FinTech Roundup: Summer 2017

As August comes to a close, we’re taking a moment to reflect on the biggest fintech happenings of the summer. If you spent the last 12 weeks at the beach, here’s what you missed in the fintech world:

Tech Titans Pose a New Threat to FI’s

While startups continue to innovate in consumer finance, financial institutions should look to stay ahead by plugging into incumbent tech platforms, leveraging Google, Facebook, and Amazon as a front-door to acquire and engage customers. To understand the unique opportunities for today’s largest financial institutions, see our FAANGs in Finance series.

Bitcoin Rally Endures the Split

bitcoin-and-ethereum-sitting-on-a-tree@2xThe price of Bitcoin is up 119% since May, to $4,700. In August, the currency split into two: Bitcoin and Bitcoin Cash. Skeptics warned the split would undermine public confidence in the technology and kill its price rally. One month after the split, that concern hasn’t materialized.

FinTech Funding Is Hot

Venture Capitalists continued pouring money into fintech companies, and 2017 is expected to be a record funding year. Here are some of the largest rounds announced over the summer:

Coinbase: cryptocurrency wallet. Series D: $100M

Betterment: automated investing. Series E: $70M

Stash: investing for millennials. Series C: $40M

Kabbage: lending technology. Series F: $250M

Personal Capital: financial advice. Series E: $40M

Wealthsimple: Canadian robo-advisor. Series B: $37M

FAANGs in Finance, Pt. 5: The Compliance Barrier

Over the past month, we documented the upside opportunity for Google, Facebook, and Amazon to build financial services products, following in the footsteps of their Chinese counterparts Baidu, Tencent and Alibaba. This week, we highlight the three biggest roadblocks we see for these companies to become vertically-integrated players versus platforms– Regulation, Compliance and Culture.

Regulation:

Can you imagine Google drug testing their 75,000 employees?

Banking and payment is largely regulated by the OCC which has an extensive list of types, there are a few alternatives for banking regulation such as a Thrift. Investing is largely regulated by the SEC, while lending, real estate and insurance are regulated on a state by state basis. Outside of the application time, review process and process/procedures required to be in place– the decision to be regulated requires careful consideration. All aspects of employee behavior, conduct as well as business practices become subject to regulatory audit.


Compliance

Can you imagine the CFO telling analysts that Facebook’s new bank will have a 5% cost of compliance?
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Banks spend billions of dollars a year on compliance and risk control staff. While banks’ overall headcounts have shrunk considerably since 2007, compliance spending has more than doubled. This trend shows no signs of slowing down, with costs around risk and compliance expected to double again by 2022.

For the largest banks, compliance represents 3% of non-interest expenses. For smaller banks with less assets, compliance takes up close to 9% of costs. Even if Google, Facebook and Amazon build technology to automate most compliance and legal processes, they will still need to hire a couple thousand compliance officers, a huge hit to their bottom line.


Culture

For tech companies, the dollar cost of becoming a bank is nothing compared to the drag on their fast-moving culture and product development. These companies are already viciously competing to build the best messaging platforms, cloud storage, and digital advertising, to name a few. Becoming a regulated financial institution would put a speed limit on many of these projects, and suffocate their culture of asking for forgiveness rather than permission.


Lessons from FinTechs

Many of the most successful fintech startups reached critical mass without becoming financial institutions: think PayPal or Square. Acquiring a banking license takes at least 2 years, and these firms got a head start by avoiding it all together. Last year, British fintech Mondo opted to become a full-fledged bank, a transition that required them to raise an additional £20 million in funding.

While the OCC proposed a “fintech charter” that would streamline this process for growing startups, state governments sued, making slow, expensive banking licenses the only option for the foreseeable future. It’s no wonder most tech companies are opting out.


The Platform Path

While a financial license might be too much of a drag on their culture, we see an alternative path for Google, Facebook, and Amazon finance: the platform play. By building financial products that are compatible with today’s leading financial institutions, tech titans can capture the additional screen time of personal finance, without slowing down their agile, user-focused culture.

Previously in this series:

FAANGs in Finance Pt. 4: Facebook

FAANGs in Finance Pt. 3: Google

FAANGs in Finance Pt. 2: Amazon

FAANGs in Finance: Joining the Customer Journey

FAANGs in Finance Pt. 4: Facebook

Facebook’s closest Chinese counterpart is WeChat – a social network that acts more like a complete operating system than a single-purpose mobile app. Previously, we outlined three paths for Amazon to go into financial services, and how their business mirrors Chinese behemoth Alibaba. This week, we look at parallels between Facebook and China’s WeChat, extracting a few predictions for how Facebook’s product suite can enter finance.

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WeChat is China’s dominant social networking platform, owned by TenCent. While it’s available for download worldwide, it has a vast set of functionalities inside China, acting more like an operating system than a single-use app. In China, its 800 million users can split a bill, book a cab, send cards, shop, and even manage their finances without navigating outside of WeChat’s app. For WeChat, these integrations boost in-app engagement, pull in revenue from service providers, and allow them to build financial products without becoming regulated.

There is a digital rat race to build the “WeChat of the West.” With Messenger, WhatsApp, and Instagram in its product suite, Facebook is currently the front-runner. Each of these products has its own set of advantages for Facebook to integrate financial services. Here are our thoughts on the potential of each:

WhatsApp:

Facebook acquired WhatsApp, and its 450 million users, in 2014 for $19 Bn. Founded and built by a Ukranian immigrant, WhatsApp became hugely popular as a cost-effective way to communicate with people overseas and evade pesky SMS charges. Since waiving the app’s traditional subscription fee, $1 per year, Mark Zuckerberg has yet to monetize its huge user base, but that is likely to change soon.

With an international user base, WhatsApp is the logical platform for Facebook to test cross-border payments. It is already pushing to launch P2P payments in India, seeking to replicate WeChat’s success in Asia’s second-largest market. If P2P payments on WeChat succeeds, it will pave the way to add more value-add services into the app, like personal finance tracking.


FB Messenger:

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At Facebook’s annual developer conference this year, the it-girl was not their social network, but their Messenger app. Facebook laid out their plans to embed business services into the platform, directly in line with WeChat’s strategy. Now you can order an Uber, book a reservation, or shop for new clothes, all within Messenger.

At the same time, Messenger has shown an appetite for P2P payments, and a propensity to help businesses boost their AI capabilities. These two strategies position Messenger as an ideal platform for financial institutions to integrate with. By creating new touch points in an app their clients visit daily, financial institutions can stay relevant to their daily lives and entertain them with custom, behavior-based offers.


Facebook:

Facebook is most likely to embed financial services in its core platform – Facebook. While people flock to Twitter and Snapchat to share live, sporadic updates, they still use Facebook to log the most important updates in their lives: having a baby, getting a new job, or relocating to a new city.

All of this data can help financial firms gain a deeper understanding of their clients lives, and tailor their messaging and marketing appropriately. From graduating high-school to becoming a grandparent, we share much more information with Facebook than we do with our bank. Integrating financial services onto Facebook can help banks avoid the “tone-deafness” that can irritate customers, and connect with clients on a personal level. With an older and more established user base, Facebook is an ideal platform for financial institutions to integrate financial planning and 529 products.


How far is Facebook Finance?

Unlike Amazon, Facebook’s patent applications (425 in the past year alone) have shown no clear intent to become a financial services provider. However, they have shown strong interest in integrating these services from third parties, most recently by acquiring an e-money license for the EU. Additionally, they’ve poached David Marcus, a PayPal executive, to serve as a VP of Messaging Products.

If Facebook Finance plays out in line with these early moves, it will create an opportunity for financial institutions to use the platform as their front-door. This will allow them to lean on Facebook for the front-end product, client insights, and AI capabilities, without causing it to be regulated. In return, Facebook will be rewarded by the boost in screen-time and engagement from its users. A win for both parties involved.

The ‘Belief Profile’ Opportunity

As the investing population skews towards millennials, socially conscious investing is outgrowing its past as a niche market. To capture the loyalty of tomorrow’s investors, financial institutions should think beyond risk profiles by constructing portfolios based on their clients’ beliefs.

Investors often design their portfolio around a “risk profile,” generated by their age, income, acceptable level of volatility and long-term goals. Thinking back to microeconomics, we know that individuals get different, though ambiguous, levels of utility from the different choices they make. For a growing number of investors, returns are important, but so is having a portfolio that lines up with their beliefs. For example, if I care deeply about the environment, and my wealth manager allocates half of my portfolio to a coal company, I won’t be happy, no matter how big a return I get. If we expand this concept to all of the broad ethical concerns one can have, it follows logically that personal interests and beliefs ought to be given more consideration when determining a proper portfolio. While today’s “socially responsible” investing is quite niche, and still focused on environmental sustainability, it’s becoming more customary for investors to buy what they believe in.

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As wealth management fintech firms evolve, a client’s ‘belief profile’ will take an equal seat next to his or her risk profile (Stash, imaged above, is a great example of this). While a risk profile is essentially confined to a scale from risk averse to risk hungry, a belief profile is multidimensional, using clients’ stances on as many issues as they choose to weigh in on. A client’s ‘belief profile’ could consider environmental concerns, foreign policy, gender, and even religion, enabling one’s portfolio to more closely reflect oneself. With an estimated 84% of the millennial generation interested in sustainable investing, the more accurately a manager can construct a portfolio that resonates with an investor’s beliefs, the more assets they can expect to pull in. This is precisely why giants like Blackrock and Goldman Sachs have started to offer more sustainability-concerned mutual funds and ETFs in the past few years.

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Sustainable funds are certainly not a new concept. Take Calvert, which was founded in 1976 and launched the first socially responsible mutual fund. Calvert’s fund excluded companies that did business in apartheid-era South Africa. Today, Calvert offers 26 different funds. What’s sparking the reinvigorated interest in this space seems to be a combination of Millennials’ belief-driven preferences being given more weight, along with more and more companies taking an interest in sustainability. Some of the most sustainable companies (certified as such) are benefit corporations, a.k.a. B-Corps. There are over 2,000 B-Corps, including some large publically traded companies, such as Etsy (ETSY; NASDAQ) and Natura (NATU3; BVMF).

Robo advisors can play a key role in the taking the “belief-profile” to mainstream investing. With more precise technological capabilities, robo-advisors can quickly and simultaneously adapt to their client’s needs and the current state of the markets. New institutions, like Swell, provide research on publicly traded companies who stand to grow, based on social and environmental trends. It may be easy enough to say “I don’t care about _____”, but it’s hard to ignore socially conscious investments that outperform their benchmark indices. For example, since 1990, the MSCI KLD 400 Social Index has returned an average of 8.4% a year, compared to the S&P 500 index’s 7.6%.

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The MSCI KLD started with the name “Domini 400 Social Index” or “DSI”

Any financial marketer can tell you that Millennials expect “personalized experiences.” Building a strategy around a client’s “belief profile” will help wealth managers deliver just that, all while making them feel good about putting their money behind their values.

 

Read More:

Where to Find Socially Responsible (Robo) Investing

What Is Socially Responsible Investing?

Calvert to Launch Responsibly Managed Ultra-Short Income Strategy in NextShares™ Structure

Ethical funds see jump in investment inflows

https://thegiin.org/impact-investing/

FAANGs in Finance Pt. 3: Google

What’s the #1 source for fast, accurate information? Google. With a culture of transparency and unparalleled data management capabilities, Google is positioned to help wealth managers engage clients by delivering the highest level of insight into their investments. With rumors circulating of a Google Wealth product, today’s financial institutions should act fast in embracing Google’s platform.

