Fintech: The Disruption of Your Money

Fintech (technology supporting financial services) remains a popular area for startup activity and funding. The areas encompassed by fintech include wealth management, insurance, lending, mortgages, real estate, money transfers and remittances, capital markets, payments and billing, personal finance, reg tech and cryptocurrencies. While the hot area(s) of investment in fintech shift back and forth, the enthusiasm for fintech deals and funding continues to grow. The disruption of your money has begun!

By Allan Thomas Chiulli, DigElearn
www.DigElearn.com

February 15, 2019

Fintech (technology supporting financial services) remains a popular area for startup activity and funding. The areas encompassed by fintech include wealth management, insurance, lending, mortgages, real estate, money transfers and remittances, capital markets, payments and billing, personal finance, reg tech and cryptocurrencies. While the hot area(s) of investment in fintech shift back and forth, the enthusiasm for fintech deals and funding continues to grow. The disruption of your money has begun!

Financial services incumbents are a natural target for disruption by changing technology and new business models. This industry is encumbered by numerous stale business models and practices that make the individual consumer cry out “There has got to be a better way!”

After a career in financial services, my personal experience may offer insight as to why innovation by financial incumbents occurs slowly:

  • Culture: Large incumbent financial services firms like to think of themselves as “fast followers”. This characterization creates an industry wide culture that rewards an aversion to unnecessary change—the understanding is that you keep your job (and income) if you avoid the big mistake. This approach is permissible as long as product innovation within the financial services industry comes from expected players, is incremental in nature and focuses on new product features that are easy for others to quickly copy. After all, a popular new mutual fund discipline or annuity payout method is never unique in the market for very long.

    Thus, “fast follower” companies have the luxury of sitting back and watching innovation by others, monitoring to see if the new product or feature sticks and then quickly copying those innovations that succeed. There is little reward for sticking one’s neck out in front of everyone else by being first with a ‘Big New Idea’.

  • Technology: Financial service firms look at technology in much the same manner as they do product innovation: The safe and high reward path is, at best, taking the “fast follower” approach. Here’s the main reason: Financial service firms have historically benefitted from increasing margins at scale. For example, the additional resources required to support a $500 million mutual fund vs a $5 billion mutual fund are quite small compared to the 10X increase in income. The result is a culture of aversion to unnecessary change that also applies to technology. Given increasing margins at scale, companies believe their resources are best directed at growth-oriented marketing and sales initiatives, thereby creating commensurately higher margins than to spend resources on technology than may slightly lower costs. The result is that financial services firms take a “We’ll do it when everyone else does” mentality towards new technology.

  • Regulatory Pressure: Make no mistake about it, the regulatory and compliance pressures faced by financial services firms are often overwhelming. In addition, the strict requirements from many regulatory directives are often ambiguous and firms are left guessing as to a new regulation’s required actions and supporting documentation. In addition, the presence of ‘good intent’ (that is, I was not aware of the deficiency) and the ambiguity of their own regulations is sometimes ignored by a regulator on a hunt to identify and punish an actual or perceived deficiency or wrongdoing.

All in all, the combination of easy-to-copy innovation, higher margins at scale and an often ambiguous and unforgiving regulatory climate combine to create a culture that encourages an aversion to meaningful change, the adoption of a “fast follower” approach and places a low premium on meaningful innovation. As a result, financial services incumbents generally gather into a herd when confronted by innovative ideas. The most important question becomes: “Who else is doing this?” as I do not want to be first.

