The API Ecosystem Defined

APIs have become pervasive. We’ve moved from the days when people would joke that they knew how to spell “API” to APIs driving most of the apps, sites and tools we all use day in and day out. The ecosystems powered by APIs have grown by leaps and bounds, and with this growth, the types of APIs have shifted as providers emerge with specialities and unique value adds. Niche players have grown and API portals have expanded into various industry and functional categories. Many APIs and API providers fall into categories such as thin layer, transactional, or even APIs built based on multiple APIs.    

In looking at the ever-expanding API landscape, there are some basic categories and axises to evaluate APIs. More than ever, API infrastructure is ripe for investment and today’s marketplace is being dubbed the ‘rise of the API economy.’ One of the reasons is overlap; APIs partner together and thrive off each other to function at the highest, most efficient level and drive each other’s success. As we have written in the past, the value chain has morphed in many sectors from a horizontal supply chain to an ecosystem. And this “big bang” has been powered by and enabled by APIs.   

APIs at Work

Let’s use Uber as an example. In order for Uber to meet your needs as a customer it needs to allow you to pay ahead of time, have the vehicle locate you and ensure your driver knows how to get to your destination. To do this, it taps into a payment API (e.g. Stripe), leverages Google Maps to plot the route and then uses an alerting API like Twilio to make sure you know when your driver has arrived.

We can learn a lot from this example, as Uber’s success is driven by different APIs that use different key components to make a robust end user and driver experience. Uber perfectly showcases the use of thin layer APIs, read only APIs, and transaction APIs, as well as partners providing a variety of API management tools — monitoring, analytics, customer support, encryption, etc. All of them coexist and support each other.

API Landscape: Defined

Outlined below are four key categories we have identified in the API landscape. These all bring value and many market participants can and do leverage multiple providers from these different categories. FI’s are great examples of the the type of partner that taps into multiple categories. Many will work with an Apigee to provide a proxy layer, while also working with TradeIt to help open up their APIs to app developers.  

API Portals

Portals bridge providers and consumers and provide information about the API along all stages of its life cycle both on the front and backend. They not only offer tools that cater to developers, they allow providers to make their APIs public, providing consumer access to applications and credentials. And they’re on the rise. In fact, the number of APIs that Apigee’s customers ran on their platform climbed more than 160%, to nearly 36,000, and the traffic running through the Apigee cloud nearly doubled, to an average of 5.3 billion API calls per day at the end of last year.

Key players in this category include:

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Portal benefits:

  • Monitoring tools and dashboards
  • Best practices
  • Analytics
  • Scale
  • Developer portals, deep with resources and documentation

API Integrators

With a consultative approach, Integrators can help you build an API with market requirements and specs. Integrators partner with you to easily bring the functional tech that is the API to your platform. These companies can staff a team for you to work through each aspect of your project and build, distilling services down to the basics to allow for easy building blocks.

Key Integrators: 

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Integrator benefits:

  • Consultative approach
  • Spec and build APIs
  • Bring the knowledge of best practices to the table

Screenscrapers

Screenscrapers offer a wide breadth of coverage among FIs. They go deep into the small and community banks for some of the widest coverage available. This space is active…and lucrative. (See Plaid’s recent acquisition of Quovo for $200M)

Key API Players driven by Screenscraping:

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Screenscraper benefits:

  • No oAuth security speed bump
  • Single turnkey API
  • Screen-scraped access to multiple FIs
  • Read only data vs. transactional

API Ecosystems

As platforms have emerged, ecosystems have become the dominant force vs. a traditional linear supply chain. APIs have helped to move this evolution along further. The Uber example above is a byproduct of the growth and development of these API ecosystems. Both TradeIt and Stripe offer the technology that provides the connective tissue of an ecosystem in order to bring together partners, but they do this by providing the transactional service required for partner A and partner B (and perhaps C and D) to work together — easily and with streamlined integration. API ecosystems also provide developer tools like an API portal does, but it’s not just a point of connection for data or content; it’s by bringing partners together via a transactional service.

Ecosystem benefits:

  • Analytics
  • Distribution
  • Multiple FIs
  • Security vs. oAuth speed bumps and tokens
  • Visibility
  • Transactional, not a thin API layer

Another Lens

Gartner’s Magic quadrant provides another lens for evaluating the API landscape. By using quadrants for challengers, leaders, visionaries and niche players it compares the completeness of vision vs. an ability to execute.

