The infrastructure for asset management of Digital Assets – Melonport

cryptovalley

I confess that I hadn’t been to Zug in 2017 and I grabbed the opportunity of the Crytpovalley meetup last Thursday at GG6 with its catchy topic “Crypto Valley – A better Silicon Valley?”. Max Wolter and Alexander Bremin, have captured moments about the people that have made and continue to make Crytpo Valley in Zug a unique and vibrant place. Read more in Alvalor Mission to Crypto Valley – a tale of the big world of crypto around the little town of Zug and about the many amazing people who make this place a reality. From Bitcoin Suisse, one of the first startups in Zug before Crypto Valley’s birth; to Monetas, one of the instrumental ones in nurturing the Crypto ecosystem in Zug, all the way to Søren Fog, founder of the Crypto Valley association and the crypto-expert legal partners MME.

The Alvalor project is a live example of a venture in its very early stage that is choosing to grow in the vibrant Zug ecosystem. As we were sipping wine, Max shared his excitement around the Alvalor new blockchain platform “that extends state channels to allow arbitrary applications to be executed, eliminating limitations of block space and blockchain size. We are modeling after the Ethereum foundation as a non-profit Open Source project, with a focus on research.” Max and Alexander also confessed “Opening our offices near teams that serve as an inspiration to the blockchain community, such as Melon Port, Akasha and SingularDTV, will be a privilege. There can be no doubt that Alvalor is primed for success in a location as unique as the Crypto Valley.”

Melonport is my pick today for many reasons that I can sum up in one word as “My biases”:

  • Melonport is co-founded by a woman, a young ex-Goldman Sachs trader and a Swiss blockchain developer who is an expert in the Ethereum world
  • Melonport is a blockchain venture focused on digital asset management
  • “Melon” is the Greek word for “Future”

A Swiss Ethereum expert with a background in mathematics from ETH Zurich and a female tech leader creating a venture that brings transparency, lower entry and running costs for hedge funds and asset managers, and access to a new asset class that promises genuine diversification; a vision that is broad and will be needed in the future world that is under construction.

melonport

I will start from the future that is beckoning infrastructure that can accommodate the new financial instruments and the new value creation.

  • Melonport wants to be able to accommodate all kinds of Digital Assets.
  • Melonport wants to be able to accommodate all kinds of Digital Asset management strategies (passive, active, open-end, closed-end). This encompasses the entire lifecycle from setup, to trading, custody, redemption, valuation, etc.

Melonport is a Decentralized blockchain protocol relying on the Ethereum Blockchain. In plain vanilla terms, Melonport is a protocol which means that they are building a core part that allows all sorts of Modules, that can function on top of the core part. Melonport is expecting a live beta version over the next couple of months. This will include the core part and 7 modules that Melonport has promised to offer in their green paper. These are the basic functions that a portfolio manager (PM) needs to setup his/her business. Once the PM chooses the parameters of the modules, the portfolio is ready for deployment in a secure and decentralized way (to be explained later).

Foundational Melonport modules:

  1. Registar: this where the PM chooses which assets will be traded. I love this, because the smart contract that operates this module, re-assures me that when I invest with a hedge fund manager who has promised to offer Alpha by a Long/Short strategy in one sort of tokens; the PM can’t “punt” on the bitcoin/TUSD rate.
  2. Functionality: PM can customize the rights around the use of the funds which may vary from one asset to another. This module determines whether penalties apply or not for certain actions by the PM.
  3. Price Feeds: PM picks the feed module (one or several) that will be used to evaluate the portfolio for mark-to-market purposes. This smart contract solves in a secure and transparent way the problem of ambiguous pricing for various assets and manipulation by the PM.
  4. Exchanges: PM chooses on-chain exchanges for trading.
  5. Trading: PM sets various rules around trading and risk management. For example, caps on leverage, caps on trade size with respect to total volume of the asset, caps on concentration exposure etc
  6. Management Fee: PM specifies the calculation of the management fee which typically is linked to the gross value of AUM.
  7. Performance Fee: PM specifies the calculation of the performance fee which typically is linked to the increases in the gross value of AUM. It also typically, involves a high-water mark, which means that if the PM is performing below a designated benchmark since inception, then the performance fee is not paid. This module will allow for more customization by the PM

Since Melonport is an open-source protocol with these 7 basic functionalities, anyone can develop more Modules on top of the Melonport protocol and create a new portal to access it.  If a hedge fund manager or a passive asset manager designs his/her portfolio parameters using the 7 basic Melonport modules, that can be seen in Blockchain land as the offering of a legally binding contract. The contract terms are defined by the smart-contract terms that are operating the modules. Melonport will be partnering with data feed providers and exchanges like CryptoCompare for price feeds from various exchanges, or  Oraclize for fetching data.

