Can AI Drive Alpha for ETFs?

In our previous post we touched on the potential of an ETF bubble. The exponential growth of ETFs, especially from younger investors who want to set-it-and-forget-it, means there’s an opportunity for providers to increasingly use Artificial Intelligence in smart alpha and active products. But what can AI do for your business and investment strategy?

Like Humans, Only Better, Faster, Smarter

AI tools can intake data, learn from it, and act on it to meet specific objectives. But they can do it more quickly and efficiently. In fact, machines running AI algorithms can process large amounts of data in the blink of an eye. Market data is dynamic. Machines can react instantly to fluctuations to best identify ideal investment strategies. They can also read through thousands of pages of market reports in seconds, while simultaneously connecting new market signals with recent ones detected in other markets. It would take a fund manager hours to do the same thing a machine can do in split seconds.  

AI Has No Ego or Emotion

Investors tend to make poor decisions because it’s their money they could lose. Money is emotional. But machines don’t get stressed, tired, or angry. There’s no winning or losing. They operate in a purely logical manner and make decisions based only on evidence and indicators. When you remove emotion from the equation, you make better decisions. There’s no holding onto a position because you think it might change. There’s only analyzing the facts and deciding based on what is happening, not what might happen.

Disrupting the ETF Industry

ETF positions are decided on by an AI system that processes market signals, news articles, and social media posts. Daily trade recommendations in an AI capacity are not only easy, but cost-effective. Smaller fintechs and individual developers have unprecedented access to this technology. Perhaps you read about AIIQ from EquBot, the first exchange-traded fund to use AI technology to pick stocks from developed markets outside of the U.S. It leverages IBM’s Watson capabilities to build predictive models that identify 30-70 U.S. stocks every day that have the best appreciation potential.

IBM’s open APIs and developer-friendly portals charge per API call once a product is live. This sort of scalability makes AI accessible to anyone, regardless of size or motivation. And, as you can see from the below chart, ETF providers who aren’t taking advantage of AI are losing out on revenue.

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All About the Alpha

Experienced traders are turning to AI in order to maximize profits in up markets and minimize risk in down markets. Because AI leverages Natural Language Processing, Sentiment Analysis, and Numerical Data Processing to analyze social sentiment with lightning speed and precision, it can maximize alpha. It takes a human three seconds to analyze a tweet, but it takes AI less than one millisecond to analyze a tweet as bullish or bearish.

Since AI doesn’t need to sleep, it can be working 24/7, even when the markets are closed, trying strategies that might be difficult to execute for traders. And because of the amount of data available, risk is mitigated because AI will know when to get out before it’s too late. An AI system can make daily stock recommendations that the ETF manager can then use to shift positions, increasing alpha.

Compete or Go Home

An important aspect of any AI strategy is partnering with external developers. Because, in order to compete with the top financial firms in your sector, you need to leverage machine learning or risk being left behind. In fact, you might already be.

Are you leveraging AI in your business? We’d love to hear about it.

 

Is an ETF Bubble Looming?

ETF Folklore

“From the industry perspective, what’s brilliant about ETFs are they have the ability to work well under pressure. Any time we’ve seen dips or a bear market, we’ve seen ETFs be a good haven because all you’re doing is going to a different side of a trade.” – Global Asset Manager with >$1T AUM

The appeal of ETFs to investors is diversification. The ETF surge represents a shifting investment ecosystem away from active, toward passive. According to a Charles Schwab 2017 ETF Investor Survey, the percentage of ETF investors by demographic is as follows: 56% of Millennials, 44% of Gen X and 30% of Boomers. In fact, an astounding 96% of millennials see ETFs as a necessary part of their investment strategy, perhaps because they have less money available to invest.

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ETFs are appealing because:

  • They have lower expense ratios
  • You can purchase fractional shares
  • They are more attractive for people with little knowledge
  • Typically there’s no minimum to invest

Crunch Time

However, many ETF investors are unaware of the risks of investing in ETFs. Some [watchdogs] see an ETF bubble that is set to burst, even though what is being invested in is more of an investment wrapper than an asset class in its own right.

Our current financial system is geared towards a much lower average life expectancy. Yet, as people live longer, their portfolios need more durability. So what is the liquidity of ETFs and the ability for ETF companies to unwind when, for example, a boomer needs to start drawing down? Or, what happens during a crunch?