As the ecosystem for APIs continues to grow with new players and providers — and no matter which type of API technology we’re talking about — there’s no denying that investing in API infrastructure, especially in finance, is growing and necessary. Understanding the unique selling proposition and value add of each is crucial when navigating potential partners. Companies that see the value in creating these shared ecosystems are setting themselves up for mutually beneficial partnerships and of course, financial returns.

Take Amazon, for example. They have a policy of creating open APIs. Their 33 open APIs have been combined with other APIs to create over 300 API mashups. Walmart, by contrast, has only one API that has yielded only one mashup. And while Walmart still beats Amazon in overall sales, it lags behind Amazon with less than one-sixth the online sales. “While there are a variety of explanations for these results, the differences in APIs strategy provide valuable clues contrasting approaches to innovation and customer engagement.”

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First-mover Advantages Matter

The lesson we take from this research is significant. Do you have an API portal? Do you have readily available APIs for developers? Are you requiring APIs from your vendors? We encourage you to think about how APIs working together can enhance the end user experience and bring value to individuals where they are and through the channels they’re engaged with. At TradeIt, we believe building solutions and forging partnerships with this in mind, helps drive value for everyone in the ecosystem.  

 

TradeIt Account Opening is LIVE

TradeIt Launches Direct Mobile Account Opening for Major Brokers

Our first of its kind, application tool leverages an ID scan to eliminate user abandonment and reduce client acquisition costs…. And users can complete their account opening applications in under 2 minutes!  

We are excited to announce that our new Account Opening SDK is up and running – this new iOS SDK delivers a seamless, fully native experience that will allow users to open new accounts without leaving an app. We have simplified the account opening process by greatly reducing the amount of information the customer must enter manually. Using the iPhone camera, our SDK can scan a driver’s license and pre-populate many of the fields required to open an account. Additionally, all addresses are pre-filled within a few taps using our integration with Google Maps. (Shameless plug… check out a video of one of our first partner’s integration!)

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As we wrote last Spring, financial institutions spend the lion-share of their marketing dollars on account acquisition.  Significant dollars are spent for acquisition and yet, abandonment rates are high and continue to be. “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%,” quoted Nathan Richardson, CEO of TradeIt. “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.”

In a previous post, TradeIt conducted time trials to open new brokerage accounts on mobile, only to see application processes take anywhere from 6 minutes to a whooping 12 minutes.  The lengthy process we experienced, coupled with a mobile responsive web experience highlighted to us exactly why drop-off rates are so high. Applying the best practices of mobile UX, we are reducing the user application time by 80%, resulting in more completed applications and reduced client acquisition costs, and a new channel for revenue for our partners.

With only two or three lines of code, partners can simply link into the iOS SDK from an ad or a new menu option. Or add TradeIt’s Broker Center, a pre-build, mobile optimized comparison tool, populated with offers.  Each of these options offers a partner’s audience a variety of compelling offers for brokerage accounts sourced by TradeIt or populated with partners’ own advertisers’ offers. For brokers, we will customize the experience to reflect your specific KYC requirements.  

“We are very excited to be one of the first launch partners of this brand new acquisition tool that no one else is doing,”  says Max Grigoryev, Product Manager at Just2Trade.  “This pioneering solution solves for the 90% abandonment rate seen through traditional account open workflows, and complements the other innovative account opening tools we’ve been developing like our Facebook bot.“

With a simplified flow and best practices for mobile UX in place, we are pushing towards easy and fast, a surefire way to win the acquisition game in the long run.  

For more information on TradeIt’s partnerships, or to create an account, please visit https://www.trade.it/.

 

The Passing of the Screen Scraping Baton

The FinTech world is buzzing with news of Plaid buying Quovo. Hats off to Quovo’s founder, Lowell, who’s built an excellent reputation in the industry for innovation, professionalism and proprietary technology to enable screen scraping. We’ve received over a dozen inquiries from partners, investors and prognosticators on what the deal means, and, while we have no insider information, we have a few thoughts given our earlier blog series on screen scraping.

There are a few lenses to look at this deal as it relates to what it means to the FinTech space and why it makes sense. We’re going to break it down based on three factors: market structure drivers, systemic reasons and direct reasons.  