I won’t get into the tech details of how shares are created and how they are redeemed in the Melonport world (anyone interested can read the green paper). I will however, outline what value is created in the Melonport world. I foresee, that this will be a world that will reduce substantially the costs of setting up a fund for many reasons but mainly because the costly custodian and fund administration function will be given over to a few modules operated by smart contracts. The cost of using the Melonport protocol is MLN tokens. At the same time, there will be large efficiency gains because the processes will be real-time, without human errors, and fully transparent. These features are absolutely necessary for investing in protocol tokens and their derivatives.

The Melonport protocol is creating a digital asset management world that offers both Decentralized storage and Decentralized execution. I am excited about this future world that the assets, the track records, and the smart contracts are stored on a decentralized Blockchain. This reduces the centralized custodian risks that showed their ugly head especially during the 2008 financial crisis. In addition, decentralized execution using the Ethereum virtual machine, reduces counterparty and settlement risks.

We can all foresee a future world in which a variety of hedge funds are using the Melonport portal but also for the creation of passive investments focused in the protocol token asset class. We can foresee that Funds-of-Funds (FOFs) will be able to offer value since costs will be reduced and multi-layered risks mitigated. We can foresee better diversification across digital asset classes that would be expensive to design in the analog fund world that we currently live in.

Before ending my coverage of the Melonport protocol, I want to circle back to the variety of Digital Assets that are being created by companies like Lykke, Digix, T0 platform etc.

I like to think of the growing Digital Assets space in 3 main categories:

We will be watching Melonport rollout the infrastructure for asset managers to create new strategies focused on digital assets: protocol tokens, derivatives, and tokenized old assets. Mona El Isa says:

We are primarily building “Melon”, as an infrastructure to set up and manage funds built around protocol tokens — an asset class which we fundamentally believe will have a place in every single diversified portfolio ten years from now.” Source The Difference Between Protocol Tokens and Traditional Asset Tokens

Efi Pylarinou is a Fintech 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.

 

 

Lendity: ideal marketplace lending exposure for pension funds, asset managers, family offices, private banks

A sea of 300 suits is what I faced last week at the first Swiss Alternative Lending conference hosted at SIX and in partnership SIX and Lendity. I was privileged to know the inspiration driving the founders of Lendity, as they had shared their vision with me early on. The Karamanian brothers, Rafael and Armen, combine experience from the Sell and the Buy side and are full of passion about solving the problem for institutional investors that don’t have the size and the risk management analytics to access the marketplace lending marketplace sector in a compliant way and more importantly, in a way that optimizes their taxes and offers diversification across the multiple sectors and platforms.

In an earlier post this past February, titled A little bit of P2P is all I need – Mambo in Lending I looked at all sorts of investment vehicles that offer different types of exposure to this sector. Most were geared towards retail investors but not only. I did highlighted LendingRobot from the US, a Fintech that has been helping manage P2P portfolios and is in the process of launching a hedge fund for accredited investors that offers diversification both the asset level (i.e. consumer loans, student loans, SMEs, invoice, real estate etc) and at the platform level.

Lendity is focused on developing structures that a family office, an asset manager, a pension fund, can book on their books or a private bank can list in their private debt product offering for qualified investors. And at the same time include:

o   Global exposure – US and Europe for now (USD, CHF)

o   Asset diversification – Consumer, SME, real estate etc

o   Platform diversification

o   Tax efficiency, despite the cross-border exposure

o   Regulatory compliance, despite the cross-border exposure

o   Private debt without additional counterparty risk from the issuer.

Lendity is really solving a pain point for both marketplace lending platforms and for institutional investors.

For marketplace lending platforms, Lendity acts as a marketplace that matches them with institutional capital from Financial advisors, Private Bankers, Pension funds, Family offices, and Asset managers (the 5 “investor” types). Lendity actually has its own proprietary system to qualify which platforms to partner with. Lendity, doesn’t originate loans but buys loans from the qualified marketplace lending platforms in a way that allows them to create the “dream” structure for the 5 “investor” types.

For a start, Lendity has qualified one US, one European and 3 Swiss platforms – Upstart, Lendico, and Cashare, CreditWorld, CreditGate24, respectively.

Upstart out of California, is mostly consumer lending but also business lending ($130k average size – 3/5yr loans). Founded in 2012 and with a total funding of $85mil, has logged in my Fintech brain folder as the “personal FICO score disruptor”.

