glossary. SegWit is shorthand for Segregated Witness. It enables signatures to be kept outside the Bitcoin block (which matters if you don’t want to increase the block size and that is the technical issue at the heart of what is referred to as the Bitcoin Civil War). Think of this like keeping signatures on a check outside the core banking system (which only records that a signature was received and points to the system where evidence of that signature is stored). This becomes more important now that MultiSig means more signatures.

Glossary.  MultiSig is shorthand for Multiple Signatures. This is critical to fraud prevention. It means that more than one person is needed to release a transaction (payment or other value exchange), just like in old-fashioned banking/payments systems.

Our Take. The ASICBOOST patent is filed in China (which raises doubts about its enforceability). More importantly it raises doubt about the intellectual credibility of those opposing Segwit and other Bitcoin Core approaches to scaling (for our decrypted take on Bitcoin scaling challenges please read this).

This could be the last bloody battle in the Bitcoin Civil War. The war has to end for Bitcoin to move forward. A hard fork would be “game over” for Bitcoin, Blockchain and Crypto. Obviously this news can be interpreted in different ways. The Bitcoin price action in the weeks and months to come will be the wisdom of the crowd that will tell us who is winning this argument. I am putting my belief on the line by launching The Blockchain Bitcoin & Crypto Weekly CXO Briefing this week. If I thought that a hard fork was likely and that everything Blockchain Bitcoin & Crypto would be relegated to the dustbin of history, I would be foolish to do this.

News Item 2: Blockstream Launches New Confidential Assets Feature for Enterprise Blockchain Customers

News DecryptedMany Bitcoin enthusiasts love the transparency that is enabled by every transaction being publicly visible on the Blockchain. That transparency does not work for enterprises that thrive on proprietary data, secrecy and control. Nor does it work for those individuals who, for whatever reason, don’t want anybody being able to see their transaction. Blockstream, a VC funded venture, offers “cryptographically-enforced confidentiality” (translation = hard to hack). Blocksteam is a driving force behind the idea of Sidechains, which is an alternative to a Turing Complete Blockchain platform such as Ethereum. Blockstream, via Confidential Assets, aims to offer the benefits of transparency – that transactions can be publicly verified to be accurate – without losing the benefits of privacy, by  giving control to individuals who can selectively disclose the hidden asset values and types.

Glossary. Sidechains is the idea of taking a Bitcoin transaction and sending it off to anther system where some additional processing can be done. The idea is to keep the core Bitcoin transaction processing simple (which tends to mean cheap, fast and reliable) while enabling each transaction to be programmable.

Glossary. Turing Complete means you can run application code on a platform.  That is why Ethereum is such an ambitious project; it is a decentralised operating system.

Our Take

  • This could be a blow to Z Cash, Monero and other Altcoins selling anonymity.
  • This could be a blow to Ethereum as it will boost the idea of Sidechains as an alternative way to have programmable transactions.
  • This could be a boost for Bitcoin as it will overcome one of the perceived weaknesses (lack of privacy).
  • This signals a more commercial Bitcoin, with VC funded companies like Blockstream making the big moves. The price for this commercialisation is greater centralization and less control by individuals (unless they invest time and money to get that control), but the commercialisation is probably needed for Bitcoin to go mainstream.

News Item 3: Japan Officially Recognises Bitcoin as Currency Starting April 2017

News DecryptedLegality is essential to any move to the mainstream. The issues are complex and this has been debated a lot in many countries. It is natural for politicians to fear the lack of control, but there is also the increasing recognition that being bitcoin friendly can drive innovation, productivity, jobs and a higher standard of living. So when one of the biggest economies in the world does this, it is a seriously big deal.

Our Take: This is another sign of something that took most people by surprise, which is that Bitcoin adoption is happening first in countries with strong currencies and fairly good governance. Many people were drawn to Bitcoin by dreams of stateless trust based on math replacing more authoritarian governance. So the meme got established that Bitcoin would first go mainstream in countries like Argentina; we debunked that theory here.

