Marketplace banking is on the up, GAFA doubles down on crypto whilst regulators bite down, Digital bank Finn closes up shop -- Autonomous ?NEXT #147

Hello and welcome to Fintech Focus --

It has been an interesting week in Fintech -- predominantly driven by some new hardware and software announcements made by Apple at their Worldwide Developer Conference. You can read about one of them in the second entry below. We would like to remind you that should you ever wish to refer back to previous newsletter entries, you can find them on our website HERE.

If you have any questions, comments, or suggestions regarding the content and/or structure of the newsletter, feel free to reach out to me directly on LinkedIn, Twitter, or via my email. I look forward to hearing from you.

Our top 3 thoughts for this week are:

1. FINTECH: From mobile networks in Africa to global eCommerce platforms, marketplace banking is on the rise
2. CRYPTO: GAFA doubles down on a crypto future, whilst regulators bite down on a crypto past
3. NEOBANKS: JP Morgan Chase's Finn proves that digital banking is tougher than you think to get right

Our featured artist(s) this week is Apple's design team 

FINTECH: From mobile networks in Africa to global eCommerce platforms, marketplace banking is on the rise

It has long been the promise of regulations like PSD2 or plain old web-forced transparency, that banking information and products get popped out from behind the curtain and made to compete within the foreign land of tech platforms (i.e., App stores and e-commerce). This means prices fall and economic rents go to fewer winners that have strong APIs, integrations, and a nimble balance sheet. The promise is a utopian Fintech ideal in which one’s cash, savings, debts, bills, tax, investments, and assets exist in a single platform that is fast, secure, and globally accessible. And where the long tail of banks evaporates into commodity providers as their regulatory and distribution moat falls away. The symptoms of this happening aren't difficult to find either.

Take open banking platform Plaid – a US-based data aggregation platform that powers authentication and banking detail provision -- not "personal financial management" only -- for any tech startup that wants your bank account and routing number. The platform has built a major open financial data infrastructure for over 15,000 tech startups such as Venmo, Acorns, Robinhood, and Coinbase. It goes without saying that these startups Such success has driven the platform to the shores of the UK, in which it is already connected to over eight of the largest digital-only banks. The claim is that the platform will give UK Fintech businesses access to 70% of all personal current accounts and promote the democratization of financial service offerings to customers between the US and UK. Essentially, these open banking platforms -- Tink and Bud included -- aim to be the Amazon Web Services for financial service companies.

A less obvious but just as important example is in eCommerce, where marketplaces like Amazon are partnering with financial institutions to shift the flow of retail into its walled garden -- Bank of America for merchant lending, American Express for SME credit cards, JP Morgan for checking accounts, and so on. The goal here being to monetize a sticky business customer (SME) within the eCommerce platform over and over again -- remember the cross-sell is bigger than the sell. We found two noteworthy new developments in this department. (1) African mobile network operator MTN is building a digital marketplace platform to offer everything from financial products to household goods. The platform will be bootstrapped to MTN's existing mobile money app MoMo, with hopes of it becoming a leading full service banking and eCommerce platform, offering loans, savings accounts, insurance, as well as third party products. The reach of such a digital service would be massive with MTN operating in 22 countries with over 200 million customers. Compare that to the "Amazon of Africa" eCommerce giant Jumia's 4 million customers across 14 countries and you have yourself a juicy competitive advantage situation.

(2) eBay has just announced a partnership with Santander to offer loans to its 200k SME customers – similar to the Amazon BoFA cooperation. The vision is that eBay have proprietary data that that could indicate SME revenues before those revenues even materialize -- for example: the traffic on product pages by consumers on the eBay website. Here the story is the same where financial institutions are leveraging the customer base and stickiness within eCommerce platforms to sell their products, with the intention to either up-sell or cross-sell them to higher margin products at a later stage.

Overall, it is clear that there is a movement to consolidate financial products and services into digital marketplace platforms is afoot. Should this concern existing banking incumbents? Not entirely, as such institutions still hold the resources sufficient to rapidly spin up their own Fintech startup -- Goldman Sach's Marcus and Well Fargo's Greenhouse. For those that don't, and rather partner with Fintech marketplaces -- the incumbent becomes the client of the Fintech -- the risk is clearly commoditization. Why would anyone choose the pain of shopping for and opening a third-party bank account, if one comes pre-installed in our virtual shopping assistants? Here, Fintech's have their cake and get to eat it.