Lendico out of Germany but with an expanding presence in the DACH region, has the backing of Rocket Internet. Founded in 2013, offers both consumer and SME loans. Lendico operates mostly as a credit underwriting partner. They pride themselves for their proprietary credit model that they calibrate to local conditions in the different regions in which they operate. They have established partnerships with German banks; they offer personal loans in Brazil (mostly needed for the purchase of iphones!); Post Finance in Switzerland has invested in them even though their current by-laws prohibit them from lending. Lendico was always logged in my Fintech brain folder as “Lender daring to go cross-border”. They are currently operating in Germany, Switzerland, Austria, Holland, Brazil. They organize challenger events towards improving their credit model; by giving access to their data to developers that get the opportunity to test their ideas.

Cashare is the oldest Swiss crowd-lending platform for both consumer and SME loans. Since they ironically launched in 2008 when Switzerland and Europe still thought they were immune from the US subprime crisis; they are a living proof of survival through a major black swan crisis. Up to 2014 they were the only Swiss company in the space! I need to file them in my Fintech brain folder as “subprime crisis survivor & daring to be alone for 6yrs”. Check out the stats of this old-timer here.

CredtiGate24 is a new Swiss lending platform, launched in 2015 for both consumer loans and SME loans (in the order of CHF 100k). They use credit analysts to access the creditworthiness of the business borrowers. I now understand their differentiation better and have filed them in my Fintech brain folder as “mostly front-end automation in lending, ideal for channel partnerships with banks”.

CreditWorld is only focused on SME lending and the average size seems larger than the rest (close to CHF1mil rather than around CHF100k). Their focus is on the creditworthiness of the borrower. Their process differs in that they use both a rigorous internal process for evaluating the creditworthiness but also an additional external party, Euler Hermes owned by Alliance, as an independent third party check. I need to file them in my Fintech brain folder as “Extra SME screening: plus third party credit check”.

Just with this first batch, one can see that even for those that continue to invest in Private loans (a traditional asset class) the exposure that Lendity will be offering through efficiently pooling loans from these qualified platforms, adds value. These platforms are lending to consumers (in addition to the credit-card receivable space) and to businesses that aren’t serviced from the banks or the non-bank lenders. These borrowers are serviced because of the reduced cost of customer acquisition and (hopefully) the better credit pricing algorithms coupled with the ML algos on the accumulated data. This latter part is significant. Deep learning (a sub-vertical of AI) can be used to improve credit models. More data and use of non-conventional data (e.g. which social channel does a consumer engage on more frequently, Ebay purchasing history etc) is the only competitive advantage that will differentiate marketplace lenders. I totally agree with Guenther Dobrauz, PWC financial services partner, who alluded to the fact that the marketplace lending sector will grow through consolidation. Collecting data will improve the ability of pricing risk and therefore, the ability to be profitable with narrower margins. So, big players will price risk better.

Lendity is in the business of partnering with the players that price better and offering a much needed diversified structure to the 5 “investor” types that need it. We will be watching their journey.

Efi Pylarinou is a Fintech 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.

 

 

I am with French when it comes to robo-advisors

“Do the Brits continue to be ill-informed?”

As a standalone statement it is definitely very political. But bear with me and I will explain myself.

For this post, I looked around for an image for Systemic Risk. My inclination comes from being a graphic novel aficionado and having flirted with the idea of graphic storytelling while living in the birthplace of Marvel and Drawn and Quarterly.

Should I have picked explosives, or an earthquake, or simply the year 2008? None of these capture the essential element of “Systemic Risk”, which is an event whose consequences will require Central level intervention because the stakes are too high to leave it to the market forces.

Even though it has been 10yrs since the last major systemic event, the memory hasn’t dissipated especially behind the walls of Central banks, Regulators, Treasuries and the such.

Brits behind the walls sniffing around for signs of systemic risks

Jan 2016

Lord Alain Turner spiked Twitter impressions with his media comments in early 2016 around the systemic risks of the P2P lending space. As is customary in the media, his remarks were singled out.

“The losses which will emerge from peer-to-peer lending over the next five to 10 years will make the bankers look like lending geniuses,” said Turner on a BBC program.

Lord Turner, ex-chairman of the FSA, reversed his thinking before year end at the Fall London Lendit conference that I personally attended. He said that MPLs (market place lenders) may prove to be the spare tire in the next crisis. He claimed that peer-to-peer lending platforms could actually help reduce the risk of a future financial crisis. I agree with him in that the MPL sector is more than a spare tire already, in terms of mitigating the “Too big to Fail” risk that was the nightmare of the 2008 financial crisis. I also agree with Lord Turner that the multiple and complex risks of the broad, predominantly over-the-counter lending market are very similar within the “Castle” of the regulated financial system and within the “Fintech valley” of the self-regulated (partly) Altfi scattered ecosystem. From cyber security issues, to due diligence, to legal structuring, etc; these are structural issues that are inherent no matter what the delivery process is.

The conversation around this topic is live on the Fintech Genome and insights are welcome.