Market Structure Drivers

The FinTech world is embracing APIs as the most effective way to interact between institutions, apps and developers — as PSD2 in Europe leads the way. Asian countries are already adopting API protocols. However, since the US has not developed a standard or unified protocol, we can expect more jockeying between screen scrapers and financial institutions, as we saw earlier this year with Plaid & CapitalOne. As long as the US doesn’t mandate standards, screen scraping companies are going to look to gain greater scale and leverage against the more fragmented financial institutions (when’s the last time you saw Citi, JPMorgan, Fidelity & Schwab join forces to protect customer data?).

With 40-70% of FIs website traffic coming from screen scraping companies providing access to Personal Financial Management apps like Mint, FIs have finally woken up to the need to provide secure, controlled access to their products in an increasingly unbundled and distributed world.  FIs are going to require customers to use oAuth to ensure proper security and controls, but traditional US screen scraping companies don’t look favorably on oAuth due to the user experience. The Plaid/CapitalOne battle was a preview of things to come between screen scrapers and Fis, requiring scrapers to go through the front door, not the back.  

Systemic Reasons

If you’re in the screen scraping business and do a value chain analysis, you want to own your own destiny and technology. Screen scrapers exist for a simple reason: to make it easy for FinTechs to enable their clients or customers to aggregate their data in one spot. The screen scrapers create simple and easy to use APIs that customers can integrate and these APIs use screen scraping technology behind the scenes. The technology learns the layout, data formatting and access placements for thousands of FIs, which allows the scrapers to easily enable customers to share their credentials in order to gain entry into the FI. The FI is not a party to this access, it’s a back door. Not all screen scraping companies do this themselves. Quovo did it with robust and secure technology, as do Yodlee and Finicity who often provide their technology to other screen scraping companies like Plaid and MX.    

Data security couldn’t be more paramount to FIs. As much as customers like to demonize banks, banks have done a lot more to protect customer information than big Silicon Valley tech companies. If your user name and password were breached by a portal, hotel company or social network in the last year, it’s likely that the user name and password combination was sold on the dark web. Bad actors on the dark web then run scripts testing your credentials against FIs to get access to your funds. And, while the Fis are proactively monitoring their front door, what many have found is that the bad actors run the scripts via sites using screen scraping to identify vulnerable accounts via the back door. Herein lies the rub. Screen scrapers don’t want to put speed bumps into the user journey, but FIs are requiring oAuth through the front door.  Something has to give, and hopefully it won’t be caused by a breach of your financial information.

Direct Reasons

Plaid and Quovo were direct competitors with similar offerings which could lead to downward pressure on prices. Consolidation will likely allow the combined entity to test price elasticity. Yodlee was the Grand Daddy of screen scraping. Early on, Yodlee bought Vertical One for customers, pricing power and leverage. Yodlee is now owned by Envestnet who has publicly stated that they’ve been focused on making the acquisition pay, meaning they’re increasing prices.

Plaid stated that Quovo’s offering in the wealth space was a driving force for the acquisition.  Yodlee and Morningstar® ByAllAccountsSM have a solid grip on the wealth space, however a combined Plaid/Quovo could result in a greater penetration. And, it doesn’t hurt that Quovo’s founder hails from a storied wealth management lineage, adding to his wealth sector cred.  

Finally, the brands of Plaid and Quovo resonate differently in the broader financial space. Plaid is loved by Silicon Valley FinTechs and Quovo is well-regarded by the established FIs.

In sum, while the financial terms are not readily available, the strategic fit of Plaid and Quovo makes sense — leverage, scale, reputation and technology. Just as Yodlee’s founder stepped away last week from leading his company, the baton (and screen scraping team captain) is now with Plaid’s leadership — run fast and innovate often.

What does 2019 hold for FinTech?

2018 had its fair share of disruption in the FinTech space, but for the most part, companies and investors sat out the end of the year market fluctuations and are cautiously — and perhaps optimistically — looking to 2019. The latest downturn is definitely not unexpected, and if the market continues to soften as most have predicted, we expect to see more acquisitions in FinTech, as investors tighten their belts.