We spotted the trend towards wealthy countries adopting bitcoin first in Switzerland and now the news from Japan indicates that exactly the opposite of what pundits expected is coming to pass – mainstream adoption happens first in a country where citizens have an unusually high amount of trust in their currency and the government that issues the currency. Here is our review of Bitcoin in Japan.

Opinion of the week

VC Fred Wilson Thinks Coinbase Is the Goldman Sachs of Bitcoin

Why pay attention: because Fred Wilson is a VC with a great track record, who is very thoughtful and who has made many bets in Bitcoin ventures, including Coinbase.  Cynical counterpoint: he is just talking his book

Bernard Lunn is a Fintech thought-leader and deal-maker

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.

 

AI will hurt banking without a ground-up approach

Injured Piggy Bank WIth Crutches

Image Source

The last twelve months have seen AI fever reach new peaks. Every technology giant we could name have got a huge AI story to tell. Starting with IBM Watson, Google Allo, Facebook AI Research, Amazon Echo have all had major traction. This is also reflected in investments being made into the AI industry. Industry leaders magazine predict 2017 would be the year of AI investments. It is predicted that about $37 Billion would be invested into AI by 2025. There have been similar “This time it is different” stories on AI for almost 50 year. Well, I believe it is definitely different this time, mainly because AI was preceded by the Big Data revolution this time. I believe it is different for firms and industries with access to quality data to leverage for AI. I believe that the technology firms mentioned above have got their data right. And I believe banks are a joke when it comes to quality data. AI will hurt banks without quality data.

 

Internal legacy tech challenges and data quality problems aside, new regulation in the form of PSD2 is going to have massive impact on a bank’s strategy to customer facing AI use cases. With PSD2, customers will be more in control of their transaction data. Third party providers (TPP) will now have access to customers’ transaction data, in the process becoming an abstraction layer between banks and customers. So, unless banks completely rethink their customer interfacing model, nimble players who can create clever AI applications on customer’s financial information, will make banks just a utility provider, hence hurting their margins.

Banks have two challenges to resolve at the same time, internal data quality issues to make AI work for operational intelligence, and external data ownership issues to make AI work for dealing with customers.race_for_ai_new_1-featured.png

Image Source

Data is the 21st Century Oil

There have been some success stories with Fintech firms doing AI and there are new ones emerging every day. The world is moving to a place where there will be an AI app (and an app store) for most activities. When we were evaluating IBM Watson at PwC, one phrase the IBM team used was “Watson going to school”. This effectively meant training IBM Watson on a particular topic. Let’s assume IBM Watson had to be trained in MIFID 2 regulations, it involved loading the regulation text into Watson and then an SME spending a few weeks with Watson asking questions on MIFID 2. The SME would then provide feedback on Watson’s answers, and Watson would use this data to provide better answers next time. This needed to be done until Watson became an expert in MIFID 2 before the capability could be launched commercially. We also learnt from the exercise, how understanding legal/regulatory language was different from natural language. That exercise showed how critical data, data structures and the taxonomy of data was for AI applications to work. On that note, news is that IBM just acquired a Promontory Financial Group to help improve Watson capabilities for banks’ back office functions.

'And then Dmitri noticed something that would have a profound effect on the human/robot wars.'

Regulations for data have failed?

Most successful AI platforms have access to high quality data, and in huge volumes. They also get to see regular transactions across different streams of data that they can then learn from. This is the case with Fintech firms that use AI at the heart of their proposition. What about our dear banks? Banks do have data, but the quality, integrity and accuracy of data stored digitally is generally appalling. A few years ago BCBS 239 emerged as a regulation focused on fixing data in banks, however compliance to that is mostly being treated as a check box exercise costing the banks millions. The point being, banks are years away from processes and infrastructure that provides quality data. If AI is introduced into this landscape, it would be more detrimental to existing processes, as there would be more hands involved in confirming results suggested by AI, and the costs of using AI would outweigh its benefits. Is there hope?