If one is sniffing around for the exact same kind of 2008 systemic risk (i.e. too big to fail) then I say that you wont find out coming out of the MPL space. Of course, black swans include those risks that we haven’t thought of.

Jan 2017

Carney, the governor of the Bank of England, showcased his concern around robo-advisors posing systemic risk to the financial system at a recent G20 conference meeting.

“Robo-advice and risk management algorithms may lead to excess volatility or increase pro-cyclicality as a result of herding, particularly if the underlying algorithms are overly-sensitive to price movements or highly correlated,” Carney told the conference.

Scalable Capital UK chief Adam French, decided to publicly defend the sector through an open letter which you can read on their site (instead of media excerpts).

I agree with French that for now, the money managed by robos globally (standalone and from incumbents) are clearly less than1% of managed assets. Honestly, the Customer Acquisition Cost (CAC) has proven to be very high and the growth rates of standalone robo-advisors are nowhere close to showing signs of overtaking the asset management industry. Actually, what is growing faster is the leapfrogging of incumbents into the robo space. Brokerage houses are the main adopters simply because their business is experiencing a type of second world war threat (first WW was the online brokerage digitization wave); followed by incumbents like Vanguard, Blackrock, ING, etc that are adopting variations of the business model parallel to their business as usual.

Current evidence shows, that

The majority of robo-advised AUM is by incumbents not by standalone robos. So, leave those kids alone.

Why voice concern for assets managed through robos, since the processes used don’t differ from those used by conventional practices?

  • Algorithms used are no different than those used by conventional managers or financial advisors. Mostly MPT based and in some case risk attribution (like Scalable Capital).
  • The ingredients are basic and liquid and used by conventional asset managers and financial advisors.

Would or should there be an central concern, if we woke up one day and realized that flows of funds shifted into actively managed vehicles that were using predominately passive low cost financial structures? I don’t think so.

Such kind of “herding” has been inherent in the system and more so, as the asset management business is consolidating and we live in a world that a few Blackrocks, Vanguard, etc can survive. Independent asset managers of medium size are struggling to stay afloat as standalone businesses. Did you not notice the recent move from Calamos (NASDAQ: CLMS) one of the few remaining public independent asset managers, that has been taken private?

Shouldn’t the attention be on those entities managing the majority of AUM through basic MPT asset allocation frameworks?

Look for concentrations within incumbents not at standalone robos. So, leave those kids alone.

I’ve always thought that robos could and should differ from the conventional way of servicing smaller amounts of wealth, in two main ways:

Batch One:

(a) Reduced Cost and transparency,

(b) Risk-adjusted performance transparency,

(d) fiduciary duties

Batch Two:

(a) Goal-based investing

Reduced and transparent costs have been the marketing strength of the robo-advisory business model. This is of no concern to central authorities, on the contrary.

The fiduciary responsibility or lack thereof, is of course the main concern. To put this in very simplistic terms, as long as you leave your money to be managed (i.e. not withdraw) the robo-advisory business model entail less incentive conflicts (i.e. a financial advisor selling a fund etc).

It is a simple algorithm (asset allocation – e.g. x% equities, y% fixed income, z% commodities etc) or a more sophisticated one (risk attribution and maybe coupled with momentum analysis; tax loss harvesting may also be incorporated). The only human or emotional decision, which is no different in the digitized asset management delivery or the conventional, is to liquidate part of whole of the portfolio or to Top Up.

As the robo-advisory business model is moving to a hybrid (auto asset allocation + Call a human for an extra cost), I really don’t see the difference in terms of the incentives and the fiduciary duty.

Central authorities should start thinking of mass-market, true AI-driven, asset management. Now that is a tricky one. It has been around for the elite, through the Bridgewater likes. What if technology makes it a viable business model for the mass? How can we think of Deep-Learning (a specific AI application) being used for managing our 10k or 50k savings? The fiduciary responsibility lies with whom?

Add to your radar screen Deep learning applications to asset management, as a future source of concern. In the meantime, please leave these kids alone.

If you want to understand more on AI, ML, Deep learning, listen to this primer because “Software is eating the world”.

Robo-advisory businesses will evolve and grow up and in some ways look more like their old-fashioned ancestors. My concern is that they have not taken the next step in terms of Transparency. They started with the Cost Transparency and reduction campaign. But the bottom line of the financial business is to create wealth. This means offering performance.

Lowering costs of execution, advise, custody, reporting etc is the first step. This is actually low-hanging fruit in 2017. Now, where is the performance? Where is the Risk-adjusted transparent performance?

Why are robo-advisors not reporting online, transparent risk adjusted Actual performance? Simply moving model portfolios online, isn’t an innovation. Simply measuring internally, performance and risk isn’t an innovation.

Contributing actual performance statistical data towards the development of some kind of Robo-Index, that can be used for internal improvement and for offering transparency to end-customers; is the way to go.