Meanwhile, despite the ambivalence of the incumbent financial services firms, enormous investments are occurring in potentially disruptive fintech opportunities. This phenomenon is occurring across the globe as total global fintech investment has grown over the past five years:

Global Fintech Funding Global Fintech Deals
Source: CB Insights
2014 $8.3 BB 885
2016 $19.3 BB 1,254
2018 $39.6 BB 1,707

In addition, many new fintech firms are gaining sufficient traction such that funding mega-rounds of $100 MM or larger are becoming more common, and especially in North America and Asia:

Global Total North America Asia
Source: CB Insights
2014 10 5 2
2016 18 8 10
2018 52 25 18

Lastly, there are now 39 fintech unicorns (with a private market valuation of $1 BB or greater) valued at a total of $147.4 BB (excluding Alibaba’s Ant Financial, whose 2018 $14 BB funding round occurred at a $150 BB valuation.) 16 of these 39 unicorns reached their $1 BB valuation for the first time in 2018. Furthermore, over the past several years, public fintech companies (such as PayPal and Square) have outperformed the large incumbent financial institutions (such as JPMorgan Chase and Bank of America) and the S&P 500.

So, where is all this excitement focused on? Here are ten emerging trends in fintech:

#1 The Battle For Deposits
Fintech firms are becoming more aggressive as they expand beyond their initial lines of business and begin chasing consumer deposits. Banking-as-a-service is emerging as a new product to help fintech companies capture deposits, as Green Dot and Cambr provide mobile banking capabilities to hundreds of firms. The end game is to capture the client’s paycheck, which opens dozens of service-providing and revenue-generating possibilities for these fintech firms (while incumbent banks are hamstrung by the Durbin Amendment mandating low fee charges to consumers on debit cards).

#2 Fintechs Morph Into Platforms.
The initial use case for many fintechs is now morphing into a wide-ranging platform of financial services. Robo-advisor Wealthfront is now entering college savings, lending and real estate. Robinhood stumbled badly in their attempt to offer high interest checking and savings accounts but is adding cryptocurrencies to its free trading platform. Cryptocurrency platform Coinbase is adding institutional investing, index investing and wealth management to its services. It appears that fintech firms are concluding deposits, platforms and data are the new gold.

#3 Southeast Asia is a Fintech Hotbed
Southeast Asia’s combination of an emerging middle class, high Internet access and increased smartphone ownership creates a fertile environment for new fintech platforms to emerge. Thailand, Vietnam, Indonesia, Malaysia and the Philippines now host startups in financial services, digital wallets, e-commerce and remittances. Alibaba’s Ant Financial and the ride hailing apps (after acquiring mobile payments apps) are active in all these countries. Singapore-based Grab is moving past ride-hailing transport services and food delivery to add a payments ecosystem, even as it begins to offer financial services to its driver, agent, and merchant community. Indonesia-based Go-jek is moving past ride hailing to become a payment hub through its Go-Pay app. These moves mimic how AliPay and WeChat have transformed China by becoming an online community of services far beyond their initial payments and messaging services.

#4 Unbundling the Paycheck
An early wave of fintechs provided a direct to consumer path through startups like Lending Club (personal and auto loans), SoFi (student debt) and GreenSky (home equity and renovation). However, new startups scrape off a piece of the paycheck to fund a wide array of services, including Alice (pre-tax spending), Even (earned-income advance), Goodly (student loan payoff) and Honey Bee (emergency funds). Meanwhile, Gusto and Earnin allow employees to access earned income ahead of their payday.

#5 Amazon Lurks at The Edge
Amazon is always looking for industries where they can remove margins and make money on data and convenience. The e-commerce giant now offers bank-like services that just fall short of becoming a bank, including Amazon Pay, Amazon Allowance, Amazon Go, Amazon Protect, Amazon Lending, Amazon Reload and Amazon Recharge. At this point, Amazon is not yet in frontal assault mode on financial services. However, once Amazon figures out their strategy, they can acquire or charter a bank and create significant disruption by leveraging their community of 310 million e-commerce users, 100 million Amazon Prime members and 1 million small business sellers.

#6 Democratization of Investments
The mutual fund was an early way of democratizing investments, as an investor could buy into a diversified mutual fund at an investment far below that of a portfolio of individual stocks. This was followed by mutual fund platforms that allowed easy buying and selling of mutual funds without contacting the individual mutual fund companies. Now, the trend towards democratizing investments continues, as micro-investment platforms (allowing small investments) emerge in new asset classes like music (Royalty Exchange) and art (Masterworks).