In a 2015 FactSet survey, high net worth individuals (HNWIs) were most excited about a wealth management offering from Google, citing their need for more frequent and in-depth insights into their portfolios. A UBS analyst famously used Google satellite images of parking lots to predict Walmart’s revenue. Google analytics can predict unemployment claims before the government finishes counting them. While Google Finance failed to gain traction from Yahoo! Finance, Google has improved the results of stock-market searches by pulling the charts, quotes, and news onto their main search result pages.Screen Shot 2017-07-19 at 10.48.13 AM.png

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Google has danced around the more profitable parts of finance for one reason: Regulation. While Google may have an aversion to the regulated parts of finance, it can still become a major player in finance by leveraging its strength as a preferred platform, its trusted brand, and proven ability to store information securely.

Google still makes 86% of its revenue from unregulated online advertising. Aside from its moonshot projects, its other products are mostly tools to gather behavioral insights that, in the end, further boost their ad business. Here are some of Google’s products that could prove to be a gateway for financial institutions:

Storage:

Google has not been shy about its ambitions in cloud computing. In fact, it has already made the Google Drive a passport platform for healthcare documents, see: How Google G Suite Helps Keep Your Hospital HIPAA Compliant. Google holds 27% of the market share for cloud storage, second only to Dropbox, with 47%.

The Google Drive would be an ideal place to bring together financial institutions and their clients – Google could allow financial institutions to create Google Drive Folders with securely stored client information, and allow the client to set up the PFM and wealth management tools they most desire, talk about personalized. To take it one step further, Google could leverage its platform to help clients control which third-party tools have access to their account information. This would position Google as a client-oriented provider, and help them ease sour relations within the EU – where PSD2 requirements are hanging over financial institutions.


Trusted Brand Offers & Engagement:

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Currently, Google’s financial ads take you outside of their platform to the advertiser’s site. What if they internalized this process by embedding offers, and actions, for trusted brands? In this scenario, Google users could create, fund and manage financial accounts all from Google’s secure, familiar platform. Consumers crave frictionless finance and already trust Google. Why force a user to navigate away, when you can bring these offers into the Google platform? This would boost Google’s user engagement, make it easier for financial institutions to onboard clients, and delight users with a smoother customer journey.


Gmail:  

For individuals, Gmail is the email provider of choice with around 50% market share. However, cloud-based email is still in its infancy for larger companies; a recent Gartner study found that only 8.5% use cloud email from Microsoft, and a mere 4.7% use Google Apps for Work. The remaining 87% have on-premises, hybrid, hosted or private cloud email managed by smaller vendors. Most financial institutions are not using Gmail internally, but they should not underestimate Gmail’s potential for communicating with their clients.

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Rather than serving as a gateway back to your financial institution’s website, Gmail could become a trusted platform for sharing secure information, proxy voting (which 72% of retail investors abstain from today), supporting customers on Gchat, and more.

Financial services emails today get a dismal 2.7% click-through rate. This weak communication channel could be displaced by an in-app messaging system that reduces friction and increases engagement with Gmail users – of which there are now over 1 billion worldwide.


We have explored 3 possible paths for Google to enter financial services, and there are infinitely many ways it could play out. We welcome you to leave comments to share your predictions for Google’s entry into Finance.

FAANGs in Finance Pt. 2: Amazon

This spring, at TechCrunch Disrupt Asia, a leading VC called Amazon the next biggest FinTech company. In this post, we explore the opportunities for Amazon to enter Financial Services – and how today’s Financial Institutions can leverage the Amazon platform to engage tomorrow’s investors.

The Chinese Parallel

Our “Amazon Wealth” prediction isn’t pure speculation – the company’s Chinese e-commerce counterparts have already become financial titans by embedding payments, loans, and investments into their consumer platforms. Alibaba, a $391BN market cap global competitor with Amazon, spun out one of the most successful fintech companies, Ant Financial.

Ant, the creator of Alipay, acquired MoneyGram for over $1BN in cash and entered the Spanish payments market through a partnership with Santander. Ant’s “leftover change” product, Yu’e Bao, took in over $165BN in under 4 years, becoming the largest money market fund in the world. It yields 3.93% on consumers’ spare change, a significant increase on traditional Chinese banks’ funds.

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Amazon is as ambitious as Alibaba, from books to food, music to movies, AI & AWS, and most recently, messaging.  Last year, Amazon filed over 566 patents; this year, it has averaged 32/month so far. The top categories were computing and electronic communication, while their most active Trademark filings are 97 for advertising and 88 for scientific. A bit more digging yields filings for Trademarks on things like “Amazon Coin” which could be a Bitcoin-like cryptocurrency or an internal payment system. Amazon’s wide-ranging patent portfolio indicates they are eyeing multiple opportunities in finance.

How would “Amazon Finance” play out? We see a few paths:

Mirror Alibaba:

Amazon could accelerate their move into finance by gobbling up PayPal or Square. A PayPal acquisition would give Amazon social media assets in Venmo and a strong footprint in global payment systems. PayPal’s origins as a P2P payment system aligns with Amazon’s platform and position as an e-commerce marketplace. Paypal has also remained relatively nimble by avoiding the most cumbersome regulations that slow down other financial institutions, making the company an attractive acquisition target, given Amazon’s culture of “trimming the fat” to maximize efficiency.


Platform Play:

Growth in Amazon’s non-core business lines is often overlooked, but their Trademark filings convey continued ambition across verticals. Amazon could easily become a marketplace platform for a range of financial services from investment accounts to credit cards.  Amazon could build the systems for financial firms to open accounts, enable customers to manage the accounts and interact on Amazon. Over 70% of digital natives would trust Amazon more than a bank site, so why not bring them into the Amazon Tent? This would allow financial firms to leverage the Amazon platform to engage customers, without the regulatory hassle.  The “Platform” angle would give Amazon the “kingmaker” role with Financial Service firms.  The “Platform” play gives them another service to put onto their new messaging service “Anytime,” following in the footsteps of Alibaba’s chief rival WeChat.

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Alt Currency:

An already trademarked ‘Amazon Coin,’ the name of which currently only used for game and app purchases, could be a bold yet logical entrant to the booming Cryptocurrency market. Amazon already does $135BN in annual revenue. Combined with their ability to leverage their reputation for security, Amazon is a natural market maker, the middleman for vendors, suppliers, sellers, and customers. Increasingly positioned as a central pass-through for all things commerce, Amazon launching its own cryptocurrency would keep customers sticky to their platform and boost their bottom line.

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Amazon has trodden lightly thus far with its financial services offering, but we don’t expect their idleness to last for much longer. While we present Mirror, Platform, and Alt Currency as 3 potential paths, there are certainly many more paths that Amazon could take.  What do YOU think Amazon’s next move will be? Send us your thoughts.

Is FinTech Failing?

No one is denying that the FinTech space is ripe with innovation. What most fail to realize though, is that mainstream media outlets tend to report on us with a survivor bias. If you look around, you may have noticed quite a few FinTech companies are going under (click here to see a piece by Benzinga that includes a slew of failed companies).

While VC funding is often cyclical, there are still many unicorns in existence. Despite not being household names, Square had a successful IPO, and Stripe, Transferwise, and Addepar all received lofty valuations. In 2016 overall, FinTech companies received $36 billion in funding across from over 1700 unique investors.

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While this was a $2bN decrease from 2015 funding, the growth cycle for FinTech companies is longer. Historically, the average time for IPO or Exit looks something like the chart below. The mass “buzz” factor tends to be quieter, and the sales cycle longer.  

 

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While we don’t deny the foundational shift against app-based ad-supported businesses, we also see big opportunities. As we deploy our SDK solution on more than 100 partner apps, these apps have seen a 3-4x boost in user engagement and awareness. This is a measurement of enabling financial institution customers to take actions on publisher apps, and these financial institutions are increasingly moving towards “action” based compensation. This is a systemic shift towards enabling technologies like ours to provide the basis for monthly recurring revenue (MRR) and action based incentives.

Net Neutrality Update

If you’ve been on the internet in the last week, you’ve probably seen some mention of protecting “net neutrality.” While the term sounds self-explanatory, it’s more important than most realize. Net neutrality is the principle that Internet service providers (ISPs) and internet regulatory entities must treat all data on the Internet equally. It prohibits internet providers from charging differently by user, content, website/application, or communication mode. John Oliver gave a spirited review of the issue. Essentially, without net neutrality, ISPs would be able to charge companies and consumers for preferred speed and access to certain sites.

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Net Neutrality prevents a traffic hierarchy

In 2015, four million people petitioned the FCC to reclassify broadband ISPs to protect net neutrality. This public support was unprecedented, forcing the Commission to enact strong rules, called the Open Internet Order, in favor of a neutral internet. However, in the last couple of months, President Trump and the FCC Chairman, Ajit Pai, are looking to overturn the 2015 Net Neutrality win, despite the prevailing popularity of the rules across party lines: 77% percent of those surveyed still support the FCC’s rules. The only group pushing for a repeal is your friendly neighborhood ISPs, a.k.a. Big cable. It’s worth mentioning that ISPs aren’t exactly taking the outrage well, AT&T even tricked some customers into sending pre-written protest messages that actually are against net neutrality.

The formal “Day of Action” passed this Wednesday (7/12), but if you support better and fairer internet speeds and access, or you’re against padding the pockets of Big cable, you can still sign the actual petitions against the FFCs new proposed changes at a number of sites, these are the top 3: https://www.battleforthenet.com/ | https://www.change.org/p/save-net-neutrality-netneutrality | https://www.savetheinternet.com/sti-home

Luckily, the outcry has been successful. So far, there have been 4 million comments to the FCC, 2.5 million petition signatures, 10 million e-mails to Congress, and 500,000 calls to the FCC and Congress. With those numbers, we can see that many people out there care. However, continuing the dialogue about a free and open web is paramount for both consumers, big sites like Facebook and Google, and us here in the FinTech space.

Read More Here:

–Internet Service Providers Were Not Amused by the Net Neutrality Day of Action

–Apple’s deafening silence on net neutrality

–The net neutrality fight is on: Where do we go from here?

–How to Smoke Out Where Broadband Companies Stand on Net Neutrality

FAANGs in Finance: Joining the Customer Journey

The biggest opportunity for Financial Institutions today is getting their product into Google, Amazon, and Facebook’s customer experiences.

72% of millennials would rather bank with Google, Facebook or Amazon than their existing financial institution. You have to wonder how long it will be before these tech giants launch their own financial products.  Financial institutions already receive over 50% of their web visits from clients who pull their information onto other platforms; customers want their financial information everywhere, not just on their financial institution’s website.

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Financial institutions have their own apps, but few are capturing eyeballs like the tech giants do. I encourage any financial executive to try the “Battery Usage” test: on your iPhone  => settings =>battery => scroll down and look at which apps drained your battery for the last 24 hours & 7 days.  We have yet to find anyone with a Financial Institution in the top 5.

Over the next 3 weeks, we will explore the potential of Financial Institutions bringing their customer journey into the experience of Google, Amazon, and Facebook.  In each of these cases, we will discuss how these three companies can serve as safe, secure, trusted platforms for Financial Institutions to engage with their customers, breaking free from click-based advertising to action-based engagement.  These social platforms continue to do what they do best, increase engagement, while the Financial Institutions reap the benefits for their clients.

PS:  We’ve covered WeChat as an operating system here – we look west to learn the best practices, customer trends, and applicability for the US market.

Fintech News: June 23rd, 2017

New Trading Service Declares War On ‘Disgraceful’ Commissions (Forbes)

The UK market has it’s own free-trading broker now, Trading 212. While all of the major US brokers charge around $5-7 per trade, UK brokers typically charge around £11.

US Wants Travelers to Declare Cryptocurrency Assets At Border (International Business Times)

Regulators are hoping to control the threat of moving money across borders to fund terrorism. However, it’s still fairly easy to do that through traditional financial channels, and the evidence that cryptocurrency funds terrorism is mostly anecdotal, as of today.

Will Amazon Become a Force in Fintech? (TechCrunch)

EY thinks Amazon is the most likely tech company to get into finance, first by expanding into payments and lending.

Investing in Crypto: Go Long

To invest in crypto, learn how it works, and start actually using it.