Are you a robo-advisor managing assets and want to know more? Drop us a note in the comments below.

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.

Digital Wealth – Shùzì cáifù – in China

screen-shot-2017-01-27-at-3-03-03-pm

Heading into 2015, China had US$21 trillion dollars pent up in bank deposits. With such a large, investment hungry population with so much ready-to-invest capital, anyone with a WealthTech business idea can only start salivating.

Be careful and contain your excitement around this huge single market opportunity. There is no doubt that strong favorable winds are blowing in China because of:

  • Very high internet penetration
  • Reduced anxiety over data privacy
  • The internet of finance birthplace
  • Government support for innovation
  • A nationwide credit scoring system underway
  • Openness to Collaboration of restrained banks with fintechs
  • Capital looking for investments

On the other hand, look at who is already positioned in China to offer wealth management products and examine how they are delivering these services.

The Internet of Finance refers to financial services delivered through digital platforms (digital from birth).

Digital money-market type of funds

The money-market funds typically sold by the Charles Schwab’s or the HSBC’s in the West; are offered e-commerce giants in China. We are all familiar with the Yu’e Bao fund of Ant Financial (Alibaba when it was launched in June 2013), which by the way was met by the media with great skepticism since there were already more than 200 such funds in the Chinese market. Was it for small-size savers or was it for typical clients of wealth mgt services at banks?

To cut a long story short, the remarkable path of asset accumulation (summer of 2016 AUM 772 billion yuan (=$116 billion)) is even more stunning as the AUM growth occurred even though rates of return declined.

The fund started with initially offering 7.5% interest rates compared to 0.39% maximum interest rate that China’s national banks could give out. The Yu’E Bao rates are now only able to pay out an annual interest rate of 2.5%.

The fund is run by Tainhing Asset management and integration with Alipay, facilitated the growth of the retail user base. By mid 2016, there were close to 300,000 users reported.

Li Cai Tong’s fund by Tencent and Baifa fund offered by Baidu; are also major players in this space which continues to incentive users by offering better rates and better user experience.

Stock Trading apps

Broader Fintech type of activity in China is seen in the PFM space both from the e-commerce giants and the P2P lending platforms. Stock trading apps have been launched by several such platforms and are the first signs of integrated platforms that address investment and funding needs of individuals and their businesses.

These apps offer access to trade-invest in A-shares and mutual funds or structured products that are more diversified options. They are all heavily used by brokers (over 90% of usage) who form their end, tap into the growing customer base of these tech businesses. Some of the players are the ever present trio BAT, JD finance, Credit Ease, Wacai, and Tongbanjie. The latter two are standalone Chinese mobile apps. JD Finance is the financial subsidiary of e-commerce giant JD. They are in the process of following restructuring the organization and following pretty much the spinoff steps of Alibaba-Ant Financial. Credit Ease, run by publicly traded Yirendai (NYSE: YRD) was setup as both a lender (small business and consumer) and a wealth mgt business focused more on the middle and upper end of the wealth spectrum.

In addition to these local players, there are already noteworthy moves from foreigners positioning themselves through local partnerships in the stock, fund trading space. These strategic moves makes sense given the much anticipated increase of the limit for Chinese individuals for overseas investments and at the same, establishing a sensible presence in the local market.

Currently, Chinese investors can only trade overseas equities through the “QDII = Qualified Domestic Institutional Investor” framework which offers quotas to select institutions, which in turn channel to each Chinese citizen an annual exchange “allowance” of US$50,000.

Robinhood, the US-based free stock trading app, formed a partnership with Baidu in summer 2016 to tap into the mass market of Chinese citizens by offering them US stock trading access. They also launched their Chinese app, named Luobin Xia (罗宾侠), for US citizens in mainland China.

Another different partnership of two Asian Fintechs and an established global financial service provider originating from Europe, is that of Saxo Bank, WEEX, and Lean Work. The Chinese online trading platform WEEX of WallStreetCN, partnered last summer with Saxo Bank, the Danish-origin multi-asset trading business, and Fintech startup LeanWork to tap into the mass market of Chinese speaking users. Lean Work is a Shanghai based startup, focused offering cloud based risk management, back office, trading and brokerage solutions. The 15million monthly users of the WallStreetCN financial media business (a 3yr old financial content startup) will gain access to over 30,000 instruments via this integration.

Brokerage, social trading, robo-advisors

The lines between stock trading apps (linked to third-party brokers) brokerage businesses with bells and whistles, and robo-advsiors; are blurred. The grouping I have chosen is more for the sake of simplicity.