#7 Real Estate Enters the Digital Age
Fintech is now heavily involved in real estate through startups offering cloud-based platforms including listing, settlement, energy management, mortgages, analytics and title services. New business models, through startups like Ribbon and Flyhomes enable ways to make all-cash offers on homes along with guaranteed sales while startups like Verbhouse and Divvy provide rent-to-own paths to home ownership.

#8 Technology as a Distribution Channel
Blackrock, the world’s largest asset manager with $6.3 TR in asset under management (AUM) and Microsoft (the world’s 1st or 2nd most valuable firm, depending on the day) with their Azure Cloud service and 135 MM Office365 users, announced an initiative to create “guaranteed Income” for retail investors. This ambitious announcement belies the fact that, today, neither BlackRock nor Microsoft can provide a penny of guaranteed income to anyone. Guaranteed income requires an insurance company and neither firm is an insurance company. Still, there is something promising in this strategy as BlackRock looks to market its iShares ETFs in retirement accounts using Microsoft’s Cloud, Office 365 and Windows products as a distribution channel. As this technology-based distribution platform begins to reach out to consumers, every insurance company in the world will beat a path to BlackRock and Microsoft to become an annuitization provider to this product. Other firms with major consumer reach such Google with Chrome and Android, Apple with Safari and iOS and Facebook (already rumored to have a cryptocurrency initiative underway) with 2.3 billion global users may follow. Today, a dozen or so Chinese firms (Tencent, Alibaba, Didi Chuxing) with 500 million to one billion users already implement some version of this strategy.

#9 The Incumbents Focus on Mobile and AI
Banks sometimes mimic the startups. For example, Goldman Sachs’ Marcus platform provides no-fee loans ranging from $3,500 to $40,000 loans to individuals. Bank of America is offering free equity trades (like Robinhood) to its best customers. Still, most banks are content to improve efficiency by expanding their mobile offerings and through Artificial Intelligence (AI) initiatives like introducing chatbots for customer service and in streamlining loan processing. We have not seen a wave of acquisitions of fintech startups by the major banks as regulatory, cultural and legacy technology issues appear to keep the banks on the sidelines. Still, inevitably, we can expect to see a wave of acquisitions by financial incumbents as their own R&D efforts become increasingly marginal in impact.

#10 Cryptocurrency’s Business Model Needs Repair
The Bitcoin bubble popped as the price of Bitcoin dropped from a December 2017 high of $19,783 to below $3,500 in 2019. Meanwhile, cryptocurrencies are still searching for their “killer use case.” Foreign remittances, so far, appear to be the strongest candidate, but adoption has a way to go. Further, JPMorgan recently concluded that the average cost of mining a single bitcoin is now $4060 (versus a current average bitcoin value of around $3,600) while the energy consumption of the global bitcoin mining industry now equals that of Ireland. A lower-energy use alternative is a proof-of-stake mining model that requires miners to (essentially) buy a mining franchise and have this purchase price held as a way of reinforcing good behavior. Another approach is stablecoins, whereby the cryptocurrency value is pegged to assets such as the U.S. Dollar or gold. Issuers of stablecoins must hold reserves to back their coins, but then stablecoin issuers begins to look like banks. Stay tuned to see how these problems get fixed!

Gradually, Then Suddenly
The investment community keeps betting ever-increasing dollars that these new fintech firms will find their place in the new financial service ecosystem. The reason may be that technology and business model disruption will occur gradually, and then suddenly, as it has in many other areas. This “gradually, then suddenly” experience reflects the impact of new competitors coming from unexpected directions into a market. At that point, a “fast follow” strategy falls apart as the incumbents are culturally and technically ill-equipped to respond effectively to the nature and extent of the disruption.

In the end, will the tech giants and the new fintechs team up to create a new financial service ecosystem, or will the incumbents and startups join together via partnerships or acquisitions or, lastly, will the new startups emerge victorious? As this activity plays out on a global scale, new combinations of financial services incumbents, tech giants and fintech startups are shaking up financial services and the disruption of your money is just beginning.

