Ride-hailing apps become the Uber of Fintech, we trained AI fakes to stab us in the back, E-commerce's "solid" 12.4% growth -- Autonomous ?NEXT #148

Hello and welcome to Fintech Focus --

We had some great fun putting this one together for you this week, so we hope you enjoy it just as much. 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. NEOBANKS & FINTECH: Ride-hailing apps are becoming the Uber of Fintech
2. ARTIFICIAL INTELLIGENCE: Proof that we have been training AI fakes to stab us in the back
3. PAYMENTS: E-Commerce sales growing at a "solid" 12.4% vs. Retail's 2%. What is driving this?

Our artist of the week is Manolo Gamboa Naon who uses AI to produce art that serves as a welcome (and needed) bridge into digital art and an antidote for those who see the genre as cold, mechanical, and discontinuous with the history of art.

NEOBANKS & FINTECH: Ride-hailing apps are becoming the Uber of Fintech

Steve Jobs defined a key distinction that stuck with many entrepreneurs -- is your company a Product or a Feature? It's bad to be a feature -- you are just one widget in someone else's platform. It's good to be a product -- you fit into many environments and use-cases. What we are observing now is that Fintech product is being transformed into a platform feature by non-Fintech players -- specifically ride-hailing apps like Uber, Lyft, and Grab. 

These ride-hailing giants have built their empires by making the burden of payments a truly seamless experience for their customers. Which is why the potential for them to expand into Fintech and financial services far outweighs the need for new forms of transportation -- autonomous human-carrying Uber drones or Lyft trains. The kicker being that their robust platforms and/or large customer bases create ripe cross-sell opportunities. 

Take Grab -- the $14 billion-valued ride-hailing giant that acquired Uber's Southeast Asia business last year. Since then, Grab has faced growing competition from Go-Jek -- its +$9 billion-valued rival who is backed by Google, JD.com, and others. Forcing Grab to earmark financial services as a core pillar of its strategy for regional dominance over Go-Jek and financial incumbents who are disadvantaged by the lack of financial services infrastructure and unified credit scoring. Since then, Grab has partnered with Mastercard to launch a prepaid card to target the unbanked, spun out its own financial arm -- Grab Financial Group, which brings group payments, rewards & loyalty, and insurance to its drivers and customers, and recently announced a co-branded credit card with Citi. 

Uber's initial foray into financial services was the launch of Uber Cash -- a digital wallet allowing credit to be added in advance via prepaid cards. Since then, the popular ride-hailing app has partnered with Venmo for payments, Finnish-Fintech Holvi for offering financial services access to its drivers, Flexible car-leasing startup Fair for car leasing, a credit card in partnership with Barclays for loyalty and promotions, and a recent hiring spree showing signs of a potential New York-based Fintech arm -- much like that of Grab's. One of the interesting outcomes from such an arm would be the potential for a native Uber bank account, which would help remove the ride-hailer's reliance on the existing banking system -- Card processing fees alone cost Uber $749 million in 2017 -- to get paid and pay its drivers. Such a move would see Uber partner with cheaper and more agile low-profile FDIC-insured banks such as Cross River, Green Dot, or Chime, rather than have its own charter or partner with larger institutional banks. This is likely, as US-based ride-hailing companies such as Uber and rival Lyft have come under scrutiny by lawmakers to consider their drivers as employees rather than "independent contractors". Both Uber and Lyft argue that such a move would be cripplingly expensive -- Quartz estimates the cost to be $508 million and $290 million respectively. Our question is, to what extent would native bank accounts offset these potential employee-related costs?

Fintechs such as Square and Stripe are prime examples of digital startups that have used their enrolled bases of small merchants to cross-sell other services. Ride-hailers are starting to take note by replicating this model -- using their extensive base of both drivers and riders to build out their own ecosystems.

Source: Grab (via Business Insider), Grab Financial (via TheDrum), Uber (via Business Insider), Uber Credit (via Techcrunch), Uber-Lyft wage concessions (via SFChronicle)

ARTIFICIAL INTELLIGENCE: Proof that we have been training AI fakes to stab us in the back

In the 1933 film Duck Soup, actor Chico Marx is famously known to have asked, "who ya gonna believe, me or your own eyes?" Fairly meaningless in the 30s, but today, it's more relevant than ever. Let us explain. We know how the ever-expanding capacities of computing power and algorithm efficiency are leading to some pretty wacky technology in the realm of computer vision. Deepfakes are one of the more terrifying outcomes of this. A deepfake can be described as a fraudulent copy of an authentic image, video, or sound clip, which is manipulated to create an erroneous interpretation of the events captures by the authentic media format. The word 'deep' typically refers to the 'deep learning' capability of the artificially intelligent algorithm trained to manifest the most realistic version of the faked media. Real-world applications being: Former US president Barack Obama saying some outlandish things, Facebook founder Mark Zuckerberg admitting to the privacy failings of the social media platform and promoting an art installation, and Speaker of the US House of Representatives Nancy Pelosi made to look incompetent and unfit for office.