Tiger Brokers (Bejing based) is a 2yr old Fintech broker targeting the overseas investing market segment (Hong Kong and US). One of the largest mainland China brokers, Citic Securities (Shengzen based) participated in the Dec 2016 Series B funding round ($29mil) which will be used mainly to boost Tiger broker’s big data capabilities in financial advice. Xiaomi participated in the Series A round.

Jimubox (Bejing based) the Xiaomi backed marketplace Fintech, launched a trading app mainly to serve the overseas channel, the Jimustock app.

Snowball Finance (Bejing based) is a Fintech with a social information and investment platform that plans to add brokerage capabilities (Sequoia Capital participated in their $40mil series C in 2014).

ChaoTrade, is a newly launched social trading Fintech platform.

At the same time that Robinhood launched Luobin Xia, 8 Securities launched their free-trading app in Hong Kong, with an AI feature, Chloe, that can educate and help users in their investment discovery process.

In the summer of 2016 which is clearly a turning point for the Digital wealth space in China, CreditEase launched a robo-advisor in mainland China, ToumiRA. The offering allows overseas investing via ETFs instead of the expensive and non-transparent way of managed accounts. ToumiRA was launched in partnership with the US based B2B robo-advsior DriveWealth.

Pintec is the other significant player in mainland China. Pintec is a Fintech group that spun off Jimubox. XUANJI is their robo-advsiory offering launched also in summer 2016. They have an onshore and offshore version; and they have a B2C offering in addition to a white liable offering.

Digital apps using machine learning for investment advisory are:

Micai Fintech launched in Spring 2015

Clipper Advisor, launched out of California and with a motto “the Wealthfront of China”.

Our Chinese Fintech startup coverage in this post on wealth management is focused on the B2C segment. Hong Kong is booming right now with B2B offerings that mainly targeting the South East Asian markets (Indonesia, Malaysia ect). Another post will cover those trends.

Wealthtech China

China is leading in the integrated digital wealth management movement.

Credit Ease, is one Fintech launched with that mission; the PINTEC group is similar in its broad scope and aim to become a full range financial services provider. Alibaba, Baidu, Tencent, JD, the e-commerce tech giants, are spinning off subsidiaries and taking the lion’s share from Fintech funding (skewing global reality also, with the huge lump-size funding rounds) and dominating the financial services space. They are leading the way of digital cross-selling.

In a report recently published by EY and DBS on “The rise of Fintech in China” it is noted that:

“ The willingness of Chinese consumers to adopt FinTech services is striking. Forty percent of consumers in China are using new payment methods compared to 4% in Singapore. Thirty-five percent are using FinTech to access insurance products compared to1-2% in many Southeast Asian markets. There are also significantly higher rates of FinTech participation in wealth management and lending.”

Happy new year China.

Thank you April Rudin for tweeting the jewelry designs for the New year in case your gold allocation has some room.

chinese-jewelry

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.

Three market opportunities in Insurance Asset Management

The asset management side of insurance business is a sleeping beauty that hasn’t awoken to the Fintech drumming. Apart from the regulatory driven involvement due to Solvency II ( covered here) I have not seen any laser focus from Fintechs in the asset management part of insurance businesses. Naturally, low hanging fruit, screaming inefficiencies are picked and addressed first.

The opportunities on the Asset management side of Insurance businesses

I see three main areas that insurance companies can monetize and create adjacent revenue streams to their main business which is clearly suffering. One is the area, of Data; the second is the area of third-party Asset management; the third is breaking the silo between these two (explained below).

Data

United Health has been selling data (aggregating claims data) to drug companies, which in turn use for market research on how their products are used, how effective they are, and how well they are competing with rival drugs. As a result of this “aside” type of business, United health created a standalone businesses offering support, called Optum in 2011, which operates multiple businesses (Optumbank for loans, OptumHealth managing care centers, OptumInsight offering data analytics etc). OptumInsight uses analytics and predictive scieneces to make empower its clients to form accurate financial and clinical projections. It is a $5 billion in annual revenue business, based on reusing the aggregate information contained in the vast number of claim forms United Health processes

optimum-insight

Source here

Other major insurers are investing and growing data analytics divisions within their businesses (e..g Aetna, Cigna, and Anthem).

To find opportunity at the edge is more effective because it generates new revenue from assets – customers, products or enterprise activities – that are already in place.

from the Harvard Business Review article To Get More Value from Your Data, Sell It

One Fintech that is focused in offering analytics (not the data) is Apertiva based in the US and offering a software to turn medical intellectual property – data – to computable content that can be monetized.

Third-party Asset management

Large insurance companies are creating new funds that are then offering them through the traditional distribution channels to investors. Insurance companies obtain regulatory approval to become investment managers and create funds, that earn fees for them, a capital-lite type of activity. Allianz, Generali and Standard Life, are a few of such players. And the smaller ones (see graph below) are starting to grow through acquisition of independent asset management businesses or human talent.