Facing Liquidity

“I’m not worried about ETF liquidity. There’s always fear of that but I don’t think there’s suddenly going to be a liquidity drought in asset classes. It’s really at the very back of our heads.” – Large Pension Fund

High-frequency traders, traditional active fund managers, and other value investors believe that one of the challenges for ETF companies will be unwinding their positions. For some financial institutions that own ETF providers, exiting subscale market positions may prove to be attractive. The rapid growth of the ETF market means that we’ve seen comparatively few exits. In a consolidating market, ready buyers could be plentiful. But the challenging economics of ETFs could mean that sellers find exit valuations disappointing.

Mistaken Valuation

Cash inflows to an ETF that has large holdings of a specific company could misprice a company blindly. “In the largest products, where most of the money sits, about 90% of trading that occurs is in the secondary market, according to Vanguard’s research. That means ETF investors are passing investments between themselves, and not having to transact with fund managers.”

Another reason for concern, a July report from Cirrus Research cites that, “companies with higher ETF exposure have steadily underperformed their counterparts since last June.” While the rise of robo advisors reflects this changing paradigm, a lack of understanding drives ETF demand and introduces risks. And it shows no signs of slowing down with 61% of millennials planning to increase their ETF positions. So while wealth managers used to be too expensive for the masses, automation is changing that and ETFs are democratizing the investment world.

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ETFs played a role in the sell-off in 2015:

  • According to SEC, exchange-traded products experienced higher volume and volatility than standard stocks
  • Swings in price seemed arbitrary among otherwise similar ETFs
  • Many of the shares owned by investors were dealt by short sellers (unbeknownst to the investors)
  • As investors realize they own ‘synthetic’ ETF shares, the situation could explode

Before the Burst

Banks and trading firms happily sell and trade ETFs when the market is calm. When they can buy at a discount and sell at a premium, these firms will continue to offer ETFs in large quantity. But when that is no longer a probability or possibility, the suppliers of ETFs will most likely disappear, essentially undoing the entire system. But there are ways to fix the bubble.

‘Physical’ ETFs have much lower risk because they are actually hard backed by the underlying security. Diversifying with equities that aren’t usually tracked by ETFs can help avoid market cap bias.

How Close is the Burst?

Millennials are pouring their investment dollars into ETFs. They’re also the target of many of the robo advisors and FinTech’s helping investors begin to grow their wealth. Many of these robos and “set-it-and-forget-it” FinTechs are leveraging ETFs in their portfolios due to the lower price point, dollar-based investing, etc.

That said, could the potential burst or liquidity crunch be stalled due to the influx of Millennials investing in ETFs? Or is that a temporary distraction? Will the robos and FInTechs potentially suffer the same fate?

Case in point: look what happened to some of the robos that got squeezed during Brexit as people demanded access to their funds. Will this instance be a case of only time will tell, or are these brakes on their potential roller coaster?   

What do you think?

 

 

 


1, 2 Citibank “New Approaches to Active Management & The Need for Manufacturing        Flexibility in an Era of Asset Class & Factor Investing” 2016
3 Financial Times
4 Bloomberg

Design Smackdown – Incumbents vs FinTechs

“To design is much more than simply to assemble, to order, or even to edit: it is to add value and meaning, to illuminate, to simplify, to clarify, to modify, to dignify, to dramatize, to persuade, and perhaps even to amuse. To design is to transform prose into poetry.” –Paul Rand

We know what you might be thinking. Why is a FinTech company talking about design? Think about it. We all have products or services to offer. Shouldn’t the way we present those offerings be the cleanest, most intuitive and simplest to use? After all, the barrier to entry can take many forms and design or user-experience is certainly a big one.

It’s more than this interface is ugly and this one is clean. It’s about creating the easiest experience for the user. One that allows them to sign up in a few steps and of course then is a no-brainer for continued use. In today’s day and age, the mobile experience is paramount.

We took a look at the customer experience of several Financial incumbents and some FinTechs to see how they compared. This includes things like interface density: color, fonts, spacing, as well as more quantifiable data—steps to sign-up and log-in, overall app navigation and ease of usage.

Author’s note: In our review of incumbents and fintechs, we have attempted to assess the user interaction and experience with quantifiable data points to try to eliminate subjective opinion. If you believe that beauty is truly in the eye of the beholder, we’ve tried to focus on objective learnings vs subjective opinion.

Clutter vs. Clarity

The incumbents seem to have taken their web experience and tried to leverage those existing workflows into mobile. The screens are dense with information with a less intuitive path to entry, a plane can only land on one runway. In fact, on the sign-in screen, users are given quotes, research, accounts, trades and more. There are in some cases, 60, yes, 60(!), fields or upwards of 10 steps to complete in order to sign up. Some even suggest a 10 minutes process and then tell you it takes 2 days, yes days, to hear back. Who is going to do all that on mobile?