If you’d put your Holiday bonus into Bitcoin, you’d have doubled your money by now. If you’d bought Ethereum instead, you’d be up 3,000%. Bitcoin, Ethereum, and the growing number of altcoins in the market have all rallied over 150% since January.

However, most money flowing into these currencies today is speculative. Some are calling it a bubble – with talking heads on TV covering Ethereum, and regular people “investing” in cryptocurrency to make a quick buck. While this buying activity drives up the price of Bitcoin and Ethereum, it’s also causing more price volatility in both directions. It is time to rethink cryptocurrency investing, with the goal of contributing long-term value to the ecosystem, not propping up the price bubble.

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Both cryptocurrencies are their own ecosystems, with Bitcoin’s acting more like a digital gold, and Ethereum acting as a platform for smart contracts. So, if you believe these technologies have a place in our future, you should be regularly buying bitcoin and then using it as a payment when possible – buy lunch with bitcoin, send your friend money with bitcoin, etc. Bitcoin’s market cap gets the most attention, but it’s transaction volume, another key measure of adoption, is mostly overlooked.

Ethereum is a little different – by allowing people to build new cryptocurrencies on top of smart contracts, it acts as a platform for enforcing the rules. If bitcoin is digital gold, Ethereum is more like a digital form of the US government.

With a more flexible and modernized programming language, Ethereum has made headway with multinational companies alongside the growing startup ecosystem. These players can build their own coins and sets of rules on top of Ethereum’s technology – like a “white-label” cryptocurrency.

Some interesting projects on Ethereum’s platform include:

  1. SlackCoin – an artificially intelligent chatbot that rewards employees for certain behaviors. Want to incentivize information exchange? Open communication? Boost efficiency? Set up SlackCoin. SlackCoin is an alt-coin incentive to be the employee you’d want on your team.
  2. FileCoin – The AirBnb of hard-drive space. Have an extra 500GB? Rent it out to the network and get paid in FileCoin. Then when you need to borrow some later, you can spend your FileCoin instead of buying a new hard drive.
  3. KYC-Chain – A virtual wallet to authenticate your identity. Instead of doing know-your-customer from scratch every time you open a financial account, all institutions can refer to the KYC-chain.

There are dozens of new applications being produced on Ethereum every day. Like Bitcoin, investing in Ethereum means investing in its real-world applications. If you’re putting money into cryptocurrencies with the goal of converting it back into USD for a quick profit, you’re not investing, you’re gambling.

Where Robo-Advisors Went Wrong

What’s next for the robo-advisor? First championed by venture-backed startups, the robo-advisor was quickly replicated by incumbent firms. Today, the startups in the space are seeing declining growth rates, while competing with the incumbents they once threatened. To achieve staying power as stand-alone companies, the next generation of wealth management startups will need to invest heavily in cutting-edge technology, not clever marketing.

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In the past 5 years, VC-backed robo-advisor startups appeared left and right, offering low-cost diversified ETF portfolios that are “advised” algorithmically with a risk questionnaire. Many industry analysts were quick to call their bluff. The robo-advisors, they said, were just a traditional target-date retirement fund with a sleek mobile app, marketed as a replacement for a human financial advisor.

The Copycats

Revolutionary technology? Maybe not. But the startup robo-advisors were onto something, and incumbents started copying them. In 2015, Vanguard and Schwab launched their own robo-advisors, which gobbled up more assets in six months than the startups did in four years, combined.

Vanguard and Schwab eclipsed the startup competition, not because their product was better, but because they had economies of scale, a recognizable brand name, and large customer bases to cross-sell to. All of this translates to a relatively low customer acquisition cost (CAC) for their new products.

E*TRADE and TD Ameritrade have since released their own robo advisors. Fidelity, Merrill, and Morgan Stanley are likely follow suit, further eclipsing the market.

An Uphill Battle

Analysts estimate startup robo-advisors spend up to $1000 to acquire a new customer, and will need $40B in assets to break even. The largest startup robo-advisor, after five years operating, is at $10B, and growth rates have slowed drastically. 

With incumbent robo-advisors going “mainstream,” most people have access to a robo-advisor from their existing financial institution. Given the high costs of switching, this doesn’t bode well for the startups’ growth.

What’s next?

For the well-funded startup robo-advisors, a diversified product suite is a good next step. That way, they can cross-sell to the (mostly young) clients they acquired, as their financial needs become more complex. Wealthfront, the second-largest startup robo-advisor, seems to be pursuing this strategy, offering a portfolio line of credit, 529 plans, and direct-index investing to help wealthier clients avoid underlying ETF fees. Complementary products might boost per-customer revenue, but until a startup robo-advisor can drastically lower their acquisition costs, they will continue to experience the same setbacks.

For the next generation of fintech startups, the rise and fall of startup robo-advisors provides some valuable lessons:

  1. Invest in technology, not customer experience and design, which are too easy to replicate.
  2. Watch your CACs. Robo-advisors reduce some operational costs, but that edge is wiped out by sky-high acquisition costs.
  3. Sell high – don’t raise money at valuations that make exiting impossible.
  4. License your technology to the industry you thought you’d disrupt. B2B robos need just a handful of deals to prosper, and can do so with less manpower.

Beneath the glitz of the heavily-funded fintechs, smaller players are already focusing heavily on technology. In the investment world, tomorrow’s winners will build tech to enhance the incumbents, rather than competing for their customers.

Announcing: Interactive Brokers, Powered by TradeIt

We’re excited to announce that we’ve connected our core products — Portfolio View and Trading Ticket — to Interactive Brokers, the largest electronic broker by DARTs and a top choice for active traders worldwide.

Over the past month, we launched early-access IB support on Stockflare and the Trigger Finance app. Today, we’re extending IB connectivity to our entire partner network, so IB clients can view their accounts and trade from any of the apps in our sphere.

IB and Trigger 2 (2).png

“As one of the leading platforms for active investors, we are constantly upgrading our systems for the future. We’ve heard from our customers that they want to be able to take secure action from the apps they use,” said Steve Sanders, Executive Vice President of Interactive Brokers. “Our partnership with TradeIt enables IB to reach our customers wherever they prefer to operate with a high level of sophistication and security.”

After four decades of focus on technology and automation, Interactive Brokers is equipped to provide cutting edge technology and tools at the lowest costs in the industry. We’re thrilled to distribute IB’s offering across our partner network to help their clients stay connected from anywhere.

If you’d like to add IB connectivity to your platform, shoot us a note at support@trade.it.

 

FinTech News: May 26th, 2017

Summer has sprung! Here are our top Friday reads this week:

A Quant Program is the Reason You Just Bought that ETF (WSJ)

BlackRock is using Twitter sentiment data to sell you their funds at the perfect time.

The World’s Largest Bitcoin Exchange Couldn’t Handle this Week’s Crypto Boom (TechCrunch)

Bitcoin hit all-time highs at $2,800 this week, and traffic was so high it crashed Coinbase, spooking some investors.

Teen chat app Kik to launch digital currency (Finextra)

Kik, sometimes called the “WeChat of the West,” launched its own cryptocurrency, “Kin,” for in-app transactions and services offered on the platform.

The View From Europe

We had the privilege to attend and present at EXEC Conference in Berlin last week. In an ideal location and surrounded by great company, we observed a rational, results oriented ecosystem that offers plenty of lessons and observations for the broader market.  Here’s what we learned:

PSD2 Matters

PSD2 was mentioned on nearly every panel. The law may not be implemented until 2019, but it is already encouraging innovation in the FinTech and Financial Institution landscape. Financial Institutions are not trying to stop it, and FinTech companies are seizing on the opportunity to collaborate with Financial Institutions under PSD2.  (Note:  I am sure that the sausage making behind the scenes is much less collaborative.)  Examples of the collaboration are evident in the number of API service providers represented; Financial Institutions with “at-the-ready” APIs and Fin-Tech companies such as Figo and N26 charting new business paradigms.

Framework-Based Discussions

The dot com bubble taught me that data should drive decisions, and strategic frameworks can uncover exciting & otherwise invisible opportunities. Lately, the US tech market feels more like a reality tv show than a real framework-based industry. At the EXEC conference in Berlin, high-level strategic frameworks were front and center, with panelists and keynote speakers displaying “value chains” to contextualize their arguments. Particularly in the Fintech eco-system, value chain analyses reveal multi-billion dollar opportunities, and help Fintech companies focus their resources strategically. This brings me to N26.

N26’s Model

One of the first keynote speakers opened with a simile: financial institutions today are like frogs boiling to death in a pot of water: the clock is ticking for them to innovate or boil. N26, a relatively young bank based in Berlin that has raised over $50MM, presented some important lessons that can help FinTech startups and incumbent banks avoid boiling. N26 has two notable differentiators: Design & Platform. On the design front, N26 wanted banking to be beautiful.  As their founder noted, 7/10 millennials would rather go to the dentist than their bank. N26 makes banking a beautiful experience, a quick way to draw in young clients. But beautiful design is easy to replicate; N26’s staying power is all thanks to their platform. While big banks are bogged down by legacy systems, N26 leverages best-in-class providers like TransferWise to provide non-core banking services, such as transfers, lending, credit and more.  N26 is a platform bank, with the potential to become a marketplace replacing the end-to-end ego of traditional banking with an adaptable tech platform for changing times.

When we stitch together these three observations, we see a bright future for TradeIt, as we build, manage and distribute APIs for the spectrum of investing firms. At the same time, we recognize that rescuing frogs out of boiling water will inevitably leave you with a few burn blisters.

Who’s buying $SNAP, and where?

$SNAP’s IPO has dominated financial news for the past month. After the stock gained 45% on its first trading day, bloggers called it “dumb money,” and not a single Wall Street analyst gave it a buy rating until today. In this post, we compare our transaction data for three social media giants: here’s our take on $FB vs $TWTR vs $SNAP.

Not So Millennial:

According to the headlines, $SNAP investors are a bunch of college-aged power-users buying their first stock ever. Our data points to a more diverse group of investors: our average $SNAP order size was over $10,000, which was slightly higher than the average order for $TWTR. A fair share of young people invested in $SNAP, but given the volume and quantity of large retail orders, it looks like Gen-Xers and Boomers are buying shares as well.

Fear of Missing Out

ezgif-3-b9aa9a85bdWhat’s more interesting is where people are trading these stocks. A large portion of our trade data comes from from social trading communities like StockTwits, where investors can share predictions on a stock’s direction. The $SNAP IPO generated huge buzz on these networks, with a steady stream of speculators sharing their opinions and price targets for the company.

 
Social InfluenceIt looks like all the buzz influenced some investors to join the party and buy in. Investors were twice as likely to buy $SNAP from a social investing community when compared to $FB and $TWTR. Sounds like people in the forums are buying $SNAP because, well, everyone is doing it.

Trading the Headlines

Though everyone was talking about $SNAP last week, most financial commentators were talking $SMACK. Investors were much less likely to invest in $SNAP from a news website; they were 10 times as likely to buy $FB and 3 times as likely to buy $TWTR when reading the financial news. If you take a look at the headlines, you can see why:

News InfluenceSnapchat IPO: Don’t Confuse Popular with Profitable (Forbes)

Is Snapchat IPO the Good Kind of Crazy? (Bloomberg)

SNAP is Clown Car 2.0 (Fortune)

The Complete Bearish Case Against Investing in SNAP (Business Insider)


So, if you’re reading the grim headlines in the news, you’re probably not investing in Snapchat without doing more research elsewhere.

In the weeks since $SNAP’s IPO, we’ve been surprised by large order sizes of the supposedly “millennial” stock, the large influence of social platforms, and the small number of news-related transactions. Got ideas for our next data dive? Tweet us!

