Fintech AI Kensho Sells for $550M; Crypto Index Fund from Coinbase still not ETF; Amazon's "Checking Account-Like Product" - via Autonomous ?NEXT

Hi fellow futurists -- here are our top 3 favorite thoughts. 

Fintech AI Kensho Sells for $550M.  

Big news is big. Finance startup Kensho has just become one of the largest artificial intelligence acquisitions in history. What is even more impressive is that the acquirer S&P, is also a financial services firm, and not the ever-present boogeyman of Google, Apple, Facebook, Amazon. Forbes claims this is the most expensive AI acquisition to date, though we see you Otto (self-driving trucks) at $680 million in Uber equity.

There's a nagging question around the acquisition price. Pitchbook shows a bit over $100 million raised into the company to date, with the last check being $50 million, led by S&P, and with a post-money valuation of $595 million in March 2017. So the acquisition price is essentially identical to that of a year ago, with none of the investors taking a downround, and S&P effectively not paying for their own slice. Across all rounds, it looks like the company sold about 50% of the equity. Why exit now without an uptick for control -- the other investors from last March, like Goldman, JPM, Bank of America, etc., can't be happy to just get their toys back.

Anyway, what does Kensho do that is valuable? According to Goldman, which was one of the original investors, the answer is not that the AI manufactures investment product. Instead, it augments human analysts so that they are more powerful and can get more done -- like running a quantitative analysis in seconds rather than days. "It never disrupted the underlying business model". That's a lot of exit money for something that didn't disrupt any business models. Also not a surprose -- very few fintech companies are standalone businesses, but many will work when levered up 1000 times on a large incumbent client base. This was the logic behind BlackRock's $150 million spend on FutureAdvisor, a company with about $3 million in revenue. And a similar logic must animate the need to have the industry's best known AI asset to distribute to thousands of S&P institutional clients. 

Source: Kensho / Forbes

Crypto Index Fund from Coinbase still not ETF. 

One of our key predictions for 2018 was the rise of vanilla investment product packages for digital assets. That means we would get to see ETFs and boring-old portfolios, rather than the wild contortions of 2017, where public companies pretended to always be into blockchain to get a crypto halo. And in large part, we put the responsibility for irresponsible retail investment behavior squarely at the feet of American regulators. Instead of a 5 bps ETF with some crypto exposure, we continue to see coin mania and sentiment-driven speculation. 

Coinbase is not standing still, and has announced a subsidiary called Coinbase Asset Management that will oversee a Coinbase Index Fund. While Coinbase has never been one to list a lot of assets, it is disappointing to only see 4 crypto currencies (BTC, ETH, BCH, LTC) in the package. Not to mention that this product comes with a $10,000 minimum and a 2% annual management fee. Looking at crypto assets, 2% may not sound like much given 1000% returns last year. Looking at digital investment management, 2% sounds like 10 times the price of the entire Betterment service. That price is expensive and inefficient, and is another reason why we need an ETF structure.

Last, investors have a track record of experience with the Bitcoin Investment Trust structure (about $2 billion of GBTC), which shows some of the disconnect between holding a crypto asset directly, versus through a wrapper. The wrapper can trade at a discount or a premium to the actual assets it holds. Below you can see that depending on the time period, you would have had quite different return profiles investing in Bitcoin directly versus the investment trust. And at times, you would be buying the fund where the net asset value was 20-30% higher than the value of the holdings in it. The solution for better pricing is more liquidity, not less, and lower fees, not higher.

Source: Autonomous NEXT analysis, Coinmarketcap, Yahoo

  Amazon's "Checking Account-Like Product"

Lots of chatter last week about how Amazon is in discussions with JPMorgan about partnering on a "checking account-like product". This is right on the heels of similar discussions with Bank of America about putting capital behind its SME lending business. So since when are banking products or lending products or investment products just a "-like" product. Meaning, don't you have to have a bank to offer the trusted service of a bank account? Don't you have to have a trusted banking brand to hold on to people's money? Quaint questions for the last century.

Not really. According to a study from Bain, 74% of 18 to 24 year-olds and 68% of 25 to 34 year-olds expect to buy financial products from technology firms. And according to the Edelman trust barometer, people still trust Finance less than absolutely every other industry, while trusting Technology more than any other industry. There goes your core value proposition.

The implication of a GAFA sector that offers all the financial products without manufacturing them isn't the safe passage for the financial services industry to the future. Rather, it is the full commoditiziation of financial services, as the main manufacturers of financial products squeeze themselves into the customer acquisition and engagement channels of the big tech AI companies. When the AI knows clients better than anyone else knows clients, financial services are mere features within the rich tapestry of services called Amazon Prime. Why would anyone choose the pain of shopping for and opening a third-party bank account, if one comes pre-installed in our virtual assistants?

So you can see how puzzling it can be to read that JPMorgan is investing $20 billion in 400 new branches. Does 75% of deposit growth really come from customer visits to those branches? Do 60% of Americans still prefer to open an account at a branch, rather than digitally? Maybe, but these are decreasing data points in time, part of a larger trend towards digital. As shown below, each year these numbers go down, not up. Or, maybe, JPMorgan recognizes a corporate responsibility for its employees in a world that is moving towards automation and unemployment, and is doing its part in trying to stabilize local communities and the industry's reputation?

Source: Edelman, Bain, Tradestreaming/Cuebiq

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