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Meanwhile, many FinTechs were mobile first, starting from the ground up, which allows them to simplify and convey the one thing they want the user to do: sign up, log in and start immediately using the tool. There is nothing distracting them from that goal and it’s literally the only thing they can do on that screen. No distractions. No extra steps. Just sign up or log in. All of these offer 12 screens (some which are inaction screens) to sign up. That’s under 5 minutes. No waiting period. Mission accomplished.

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Incumbents Still Winning…for Now:

While incumbent apps are rated well and—as of now—preferred by experienced traders or those who have broader active investing needs, this rating likely has more to do with the rich legacy features that older generations of investors rely on. In other words, rich features and lack of head-on competition from Fintech apps that aren’t competing to the same level of investors and for the same features are the reason they are being more utilized. An example of this would be a plethora of research and charting tools as found on Etrade but not on RobinHood, something an experienced, active trader leverages to make decisions.

Let’s compare:

Here how Robinhood and Etrade both show AAPL as a quote page. There are two distinct approaches being utilized and it’s clear the apps cater to two types of investors. Etrade is info-rich, providing more information for trading decisions. For a newer investor, this might be more content than is needed. But for an experienced trader, this is what they’re used to seeing.

Robinhood, on the other hand, offers a slicker and cleaner interface. Robinhood presents users with one aspect of the stock and directs them to exactly what they want them to see. For a newer investor, this is likely all they need and doesn’t overwhelm with excess complexity. 

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Understand the Trends

Fintech apps have mainly been focusing on a large pool of inexperienced or young investors, or those that want to take generally a passive role in the investment markets. As we mentioned, Robinhood—the only FinTech broker competing for active trading—is still lacking in basic Incumbent features such research reports and stock screeners for idea generation. However, each segment has something different to offer:

Incumbents

  • Audience: Experienced investors/traders
  • Sign up process: Lengthy and information-rich  
  • Ease of use: High learning curve
  • UI and UX patterns: Complex
  • Capabilities: Feature-rich

FinTech

  • Audience: Young investors/traders
  • Sign up process: Straightforward and short  
  • Ease of use: Shallow learning curve
  • UI and UX patterns: Simple and modern
  • Capabilities: Limited focus

What the Future Holds

For now, FinTech apps aren’t a threat to Incumbents for serious traders. However, that doesn’t mean Incumbents should rest on their laurels and accept their outdated and clunky app experience. Given a bit more time, FinTech players could, and likely will, gain ground on new waves of investors. Since Incumbents have been really slow to adopt in focusing on the end-user through better UX, FinTechs are picking up Millennials that have grown up using Facebook, Google, Uber and other services that established high standards for their experiences. These are apps that offer low learning curves, simple entry, and minimalistic user interfaces. And they are what the people want. So, it’s only a matter of time before user experience trumps experienced.

Screen Scraping’s SODA Framework Explained

SODA

Recently, Yodlee, Quovo and Morningstar announced that they were launching a joint initiative “…to enable secure, open data access for consumers in regard to their financial data.”  They’ve created the Secure Open Data Access (SODA) framework, a set of consumer-centric principles for data access and financial data security to promote transparency, traceability, and accountability in the financial services ecosystem.

We’ve done a lot of talking lately about open data and why it’s so important for consumers and businesses. This ranges from allowing for increased innovation to the importance of APIsLet’s dissect what this announcement doesn’t say:

SODA Broken Down

“To ensure that the aggregator bread-and-butter business isn’t scuttled completely, or at the very least taxed into oblivion by the banks, aggregators are stealing a march by positioning themselves as consumer advocates.” – Drew Sievers, CEO of Trizic Inc.

1) Mention of Financial Institutions

How can you protect data or open it up without partnering with the very people who provide the customer info in the first place? What we do know about this deal is that there’s no clarity on where the data goes, no clarity on how to control users’ access from the FI side via these three companies and no comparison to PSD2. The bank’s data is what the aggregators are mishandling, either intentionally or unintentionally.

2) APIs Not Included

The three SODA aggregators don’t say that they will no longer screen scrape. They have positioned themselves to appear on the side of the consumer while stopping short of adopting more secure methods of data sharing like APIs. They also criticize the government for a lack of clarity but suspiciously stop short of advocating for new legislation that would most likely restrict their operations. “The move is partly a response to other industry proposals that the SODA framework developers see as too restrictive.”

3) Data Resale

The framework benefits a data aggregator company that makes money on selling the technology. Yodlee has taken heat on reselling anonymized data to investors and others. But they say the framework is designed to put the consumers’ needs first.