Online Brokerage Price Wars, Part 2

Looks like last month’s price war was just the beginning. Here’s the current state of the stock market pricing war:

Typically, brokers change their prices once every five years. In the past month, they’ve dropped fees twice already. Last week, after Fidelity announced $4.95 trades, Schwab shot back by matching the price. TD Ameritrade, which is more popular for active traders, joined the battle by dropping fees 30%, from $9.99 to $6.95. Their competitor, E*TRADE, remained silent the longest, but ultimately followed TD to $6.95. Here’s what the low prices mean for the industry:

Redefining Discount

TD Ameritrade and E*TRADE are in the process of acquiring Scottrade and OptionsHouse, respectively. Tradeking is being acquired by Ally at the same time. Until this week, Scottrade’s $7.00 and Tradeking’s & OptionsHouse’s $4.95 were some of the lowest commissions in the industry, a major selling point for these firms.

Now that Fidelity and Schwab have dropped to $4.95, their super-discount competitors will have to drop their own fees even further, or find a new way to compete on something other than price. It’s likely that the battle will continue when these players cut fees below $4.95.

Price Wars Graph.png

Customer Value Reshuffled

With less revenue coming from trade commissions, the definition of “most valued customers” is changing. Brokerages now make more money off of management fees, interest on margin and cash balances, and fees on their ETFs & mutual funds. If you trade stocks yourself, your broker might start cross-selling to you, hoping to make more off of advice and fund fees.

Stockflix, Stockify, Dollar Stock Club

Remember paying $.99 per song? Online brokerages are still using the pay-as-you-go model the music industry abandoned years ago. We predict subscription models will make their way into the brokerage world. Instead of paying per-trade, investors will pay monthly subscription fees that include a certain number of trades, access to research, and other perks.

Less Now, More Later

Brokers should listen to their own advice and start thinking long-term. While a subscription model might not produce huge profits at first, it will provide steady revenue when trading behaviors die down. Per-trade fees generate huge profits when the market is booming, but those profits dry up quickly when the market spooks retail investors.

If you bought E*TRADE stock 10 years ago, you’re down 84%. Adopting a subscription model will save online brokers, and their shareholders, from the volatility that comes with depending on unpredictable market conditions. Instead of worrying about the next fee war, online brokers should start poaching Spotify execs.

A Letter to Regulators

Over the past few weeks, we covered the data battles taking place in fintech. As the CFPB deliberates on whether to defend data aggregation, we urge them to remember their mission to “empower consumers to take more control over their economic lives.” To grant data ownerships to banks, rather than consumers, would represent a stark failure of the CFPB to deliver on this mission.

We encourage anyone who cares about their data to write the CFPB at the email address below.  As Plaid, Yodlee, and other tech innovators have argued, continuing to innovate in fintech relies on customer data ownership. Here is the letter we sent to regulators:

REF.png

Data Dive, Part 1: Trading The 2016 Election

How has investing changed after the election? In our first Data Dive of 2017, we use transaction data to find out.

Since Trump’s win in the 2016 election, the S&P 500 has rallied 10% and hit multiple all-time highs. The market may be on an upswing, but how has investor behavior changed? To answer this question, we’re taking a look at our transaction data, comparing behavioral patterns from the month before the election with those exhibited in the weeks after the news.

Here are some of our findings:

Order Size.pngBuy Low, Sell High?

Looks like some investors are locking in their gains after the Trump bump. Since the election, our average sell order size has shot up by 50% while the average buy order size dropped by 11%. It looks like investors have been hoarding cash since the election, maybe waiting for an opportunity to buy at a discount if the markets get shaky.

Peak Hours.pngLazy Mondays

Before the election, Monday mornings were red hot on the trading floor. Post-election, traders started waiting until the end of the trading day to hit confirm – maybe holding out until volatility settles around 2-3pm.

It appears traders continued taking their sweet time after Monday into the middle of the week. While Tuesday was the hottest day of trading before the election, Wednesday appears to have regained its title as “hump” day, claiming the highest average volumes in the weeks following the election.

Peak Trading Days.png

 

Draining the Swamp

tech-inflowsWhatever your political views, it’s fascinating to see how a new administration can affect people’s’ portfolios. For example, our data suggests that investors are “draining” tech stocks from their portfolios after the election. Despite a few high-profile endorsements, Trump’s win is widely considered a net loss for the tech industry, which relies on visas for highly skilled immigrants to power innovation. As a result, investing in tech companies means is riskier in 2017, and investor appetite for the sector has cooled off.

A Golden Opportunity

Gold Outflows.pngGold’s price tumbled 12% in the last weeks of 2016, but it looks like retail investors are staying put and holding onto the precious metal. While inflows remained relatively steady, our Gold-related outflows plummeted after the election. Given Trump’s unpredictability, this makes sense; Gold is seen as a safe-haven investment, and its value often increases during times of uncertainty.

Got a hypothesis for us? Interested in additional info? Email us or Tweet your data requests @TradingTicket for our next installment of the Data Dive series!

About the Author

James Barrios is a Management Science & Engineering Masters Candidate at Stanford University.  James will be investigating patterns, trends, and other useful data extractions over the coming months.  For this piece, James compared “Buy” and “Sell” orders placed before and after the November election.

Aggregation Wars, Part 4: Europe

Across the pond, EU regulators are building a secure consumer-oriented financial ecosystem. To stay relevant as a global innovator, regulators in the United States act fast in doing the same.

Last January, European regulators passed the PSD2 law, which grants ownership of account data to the bank customer rather than the bank. Under PSD2, financial institutions will be required to provide free access to their customers’ accounts to any third party that the customer authorizes.

The Customer is Always Right

Consumers win under PSD2, because it encourages competition in the digital financial product space. Instead of being forced to use their banks’ clunky services, Europeans can sign up for any sleek new service, then authorize it to connect to their bank. This new and open market has tech companies building products that are better functioning, customizable, and more mobile-friendly than the existing products offered by banks.

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PSD2 in GIF format, source: Medium

Smarter, Simpler Regulations

In the United States, regulators are still years behind their European counterparts. The challenge lies in crafting laws that remain relevant as the technology evolves over time. To avoid over-regulating the industry and creating never-ending work for themselves, US regulators should build a framework of principles and “best practices” for the industry. Without micromanaging the details, they must foster:

  • Ease of Connectivity: the adoption of a universal financial “language” that makes it easy for banks, customers, and fintech companies to share data using the same protocol
  • Safety: Security standards that prevent unauthorized parties from accessing customer data
  • Consumer Protection: Acceptable use of customer information and disclosures

Acting Fast

It is time regulators take a stance in this debate with simple, forward-facing legislation. If Silicon Valley and New York are to remain competitive as fintech hubs, they need legislation that remains relevant as the fintech sector continues to evolve.

Price Wars: Online Brokerage Edition

Last week, Schwab cut its trading fee from $8.95 to $6.95, kicking off the 3rd Online Brokerage Price War – an occurrence that has happened every five or six years since the dot-com boom. Here’s what this “price war” means for the retail investor and the online brokerage community:

Short-Term Scramble

Schwab Fee Cuts.pngThe next few weeks will see Schwab’s competitors scrambling to reset marketing campaigns, hold emergency meetings at the executive level and rethink their 2017 operating models.

Two of Schwab’s largest rivals, E*TRADE and TD Ameritrade, are in the midst of acquiring super-discount brokers OptionsHouse and Scottrade, respectively. These brokers charge $5-7 per trade, but their acquirers have stuck to $9.99 trades since 2010. If E*TRADE and TD plan to start charging their newly acquired customers $9.99, then Schwab’s latest price cut might lure price-sensitive investors, at a time when their primary broker is distracted with integration activities.  

In the short-term scramble, we will be watching to see how Fidelity responds, if TD and E*TRADE sync their prices with their new acquisitions and what it means for lower-cost firms such as Interactive Brokers, TradeKing and TradeStaion, who are already being challenged by upstarts like RobinHood and TastyWork.

Falling Fees, Shifting Valuations

Historically, when one large broker slashes fees, the rest follow suit fairly quickly. That’s why online brokerage stocks plummeted 10% last week: they’ll all be forced to drop fees to stay in the game. Consumers should watch for new deals as brokers get more aggressive on their acquisition bonuses.

price-wars

Why now? A Historical Reference

The first price war occurred in 2005, after online brokerage valuations tumbled 90% since the dot-com burst in 2000. Brokerages wanted to build their customer bases and rely less on commission fees, so they slashed trading fees, and started focusing more on mutual fund fees and parallel banking services, which provide steadier revenue streams than trading.

In 2010, as the US economy emerged from the financial crisis, brokers began wooing customers to get back into the markets, and lower-fee offerings were a key component of their pitch.

If we use history as a reference, the 2017 price war looks similar to its 2005 predecessor. The asset-gathering strategy is coming back into fashion, but this time it has a robo-twist. Schwab launched its own robo-advisor in 2015, which charges no trading fees but holds Schwab ETFs and a hefty chunk of cash. TD and E*TRADE followed suit last year, with “Essential Portfolios” and “Adaptive Portfolio.” It seems only a matter of time until Fidelity joins the robo-advised party.

In the meantime, low trading fees are getting new clients in the door, boosting trade volumes, and giving brokers a cross-sell opportunity for their more profitable offerings. In short, brokers are slashing fees in 2017 because they can’t afford not to.

The Bottom Line

The 2017 price war is just getting started. While brokers are working to figure out new revenue streams, consumers should keep their eye out for more price cuts, and more robo-advisor offerings, in the next year.

Aggregation Wars, Part 3: The Opposition

In last week’s episode of Aggregation Wars, we covered the big banks’ lobbying effort to stop aggregation. This week, we profile the fintech companies who are fighting for aggregation and for the consumer’s right to access their financial data.

FinTech companies are forming an opposition party in the battle over aggregation. Some are familiar, and others are behind-the-scenes. Here’s who’s defending your data ownership:

The Companies You Know

digit-account-and-text-610x591Mint, Acorns, Digit, Kabbage, Betterment. These fintech companies offer direct-to-consumer financial products like robo-advised brokerage accounts, automated savings tools, and loan-refinancing platforms. Some of these companies are financial institutions of their own while others, like Digit, are not. None of them compete directly with banks, but all of them require access to your banking data. For example, Digit analyzes your spending habits to help you save for custom goals like a vacation. Without open access to customer banking data, these tools could not exist.

The Companies Backstage

7394dd_3b3664e7ac814efd8e5bc9aa70cdf71e.pngBehind each of these shiny new apps, there is a network of technology providers who build “pipes” that connect to financial institutions: Yodlee, Plaid, Quovo, Intuit. Without stable, secure API connections to the big banks, these aggregation technology providers are stuck using more primitive (and less secure) screen-scraping technologies to grab user data. Clearly, these companies want open access to consumer financial information.

Joining Forces

The FinTechs you know and the ones you don’t are joining forces to fight for consumer data access. This month, they formed the CFDR, or the Consumer Financial Data Rights Group. The group’s goal is to convince the CFPB that secure data access is a win for all parties: FinTechs, banks, and consumers. More broadly, the group supports collaboration between banks, regulators, and FinTechs that will help them align around common goals: building a secure financial ecosystem that benefits and protects the consumer.

While “FinTech” might yield visions of nimble, garage-style startups, there is big money behind these growing companies: global FinTech investment reached $22 Billion in 2016, and that’s from Venture Capital alone. Still, it’s nothing compared to the deep pockets of the big banks. Hopefully, the CFPB will realize the potential of free-market competition for financial products, and the FinTech Industry’s suggestions will be received well.

What’s next?

The CFPB will continue to accept letters while it weighs the pros and cons of open access to financial data. As you read this, the ABA is working to discourage aggregation practices, and the FinTech-backed CFDR is working to improve them. You have until February 14th to contribute.

Next Up: Europe and Beyond

In the next installment of Aggregation Wars, we look take a look at the open API initiatives in Europe, The UK, Singapore. If the US is to remain competitive on the global fintech front, we will need to catch up to these countries with consumer-first regulations that encourage innovation, put security first, and lay the tracks for a more inclusive, consumer-friendly financial services architecture.