Allianz Global Investors is leading the way with the largest third-party AUM and its recent acquisition of Rogge Global Partners (RGP), a UK-based global fixed income specialist.

aum-insureres

Aviva Investors hired in 2014 renowned investor Euan Munro from Standard Life (Standard Life Global Absolute Return Strategy fund, one of the most successful multi-asset funds in the world), to give a push to the third-party asset management business. Aviva launched the Aviva Investors Multi-Strategy (Aims) fund range.

A bridge between data and asset management in the insurance space

Who is building an effective communication channel between the Data (already in house) from the claims side and the asset management side of the insurance business?

Why not use such Data to develop actionable investment insights that can be used both in the due diligence process when picking external asset managers and in the investment committee that run the third-party asset management business?

Anybody building a MVP that can:

  • Take the raw data, create a graph database to gain insights and produce predictive analytics
  • Use the processed data as an input in the selection processes of external asset managers
  • Use the processed data to create superior third-party investment funds.

In this last category, I want to see a world class fund from Aetna or some such that is a health sector fund, not a general multi-strategy fund. Why aren’t any of the insurers the investment advisor to any top healthcare & Biotech sector ETFs; or better why aren’t they launching any active ETFs or PTFs in the sector.

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.

Checking investments from your wrist or your eye

We live a world that we still check our wealth from our laptop or our smartphone.

For the Intro & Index to Wearables Week, please click here.

Tim Cook is leading us to check our wrist for our health. Wearables for our finances, are still in the “nice to have” category and nowhere close to becoming the next black. Will Goldman Sachs change that, with some Marquee version for our smartwatch; that will make every yuppie envy those that have access to it?

Pact is the best app that you can earn cash for achieving your fitness and wellness goals. Users can earn cash for being active, paid by members who don’t. (Warning: not available for iwatch; GPS running in the background will drain your battery). Banks could lure customers with this type of “health money” that could be incorporated in their royalty programs.

Seems however, that nobody feels that there is a great opportunity in the shift from the mobile device in our handbags, to our wrist or to our eye (i.e. Google Glass). Blockchain is stealing the show, as a potential way to store securely biometrically collected data; and then create value. Smart watches and Smart Eyeware, have not hit any tipping point and therefore, are not seen as The Way, to collect Big data for financial services. Most finance apps for our wrists (none commercialized for our eyes) are only functional in tandem with our smartphones. The majority have bene focused on very basic consumer banking services (tracking expenses, credit cards).

While researching the wearable space in financial apps, I realize that almost all of them are focused on information, alerts, monitoring and KYC. I checked amongst brokers and broker-dealers; I had to dig and dig to make sure that the apps are available for android or ios watches, and only to discover that very few are offering trade functionality. The first mover, is London based brokerage and spread betting provider, IG Group; with their Apple iwatch app that allows for trading in CFDs and stocks.

screen-shot-2016-09-23-at-6-09-52-amIG Group app screenshots

Ameritrade is the other app WITH execution capability.

From the Fintechs, Robinhood has been keen to offer both apps (Apple store and Google Play) for clients and Buy-Sell capability. All other apps, once you decide to transact you need to switch to your smartphone. Openfolio, offers portfolio tracking and comparison to other investors in the network. SigFig offers similar functionality. StockTwits app with their social focus, is in the game.

From broad app developers, there are lots of android apps to monitor the market on your wrist:

Finance Stock Watch, offers a clean snap of one stock or index a time, color coding the moves of the financial asset.

Quote Face, can show holdings in your portfolio on the watch.

Stock Ticker, checking on your finance and your investments.

Similarly in the Apple store:

Stock Tracker, offers real time quotes, pre-market and after hours quotes, portfolio monitoring, tech charts, alerts (smartphone app has swipe to trade functionality with multiple brokers but not the smartwatch one).

Stock Pro, is another comprehensive real time stock app.

From the large incumbents:

Fidelity mobile for Apple Watch, was one of the first movers when the Apple Watch debuted 1.5yr ago. Their app has real time data and alert functionality.

E*Trade, the old time disruptor, also launched a smartwatch version, again with similar capabilities as their mobile sites but no execution.

Charles Schwab invites its clients to discover and initiate a trade (one watch screen covers markets and the other your Schwab watch list or portfolio) from their wrist and then switch to their phone to complete the transaction.

AJBell Youth, has Ios and Android apps for assisting customers on the go.

Social trading platforms like EToro or Zulutrade, don’t have smartwatch versions of their mobile apps. FX trading, has more advanced market monitoring and charting apps, like Swiss Dukascopy app and Japanese SBI FX trade app.

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.

Goldman is leading the “Sell-side empowers the Buy-side” movement.