The sale of this data is one of the big areas of interest among hedge funds. Many are interested in non-traditional data sets, and consumer portfolios/activity is one of those data sets that’s viewed as interesting data to hedge funds. With all the money available for data, it’s hard to believe they are going to leave those chips on the table and walk away.

4) Plaid and Finicity

The two missing players are smaller than the others but also used widely and screen scrape the same universe of financial institutions. “SODA’s purpose is to consolidate Yodlee et al.’s position and ward off the threat of large banks stepping in and regulating the market themselves, since it is more often than not banks’ data that’s used,” says Sievers. If this is true, why not include all the aggregators? Are Plaid and Finicity being excluded for being too small? They do the same thing and use data the same way. So why were they left out? Plaid has declined to comment on this announcement citing a lack of expertise regarding Yodlee, but it does make you wonder.

Where’s the beef?

Essentially, there’s not much here. There’s no clear benefit to the investor and the protection of their data and there’s no clear benefit in terms of security.

APIs are the big missing piece in all of this and what’s really needed above and beyond these “made up” frameworks. APIs give everyone more control, allowing FIs to benefit the users and truly keep their information secure and protected.

In Europe, the Europeans believe they own their own data, but that’s not true in the US. This is the mind shift that needs to happen to give people more control of their data and in turn, their privacy. No acronyms needed.

Acct Opening – Big Spend, Little Innovation

I’m on Top of the…Sales Funnel?!

FIs spend most of their marketing dollars on account acquisition. In fact, in 2017, the US financial services industry will have spent $10.1 billion on digital advertising, a 13.1% gain from 2016, according to eMarketer. But for all this spend there’s been almost no innovation in this space. And that lack of innovation is losing customers and costing FIs millions. It’s time that FI’s begin to ask:

  • Is there a better model?
  • How can the account opening process be improved upon for an easier flow for the end user?  

In a previous post, TradeIt conducted time trials to open a new brokerage account on mobile. Completion of those applications ranged from 6 to a staggering 12 minutes. So what were the pain points and causes of abandonment?

  • Too complex
  • Too many steps
  • Took too long
  • Required information not readily available

The biggest challenge in a mobile age is that none of the account opening processes are “native to iOS” (or Android) and all require users to go to a responsive web application that’s driven from the 20-year old Affiliate link model that was designed for desktop. So, with each additional minute and extra field to complete, or with clunky mobile interfaces, the number of completed applications falls significantly. There goes your sales funnel…and your profits.

Bye, Bye, Bye

According to Forrester, 54% of people filling out financial application forms abandon prior to completion, and on top of this, a recent study by SaleCycle saw financial abandonments reach an average of 79.3%. This is a huge, wasted opportunity considering that customers who attempt to complete an application are expressing a genuine interest in your products and services. In other words, if your process is quick and easy, they will complete their sign up quickly and easily. If it’s not, then you’ve lost a customer and revenue.  

As you can see below, Acorns’ account opening flow is super streamlined, moving the user from beginning to end in an easy progression of screens with limited questions.  

Acorns Flow.png

Dollars are moving to mobile, but no one is fixing mobile  

By 2019, advertisers will spend more on mobile than all traditional media, except television, put together. Why? Because that’s where the eyeballs are. And your customers. According to Zenith, mobile ad spending for 2017 grew 34%, to $107 billion.

FIs that respond to this need and continue to ramp up their already heavy investment in both the online and mobile channels will be better positioned to drive incremental sales, build customer loyalty, and provide an outstanding customer experience.

Innovate to Acquire

Meeting long-term customer acquisition goals for an FI requires identifying and capturing market opportunities while staying ahead of the competition. In a world of specialized products for highly segmented target audiences, being able to launch a new bank customer acquisition program faster than the competition means getting the largest part of the market share. For every month of delay, some of your customer base moves to another product with a competitor. That lost revenue over time accumulates and creates a revenue gap that will never be filled.

At the Benzinga Global FinTech Awards last week, the big brokers spoke about the need for innovation. TD Ameritrade cited:

  • 40% of their trading is happening on mobile  
  • They are doing 250,000 trades/day

The brokers on the panel—which included TD Ameritrade, Schwab, Interactive Brokers and TradeStation—agreed that constant innovation was a necessity in an age when retail brokers interfaces are being compared to Amazon and Google for being clean, easy and intuitive. As we highlighted in a post last year, 72% of millennials would rather bank with Google, Facebook or Amazon than their existing financial institution. The mobile experience is key to this and easy interfaces are what will get them to visit and stick around.