Allan Thomas Chiulli is the co-founder of DigElearn, an online digital learning membership experience at www.DigElearn.com and the author of Winning in the Digital Tornado. Both are guides to digital transformation for business and technical people needing to catch up and stay ahead of digital transformation. Readers may take a free quiz to measure their Digital Savvy at www.DigElearn.com.

The Mobility Revolution: Getting There as a Data-Centric, Connected User Experience (UX)

One of the most amazing things about the Digital Age is its “convergence”, that is, how digital technologies and new business models blend together to create new products and services. Sometimes, the change is interesting, but limited in impact, such as Uber combining ride-sharing and food delivery to create UberEats.

By Allan Thomas Chiulli, DigElearn
www.DigElearn.com

February 1, 2019

One of the most amazing things about the Digital Age is its “convergence”, that is, how digital technologies and new business models blend together to create new products and services. Sometimes, the change is interesting, but limited in impact, such as Uber combining ride-sharing and food delivery to create UberEats.

Other times, however, the potential impact is dramatic and profound.

An example of a dramatic and profound impact is how our existing modes of transportation are transforming into “Mobility” or “mobility as a service” (MaaS). The result is that, in a Digital Age, mobility becomes a data-centric, connected User Experience (UX). Matt Cole provides an excellent definition of mobility that describes what is happening while also highlighting the primacy of the user experience (UX):

“Mobility is a combination of public and private transportation services
within a given regional environment that provides holistic,
optimal and people-centered travel options.”

I spend a good amount of time in downtown Austin and am always amazed at how quickly the city has exploded in its use of new mobility services. Austin is a great trial location for these new services – the weather is mild, a lot of people live in or on the edges of the city center while the downtown business, government and university area is compact, quite hilly and an open parking space was last spotted in 1973.

Now, almost every corner of downtown has Jump, Bird, Lime and Lyft electric scooters available. Sometimes they are in neat tidy rows; other times they are simply left leaning against a building.

A Jump Scooter (Owned by Uber), Lyft Scooter, Bird Scooter

There are also pedal and electric-assisted bicycles, either as single bikes or lined up in racks.

Electric Bicycles and Credit Card Reader

These options are geared towards short, frequent commutes or casual sightseeing where walking or taxi rides are impractical due to factors involving the distance, traffic tie-ups, wait times, availability and high trip costs.

Access to these scooters is easy through an app whereby a rider taps a button on the scooter and scans the QR code. That’s it. The scooter comes alive and the rider is free to ride off in any direction they choose. Instructions are minimal and common-sense. The bikes are credit card driven, but similar in convenience.

There usually is a startup cost, such as $1, and a time-based charge after that. The user then drops the scooter off at their destination, taps a button on the app and they are done. The next rider can take the same scooter wherever they please.

The scooter companies usually cap the top speed at about 20 mph and braking is carefully calibrated. The key, however, is that one has a sense of great adventure and freedom while easily scooting around a busy city center while pedestrians trudge to their destinations or sit in a car at red light after red light.

While these scooter and electric bikes are sometimes referred to “micro mobility”, a far greater effect is in play. New technologies and business models are coming on the scene and the disruption will be dramatic: Transportation of people and goods will soon revolve around data, connectivity and the user experience (UX), not the steel, rubber and plastic that we associate with today’s automobiles.

While these scooter and electric bikes are sometimes
referred to “micro mobility”, a far greater effect is in play.

Here’s why: Mobility and its associated services will soon far outstrip the profitability potential of traditional car making. Accenture projects that by 2030, revenues from manufacturing and selling vehicles (around $2 trillion) will be only marginally higher than they are today, and that profits from car sales will shrink (from $140 billion to $135 billion). Meanwhile, Accenture also projects that revenues from mobility services are projected to soar to almost $1.4 trillion—with profits reaching as much as $250 billion.