Here are our thoughts on what potential market moves might include:

Chinese FinTechs make another go at the US market

As highlighted in the MIT Technology Review, the Chinese market is much more innovative and disruptive than the US FinTech Market. While the Alipay-Moneygram tie-up failed with regulators, it won’t deter the ambitions of these cash-rich companies.  Notably, Alipay, TenCent, Fosun, CreditEase and PingAn continue to be ever-present at US FinTech conferences, networking, looking to deploy capital, and tempting entrepreneurs with cash offers. Expect to see Chinese companies buying smaller FinTech companies that allow them to fly below the radar of regulators, yet buy and scale with US teams that have strong operating reputations.  

Betterment or WealthFront might get acquired by a smaller incumbent who’s looking to chase down Vanguard and Schwab’s market dominance

Wealthfront got a bump with a $75M investment earlier this year, but some claim that raising money at this stage (10 years in) is a delay tactic if they’re seeking acquisition. Perhaps a “marriage between two leading independent robo advisors is next,” claims Timothy Welsh of Nexus Strategy. He also states that “if robo advisors were going to disrupt, they would have already.” A very debatable stance, in our opinion. But if a merger isn’t in the cards, it’s certainly likely that acquisition is on the table.

The economics of “set it and forget it” firms might catch up with robos as market prices soften

Robos haven’t had to deal with a down market since their inception. As we head into 2019 and likely more volatility, how will they respond and, perhaps more importantly, how will their clients? With a down market and poor returns, will investors stick it out with a “set it and forget it” or will they just say “forget this” and move their funds back to an incumbent? And, though most robo investors are Millennials, will they be ok getting communication about downturns from their advisors solely via email or social media? More importantly for the bottom line, it will be very telling to see if an electronic relationship has the same stickiness as a personal one. According to Greg Curry, a fee-only financial advisor with Pillar Advisors in Louisville, Kentucky, “In a down market many clients need hand holding and the value of interaction with a human financial advisor can be the difference between them sticking with a well-conceived financial plan and investment strategy and making moves that are detrimental to their financial future out of fear.”

With the loss of Robinhood, APEX Clearing looks to sell

Now that Robinhood has built their own clearing system from scratch, what does that mean for APEX Clearing? The last time a major brokerage built something similar was Vanguard, in 2008. It was only five years ago that Apex claimed it was the only company that had the technology to make Robinhood possible. And while right now Robinhood Clearing will only be used on its own platform, they haven’t ruled out the possibility of commercializing it. So, what does this mean for other FinTechs? Is Robinhood Clearing the potential go-to for these solutions? Or, with Robinhood’s recent insurance snafu surrounding their checking and savings account announcement, did they tarnish themselves as a trusted platform/partner?  

N26’s move to the US from Europe will gain ground in the investment world based on their API platform approach

The German mobile bank just received the largest equity financing round in the FinTech industry in Germany to date, as well as one of the largest in Europe. According to their Americas CEO, Nicolas Kopp, they’re “a technology company with a bank license.” Because N26 was built from scratch, and their European roots means they have to comply with PSD2, they’re prepared for open banking protocols. Their design was specifically built for mobile — to be both visually appealing and user friendly, and they support/use APIs, not siloing technology for different lines of business, creating a seamless user experience. And they’ve AI-enabled their platform, allowing them to create more personalization at scale. We’re curious to see what else they have up their sleeve.

What are some of your FinTech predictions for 2019? Share them with us on Twitter using #TradeIt2019 and #FinTechPredictions

 

What Does It Mean That Incumbents Are Embracing Crypto?

Has Crypto Gone Legit?

It might have been easy in recent years for incumbents, mass market investors and generally the mainstream to dismiss cryptocurrency for several reasons. It’s volatile. It exists virtually. It’s all about anonymity. It’s not regulated. It cuts out the middleman. It was created by a community of  developers. For years, the virtual currency seemed more an underground fad than a true and legit financial resource. But that finally appears to be changing.

Crypto Gets Institutionalized

With the recent announcement from Goldman Sachs that they’ve teamed with billionaire Michael Novogratz to invest in BitGo, a startup that aims to help institutional investors securely store their cryptocurrency, crypto may no longer be the red-headed step child of finance. Between them, Goldman and Galaxy Digital Ventures are investing about $16 million in BitGo. And while this amount is a drop in the bucket for Goldman and Novogratz, it certainly indicates the incumbents taking crypto seriously and realizing their customers are looking for the option to not only invest but have a safe place to keep these investments.