Quick and Easy

What Robinhood, Acorns, and Stash get right with their native/mobile-enabled tools is to allow users to open an account in under 5 minutes. Why? Because those tools were built from the ground up with mobile—and the end user—in mind. They know what’s important when looking at customer acquisition and creating that experience:

  • Hone: Get the message right
  • Streamline the process: avoid pitfalls that will cause potential clients to abandon the flow
  • Focus: Only include the must-have know-your-customer components
  • Make it native: If you do one thing and one thing only, make it native

Friction Isn’t Fiction

Everyone working in fintech should know that reducing friction at key transactional points in your user journey is critical for adoption, conversion and repeat long-term use. Just remember that your users don’t necessarily understand the ins and outs of why the financial industry has to do some of the things it does. So while they expect it to be complex and difficult, those who can make it easy and fast will surely win the acquisition game in the long run.  

 

Screen-Scraping and the Halo Effect

Don’t Believe Everything You See

“Trust is a key strategic asset which creates growth opportunities and defends against competition. It allows deeper customer engagement across products and services.” – Nobel Prize winner, Robert C. Merton

We’re going to talk about screen-scraping again. Because we think it’s so important to be aware of what this means for both consumers and FI’s. You can get more background on the process of screen-scraping and what it means for the future of banking as well as the importance of API’s and innovation in our previous posts here, here and here.

One of the ways screen-scrapers are getting access to customer data is through a halo effect.

This is the foundation of the modern concept of brands. Essentially it means that when we develop a favorable impression of a brand when interacting with one partner at a firm we tend to view the whole firm in a favorable light. Our impression of that firm’s brand is strengthened. Thus creating a halo around that entire firm that is associating with the other brand.  

Screen-scrapers are using logos to build trust and credibility and then turning around and selling the data they’ve so trustfully obtained. By using the logos and trademarks from financial institutions, it engenders trust among the end users who associate the brand of Broker X with their money and the security that their financial institution provides. However, most FIs have not in fact granted permission or rights to the screen-scraper for them to use the logos in the first place. The trust of the logo makes an association for the end user, but this is an abuse of the institution’s mark and negatively impacts the end user and the institution itself.

The Anti Trust

Let’s be honest, most Americans aren’t enamored with big banks or financial institutions these days. However, seeing a logo of a familiar name in one of their finance apps will undoubtedly create a feeling of assurance that things are on the up and up; that their information is safe. As an end user, we’re putting our faith and trust in the visual association of the broker or bank brand on a third party site. And in this case, that trust is unfounded.

I Didn’t Sign Up for This

When this logo appears, it signals to the end user a perception of the financial institution’s endorsement of the technology, thus they willingly link their account. As we’ve argued in previous posts, the screen-scraper can then go in and grab their data — any of their data — and use it and sell it. These companies are selling that data many times over, charging their partners per linked user. But where’s the end user’s cut of the profit? And how many places are they selling it to?  

Millions of Customers + 1000s of Companies = Millions of Screens Scraped and Countless Data Points Up for Grabs

Screen Shot 2018-05-04 at 2.52.29 PM.pngAn Ounce of Prevention

Luckily, all is not lost. Companies like Fidelity and Ally are ensuring their information is secure and are increasingly moving towards APIs for third parties to access their clients’ data. In fact, TradeIt’s SDK specifically helps partners integrate our technology, allowing their developers to integrate faster with simple customizations. This ensures the end user that they’re protected and gives them total control over what happens to their data. By partnering with brokers to access their APIs, TradeIt only accesses the information that the broker makes available.

Here’s how it works:

  • Through a broker’s API, we allow the end user to log into their brokerage account securely.
  • We don’t view, access or retain their log-in credentials.
  • After the user consents, the broker provides an encrypted token.
  • This token will expire, and once it does, the connection is severed.
  • In order to continue to view their portfolio and/or send buy or sell orders from their favorite app to their broker, the end user will need to relink their account.

Safety First

How this differs from traditional screen-scraping is simple: we don’t retain log-in credentials and continue to access and scrape the end user’s data however we see fit. Their information is not available to us. Nor should it be. Not only is this safer in the event of a data breach, it provides true trust with the end user. We only show the logos of brokers with their permission.

Many Financial Institutions are requiring aggregators to sign agreements where the aggregator/screen-scraper is liable for the data in the event of a breach. Not surprisingly, many aggregators are pushing back and not signing these agreements (ostensibly because it cuts off their revenue stream).  