Banks need to get back to the drawing board to make the most of AI. Here is a simple approach I can think of,

  1. Banks need to have a function to deliver Intelligence capability.
  2. This function needs its own budgets and operating model.
  3. Very similar to data governance models, the Intelligence organisation needs to be federated across the firm.
  4. This federated model needs to cover parts of the bank that benefits most from AI, but also where data and processes are more matured
  5. Implementation of AI in these parts of the bank could spark viral uptakes across the firm
  6. There needs to be standardised ways for AI applications within banks to interface with each other. Without this, there will be AI applications developed across the bank for every single process and there wouldn’t be any integration possible. This is where governance will help.

Well, in order for the above to work, data still needs to be of good quality. Top down models are not always lean in their approach. However, it is possible to achieve a top down model that can be lean, if the priorities are based on benefit realization rather than empire building to get to an MD promotion.

Now, what about external challenges?

PSD2 could be a great opportunity for banks, and of course a huge challenge too. Let’s focus on the opportunity first. Say a customer banks with Barclays for his salaried account, has a mortgage from Halifax, and a credit card from HSBC. If Barclays was willing to be an Account Information Service Provider (AISP), it can effectively source the customer’s transaction (with their permission) from Halifax and HSBC and could offer Personal Finance Management (PFM) services. Imagine having access to transaction data across all products that your customers have. Barclays with access to mortgage transactions from Halifax could create a credit product for the customer for home renovation. While this is just one example, PSD2 could create new revenues streams for banks if they were willing to target other points in the payments value chain. That is a whole topic for discussion by itself though.

AISP in action

Image Source

While this sounds good from the banks’ perspective, the more likely outcome would be Fintech firms, and possibly tech giants (Google, IBM, Microsoft, Amazon) making clever use of customer transaction data as they are light years ahead of banks in their AI capabilities. While we have already discussed Tink in DailyFintech, Qapital and more recently Klarna are also jumping on the PSD2 bandwagon.

How can AI-Fintech firms chip into the story above? Well, they don’t have much to lose (unlike banks). AI firms focused on banking use cases, should focus on small problems and solve them really well. And the AI industry focused on Banking will need to identify the importance of standardisation of interfaces for data interactions across banking applications. While this exercise will be made easier for customer facing use cases (thanks to the PSD2 wave), operational AI internal to banks will be a much harder nut to crack. If achieved, it will allow for multiple processes and activities within banks to be replaced by AI in one go. I wouldn’t be surprised if banks, warmed up by Blockchain revolution, form consortiums to drive AI revolution. And if this happens, I believe AI penetration within banks could be faster and deeper than Blockchain managed.

Arunkumar Krishnakumar is a Fintech thought-leader and an investor. 

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.

Where the VC Funding is going in InsurTech

Highway Signpost Venture Capital

Yesterday we announced our content partnership with Venture Scanner. Today we use their data in our InsurTech post.

We looked at 14 categories within InsurTech to see where the funding is going (numbers are in $ millions).

Category Total Ventures Funded Ventures Total $ % Funded Average $
Health & Travel 321 67 9260 21% 138
Life, Home, P&C 112 26 6870 23% 264
Auto 64 33 6610 52% 200
Data/Intelligence 105 55 2810 52% 51
Employee Benefits 110 30 1200 27% 40
Comparison 105 73 1200 70% 16
Infrastructure & Backend 245 80 1040 33% 13
Commercial 126 20 840 16% 42
Reinsurance 31 5 759 16% 152
Product 29 10 443 34% 44
Consumer Insurance 82 29 385 35% 13
User Acquisition 86 27 342 31% 13
P2P 31 7 86 23% 12
Education/Resources 35 4 53 11% 13
TOTAL 1482 466 31898 31% 68

Takeaways:

  1. Comparison sites look the most fully invested. 70% of comparison site ventures got funded. Our analysis here.
  2. Despite all the hype, very little money has gone into P2P (and out of that $86m, $60m is to Lemonade which no longer positions as P2P).
  3. Only 16% of ventures in Commercial and in Reinsurance get funded. I believe that is because these are functionally complex (and so the supply of ventures is limited and investors lack the knowledge to evaluate them fully).

This data comes from Venture Scanner. You can get the full FinTech Market Report and data at Venture Scanner.

Image Source

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

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.