Utilizing 5G connectivity and smartphones, a new ecosystem surrounding mobility is emerging. Here is how it may all come together: The common denominator is a single app for trip planning. The individual Jump, Lyft, Bird and Lime scooter apps go away as a common user platform emerges that links all public and private mobility services: Ride sharing, scooter, bicycles, taxis, buses, trains and subways are all on the system. All of these mobility services are aggregated on a single platform and artificial intelligence guides the rider by making suggestions that incorporate the rider’s needs, preferences and history (after all, a scooter may not be practical in the snow or if the rider carries a briefcase).

The optimal trip is quickly planned, confirmed and then reserved. A single QR code or facial recognition enables all ticketing, payments and switches between modes of travel for the trip. Group travel is handled in the same manner. Four reasonably fit business people may be willing to share the adventure of riding three or four blocks on scooters to travel to a meeting on a reasonably nice day; however, there are times, circumstances and conditions where only a car will do.

Mobility and the associated services will soon far outstrip
the profitability potential of traditional car making.

The concept of a car also begins to change. The two game changers here are ride sharing services and autonomous vehicles. We are transiting from an ownership-centric society to one of a sharing economy. Sharing a ride, sharing a home, and sharing an office is becoming more of the norm.

Think of what happens when ownership of a car is no longer a necessary part of one’s life. As fewer people own cars, we all drive less while using less gas or electricity to power the car… gas or electricity taxes, tolls and license revenues, parking garages, billboard industry, repair shops, car dealerships, auto advertising, car rentals, public road infrastructure, insurance and driving schools are all impacted. New services emerge that converting parking lots, multi-story garages and our home garages into new manufacturing, recreation, work and living areas. Maybe a four-story parking garage becomes a robotic manufacturing center while the three-car garage in our home becomes a new indoor/outdoor pool!

The two game changers here are
ride sharing services and autonomous vehicles.

As autonomous vehicles begin to infiltrate into our lives, the data and design experience of cars changes. Artificial intelligence-driven predictive and optimization analytics optimize regional traffic flows, thereby reducing travel times, pollution and accidents. The result is:

  • Energy costs drop,
  • Traffic jams are rarities,
  • Vehicles hardly crash,
  • Energy demand drops, and
  • Costs per trip plummet.

The result is that whatever speed that you are traveling (in an autonomous car) is the fastest speed that will get you where you want to go in the least amount of time.

The design of cars also changes as to facilitate rider productivity and recreation. People can face each other and place tables amongst themselves. Cars can become mobile conference and entertainment centers that pick people up, facilitate a task, experience or entertainment and then drop them off.

Connectivity and payments will become as much a part of this new car as the tires. Voice services like Alexa will enable the user to accomplish pretty much anything in a car that they could at home. Food, gas or electricity, Netflix, conferencing, shopping and other personnel expenditures are handled by the rider in an easily automated manner. New mobile payment technologies, such as facial recognition, are incorporated into the car itself.

Cars may be purchased, leased, time-shared, rate-based, subscription-based or used through some other form of payments. Flexible micro payments will emerge as one leases a car for 30 minutes or 30 miles. If one does own a car, it may well be as an investment: Your car may drive you to work in the morning and then produce income for you as a ride share until it is time to take you home. Or, maybe your car is too busy providing rides and sends another car to take you home!

Connectivity and payments will become as
much a part of this new car as the tires.

Given this new vision of a data-centric, connected and UX driven mobility, the auto manufacturers are not standing by waiting to become the 21st century version of horse and buggy manufacturers. They are responding by developing technologies, forming strategic consortiums, developing partnerships and investing in startups.

For example, Ford jumped into the car sharing business with a pilot launch in London, is turning F-150s into drone launch pads, launched an on-demand bus sharing service with startup Bridj, launched a pilot for a lease-sharing service among friends in Austin and spun out Ford Smart Mobility as a separate entity to “do more faster”.