But, as we move into more transparency around banking, brokers are embracing this change. TradeIt has consent pages and end-user agreements that explicitly inform the investor that we’re accessing their data on their behalf. It’s more than just a logo, its an agreement between the broker and the third party. This puts the end user at the forefront, not on the backburner. Which is where they should be in the first place. After all, it’s their information.

In the Question of Data Control, APIs are the Answer

Abracadabra, Watch Your Data Disappear

Whoever said ignorance is bliss obviously never unknowingly shared all their data. As we mentioned in a previous post, consumer data is being screen-scraped into the ether and this creates so many issues around control and the assumption of privacy. Once your data is scraped, it’s gone. Neither the bank or institution, nor the end user has any control.

The problem, as ever with the tech industry’s teeny-weeny greyscaled legalise, is that the people it refers to as “users” aren’t genuinely consenting to having their information sucked into the cloud for goodness knows what. Because they haven’t been given a clear picture of what agreeing to share their data will really mean.

Miss Jackson if You’re Nasty

It’s all a question of control. And APIs are the answer. They offer banks and FIs the ability to control what pieces of data and how much are grabbed by a permitted 3rd party. For example, at TradeIt—from some of our brokers’ API—we see only seven days of transaction history, while others might show 30 days. Typically no one provides more than 90 days but the depth of history varies. In addition, for things like an order blotter, some brokers only provide the current days’ orders. These smaller pieces of data ensure less is shared, though what is shared is timely and relevant.

You Get My Data and You Get My Data, Everybody Gets My Data

With screen-scraping, once you provide your ID and password to the 3rd party, their bots do the scraping and can grab anything that’s available, including your transaction history and all of your accounts under that single login. For some banks or brokers—if the broker is part of a larger financial institution that offers a diverse product set—that could be your brokerage account, retirement account, mortgage, even credit card information. Most end users likely don’t realize that once they give the screen-scraper their login, they have it, and they can and will use it until the password is changed. What’s worse most of the screen scrapers don’t have trademark rights to the logos that are on their service integrations, therefore falsely leading the consumer to believe the institution approves it. In the meantime, they’ve still grabbed that data and it’s gone…to who knows where.

APIs Create a Goldilocks Solution, They’re Just Right

In contrast, most APIs are programmed to call for specific account balances since these services and endpoints are more distinct and inherently control more access to just the needed data. This is why the European Banking Federation’s position is that screen-scraping is an outdated, first-generation technology that should be replaced by APIs, which it sees as a more secure way of enabling direct access to customer data for third parties.

Not only do APIs offer a more tailored solution where you essentially get only what you need, they create a huge potential for innovation. As we demonstrated in a previous post about your data being open for business, companies like Fidelity are already showing consumers who has access to their data and allowing them to control whether or not that’s ok with them.

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In Tech We Trust

Brokers need to push themselves to invest in APIs. Ever since the invention of the FDIC, FIs have been associated with trust as it relates to consumer’s money. The theory with bank robbery was that they aren’t hurting anyone since the money is insured. Except now with screen-scraping, we are getting hurt…with our privacy…or lack thereof.

As technology evolves and allows for endless possibilities, investing in methods to engender trust and yet that also support the new ways individuals want to interact with their money, track their wealth and/or use tools for better financial decisions, is vital. Brokers and FIs need to enable that, to securely open their data with controls to prevent misuse or even breaches. This is what will create real trust with their users.

Don’t Build a Wall

Firewalls and detours aren’t the answer. It’s not about closing things off, it’s about opening them up. With the new sharing ecosystem, and with millennials having more trust and more interest in tech-driven brands, FIs need to work to remain relevant. In order to do this, you need to be an active member of the ecosystem and invest in technology that supports these behaviors.

Because, while users may be content to share some of their personal info in order to use your service now, it’s only a matter of time before they realize just how much and possibly decide it’s not worth it.

“We have consistently warned our customers about privacy issues, which will become increasingly critical for all industries as consumers realize the severity of the problem.” – Jamie Dimon

Are they really getting what they signed up for, or worse, paid for? You need to provide comfort and control to your user. If you don’t, they won’t tick that agreement box and they’ll move on to someone who can.  

The Evolution of Value Chain and Porter’s 5 Forces

Millions of eager MBAs populate the executive suites and boardrooms of top companies around the globe, and the vast majority were indoctrinated in strategy classes with Michael Porter’s Five Forces and value chain analysis. These value chains have served corporations as they examine vertical integrations, mergers & acquisitions and the strategic fit of business lines since the Industrial Revolution.

Screen Shot 2018-04-11 at 8.59.39 AM.pngExample: Linear value-chain which offers one direction for business flow only.