Aggregation Wars: Part 2, Bank Backlash

The Pandora’s Box of customer banking data has already burst open with the popularity of third-party financial products. Still, banks are doing all they can to restrict their customers from accessing their own data. What gives?

Aggregation has become a flashpoint between hundred year old banks, the CFPB and customers. In the first installment of this series, we looked at the history of aggregation technology, and its improvements since the first dot-com boom. This post explores the banking industry’s opposition to aggregation, and provides a path forward for US regulators.

New Enemy, Same Tactics

This year, the American Banking Association came out against aggregation technology, citing the same concerns and scare tactics they have relied on for twenty years. Today, aggregation technology is exponentially more reliable and secure than it was in the late 1990s. While the enemy has evolved, the banks are still using the same plan of attack.

In 2001, the OCC issued a “Guidance Memo” to banks that listed five risks posed by aggregation:

  • Strategic Risk
  • Reputation Risk
  • Transaction Risk
  • Compliance Risk
  • Security Risk

Since then, several of these concerns have been made obsolete by technological advancements. Others proved to be illegitimate in the first place. Regardless, the ABA’s latest arguments revolve around the same old concerns of “data usage” and “security.” In his 2015 shareholder letter, Jamie Dimon dedicated significant air time to criticize aggregators, and took direct action by cutting off JP Morgan’s customers from using Mint.com. While the security concerns are exaggerated, the rising popularity of PFM tools means that they are racking up significant server costs for the banks. In other words, JP Morgan doesn’t want to pay to import its customers’ data to Mint.com.

Enter the Regulators

The CFPB is a government watchdog set up to “make consumer financial markets work for consumers.” In November 2016, they held a field hearing in Utah to spark a public debate over aggregation. While the hearing made room for a healthy debate, it has opened the floodgates to banking industry lobbyists and the influential American Bankers Association, which continues to fight against aggregation.

If the CFPB plans to keep their promise to protect consumers, they should weigh popular consumer opinion against the lobbying effort of the big banks. In 2016, over 70% of customers trust the top tech companies more than their banks. A fair ruling will incorporate changing user behaviors and advancing technologies into its decision. Got an opinion? You can submit letters to the CFPB by February 14th, 2017.

Towards a Working Regulatory Framework

As it moves towards establishing new laws, the CFPB should stick to principles-based best practices that will remain relevant as the technology, and the debate over data ownership, continue to evolve. In particular, the industry will benefit from guidance around:

  • API Framework: Financial Institutions should identify 1-3 “Approved Vendors” to build and manage their APIs. The financial sector can trim inefficiencies using a standardized protocol for data, just as the healthcare sector has over the past ten years.
  • Customer Control Center: It must be easy for consumers to manage where their data is flowing. Banks should be required to provide a clear dashboard of all third-parties who are plugged in. This way, consumers can unlink their accounts from products they no longer use, keeping their data under control.
  • Re-examine OFX: As we mentioned in the first in this series, Intuit and Microsoft developed the OFX to avoid the Aggregation Wars.  Is now the time to re-examine a protocol that banks can support for distribution?

In our next installment of this series, we will take a closer look at the European regulations, and the lessons the US can learn looking forward.

Aggregation Wars, Part 1: Near History

Twenty years after the birth of the internet, aggregation remains a hot topic in financial services. Today, aggregation enables consumers to access all of their accounts in one portal, while also serving as a valuable data collector for financial institutions. In Europe, where regulators have supported aggregation, banks are learning to use it as a revenue-gathering vehicle. In the US, banks are still flip-flopping over whether or not they support the use of aggregation. As the battle continues to play out, we expect aggregation to play a key role in helping financial institutions, and associated technology providers, focus on what is best for the consumer.

This post marks the first of a 4 part series on aggregation:

  1. Near History
  2. Current Aggregation Wars
  3. Europe, Data and Confusion in the US FI Sector
  4. Putting the Customer First

Part 1: Near History

In 1997, Microsoft & Intuit created secure protocols for transmitting personal financial data, called OFX, in collaboration with Checkfree. Both companies had a vested interest in this technology: they were building their own personal financial management software (PFM).  At the time, however, financial institutions balked at the new technology, preferring to keep a tight stronghold on their customers’ financial data.

Around the first dot com boom, there were a growing number of venture backed aggregation services such as CashEdge, Yodlee, Teknowledge, and Vertical One. These services allowed consumers to access their financial information on PFM sites without having an “official relationship” with the financial institutions. This was a major win for the consumer, who could now manage all of their accounts in one place thanks to the early movers of PFM services: Intuit, Microsoft, and Yahoo! Finance.

my-money-essentials-2

During this time, some of the major banks joined the PFM “race” by building their own portals to aggregate customer accounts from other financial institutions. In the final part of this series, we will share a comprehensive review of the products & services services offered by banks for PFM- let’s just say you should get your magnifying glasses ready if you want to find the services or read the fonts.

In 2006, at the dawn of Web 2.0, Mint.com disrupted the software vanguard, Intuit, with an online service that Intuit later acquired in 2009. Founded on the premise that Intuit’s service was sub-optimal, Mint leveraged Yodlee for aggregation and offered a graphically rich and engaging PFM experience that also incorporated best practices of contact management to engage customers (something that continues to be the challenge with the “liability” side of PFM. Finally, the value of aggregation started making sense to the consumer.

minttrends

Through the last ten years, since the advent of Mint.com, account aggregation has discovered countless new use cases, from PFM to providing data for banks, advertisers, hedge funds and wealth managers. Despite using aggregation for their own purposes, banks have surfaced a rotating set of objections to aggregation, citing security concerns, owning their customers, and data costs. We will elaborate on these contradictory objections in Aggregation Wars.

Over this period, the industry has seen oscillating phases of growth and consolidation. Notably, Yodlee bought VerticalOne right out of the gate in 2001; CashEdge sold to FiServ in 2011 for a rumored $465MM; Teknowledge filed for bankruptcy in 2013; ByAllAccounts sold to Morningstar for ~ $30MM in 2014; and Yodlee sold to Envestnet for $590MM in 2015. Some of these companies, like CashEdge, built popular consumer-facing products, while others, like ByAllAccounts, reached widespread adoption by wealth managers. With so many different use cases, it’s clear that aggregation technology is no one-trick-pony.

Most recently, two new entrants have been eroding incumbent market share with “newer” technology. Quovo and Plaid have managed the banks’ objections and provided clearer value propositions to the mobile developer community. Quovo’s focus on wealth management and Plaid’s “instant funding” product show that there is still plenty of room for innovation and growth of aggregation technologies.

The big questions for the future of aggregation will include:

  • How are Financial Institutions leveraging Aggregation for Wealth Management & Messaging Platforms?
  • What are the opportunities and threats posed by aggregation for Financial Institutions?
  • Who owns the customer’s banking data?
  • Which Messaging Platforms will Enable Aggregation & Wealth Management?
  • Which Wealth Management Platform Builds or Buys an Aggregation Service?
  • How will A.I. impact aggregators?
  • Will the CFPB become more assertive in supporting consumers?

Price Wars: ETF Edition

Taco Bell and McDonald’s aren’t the only companies chasing the dollar menu audience. The major financial institutions are in a price war, cutting their ETF expense ratios in a back-and-forth which has led to the steepest decline in fees since the online brokerage was invented during the first dot-com boom.

fees-dropping

These are the three forces driving the ETF price war:

1. The Walmart Effect

vanguard-effectThe three largest ETF issuers (State Street, BlackRock, and Vanguard,) control a staggering 84% of the $3 Trillion dollar market. Vanguard has used a client-owned corporate structure, paired with massive scale, to cut fees and grow assets for decades. However, it has traditionally focused on core ETF offerings that track indices, rather than sector-oriented products like Cybersecurity ETFs.

Recently, Vanguard has started expanding into more sector-oriented products, like international dividend or country-specific ETFs. These types of investments were previously dominated by smaller funds with higher expense ratios. However, as a recent Bloomberg article revealed, Vanguard’s entry has put downward pressure on smaller issuers’ prices, like Walmart opening up next to a mom-and-pop store.

2. Explosive Asset Growth

In the last three years, ETFs have seen record-high inflows as more investors shy away from high-fee and actively-managed products. Today, ETF assets under management stand at $3 trillion, a 430% increase since 2006, and this growth is only expected to continue. In fact, the market is expected to reach $10 trillion in assets by 2020.

asset-growth-ratesAt the same time, mutual funds have seen massive outflows as investors opt-out of their high fees and tax inefficiencies. While the ETF AUM has grown 430% since 2006, mutual fund assets have only grown by about 50%, and are expected to stop growing this year.

The expanding industry has issuers rushing to cut fees in hope of soaking up as much ETF market share as possible during this phase of rapid growth.

3. The Fiduciary Rule

Traditionally, ETF issuers used financial advisors as a sales funnel to retail clients. In this scenario, the financial advisor would develop a relationship with an ETF issuer, say BlackRock, and gain a thorough understanding of the products they offer, their structure, and their purpose in a client’s portfolio. Now, suppose the client asks for exposure to high-yield bonds. Their advisor would be more likely to recommend BlackRock’s $HYG, rather than Vanguard’s $VCLT which they know nothing about.

As a result of the sales funnel, the client often ended up purchasing ETFs from whichever issuer was most familiar to their financial advisor, regardless of the expense ratios. For mutual fund investors, the value chain was even more congested. “Soft dollar” arrangements allowed fund managers to artificially reduce their expense ratios by paying for services with order flow. As a result, many investors were paying hidden, undisclosed fees which ate into their returns.

Luckily for investors, this kickback scheme sparked an outrage that resulted in new regulation nicknamed “the fiduciary rule.” The fiduciary rule requires financial advisors to act in the best interest of their client at all times. In short, the fiduciary rule requires financial advisors to suggest low-fee products, and ETF issuers are dropping their fees in order to keep the advisor sales funnel alive.

Thanks to consumer-friendly regulations, an expanding industry, and the Walmart effect, the ETF price war is saving investors billions of dollars as the fees on their investments continue dropping towards zero.

Fintech News: January 6th, 2017

This week: how AI is being used in Wealth Management, customer data brings risks alongside opportunities, and what exactly is causing the up-and-down in Bitcoin price?

Beyond Robo-Advisors: How AI Could Rewire Wealth Management (American Banker)

Banks are moving past the simple robo-advisor in favor of more sophisticated models, which use artificial intelligence to scan market data and world events, identify new trends and use their knowledge to beat the markets when trading.

Customer Data is a Liability (American Banker)

Traditionally considered an asset, customer data is becoming a liability as more data increases the number of hackers looking to steal it.

 

The 2 Factors That Drove Bitcoin’s 20% Overnight Price Plunge (Forbes)

Earlier this week, Bitcoin prices reached all-time highs around $1,100. Since Wednesday, they’ve come crashing back down to the $900 range, representing a 20% loss. What caused the rally and subsequent decline? A large part of Bitcoin’s price is driven by China’s currency controls; when Chinese citizens expect a currency devaluation, they buy Bitcoin, then swap it back into other currencies. This week, the Yuan surprised Chinese citizens by strengthening, which brought Bitcoin’s price down.

While Bitcoin has historically been volatile, its usage as a currency is much higher than it was in 2013, when the price dropped 50% overnight. Because of this, the decline in price was much less dramatic this time around.

Fintech News: December 9th, 2016

This week in fintech: Transforming financial UX in 2017, a changing regulatory environment and what it means for financial advisors, the Fed expresses interest in Bitcoin and Blockchain:

10 UX Design Trends for 2017 (The Financial Brand)

As financial institutions become more customer-centric, their UX is becoming more important. Notably, UX in 2017 will be transformed by deeper understanding of financial psychology, mobile domination, increased personalization, and alternative UIs: think chatbots, intelligent assistants, and VR technology.