Videos like these aren’t proof, of course, that deepfakes are going to destroy our notion of truth and evidence. But it does show that these concerns are not just theoretical, and that this technology — like any other — is slowly going to be adapted by malicious actors. Put another way, we usually tend to think that perception — the evidence of your senses (sight, smell, taste etc.) — provides pretty strong justification of reality. If something is seen with our own eyes, we normally tend to believe it i.e., a photograph. By comparison, third-party claims of senses — which philosophers call “testimony” — provide some justification, but sometimes not quite as much as perception i.e. a painting of a scene. In reality, we know your senses can be deceptive, but that’s less likely than other people (malicious actors) deceiving you.

What we saw last week took this to a whole new level. A potential spy has infiltrated some significant Washington-based political networks found on social network LinkedIn, using an AI-generated profile picture to fool existing members of these networks. Katie Jones was the alias used to connect with a number of policy experts, including a US senator’s aide, a deputy assistant secretary of state, and Paul Winfree, an economist currently being considered for a seat on the Federal Reserve. Although there's evidence to suggest that LinkedIn has been a hotbed for large-scale low-risk espionage by the Chinese government, this instance is unique because a generative adversarial network (GAN) -- an AI method popularized by websites like ThisPersonDoesNotExist.com -- was used to create the account's fake picture.

Here's the kicker, these GANs are trained by the mundane administrative tasks we all participate in when using the internet on a day-to-day basis. Don't believe us? Take Google’s human verification service “Captcha” – more often than not you’ve completed one of these at some point. The purpose of these go beyond proving you are not a piece of software that is unable to recognise all the shopfronts in 9 images. For instance: being asked to type out a blurry word could help Googlebooks’ search function with real text in uploaded books, or rewriting skewed numbers could help train Googlestreetview to know the numbers on houses for Googlemaps, or lastly, selecting all the images that have a car in them could train google’s self-driving car company Waymo improve its algorithm to prevent accidents.

The buck doesn't stop with Google either, human-assisted AI is explicitly the modus operandi at Amazon’s Mechanical Turk (MTurk) platform, which rewards humans for assisting with tasks beyond the capability of certain AI algorithms, such as highlighting key words in an email, or rewriting difficult to read numbers from photographs. The name Mechanical Turk stems from an 18th century "automaton" or self-playing master chess player, in fact it was a mechanical illusion using a human buried under the desk of the machine to operate the arms. Clever huh?!

Ever since the financial crisis of 2008, all activity within a regulated financial institution must meet the strict compliance and ethics standards enforced by the regulator of that jurisdiction. To imagine that a tool like LinkedIn with over 500 million members can be used by malicious actors to solicit insider information, or be used as a tool for corporate espionage, should be of grave concern to all financial institutions big and small. What's worse is that neither the actors, nor the AI behind these LinkedIn profiles can be traced and prosecuted for such illicit activity, especially when private or government institutions are able to launch thousands at a time. 

Source: Nancy Pelosi video (via Youtube), Spy AI (via Associated Press), Google Captcha (via Aalto Blogs), Amazon MTurk

PAYMENTS: E-Commerce sales growing at a "solid" 12.4% vs. Retail's 2%. What is driving this?

Last week was made great by the release of Mary Meeker's Internet Trends report. If you haven't seen the 2019 version yet, what are you waiting for? Time to read 334 slides in 30 minutes. The key takeaway we remember from last year was the broad digitization of commerce, with E-commerce living in the web and in our mobile apps, plus the augmentation of the physical space with embedded digital commerce. See entry 1 above. 

Ecommerce is still very much a highlight of this report. Specifically, the fact that US ecommerce sales growth is noted as being “solid”, reaching 12.4% year-on-year growth in Q1 of 2019, up from 12.1% in Q4 2018. Similarly, physical retail sales are noted as “solid”, albeit growing more conservatively at 2%. Additionally, customer acquisition costs were found to be rising to unsustainable levels.