The Daily Fintech founders are at SIBOS in Geneva; reporting every day, snippets of insights on the Fintech Genome. Stay tuned on all SIBOS Insights conversations.

For years the Sell side was the incubator of financial innovation and the marketplace where products and services were designed and the platforms where market making and execution took place. The Buy side, were the institutional clients!

The buy side players have always included at hedge funds, asset managers at institutionsmutual funds and pension funds. Despite the fact that individual investors are technically on the buy side, the term has usually been reserved for professional money managers. Only recently, maybe, with the explosion of Fintechs democratizing the investing space that has been traditionally only available to professionals or HNW; we can broaden the definition of the Buy side.

For all kinds of asset classes (equities, fixed income, derivatives, structured products, ect), we all understood that the Sell Side was the service provider and in the driver’s seat or the power position; whereas the Buy side was the client. It was traditionally, a Sell-side market. The competitive advantages were on the Sell Side, the proprietary algorithms were mostly on the sell side. The Buy Side was captive (partly or wholly) to the Sell Side, in ALL the phases of the trading life cycle. Starting from portfolio construction, research, product discovery, execution, and post-trade monitoring.

Fast forward, to our customer centric era and ask yourself:

Is the Sell Side, still the Sell side and the Buy side, still the Buy side?

A 35,000 feet look

The Buy Side is still using the ubiquitous Bloomberg terminal or the Eikon Thomson Reuters tools.

Fintechs wanting to become the alternative ubiquitous interface for most of the phases of the trading cycle, continue to popup despite the fact that VCs and accelerators don’t recommend this subspace (“Forget about creating the next Facebook or Bloomberg terminal; look at AI and ML and Big Data and pick your focus”).

All the Fintechs that can potentially be part of the next generation platform that is mostly used by the Buy Side; are directly or indirectly empowering the Buy Side.

The Sell Side was into market-making, proprietary trading, brokering, and investment banking. Expensive and proprietary tools were developed in-house to support the lucrative businesses of running large books, taking risks, and market-making. All these businesses have been shut down by the regulators and the otherwise perceived competitive advantages, i.e. the proprietary software tools, have lost their resale value and their potential to generate revenues.

The Sell Side, has a Treasure in their vaults that is worthless for them (at least as used in the past) and is valuable for the Buy Side (it always was). The Sell Side can and should empower the Buy Side. Much like Google empowered me and you, and all the relevant B2B users, by offering its open source solutions on its platform.

Goldman Sachs is leading by example: “The Sell side empowers the Buy Side”

Gain a perspective from one of the many web-based applications, SecDB, that Goldman Sachs has developed in house:

“Securities DataBase, also known as SecDB, allows users to test out potential trades and assess the risk of those positions. Up until now it was so guarded that chief operating officer Gary Cohn said he wouldn’t sell the rights to use the technology for $1 billion—maybe for $5 billion, the Journal reported.” Source

SecBD, was initially developed to manage inhouse complex derivative positions. It grew into a sophisticated risk management tool, that professionals can use to integrate new information or change parameters for their decision making. It became the Risk management Bible, on your smartphone. Deutsche bank and the likes were salivating in the previous era, to license such a system.

Fast forward to today! Goldman says : “Just take it, for free” to its Buy Side clients.

So, what has happened that led GS to offer SecDB for free to its clients instead of of some sort of revenue sharing agreement with them.

Goldman Sachs is empowering all its trade-prone customers, the Buy Side!

Goldman has publicly confessed that they are sharing for free with their Buy Side clients not One but Three applications.

SecBD has already been mentioned. SecDB is able to calculate 23 billion prices for 2.8 million positions and 500,000 market scenarios (Source: FX Magnates). Marquee (maybe in honor of CIO R. Martin Chavez, known by everyone as “Marty”) and Simon (Structured Investment Marketplace and Online) are the other two. Simon is focused on structured products and helps clients design products based on their hedging needs or investment views; instead of spending hours on the phones between with Sales and Trading. Goldman Sachs aims to increase their equity-linked note business and to become a platform for brokers or other distribution channels that have access to a broader Buy Side segment. Marquee is the software that integrates Goldman Sachs technology for the entire trade cycle.

gS marquee.png

Source: Business Insider

The Sell-side is empowering the Buy-Side. Goldman Sachs is leading the pack. In five years, we wont be using these terms anymore, as the platforms that can integrate all the parts of the trade cycle, will be what matters. Whether they originated from what we called “The Buy-Side” or the “Sell-Side” or the from the “outskirts” of the Wall, won’t be of essence.

The digitization of the Sell-side will be synonymous to becoming a platform empowering the Buy-Side.

The Sell-Side maybe the biggest threat to the vendors or the platforms traditionally serving the Buy-Side.

It will be a Buy-side market rather than a Sell-Side market.

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.