Source: Novobrief (article), Plaid screenshot (Plaid Blog), MTN MoMo (MTN Cameroon)

CRYPTO: GAFA doubles down on a crypto future, whilst regulators bite down on a crypto past

A few things here. Firstly, this week at its Worldwide Developer Conference Apple announced the launch of a mightily powerful computer deemed “the cheese grater”, a monitor stand costing as much as an iPhone X...just for the stand, and more importantly CryptoKit . Essentially, CryptoKit is a cryptographic developer tool that allows developers to build more security functionality into their apps with improved support and ease-of-use. Such functionality comes in the form of hashing, public and private key generation, and encryption needed to be integrated into iOS applications. Not to be confused with Samsung and HTC's phones that come with native crypto wallets. Yet, it goes without question that these companies (Apple now included) are reacting to the rising demand for crypto-focused products.

This is not the first time we are seeing the tech giant embrace crypto either. Last month it was announced that debit card and payment app ‘Spend’ -- which supports over 16 different cryptocurrencies -- now has integrated Apple Pay functionality. How this works is cryptocurrencies, such as Bitcoin or Dash that have been bought in / sent to the integrated wallet, will get converted at the point-of-sale for instant purchases through the ApplePay network. 

Another GAFA giant we know is embracing crypto is none other than Facebook with their soon-to-be-launched cryptocurrency GlobalCoin. What’s interesting is that, over the past few months, the social media giant has been hard at work trying to win over financial institutions and tech companies -- such as the Bank of England and crypto-firm Gemini -- around formalizing an independent foundation -- much like the Ethereum Foundation -- to govern the digital asset. We know that the coin will most likely be a stablecoin i.e., pegged to a fiat currency / basket of currencies / or other, making it desirable and easily marketable in emerging markets where local fiat currencies are economically unstable -- such as in Venezuela. The required funding will come from the fees Facebook charges partnering firms to run a node on the network. Essentially, these firms will need to stake their interest and commitment, and tie them into supporting the network. Facebook aims to have 100 nodes at the launch of GlobalCoin, with each node costing partnering firms as much as $10 million. Based on their tarnished reputation to safeguard the privacy and security of the social network's users, we think this is ambitious to say the least.

Facebook is not the only tech firm embracing crypto with a suspect reputation. Just last week, the US Securities and Exchange Commission (SEC) took legal action against social messaging app Kik -- regarding its 2017 sale of one trillion “Kin” tokens to over 10,000 investors, raising around $100 million. The premise being that the sale was not registered with the SEC -- a requirement under US securities laws. As such, the sale is deemed an “illegal securities offering of digital tokens.” 

It is not only the SEC that are leading the fight against previous instances of cryptocurrency-powered crimes. The Joint Chiefs of Global Tax Enforcement or J5 - a team of five criminal intelligence communities from Australia, Canada, the Netherlands, the United Kingdom and the United States whose purpose is to fight against international and transnational tax crime and money laundering. Currently, J5 has opened 60 different investigations specifically related to cryptocurrency-powered crimes. One of these is a Netherlands-based cryptocurrency “mixing service” called Bestmixer.io whose primary function was to hide the ownership history of cryptocurrencies, raking in 27,000 bitcoins ($200 million) over one year alone.

As many would consider the institutionalization of crypto by GAFA and the clamp down by global regulatory bodies a negative, its important to note that if adoption is key to ensuring the prosperity of these mechanisms, then such action needs to be taken to safeguard those vulnerable to exploitation and those that consider the inherent illicit activity too great a barrier to enter.

Source: Apple Cryptokit (via Apple), Facebook Globalcoin (via The Information), Bestmixer.io (via Europol), J5 crime unit (via IRS)

NEOBANKS: JP Morgan Chase's Finn proves that digital banking is tougher than you think to get right

JP Morgan Chase's Finn -- is a bit of a hybrid -- a digital app loaded with features suited for its millenial target market, as well as, a digital branch mechanism to transfer customer's funds to new Chase checking and savings accounts. The reason for this was to attract customer's that sought to bank with Chase, but had little to no access to a branch. The digital banking app launched in 2018, and soon proved that the Chase brand was in fact best positioned to provide that combination of services to Finn's 47,000 customers.

Three important takeaways from this: (1) Consumers who open accounts with digital banks don't do so because they want a bank with no branches. A higher value is attributed to better financial management tools, rewards, and interest rates. (2) A differentiated service offering than what exists in the market is critical to garner significant adoption rates amongst a younger target market. Finn didn't offer its consumers -- nor existing Chase customers -- anything they couldn't get elsewhere. (3) A lack of understanding the market you are attracting, is probably the cause of poor uptake. In a recent poll by Cornerstone Advisors research – Finn had clearly tailored its market to the wrong demographic with just 7% of 20-something Millennials and 6% of 30-something Millennials said a digital bank would be in their consideration set. Contrast that to the 9% of Gen-Xers and 7% of Boomers who said they would consider a digital bank.

This is Fintech at its best -- multifaceted, difficult, iterating on a solution to cater to the largest customer demographic as possible. Access and democratization are its core values, even if it is not decentralized nor truly disruptive. The kicker is if you get this wrong, then call it a day. 