What we found most interesting about the reported ecommerce growth in 2019, is its sources where not only from the expected channels i.e., offline sales shifting to online, or search-directed sales on ecommerce websites. Rather, Meeker’s report tells a story of retail becoming a feature that is integrated into apps and services of every kind, and ecommerce reaching new communities and demographics: (1) Social apps -- like Kakao, Line, and Instagram are increasingly integrating transaction and ecommerce features. The monetisation of features embedded in large scale attention platforms makes sense.(2) Ecommerce platforms are making delivery a focal point of their offering. Much of the friction on these platforms lies in the delivery phase of the customer's journey with either cost or time creating negative experiences. Data-driven and direct fulfilment is growing rapidly with agile and low cost third-party platforms -- such as Rappi -- helping to remove such friction points. Enabling local merchants to expand their online presence, and improve access of their ecommerce platform to customers in entirely new and traditionally inaccessible markets. (3) Online grocery formats in China are competing for consumer wallet share. Here, Meeker showcases the sheer variety of grocery retailers competing using different formats for customers to access them i.e., digital-only stores, physical stores with a native digital app, digital-only stores that leverage a franchised community of retail partners to provide the goods and deliver.

It's always good to know we were right. As our 2019 predictions state "customer acquisition costs will rise and the digital model will become more competitive as servicing costs commoditize at a cheaper price point. What we mean is that if everyone -- including large operating businesses -- will understand how to market to and serve Millennials, driving away the arbitrage opportunity Fintech companies have had to date". We'll take that!

Source: Mary Meeker Internet Trends 2019 report

Further Reading:

• Visa launches DLT-based cross-border payments platform. The institutionalization of distributed ledger technology is taking place at a rapid pace. This is not unexpected given that the stakes are high with the potential for Visa to become a faster and better version of the SWIFT or SEPA networks.
• Bitcoin climbs above $9,000 for first time in over a year amid Facebook crypto talk. Last week it was announced that Facebook's cryptocurrency received backing from the likes of Visa, Mastercard, Uber, Coinbase, PayPal, eBay, Spotify, Vodafone, and Stripe. Such institutional support added to the legitimacy of the coin itself, and crypto in general, with Bitcoin's price reflecting this.
• Deloitte: 80% of Businesses See Blockchain as a Strategic Priority. Deloitte released their latest Global Blockchain Survey for 2019 -- reflecting a change in heart by those that indicated their pessimism towards the potential impact of the technology in 2018.

• Brex raises $100m to reach $2.6bn valuation. Brex -- provides a corporate credit card for small business, which consolidates spending and expenses across the entire organization and leverages existing corporate spending behavior to offer higher credit limits. We have always been a fan, and it seems so have Y-Combinator Continuity, GreenOaks Capital, and DST Capital.
• Millions of Venmo transactions scraped in warning over privacy settings. A casual experiment by a computer science student, proving how vulnerable users' data really is on the platform. As we see more use-cases of data being used for malicious intent, its lessons like these that we really need to pay attention to.
• Lemonade Launches in Germany. Digital Insurer Lemonade is going after European-based competitors like WeFox, by offering an insurance package starting at just EUR2.00. Grab your popcorn.

• Artificial intelligence reinforces power and privilege. Computational surveillance empowering governments and corporations is a terrifying use case -- think about it -- empowered AI that has the right to make decisions removes all accountability on behalf of the institutions it represents or is built by.
• Teaching artificial intelligence to connect senses like vision and touch. Credit where credit is due -- here the applications are quite important, such as: how hard must a robot grip an item based on the materials its made of, or is this object hard or soft? Machine vision software could use this to better read the products on a store's shelf, or take more responsibility in the manufacturing process.
• RealityEngines.AI raises $5.25M seed round to make ML easier for enterprises. Machine learning is becoming a valuable tool to decipher product and service strategies from the massive data exhausts created by the digital ecosystem. RealityEngines is hoping to be a platform to enable enterprises to achieve this much faster and cheaper than currently available.

• Moneyfarm partners up with Allianz. A partnership to facilitate Moneyfarm's expansion into germany with a cost-efficient multi-asset investment product. Indicating support for digital wealth management offerings across the European region.
• Merrill's new wealth continuum: Blending human and digital advice. It's clear that there's no one size fits all when it comes to robo-advice. Here, BAML are trying to appeal to the broadest range of clients by retrofitting its digital wealth management offering with human advisors. We say, god speed.
• The Ethics of $2B Lemonade, $100B Softbank Visions, and $500MM of Binance IEOs. Lex gives a great breakdown as to the overpriced absurdity of capital circulating IPOs, IEOs, and funding rounds. It's a great read, so we won't give the rest away.

• Facebook researchers are building virtual spaces to improve AI and AR. Have you ever dreamt of a time in which your Amazon Alexa knew exactly where you (and everything else) were in your house? Well, Facebook is building it anyway...
• Google shuts down Daydream VR's Play Movies & TV app. Google seems to be shifting everything into its Youtube platform, meaning that users will have way more viewing options available to them when they want to watch cat video compilations.
• Unity makes it easier to insert augmented reality into native mobile apps. Get ready to have AR embedded in everything! From your bank app to Candy Crush -- Unity is making AR an incredibly easy feature to embed into any app. 

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