Meanwhile, GM is moving fast with some major moves as it launched its car sharing service Maven after acquiring Sidecar, invested $500M into ride sharing service Lyft and bought Cruise for nearly $1 billion.

BMW and Daimler merged their mobility operations under a single umbrella in early 2018, with each company taking a 50% stake in the joint venture. They have launched car-sharing (Car2Go and Drivenow), ride-hailing (myTaxi, Chauffeur Privé, and Clever Taxi), parking (ParkNow and Parkmobile), electric vehicle charging (ChargeNow and Digital Charging Solutions), and on-demand mobility (moovel and ReachNow).

Not to be outdone, nearly every day brings a similar announcement by Tesla, Toyota, Honda, Nissan, Porsche, Chrysler-Fiat, Volvo and the other major auto manufacturers. The theme of these announcements always runs along the same lines: Finding the magic elixirs in a data-centric, user experience (UX) mobility world powered by connectivity and payments.

The auto manufacturers, however, are not alone in this endeavor. Google’s self-driving Waymo unit is the first autonomous vehicle developer to deploy a commercial fleet. Waymo is widely recognized as the industry leader in autonomous driving technology. In October 2018, the company reported its vehicles had driven 10 million miles—an unprecedented number—on public roads in the US. This enormous driver data helps develop and enhance Waymo’s self-driving software, especially when it’s collected on public roads instead of test sites.

Waymo is also able to leverage Alphabet’s key technologies. Most notably, it trains its neural networks using Google’s open source artificial intelligence TensorFlow platform and its Tensor Processing Units (TPUs). Artificial intelligence thrives on analyzing huge data sets and Waymo’s 10 million miles of autonomous driving data represents an incredibly valuable resource.

Google has also integrated its Android mobile platform into vehicles through Android Auto. This allows Android users to view their mobile OS in their car’s infotainment center, making it easier to access contacts and stream music, among other functionalities. Android Auto is now available in more than 400 car models from brands such as GM, Hyundai, and Volvo.

Waymo is widely recognized as the industry leader
in autonomous driving technology.

Amazon, Apple and Microsoft also have major connected car initiatives that are beginning deployment. For example, Volvo, Nissan, and Toyota have partnered with Microsoft to utilize its connected car platform. Microsoft has also partnered with automakers including Nissan and BMW to enable its digital voice assistant Cortana in certain vehicles.

Microsoft also announced a strategic partnership with Volkswagen to create the Volkswagen Automotive Cloud, which will utilize Azure and the IoT Edge platform. This technology is slated to connect over 5 million new Volkswagen vehicles per year beginning in 2020.

Safety will, of course, always be a primary concern. The data-centric, connected car and other forms of transportation become self-aware safety zones for cars with human drivers as well as autonomous cars. They will not only take emergency evasive maneuvers but also anticipate potential hazards and dangers to riders, pedestrians and other vehicles. These systems feature new capabilities such as adaptive cruise control, automatic braking, traffic and lane departure warnings, and other alerts and automated responses.

Amazon, Apple and Microsoft also
have major connected car initiatives.

Other forms of transportation will experience the same disruption. Trucks, trains, subways, airplanes and ships will become autonomous in their operation. The data-centric and connected world will know where every one of these vehicles is located along with the path, direction, speed, fuel levels, engine condition, safety parameters, travel conditions and time of arrival.

Mobility as a Data-Centric, Connected, User Experience (UX).

The future of mobility is exciting and unpredictable. Surprises, both pleasant and unpleasant, will occur as we travel along this path. Only one thing is for sure: The day of the family car and family garage may someday go the way of the fax machine and iPod. Our mobility experience will change as it becomes data-centric, connected and user experience focused. This is an exciting time and we are just beginning this journey!

Allan Thomas Chiulli is the co-founder of DigElearn, an online digital learning membership experience at www.DigElearn.com and the author of Winning in the Digital Tornado. Both are guides to digital transformation for business and technical people needing to catch up and stay ahead of digital transformation. Readers may take a free quiz to measure their Digital Savvy at www.DigElearn.com.