Source: Finn Bank (Via Chase), Insight Vault Q4 2017 (via Cornerstone)

Further Reading:

• Blockchain Finance Solutions. If you ever wanted a breakdown of the use cases an organisation like Consensys is working on and the potential revenue numbers tied to the opportunity, then look no further than this brilliant resource.
• EY Exec: Most Ethereum Decentralized Apps Not Used Productively. It would be completely naive of us to argue that this is not the status quo within the blockchain space. However, it is important to take into account (1) the proof of concept implementation of the solution and whether the design of the experiment is not restricting the outcomes. (2) Adoption and buy-in from many major institutions/users is critical to understand the full extent of the capabilities of the app.(3) Lastly, could the lack of complete knowledge of decentralized apps by parties involved be a barrier to significant outcomes?
• Why Lobbying Growth Is a Sign That Crypto Is Maturing. This is fascinating to see. Public lobbying -- with the largest expenditure -- is centered around legislation and regulation, whilst private interests sit in-between legislation and new draft acts that seek to open the market.

• SoFi Announces ~$500M Strategic Growth Investment. From investments to loans to check and savings accounts, SoFi wants their platform to be the one for all your financial needs, and it seems the Qatar Investment Authority believes it will be.
• Beam raises $55 million for a connected toothbrush that lowers dental premiums. Beam dental is a dental benefits provider that leverages algorithmic underwriting to drive down rates. The logic here is that the more you brush, the less likely you are to claim for costly dental work. Brushing is tracked using a smart bluetooth-enabled toothbrush which is provided via a semiannual subscription service. Our observation is -- don't expect insurance-centric IoT devices to stop at your teeth...
• Why the Internet of Things is becoming scary. We added this great breakdown as a follow-up to the link above. Enjoy.

• How AI and machine learning are improving the banking experience. Often there's a misconception as to where and how exactly AI can be applied to the customer banking journey. We broke it down in our Augmented Finance report here -- In US alone, 2.5 million financial services employees are exposed to AI technologies. Potential cost exposure of $490 billion in front office (distribution), $350 billion in middle office, $200 billion in back office (manufacturing), totaling $1 trillion across banking, investment management and insurance.
• Amazon’s New AI Textract is Incredible. The cloud is becoming the new battleground for AI technology, in which small AI startups are fighting for a stake in the data rich cloud landscape to enable their capabilities. Amazon's Textract accurately extracts text and structured data from documents with no machine learning experience required -- leveraging its AWS cloud as the lifeblood. The capability has API's to connect it into a multitude of applications. AI-as-a-Service is not new -- with examples like IBM's "cognitive computer" Watson -- but unlike IBM, Amazon are not trying to reinvent the wheel.
• Cracking open the black box of automated machine learning. Although this link gets quite technical, the just is that MIT researchers are building an interactive tool to democratize access to automated machine-learning systems. In doing so, not only can improved systems be built based on their use, but also encourage the trust users have in these systems by making them more transparent.

• Wealthfront Just Wants to Be Your (Financial) Everything. What started out as a digital and automated investment management platform, is now evolving into a bank through its partnership with financial services company GreenDot. The first entry above will give you sufficient reason to know why.
• BofA launches hybrid human-digital investment product. The notion that a robo-advisor has the capacity to fulfill the capabilities of a human advisor is a fallacy. There are emotional and contextual understandings -- empathy -- that we believe are a long way away from being interpreted by a piece of software.
• Digital Wealth Management Market and Its Key Trends. With all the noise around whether current systems are winning and losing, we found this short but to-the-point piece refreshing at taking a step back and identifying what's moving the industry forward.

• We might spend more time living in virtual reality than actual reality. The logic here is simple. The psychological and emotional benefits to socialVR -- in which personal interactions take place -- are significant. Those with PTSD have said to have been aided through the use of cleverly designed VR world to rewire the brain. Essentially, if VR's immersive capabilities become rich enough over the years, we will find ourselves at peace in VR flying over distant galaxies as opposed to stressed about the next political tweet in our social media feed.
• Toyota's New Augmented Reality Shopping Experience: A Shift In The Car Buying Journey? This is very clever. Bringing AR experiences to you via existing digital channels without the need of expensive equipment is the golden egg of advertising and it seems Saatchi and Saatchi are on top of it.
• Apple doesn't have an AR headset yet, but its AR toolkit is paving the way. There's no denying that apple are busy perfecting the hardware and software necessary to bring users into a fully immersive AR experience in the comforts of their own home. Let's be honest, whilst VR and headset companies struggle to stay afloat, we believe that Apple's strategy to focus on the infrastructural aspects of AR to be a winning one.

We put this together at Autonomous NEXT, where we love Fintech, Crypto and our community. Contact us with questions and ideas.

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Thanks for reading!  

Best,

Matt