This traditional model is no longer useful or practical and the technology revolution of the last 30 years is forcing companies to re-evaluate linear value chain analysis in favor of a “constellation” approach to building businesses.
Untitled123.pngExample: Constellation approach using TradeIt to showcase the potential of a living breathing value ecosystem that flows to all entities.

As we see in the TradeIt model, the relationship between buyers and suppliers now features a “big bang” view of the ecosystem—partners that support each other and need each other to grow, branching off in every direction.

So why is this beneficial?

The TradeIt model would not be possible without APIs. APIs allow companies to securely work with each other through technical channels in order to focus, build and scale without the same linear approach as historically conceived. But we’re getting ahead of ourselves. First, a refresher…

Five Forces

First described by Michael Porter in his classic 1979 Harvard Business Review article, Porter’s insights started a revolution in the strategy field. A Five Forces analysis can help companies assess industry attractiveness, how trends will affect industry competition, which industries a company should compete in—and how companies can position themselves for success.

Essentially Porter built a framework for understanding competitive forces in an industry and how those drive economic value among the industry players. Today we’re still trying to understand how to drive value, but what’s clear is that it’s no longer through a linear value chain. Instead, we drive value through a platform model where you have contributors owning different pieces, therefore making the sum of the parts greater.

Evolution of the Value Chain

“The value chain describes the full range of activities that firms and workers do to bring a product from its conception to its end use and beyond. This includes activities such as design, production, marketing, distribution and support to the final consumer.” Nowhere does it say the chain has to be linear.

Enter the API

APIs are revolutionizing traditional business alliances and partnerships through scalability, flexibility, and fluidity.1

When companies share APIs, the world expands. Uber relies on Braintree for payments, Google integrates Uber into its map feature, and the list of interdependent API-driven technology businesses becomes more and more apparent.

Similar to the relationships between Uber, Google and Braintree—which are all focused on delivering a service to an end user—in finance, Cross River Bank allows companies like Affirm, TransferWise, and others to be free to build client-facing tools and services without having to do the core banking functions that often slow large incumbents. The ‘big bang’ approach to an ecosystem allows innovative service providers to enter a space with one “killer app” or a new tactic to solve a pain point.

Power in Partnerships

Large incumbents, where all the technology and related services are all under one roof, may not be able to move as quickly due to silos, legacy systems and/or risk and compliance requirements. The keys to this new value chain approach and the ecosystem are the partnerships and the ability to work together in new and innovative ways to meet the end user’s needs.

The visual below shows how TradeIt acts as a hub between supply and demand (brokers vs publishers) and how other partners come into the equation with ancillary and related services.

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This type of model not only offers much more flexibility for other players, it also opens the door for additional revenue streams and increased profitability. By creating value at every touchpoint, from broker to publisher and supplier to distributor, the ecosystem will only continue to expand and grow…to the benefit of everyone.   


1Bala Iyer and Mohan Subramaniam, “Corporate Alliances Matter Less Thanks to APIs,” Harvard Business Review, June 8, 2015.

How Open Banking Can Result in More Innovation

Playing Safety Catch-Up

As we outlined in our last post about the practice of screen scraping, in order to protect user’s data, it’s extremely important that financial institutions start moving towards APIs. With the PSD2 initiative, officially the Revised Payment Security Directive, Europe is ahead of US in terms of best financial institution security and consumer privacy practices. And if the recent Facebook/Cambridge Analytica scandal is any indication, it’s more likely that the US will see a data protection movement similar to what we’re seeing in Europe.

The question isn’t if PSD2 will be adapted in the US, but rather when? Before we try to answer this question let’s take a closer look at what PSD2 actually includes.

What is PSD2?

At its core, PSD2 or Open Banking is about protecting consumers. It enables bank customers to use third-party providers to manage their finances. Banks are obligated to provide third-party providers access to their customers’ accounts through open APIs enabling them to build financial services on top of banks’ data and infrastructure. This places an emphasis on consent via security, innovation, and market competition.

Third-party providers can be either Account Information Service Providers (AISP’s) or Payment Initiation Service Providers (PISP’s).

  • AISP’s provide users with aggregated information about their payment accounts in a single location, such as transaction history, account balances, direct debits etc.
  • PISP’s facilitate the use of payments via online banking with regards to online fund transfers, direct debits, credit cards transactions, etc. This is a game-changer when it comes to avoiding credit card fees and other transaction costs.

By enabling fintechs, large technology firms, other banks, and even certain retail organizations to go head-to-head with banks as PSPs, PSD2 aims to provide lower costs and higher security for consumers and to afford merchants greater flexibility to differentiate customer experiences, including payments.