What Advisors Can Expect from Fintech Next Year (Investopedia)

In the last year, advisors have been scrambling to comply with fiduciary rules, using new tech solutions. Donald Trump has promised to dismantle Dodd-Frank and fiduciary rules, which requires all financial advisors to act in their clients’ best interests. However, FinTech continues to build solutions for advisors to become fiduciaries. Despite Trump’s promises, the overall long-term trend is still heading towards consumer protection.

Regtech thrives on change: welcoming Trump, Brexit and China (Daily Fintech)

RegTech, also known as FinTech’s homely cousin, is making back-office financial services more efficient, replacing old legacy infrastructure. In the US, less regulation will not necessarily mean less RegTech, since any change in existing laws opens up new opportunities and clients for RegTech solution providers.

Fed Outlines Approach to Monitoring Fintech (The Wall Street Journal)

On Monday, the Fed released research on the future of Fintech regulation. While it contained no firm policies, it underlined the need for more studies especially on Bitcoin and Blockchain.

Fintech News: December 2nd, 2016

This week: what the election means for Bitcoin, the promise of chatbots for fintech, and seven signs the industry is maturing:

How Trump Became Bitcoin’s Unlikely Savior (Payments Source)

Last year, as banks started using blockchain, the underlying technology of Bitcoin, it seemed like the currency’s spotlight was fading. Then, Trump was elected. His promises to close off cross-border remittances have caused new spikes in Bitcoin volumes and the price has rallied over 10% since election day.

Bracing for Seven Critical Changes as Fintech Matures (McKinsey)

As the fintech industry and its regulations mature, startups are becoming more cautious, forming more B2B partnerships, and consolidating by selling to larger incumbents. On the horizon, there will be lots of new opportunities as new digital ecosystems develop and the trove of customer information continues to grow rapidly.

Walk, Don’t Run, Toward the Fintech Bot Revolution (VentureBeat)

Finance executives are buzzing about Chatbots – but customers are not. Customers don’t want to talk to a bot, they want to be supported and helped with their needs. Right now, most bots are only able to do this with a highly specific expectations. Letting them operate outside these boundaries usually damages the customer satisfaction. So financial services should start small, by automating simple tasks with clear start and end points. As the bots’ underlying tech improves, they can allow them to take over more complex tasks.

Addicted to Stocks: Completing the Financial User Hook

In the past fifteen years, content for DIY investors has taken off. To continue growing into household names, these platforms must leverage behavioral science, using the methods of Facebook and Twitter to get users hooked on their platforms.

Free websites and mobile apps have democratized the stock market, giving DIY investors tools that were previously reserved for institutional investors at hedge funds and big banks. While the number of these platforms has skyrocketed, the market remains highly fragmented, with many smaller players struggling to grow. Yahoo! Finance remains one of the top resources for investors, thanks to its most important innovation: the “watchlist” feature, which keeps its millions of users sticky to the platform, some ten years after they built their first watchlist.

hooked.jpgSince 2005, hundreds of new content platforms have popped up, but none have managed to grow into household names. So why is there is no “Facebook of finance?” The answer involves a bit of behavioral science.

Right now, the #1 bestseller in product management is “Hooked: How to Build Habit-Forming Products.” It identifies the “hook” that gets users addicted to platforms like Facebook, Instagram and Pinterest, to the point where they check these sites as soon as they have a moment of free time. This simple feedback loop consists of four steps:

  1. Trigger: something that gets the user onto the platform
  2. Action: A user-initiated action that anticipates reward
  3. Variable reward: leaves the user wanting more
  4. Investment: a reason for the user to seek another trigger (Repeat cycle)

For any stock-market content, the hook looks more like this:

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  1. Trigger: finding a stock they want to buy
  2. Action: buying that stock
  3. Variable reward: watching its value go up or down
  4. Investment: searching for a new winning stock (Repeat cycle)

The good news for financial publishers is that step three takes care of itself. Once the user buys a stock, its value is bound to go up or down and provide a variable reward. The bad news is that to take action, the user must leave the publisher platform complete a trade on their broker’s platform.

Because of this, the user subconsciously attributes both the action and the variable reward to their broker, even though the publisher provided the original trigger/trade idea. By requiring their users to take action on another platform, financial publishers are missing out on the full value of their content. Additionally, user departure severs the “hook,” deactivating the addicting feedback loop that leads 1/5th of the planet to log into Facebook every day.

To build a base of sticky & engaged users, financial publishers must reclaim the user hook with a bridge to action. By offering the ability for users to transact and manage their portfolios, financial publishers can become the one-stop-shop for stock market research, transactions and monitoring of returns. In other words, they can reclaim the Action and the Variable Reward, igniting the “hook” and building a base of users who can’t beat the urge to keep returning to their site.

Financial publishers work hard to create triggers. It’s time they use a bridge to action to finally get their users hooked.

Fintech News: November 25th, 2016

Fintech this week: Data privacy is already an illusion, the fate of a maturing robo-advisor market, and the dangers & benefits of wide-scale passive index investing. Happy Thanksgiving!

Is Indexing Worse than Marxism? (The Wall Street Journal, Op-ed)

As investor money flows from active to passively managed funds, fund managers warn of the dangers of widespread index investing, where individuals invest in companies because they’re part of an index, not because they see strong growth and profitability in them. This columnist disagrees, and with active traders growing as well prices are still determined by company fundamentals.

2016 Will be Remembered as the Year When Data Privacy Was Killed (Let’s Talk Payments)

Three of the largest US tech companies know basically everything about you. Will 2016 mark the end of data privacy, or is it already dead?

What We Learned About Robo Advisors in the Last 19 Months (Let’s Talk Payments)

As the robo-advisor market matures, it faces new growing pains and new opportunities. The industry’s narrative has changed too, as more incumbent wealth management companies have built their own robo-advisors. Despite huge growth, robo-advisors continue to struggle with high acquisition costs and a client base that has little money to invest.

Fintech News: November 18th, 2016

The Next Generation of Hedge Fund Stars: Data-Crunching Computers (The New York Times)

The future of hedge funds isn’t the billionaire stock picker like George Soros or Carl Icahn, it’s a supercomputer guided by mathematical trading equations. The industry is witnessing a split, with some funds moving to long-term performance strategies and others embracing quantitative strategies. For example, BlackRock’s quant trading arm uses satellite images of China’s largest construction projects to trade their real estate market.

Wells Fargo makes move into robo-advisor market (Financial Times)

Wells Fargo has joined other incumbent firms in creating its own robo-advisor product, through a white-label with SigFig, one of the original robo-advisor startups. Experts say it will restore trust for the company, since algorithms rarely create fake accounts and PIN numbers.

 

Three market opportunities in Insurance Asset Management (Daily Fintech)

New opportunities arise where WealthTech and InsurTech overlap.

Long Live the DIY Investor

DIY investing is alive and well. And no, we’re not talking about $ETSY.

We hear this question all of the time: will robo-advisors cannibalize the online brokerage industry? Is DIY investing a thing of the past? Both are great questions, since robo-advised assets are expected to double each year through 2020. Despite analyst predictions to the contrary, recent data suggest that self-directed investing is growing, not dying. Where is all the robo-advised money coming from? For the most part, it’s flowing out of savings accounts and traditional financial advisors.

Broken Barriers to Entry: Horizontal Growth

In the past 10 years, the online brokerage industry has lowered fees, slashed account minimums, and built more education & research tools across the board. The result has been an explosion in the number of accounts, which has grown by 4% YoY since 2007 as more women, millennials, retirees and boomers have decided to take the reins on their investments.

More Engagement: Vertical Growth

broker-dartsThe subset of active investors & traders has grown twice as quickly as the overall investor population. The active subsets trade more often than their buy-and-hold counterparts, and the growth of this demographic is represented in the brokers’ trade volumes. Since 2007, the number of trades from retail investors has increased by 6.7% each year, on average.

This uptick is only the beginning. Mobile devices are driving engagement across the consumer-finance industry, but especially for active investors. Mobile banking is great, but there’s rarely a need to check your banking app more than once a day. Mobile investing is another story: during market hours, active traders stay engaged nonstop, no matter where they go.

Where are Robo Assets Coming From?

lost-revenueSince robo-advisors encourage a “set-it-and-forget-it” mindset, they attract the client base of a financial advisory, not a retail brokerage. Self-directed investors prefer to be in complete control of their own investments. Whether they want to “beat the market” or simply invest in companies they believe in, they are not interested in handing off the responsibility to anyone, whether it is a human advisor, or an algorithm.

The “HENRY” (high earner, not rich yet) is a key customer for robo-advisors. HENRYs today have just enough money to start investing and begin saving for retirement. As less and less employers offer 401(k) plans, more HENRYs are opening IRAs with robo-advisors. It is safe to say that most of the money pouring into robo-advised accounts would otherwise end up in a savings account or in the hands of a human financial advisor.

As these HENRYs build wealth over time, many will embrace self-directed investing after maxing out their robo-IRAs. Smart robo-advisors will build self-directed products before these former-HENRYs start shopping elsewhere. If anything, the growing popularity of robo-advisors will eventually boost the DIY-investing market even further, by letting young investors dip their feet in the markets.

Finally, as we saw during Brexit and the 2016 Presidential Election, market anxieties remain a huge problem for robo-advisors. Even “passive” investors want to feel a sense of control over their assets. For robo-advisors, adding a self-directed offering will help retain client assets when the markets get stormy.

As robo-advising goes mainstream, human financial advisors may be in trouble. Self-directed investors are another story. They invest “the hard way” because they trust neither man nor machine with their assets. The robo-advisor may someday replace the financial advisor, but it shows no signs of killing the DIY investor.

Sources:

Oliver Wyman: The State of Online Brokerage Platforms, 2016 

Online Brokerage SEC Filings

PwC Fintech Survey, 2015

Aite Group 2016 Report

 

 

Fintech News: November 11th, 2016

Traders got screwed by betting on big data, what Trump means for fintech (tl;dr: nobody has any idea) and how to gain digital loyalty through customization.

Trading Stocks during the US Election, the Curious Case of Votecastr (Finance Magnates)

Instead of asking people who they voted for, Votecastr recorded the demographics of those exiting the polls, then reverse engineered the expected results. Many stock traders saw this as the ultimate prediction tool, since it didn’t rely on voter honesty. Unfortunately, the prediction technology turned out to be wrong in 5/7 swing states. Kind of like every other political poll!

Would Trump Policies Help or Hurt Financial Tech? Yes. (American Banker)

The president-elect supports government surveillance, which may clash with data privacy companies. His anti-regulation leanings could put a damper on “RegTech.” His job policies could cost banks by outlawing the outsourcing of jobs. Net neutrality and cybersecurity are still complete wildcards. On the flipside, reducing the corporate tax rate will make it cheaper to repatriate overseas funds. This would help the likes of Apple and Facebook.

Role of digital in driving customer engagement (Finextra)

How to hold on to customer loyalty in the digital age: get your product integrated in Twitter, Facebook, Snapchat, and personalize the experience as much as possible.

5 Steps to Choosing the Right ETF

ETFs have exploded in popularity as a cheaper, more tax-efficient alternative to mutual funds. But not all ETFs are created equal. From hidden costs to average trade volumes, here are 5 stats every investor should double check before taking that ETF to the checkout aisle.

1. The Ingredient List

etf-nutrition-factsAll ETFs trade like stocks, but they’re not always made of stocks. ETFs can contain bonds, commodities, REITs, futures, and more! Whatever the holdings are, you’ll want to examine them very closely in the fund’s prospectus. Otherwise, you’ll have no idea what you’re buying.

Some ETFs short major indices and even provide leveraged returns. However, these shorting & leveraged ETFs are only appropriate for short-term speculation. Over time, these ETFs diverge far from their original indices, because they are priced on futures contracts, not underlying equities.