“Greater institutional participation in the digital asset markets requires secure and regulated custody solutions…We view our investment in BitGo as an exciting opportunity to contribute to the evolution of this critical market infrastructure.” – Rana Yared, MD of Goldman Sachs’ Principal Strategic Investments

Coming to Play

Beyond security, Fidelity is taking it a step further, rolling out their own standalone company, Fidelity Digital Asset Services (FDAS). The world’s 5th-largest asset manager has established FDAS for their clients, hedge funds, and FIs to trade and store cryptocurrency. With $7.2 trillion in assets under management, 27 million customers and 13,000+ institutional clients, Fidelity might seem an unlikely candidate to hop on the crypto bandwagon, but they do spend $2.5 billion per year on technology, partially through incubators that house its artificial intelligence and blockchain projects.

It’s also an accessibility play. According to Fidelity Investments chairman and CEO Abigail Johnson, “Our goal is to make digitally native assets, such as bitcoin, more accessible to investors.” Because of their established reputation, and much like Goldman, many clients will likely feel more safe trading and storing with an incumbent over a startup. This is most certainly what Fidelity is banking on.

Will There be an Incumbent Snowball?

Beyond a handful of major players, there’s been a severe shortage of big, incumbent banks actually making the leap. According to Morgan Stanley’s research division, in a new report “Bitcoin Decrypted: A Brief Teach-In and Implications,” they’ve dubbed bitcoin a “new institutional investment class.” The amount of crypto assets under management has been increasing since January 2016, with $7.11 billion currently being stored by hedge funds, venture capital firms and private equity firms. This means if they aren’t already, the other big dogs are surely strategizing their own entry into the space.

According to Digital assets and regulation news outlet, five of the US’ biggest banks are interested in trading Bitcoin, if not already doing it. These include JP Morgan, Bank of America, Citigroup, Goldman Sachs and Morgan Stanley. Morgan Stanley announced a soon-to-be Bitcoin swaps service tied to Bitcoin futures and it plans to have a dedicated trading desk for digital asset derivatives.

But what could be holding them all back from diving headfirst is investor demand.

Don’t Count Out the FinTechs

So, while the incumbents might have the clout, they are also waiting to pull the trigger. This opens the door for FinTechs, especially since the SEC just made it easier for Fintechs to launch ICOs. Their new division, called the Strategic Hub for Innovation and Financial Technology (FinHub) will act as a central point for the securities regulator to interact with entrepreneurs and developers in the fintech space with a particular focus on distributed ledger technology (DLT), automated investment advice, digital marketplace financing and artificial intelligence. It’s doubtful that FinHub will invite a deluge of startups to the crypto party, but it does lend more credence to the virtual currency. Combining the regulation with the incumbent interest, it appears that we are likely talking tip of the iceberg when it comes to the future of cryptocurrency.

RoboAdvisors: The New Destination For $

Shifting Dollars

As more and more younger investors are embracing robos and ETFs vs. actively managed portfolios, the dollars being invested are shifting. As we look ahead to where the assets are going, it’s impossible not to wonder what this means for the economics of the investment firms, asset managers and brokers. ETFs are growing and they’re also a lower cost investment vehicle. Schwab’s annual report is a great example of how assets are flowing into lower cost investment options (ETF growth is booming – up 19%) and the number of client accounts continues to grow (more on that later). But while it’s always good to see growth, and great to know people are investing (!), does this mean there’s a reset coming as it relates to the fees generated (or not) by investment products?  

For large incumbents there’s a cushion, because they’re more diversified as it relates to product offerings, and in turn, revenue streams. But with the shift to a lower cost product like ETFs, and the combination of Millennials pouring money in and Boomers pulling money out, there’s less investing in traditional mutual funds, creating a shift in how incumbents need to think about their revenue streams. And while these companies are seeing gains, with Schwab’s stock price up over a 10 year period, what does this mean for their long term offerings and strategy?

Vanguard is currently king of the robos with $101 billion in AUM, roughly half of all robo assets. In addition to their command of the market, they also see a bump since they serve as the low cost ETF provider to Betterment and Wealthfront. The fees from distribution through these channels translate to more additional revenue for Vanguard.