APIs give the financial institutions the ability to manage security and control compliance risks while at the same time giving users access, control and visibility into how their data is being used—a win/win.

Control Begets Innovation

Giving consumers control of their data and who has access to it opens the door for new innovation and new partnerships where security and compliance are givens. PSD2 creates opportunities for banks to compete as technology innovators, wielding powerful analytical tools to extract valuable insights from their vast stores of proprietary data. And market dynamics and customer attitudes may favor banks that can capture opportunities quickly and effectively. In fact, 35% of banker’s surveyed said in the payments arena, FinTechs were the most likely to benefit from the implementation of PSD2.

There are countless other services FinTech companies could provide if they had access to customer transaction information. Currently, most banks cooperate with data requests, but they can be slow to respond or sometimes block them entirely. PSD2 will make it compulsory to both share the data and build systems capable of making this trade real-time. A massive win for consumers and businesses.

So When Will PSD2 Come to the US?

There’s no timeline right now, but there are several factors that could compel this directive to happen in the US sooner than later: requirement of screen scraping companies, FinTechs and FIs to release known data breaches; a regulatory push; another Equifax breach; a consumer-driven movement; or even FIs finally having good personal finance management capabilities.

Smart companies will start preparing so the minute we have our own Open Banking, they’re ready. Or better yet, start acting like PSD2 is already here. That means:

  • Building and opening up APIs to allow your customers to have control
  • Thinking about how you can innovate once restrictions are lifted
  • Understanding the control APIs provide for consumers and why this is a benefit
  • Learning how Open Banking can save you and your customers both time and money   

Creating more transparency and providing consumers with more control over who can access their data is a great thing for investors and an even better opportunity for innovation. How will you capitalize?  

 


1 McKinsey Global Payments Practice PSD2 Survey 2017

Your Data: Open for Business

Giving Control

Despite all the talk about big brother-like tactics, Twitter, LinkedIn, and Facebook (the Cambridge Analytica scandal, notwithstanding—but we’ll get to that in a bit) actually provide their users with a significant amount of control. Users can set their privacy and access settings for data downloads, block people, enable and disable logins, as well as receive alerts when they log in from other devices.

Taking Control

Considering how much personal consumer information they have, financial institutions have nothing comparable. In fact, they’re being screen-scraped by everyone from Mint to their own credit card marketing teams. And what’s worse, users may or may not know this. There’s no warning message or communication from the banks to their customers and if there is something, it’s probably buried in the Terms of Service of the scraper itself. Banks have no visibility into the data sharing practices or downstream uses and they have zero ability to turn-off these authentications on the banks’ site.

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So while you can choose to block a high school sweetheart or de-link your Facebook account from Tinder, once you set up an auto-payment with Stash to Bank of America, BofA has no control on where the data is going, how the data is used or when the data is accessed. It’s a lose-lose for the banks and consumers.

Open Banking

APIs are the only way to address the issue. The US is already behind Europe’s PSD2 (Second Payment Services Directive) Initiative which creates Open Banking, allowing brokers to open up data via API, providing a secure and compliant means for data transfer. This change provides greater control and limits the potential misuse of screen-scraped data. That’s why the emphasis on control and compliant access is a foundational principle of TradeIt’s platform, providing connectivity to brokers and financial institutions.

After what recently came out with regards to Facebook and Cambridge Analytica, 50 million people just got a big wake-up call when it comes to how their information is being used and disseminated. It’s likely only a matter of time before Open Banking comes to our friendly shores and once it does, everyone’s going to have to play nice in the banking sandbox.

Where’s Jamie Dimon when we need him?

Before this happens, the smart US financial institutions will need to build the APIs and control centers and start educating consumers on the risks associated with scraping and gaining control of their data. In fact, some, like Fidelity, are already doing that. Their new Fidelity AccessSM product allows consumers to see which third parties the consumer has permitted to access their data. Consumers can even go one step further to disable a token that’s in place, thereby removing the connectivity and the third party’s access to the investor’s data.

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Under Lock and Key

Privacy and controlled access are a mantra for Financial Institutions and people expect security, especially with the increasing numbers of hacks and data breaches. Now more than ever, providing users with control over who has access to their data is vital. Financial Institutions need to jump on the bandwagon with features that control their customers’ data. And FinTechs who partner with them need to push for APIs with secure and compliant access that allows customers to control that data. Open Banking should spur innovation, not deter it, but it needs to be done with security and compliance at the forefront. After all, they are the tenets of our industry.