In the months leading up to the 2016 Presidential Election, The CBOE Volatility index, $VIX, has soared 62%. However, because of their pricing structure, volatility ETFs have actually lost value during this time. See the chart below, which shows how derivative-based ETFs can disappoint in the medium and long-term.

unnamed-2

Be careful with futures ETFs.

2. The Price Tag

Across the board, ETFs have lower fees than mutual funds, but some are more expensive than others. The key number to look for is the expense ratio, which is baked into the cost of all ETFs as a hidden fee. It might surprise you to hear that some ETFs are more expensive than mutual funds, with some charging expense ratios up to 2.5%.

price-tagWhile 1% in fees might not sound like a lot, compounding interest adds up over time, and fees really eat into returns. Say, for example, you switch from a 1%-fee ETF to a comparable 0.1%-fee ETF. Assuming equal performance, your 30-year returns will be 38% higher with the low-fee ETF.

For most sector-based ETFs, there’s a low-fee alternative from issuers like BlackRock, State Street, or Vanguard, which has established itself as the “Walmart of ETFs.” For more specialized ETFs, boutique issuer firms are often the only option, but their highly specific products (like the cyber-security ETF $HACK) justify higher fees to some investors.

3-5. The Fine Print

Before hitting that “buy” button, there are a few more fine points to consider:

  1. Liquidity: most investors want highly liquid ETFs with a small bid-ask spread, so they can sell at a fair price any time they want.
  2. Commission: depending on your broker, you may be able to trade certain ETFs commission-free. If you are trading in small quantities, this is especially important for your bottom-line returns.
  3. Active vs Passive: While less common, actively managed ETFs are out there, and they usually carry higher expense ratios. Make sure you check the holdings more often if you buy active.

So whatever your investment strategy, don’t skimp on your ETF research. By checking expense ratios, examining holdings, and choosing liquid, low-spread options, you can be confident in choosing the best ETF to help you reach your goals.

Fintech News: October 28th, 2016

This week in fintech: IBM’s supercomputer tackles insider trading, billionaires start socially conscious investing, and the CFPB sides against big banks who hoard your data.

Watson and Financial Regulation: It knows their methods (The Economist)

Ever since developing the first ATM, IBM has been automating financial institutions. Now, the company’s supercomputer, known as IBM Watson, is learning to automate compliance back-offices, using artificial intelligence to catch insider trading and money laundering before it happens.

Investing’s Crowded Conscience (Bloomberg Gadfly)

On a grand scale, nobody has quite figured out how to get millennials to invest. Now, one of the most famous billionaire hedge fund managers is giving it a go. Paul Tudor Jones has announced he’s building an index of the most socially responsible companies, and will eventually issue an ETF that tracks the index.

Cordray ‘Gravely Concerned’ by Attempts to Obstruct Screen Scraping (American Banker)

The CFPB is supporting fintech companies who rely on gathering bank information from their customers. Technically, your bank, not you, owns your data. However, the CFPB has finally taken a side, saying “consumers should be able to access [their data] and give their permission for third-party companies as well.” In other words, back off, Jamie Dimon.

Fintech News: October 21st, 2016

This week in fintech: Embracing fintech culture over fintech adoption, what finance can learn from disruption in the music industry, the invisible bank of the future, and the advantages of dollar-cost averaging.

Fintech adoption vs fintech culture (Bank NXT)

Banks are being called “all talk, no action” and it sounds just like this week’s presidential debate. While banks invest heavily in internal “innovation labs,” many struggle to implement these labs’ ideas into the larger organization. These banks should focus more on embracing a culture of change that rewards challenging the status quo, and less on ways to “out-innovate” the market.

From Sony to Spotify: What the Music Industry Can Teach Banking About Survival (The Financial Brand)

In a nutshell: “just because customers used to consume a product or service in one way, doesn’t mean that method will remain the preferred means of consumption forever.” From Sony’s Walkman to Apple’s iPod to streaming services like Spotify, the music industry has undergone transformations that many predict will occur in financial services.

The bank of the future will be invisible – KPMG (Finextra)

KPMG released research predicting the “invisible bank” of the future, where banks control the internal infrastructure, and consumer-facing products are built by the likes of Facebook, Apple, and Google. The most successful banks will embrace the platform model by driving down costs, building third-party partnerships, and locking down on security.

How Regular Investing Smooths the Market’s Ups and Downs (The New York Times)

Regularly timing your investments is one of the best ways to avoid stressing over market volatility. This strategy, known as dollar-cost averaging, removes the risk of trying to time the market. If you are putting away money every month, you are already taking advantage of dollar-cost averaging. Otherwise, newly popularized automated investing products make it easy to start.

The Big Red Button: Robo-Advisors in a Bear Market

The next bear market will present new challenges to robo-advisors, forcing them to build around the value of human connection and customizable investments.

For the past five years, the robo-advisor has had a good run. Since the aftermath of the financial crisis, algorithmically-managed “robo-advisors” have grown their assets by 250% each year. The robo-advised portfolio was popularized by challenger startups like Betterment and Wealthfront, but incumbents have followed suit in the past two years with their own robo products. Robo-advised assets are near $100 billion today, and are expected to skyrocket to $8.1 Trillion by 2020.

chart

While the robo-advisor industry was taking off, so was the stock market. From its bottom in March 2009, the S&P 500 has seen steady returns averaging over 12% annually, and continues to hit all-time highs on a regular basis. For passive investors, the market has provided no reason to panic in the past six years. The second-longest bull market in history has made it easy for younger, less affluent clients to dismiss the value of a human advisor and invest their savings with a low-fee robo-advisor.

Because they have built a young client base, robo-advisors will have an especially tough time holding onto assets when the market turns south. Consider:

  1. Young clients saving for retirement have high-risk portfolios with considerable downside potential.
  2. Young clients have never endured a market downturn. They have only experienced the latest six-year recovery, watching their money grow no matter where it was invested.

The Moment of Truth

The true value of a financial advisor is not “beating the market,” it’s keeping clients calm during a downturn. When the markets are booming, a financial advisor’s job is pretty easy. When the market tanks, panic sets in and the phone starts ringing. The robo-advisor has yet to prove it can replace a human advisor when times are tough.

To Liquidate or Not to Liquidate

In the robo-sphere, there is no clear consensus on how to manage anxious clients. Betterment and Wealthfront both discourage their clients from switching their risk profile and only allow them to change it once a month. However, when the Brexit vote caused investors to panic this June, Betterment froze trading for its clients for three hours. While this may have prevented some clients from selling low, it also caused some to lose trust in an algo product that doesn’t allow for human override.

screen-shot-2016-10-12-at-4-14-51-pm

Most robo-advisors restrict tweaking your portolio.

Other robo-advisors, like Hedgeable and E*TRADE’s Adaptive Portfolio, also employ active strategies for risk management. Instead of holding put, these robo-products reallocate funds to less risky assets when volatility kicks in. While this feature may be enough to calm some investors, it is still algo-controlled and unlikely to satisfy investors looking for a big red “override” button.

The Human Touch Returns

Some time in the future, long-term investors may trust algorithms enough to not bother intervening on their own. Right now, investors are still warming up to the idea of not being able to tweak their portfolio on their own. Until this behavioral pattern changes, robo-advisors will need tools that capture their clients’ trust during times of volatility, even if it leads to lower returns in the short term.

bad tradeFor less confident investors, having someone to call might be enough. More sophisticated investors may demand more autonomy in a downturn, such as the ability to override and tweak their default portfolio. In the end, robo-advisors will need to prioritize the loyalty of their sophisticated clients over their commitment to passive-only investing.

Right now, the portfolio override button is like the steering wheel on the self-driving car. It’s comforting to know it exists, even though you are more likely to crash if you use it.

Fintech News: October 14th, 2016

This week: UBS and Merrill Edge both launch their own robo-advisor, compliance offices warm up to automation, and Google’s huge fintech opportunity.

How Google is Poised to Become a Dominant Investment Manager (Forbes)

make-money-online-and-googleUnlike the Chinese tech giants, Google, Facebook and Amazon have been hesitant to enter financial services. But Google has a unique comparative advantage if it does. Google can see real-time search trends, giving it an informational advantage over traditional managers. The company is also collecting a database of high quality satellite imaging. This would allow them to track everything from business supply chain operations to the number of cars in a store’s parking lot.

UBS to launch UK ‘robo-advice’ service (Financial Times)

UBS is joining other incumbent banks by building their own robo-advisor to compete with startups. They will offer the service to accounts over £15,000 and charge 1% in fees for passive investing, and 1.8% for active investing. This move comes at a time when wealth managers are grappling with the decline of human advisors, the traditional mutual-fund sales channel.

‘A Robot Could Alleviate This Drudgery’: Bank Compliance Meets AI (American Banker)

One of AI’s most promising use cases is compliance, where parsing through thousands of pages of laws and regulations is expensive and time-consuming for banks. Other easily-automated tasks include catching money launderers and detecting rogue employee behaviors.

 

Fintech News: October 7th, 2016

 

This Is What Millennials Actually Use Venmo For (Bloomberg)

The largest US banks are teaming up to build Zelle, their own Venmo-killer, but are they too late? This article looks into emoji usage on Venmo, and the stickiness and brand loyalty that the payments app has built with Millennials. The most popular emojs? Anything related to drinking, eating, traveling, and paying rent.

venmo-study-image-1

Source: LendEdu

When Will Fintech Regulation Grow Up? (American Banker)

Fintech Regulations have lagged behind the industry. Here’s what US regulators need to do to catch up to their peers in the UK, Singapore and Hong Kong.

Free Stock Trade App Robinhood Monetizes With $10/Month to Buy on Credit (TechCrunch)

Robinhood, the free-trade brokerage, has released a premium subscription plan, Robinhood Gold. For plans ranging from $10 to $50 a month, clients can trade during after-market hours and trade on varying levels of margin. This program’s success will pan out interestingly, as finance is one of few industries where subscription models have not taken off.

Scottrade: Who Will Acquire It? (Barron’s)

Scottrade revolutionized the discount brokerage when it introduced $7 trades in 1998, keeping the price steady ever since. Now, in the latest episode of online broker acquisitions: Scottrade is reportedly getting bought. Possible bidders include TD Ameritrade and Charles Schwab.

Seeing Sideways: the Distributed Customer Experience

Since the late 1990s, the online investing experience has been monopolized by online brokers. From physical branches to call-centers to websites and mobile apps, online brokers acted as a one-stop-shop for their customers to research and transact. Need to research a stock? Check your broker’s website for analyst ratings, fundamental data, and a risk profile. Need to check on your investments, place a trade, or add money to your account? Go to your broker’s website or app.

Today, the broker’s monopoly on the customer experience is weakened due to three new market dynamics:

  1. The internet has given investors endless places to conduct research.
  2. Investors expect highly customizable online experiences.
  3. Investors can now research and transact from third party websites and apps.

Brokers should not fear the distributed customer experience. They should embrace it as an opportunity. Brokers offer a product that is not replaceable: the ability to place trades at fast execution speeds, a safe place to store investments, and a funding portal. Whether the customer logs in via their broker’s website or via Snapchat, the broker still receives a commission when they place a trade. In other words, in the fragmented digital landscape, the broker’s most valuable asset is its ability to serve as a platform and a marketplace.

Brokers who adapt to this change will capitalize on the assets generated by their platform; brokers who resist will struggle to hold onto market share as their competitors tout a more customizable product suite.

brokers.png

Adaptive Brokers

Adaptive brokers will embrace their platform capabilities by extending their APIs across the digital landscape. This will create touch points with their customers in the apps and websites that they already visit regularly. The adaptive brokers will go to the customer instead of waiting for the customer to come to them.

For adaptive brokers, APIs will become powerful asset gathering vehicles. By integrating their product across the landscape of third party content producers, they will leverage these third party apps and websites as sales and product channels. Rather than devoting huge resources to developing their own niche products, adaptive brokers will plug into the niche products that their customers already use. From the customer’s point of view, the adaptive broker is tech savvy, customer focused, and flexible: all critical selling points to millennials, 75% of whom care more about up-to-date technology than in-person customer service.