Schwab is sitting comfortably at number two, with $27 billion across its robo platforms. But the pure-play robo startups, while not in the same hemisphere, are currently holding their own. Betterment and Wealthfront have $13+ billion and $10 billion in AUM, respectively.

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According to a recent report by PricewaterhouseCoopers, experts estimate that robo-advisors could see their AUM increase by over $800 billion over the next five years as they continue to plow investors’ money into ETFs. And A.T. Kearney estimates that digital advice could grow to over $1 trillion by 2020, a 68% increase over current levels.

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Who Is Driving Growth?

It’s no secret that Millennials are heavily investing in ETFs and mostly via robos. As we’ve talked about before, it’s a low barrier to entry vs. mutual funds or advisory solutions and investors at this age simply have less assets. But interestingly, new findings of emerging Canadian robo-advising companies describe a higher-than-anticipated demographic of baby boomers and Generation X clients with 44 being the average age of clients. Part of this rapid growth in AUM is due to older clients with larger retirement savings.

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However, according to LendEDU.com, American Millennials are distrusting of robo-advisors, with many stating they still prefer traditional advisors. In addition, a large proportion of millennials who don’t use robo-advisors haven’t heard of them, showing that robo-advising has yet to penetrate the Millennial market.

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And while Gen X and Boomers might be investing in ETFs, the majority of them and their dollars are invested in mutual funds and/actively managed portfolios. These represent greater asset volumes and are also higher cost products.

Will there be a pendulum shift?  

It does appear that way. As older generations move into retirement and withdraw funds, the AUM in traditional mutual funds, actively managed portfolios and among advisory solutions will decline. But, because younger generations are continuing to earn and earn more, it’s likely they’ll continue to pump more into ETFs. The set-it-and-forget-it type investing is ripe for this new audience who wants to dip their toes in the water, including the introduction and usage of target funds as options in 401Ks and IRAs. In fact, according to Statistica as of 2018, passive investing is growing exponentially in the US:

  • AUM in the Robo-Advisors segment currently amounts to $283 Billion
  • AUM are expected to show an annual growth rate (CAGR 2018-2022) of 22.8% resulting in the total amount of $643 Billion by 2022
  • In the Robo-Advisors segment, the number of users is expected to amount to 12 Million by 2022
  • The average AUM per user in the Robo-Advisors segment amounts to $43,039  

Bringing it back to Schwab, their active brokerage accounts are up 6%, their total client assets are up 21% and their proprietary mutual funds are up 19%.

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However, total assets among their ETFs more than doubled from 2013 to 2017, an astounding $204 vs $436B. From 2016 to 2017 alone, that was a CAGR of 37% among ETFs vs. 20% for mutual funds during the same period. And only 7% when you look specifically at Schwab’s proprietary mutual funds.

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Some final thoughts:

  • As more investors jump on the ETF & Robo bandwagon and less use full service advisory services and higher cost Mutual Funds, what happens to the fee structure of these firms as more assets move to the lower cost products?
  • Will there be a need to create a new model and what will that model look like?
  • Could we see, as we’ve talked about before, an Amazon Prime model of investing?  

Share your thoughts below or tweet us.

 

Land of the Free (Trade)

What happens to competition when everything is free, when there’s no obvious financial differentiator? How do you get customers to choose you over the other guys?

With the recent bomb dropped by JPMorgan that they’d be offering free trades to everyone via their new You Invest Trade Service, brokerages are on high alert and looking  to understand how this will affect them and the market. Certainly JPMorgan is the first incumbent—but not the last—to make a serious move in this space, and while fintechs like RobinHood built their platforms on free trades, they have less overhead and less offering to contend with. In other words, the incumbent fall out is likely much more significant. But the potential is also astronomical for those who do it right.

How Will You Stand Out?

Since it appears that trading is becoming a commodity with a race to lower pricing until it’s ultimately free, the competition is going to have to create other factors in order to differentiate themselves going forward. As we’ve posted about in the past, these could include user experience and ease of use and delighting customers via good design. As well as attracting new customers. (More on that in a bit.) But there is so much more FIs can do. In fact, no financial company has leveraged the full platform like Expedia has in the travel category or Amazon in the consumer shopping space. This industry is stuck in the mid/late 90’s, whereas consumer spending platforms have evolved and changed with or even ahead of the time. Finance needs to up their game.