By opening up to third party integrations, adaptive brokers will empower themselves to create their own great products down the line. Armed with customer engagement data from third party apps, brokers will learn how their customers interact in diverse environments, and use those insights to optimize their own product offering.

Resistant Brokers

On the other hand, resistant brokers will have a tough time in the distributed digital landscape. New investors will be turned off by a broker that forces its customers into a mediocre one-size-fits-all experience. Thus, customer acquisition costs will skyrocket as new investors choose more adaptive open-platform brokers. Even existing customers will be less engaged for resistant brokers, since engaging with their broker requires going out of their way to navigate to the broker’s app.

Most importantly, change-averse brokers will miss out on crucial customer interaction data, as they do not have access to the websites and apps where their clients research their investments. Without a real-time feed into what drives customer engagement, antiquated brokers will lose touch with their customer base, and struggle to build innovative products that stay up to speed with the competition. From the customer’s point of view, change-averse brokers will appear technologically out of touch and ignorant to their desire for customization.

The Customer Experience, Reinvented

The message to brokers is this: embrace the distributed customer experience, or you risk losing the customer all together. Your APIs are an increasingly important way to understand what drives client engagement while creating new touchpoints with current and potential customers. The digital landscape is changing, and brokers will only be fully disrupted if they fail to adapt.

Fintech News: September 30th, 2016

This week in fintech: private valuations come back down to earth, Bloomberg terminals allow outbound Tweets, how do retail investors want to feel, and defending a fintech product from incumbent copycats.

Fintech Unicorn Pain as the Public/Private Valuation Inversion Comes to an End (Daily Fintech)

This article takes a closer look into the high-flying valuations in fintech, and predicts some of the pain ahead as these valuations come back down to earth. Some companies are avoiding raising money in the meantime, while others seem to be reigning in high growth to find a shortcut to profitability.

Bloomberg Lets Subscribers Tweet from their Terminals (Finextra)

The Bloomberg Terminal has added another product to its long list of third-party integrations: Twitter. Part of Twitter’s value is that it serves as a real-time database for breaking news. This partnerships brings that data to a demographic who always stay on top of the financial news in real-time: active traders.

E*TRADE Unveils Emotional Triggers for Digital Investing (E*TRADE)

E*TRADE researched what investors want to feel when using an online tool to manage their investments. The top responses? For boomers, confidence and peace of mind. For millennials, enthusiasm, excitement, and joy. This research continues to guide product development for brokers, who are eager to attract millennial investors and gain their loyalty before they become wealthy.

Fintechs might be scalable but are they defensible? (Daily Fintech)

In the early days, single-product fintechs can offer a better solution than incumbents, and sell it at a high margin. However, when this product is easy to replicate, the incumbents will inevitably make their own, and can usually offer it at a lower price. At this point in the cycle, fintechs need to continuously communicate their value to their customers vs the competitor’s product. Banks have not figured this out yet. It’s time fintechs use behavioral analytics to build a customer retention strategy.

Alphabet Soup: Fintech AI Lingo, Deconstructed

AI is a hot topic for financial innovators, but few can keep up with the technical terms. Don’t drown in the alphabet soup of jargon. Here are the most used AI terms in plain English.

AI: Artificial Intelligence. A computer that can understand natural language and develop learning skills. More sophisticated than automation, AI enables computers to make complex, judgment-driven decisions that mirror the human process, and then learn from the outcome of those decisions.

Analogical Reasoning: The ability to solve a new problem by comparing the outcomes of past experiences. Humans do it all of the time, computers are just learning.

ANN: Artificial Neural Networks. Machine learning models that seek to imitate the structure of the brain’s neural network.

API: Application programming interface. A set of protocols that allows two (or more) systems to interact with each other. When you choose “log in with Facebook,” on a third party website, an API to connects the two systems. Internal APIs enable connectivity across financial institutions. External APIs connect third-party developers to those institutions’ systems.

Chatbot: A computer program that simulates human conversation through artificial intelligence. Some predict the chatbot will replace the bank teller.

Deep Learning: A subset of machine learning that uses multiple processing layers to make decisions.

NLP: Natural language processing. A computer’s ability to derive meaning from human language through machine interpretation of text and speech recognition.

Robo Advisor: Wealth Management of the Future.  A digital financial advisor that assesses your goals and risk tolerance to build an algorithmically managed investment portfolio with little or no human interaction. Soon to be powered by AI.

SDK: Software development kit. A set of development tools that makes it easy to implement an API. SDKs can contain pre-built screens, or a designated workflow to help developers communicate with APIs.

Weak AI: Artificial intelligence that uses few layers of processing, and focuses on a small set of tasks. Most AI in use today is weak AI.

Fintech News: September 23rd, 2016

How Technology is Changing the Way You Trade (Finance Magnates)

How is technology changing trading? Markets are more accessible for retail traders and the brokerage landscape is more competitive, giving consumers more features for less fees. White-label solutions allow smaller players to set up shop quickly by using somebody else’s platform, and traders are freed from their desk by mobile apps. Negatives? The interpersonal aspect of trading has diminished, and high-frequency trading can create excess volatility.

U.S. House Bill Aims to Set Up Sandbox for Fintech Innovation (The Wall Street Journal)

The US is losing financial innovators to the UK, where a “sandbox” regulatory program allows startups to test their ideas alongside regulators from the FCA, the British version of the SEC. There are similar programs in Singapore and Hong Kong, and soon there will be one in the US. Congress members have stressed that it will keep business in the US while forcing regulators to get up to speed with what’s happening in the marketplace.

The Banking Bazaar and The Bizarre Banker (The Finanser)

Banks need to focus on creating and owning FinTech marketplaces. Rather than locking their customers into a mediocre end-to-end experience, they should embrace the marketplace of open platforms linked through APIs. With an open platform available, they can attract top third-party innovators to build superior customer experiences, while still keeping a hold on their own customers and their data.

 

Fintech News: September 16th, 2016

It’s Not Creepy, It’s the Future (The Wall Street Journal)

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Source: WSJ.com

In chess, a Centaur is a half-human, half-machine that is better than either the human or the computer alone. Now, the centaur is coming to financial planning. Human advisors aren’t going out of business; they’re using artificial intelligence to do the dirty work. By using AI to analyze huge troughs of data, advisors buy themselves more time for the emotional side of financial planning: understanding their client’s story, moods, fears, goals and dreams.

Banks urged to wait 2 or 3 years before offering bots to customer (Venture Beat)

A new report from Forrester agrees that bot technology is still too rudimentary for the mass market. It urges banks to hold off for a few years before offering a banking bot to their customers. In the mean time, they should start exploring APIs and platform improvements in preparation for the eventual use of customer-facing bots.

Ant Financial snaps up EyeVerify (Finextra)

Ant Financial, the fintech arm of Chinese tech giant Alibaba, raised eyebrows this week by acquiring EyeVerify, a US-based cybersecurity startup. EyeVerify’s core product is a technology that uses a smartphone’s front-facing camera to verify a user’s identity. Ant Financial has repeatedly denied plans to expand into the US market; they will use the EyeVerify product in their own products as an extra line of defense.

 

 

A Case for the Overbanked

As more customers spread their wealth across multiple accounts, financial institutions need to develop new marketing strategies to engage their existing customers.

In retail financial services, a new demographic is emerging: the overbanked. An overbanked customer has accounts with at least three different financial institutions. As new technologies take the hassle out of overbanking, the demographic is growing rapidly, threatening to upend the traditional relationship-based banking model.

The Multi-Bank Advantage

The overbanked tend to be tech-savvy and wealthy. They have high financially literacy, but no financial loyalty. They deny having a “relationship” with any financial institution. For checking, they hold an account with a large bank with plenty of local ATMs. For savings, they benefit from superior interest rates with an online-only bank. For investments, they have a discount online brokerage account for active trading, and a separate index-investment account for long-term retirement goals.

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Their end-goal is to maximize returns and minimize fees. They would rather switch banks than start paying fees to their current bank.

Overbanking, Simplified

The good news for penny-pinchers is that thanks to technology, overbanking is no longer the headache it used to be. Comparison engines like NerdWallet make it easy to shop across providers for the best deals. Aggregation products like Mint allow consumers to view and manage all of their accounts in one place. Even transferring money between banks has become a breeze. This year, the country’s largest banks teamed up to create ClearXChange, a technology that enables same-day transfers between institutions.

Thanks to these new technologies, multiple accounts no longer means visiting multiple banks, remembering multiple passwords, or waiting days for your money transfers.

A case for the overbanked

eggs-in-basketOverbanked customers achieve peace of mind in addition to bottom-line savings. Since the financial crisis of 2008, people have been reluctant to keep all their financial eggs in one basket. Having multiple accounts also ensures constant connectivity; brokers and banks experience occasional service outages, so it’s reassuring to have a backup account to place a critical trade or withdraw cash in case of an outage.

Today, 38% of investors are able to get a better deal by looking outside their primary provider.* Most retail investors have two or three brokerage accounts. With comparison engines, aggregation software, and same-day transfer capabilities, it’s no longer a hassle to shop around for financial products.

As these enabling technologies become more popular, it’s no surprise that overbanking is on the rise. Last year, more than one-third of consumers shopped for financial products outside their primary bank.* While this trend continues, financial institutions will need to develop new ways to engage their existing customers, as loyalties increasingly depend on rock-bottom fees.

*Source: Oliver Wyman

Fintech News: September 9th, 2016

This week in fintech: how AI will help max out your returns, a $500 million funding round, and the growing need for new solutions in compliance.

AI can make your money work for you (TechCrunch)

AI is still in its early stages, but soon it will serve more specialized functions. For investors, that means maxing out your returns by keeping your money in balance between checking, savings, and investments. Here’s how AI will help you max out your investment returns.

SoFi Looks to Raise $500 Million in Latest Test for Fintech (Wall Street Journal)

SoFi is one of the largest privately held fintechs, is looking to close one of the largest fintech funding rounds of the year, marking a new test for the growing online-lending industry. As the company expands beyond HENRYs into students with good-but-not-great credit scores, it faces tougher competition from incumbent lenders.

You’ve Heard of Fintech, Get Ready for ‘Regtech’ (American Banker)

Back-office innovation is taking off as the less-flashy but more-lucrative version of consumer fintech. Compliance is one of the costliest bottlenecks, slowing down new initiatives and leaving them months behind their startup competitors. Now, a new flurry of “regtech” startups are improving banks’ internal processes, allowing them to keep pace with their more agile competitors.

Fintech News: September 2nd, 2016

Taxing times for Ireland as EU takes a bite out of Apple (Silicon Republic)

EU-apple-taxThis week, the EU ruled that Apple owed Ireland billions of dollars in taxes. For decades, Ireland has attracted tech talent and become a major player in Europe’s fintech scene by lowering its corporate tax rate to 12%. The EU’s decision threatens Ireland’s reputation as a credible, tax-friendly place to do corporate business in Europe.

Fintech Startup Transferwise Moves Away From Banks (Wall Street Journal)

Transferwise, one of London’s fintech stars in P2P lending, is moving away from relying on banks by becoming one. In the US, this requires state-by-state applications, 37 of which are already active.

Boomers value tech for managing retirement savings (Finextra)

While Silicon Valley continues to focus on solutions for millennial investors, studies repeatedly show that boomers are underserved. In this study, boomers value wealth management technology just as highly as their millennial counterparts, discrediting the idea that boomers don’t have any need for technology.

It’s the fees stupid! Fee Adjusted Return On Capital (FAROC) (Daily Fintech)

While talks about improving UX are common, the real innovation in consumer fintech is the continuous downward pressure on fees – especially in asset management. Vanguard has been paving the way for 40 years with low-cost index funds, and the new expectation of low-fee products leaves little room for B2C marketing efforts.