Here’s how we see things evolving:

Pricing is No Longer a 2-Year Study

Gone are the days where pricing used to be modelled out with firms conducting tons of research and testing before changing their fee structure. Today, FIs need to be more nimble and push out pricing changes to be immediately responsive to market changes and influences. Being able to pivot or better yet, being first out of the gate, could make or break a new pricing strategy. And leave everyone else scrambling.

Market Cap Erosion

With their announcement, JPMorgan shaved $9B off the market cap of everyone else. With the trading fee revenue stream eliminated, it impacts all companies as it relates to their valuation and market cap. So if brokerages remove trading fees, where will that “lost” revenue come from? Several incumbents have said they too could go to $0 trading, particularly in a rising interest rate environment, but why do it if you don’t have to?

RIP Legacy Systems

For most established banks and credit card companies, account conversion on legacy systems still takes place offline. This is not only slow but costly. JPMorgan has invested tens of millions to change this on-boarding process, therefore creating a solid ecosystem of digital products. JPMorgan’s ability to cross sell between Asset Management and Banking is key to their success. The Chase Mobile acts as a digital branch for customers, allowing users to make deposits, payments, keep tabs on their account, and will soon add You Invest to this digital suite. All this capability in one place sounds very familiar…

Will We See “Prime Trading”?

Stash and Acorns have proven out that customers are open to subscription based financial services, a model that Amazon Prime has pioneered in retail. And, by moving away from the fee-based model to a consumer-friendly ecosystem model, JPMorgan believes that creating a digital ecosystem will help the bank better align with clients’ interests.

“We’re very focused on delivering more service. All our analysis shows that those customers who do more than one thing with Chase will stay with us longer,” [emphasis added] says Jed Laskowitz, CEO of the bank’s You Invest service.

For example, You Invest will offer free portfolio-building tools and access to the bank’s stock research allowing customers to construct a portfolio composed of cheap ETFs and stocks. This sets up Morgan to create its own passive investment vehicles, essentially getting that fee back albeit in a way that serves the consumer and the bank. So, by offering free trades, JPMorgan could actually grow the business as customers use other services.

Remains of the Day

Time will tell what no fee means for incumbents, or if JPMorgan resorts back to a more traditional fee structure. In the meantime, one thing is for sure, and that’s that nothing is for sure. FIs are going to have to look to other industries to see how they can model a more robust and streamlined offering, tap into untapped customers and still find a way to grow their bottom line.

Incumbents vs. FinTechs: Product Offer Throwdown

Previously, we have done comparisons on mobile account opening and the design of these offerings as it relates to incumbents vs. FinTechs, so we thought it only fair to do a more detailed comparison based on product offerings and where the industry is headed. While you can call our design evaluation subjective, our side by side product and feature comparison demonstrates how the large incumbents serve a stronger set of offerings to a broader base of investors, but at the expense of simplicity. While the FinTechs have limited offering but a more honed feature set.

Set-It-And-Forget-It

Pretty much everyone is working on some form of a robo, and many have already started their own. In fact, due to competition for passive investors from low fee, automated investing startups like Wealthfront and Betterment, incumbents (Schwab, Fidelity, E*TRADE, TD Ameritrade) were quick to roll out at least one automated investing account and many now offer more than one option.

While the incumbents are dominating AUM (Vanguard $112B and Schwab $33B vs. Betterment $14.5B and Wealthfront $11B), the independent robos are pushing the tech envelope. “For people who are looking for a quality, digital online experience, independent robos are a step ahead of the incumbent ones.”

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The start-ups are forcing banks and brokers to adopt technology faster than ever before, while the established players are pushing the robos to incorporate more traditional services in their products. In fact, many of the digital-only startups are layering in human advice to complement their automated offerings. This should give pause to any incumbent, or at the very least, make them rethink their features and user experience.

In a Galaxy Not Far Away: Pricing Wars

Whether it’s executing trades, managing portfolios or simply owning mutual funds and ETFs, costs have been collapsing on Wall Street. Feeling the pressure from low cost or no cost entrants like Robinhood and Tastyworks, Fidelity finally slashed trading commissions to $4.95 in February of 2017.  This quickly resulted in similar changes from the other incumbents (Schwab, E*TRADE, TD Ameritrade), and Fidelity and Vanguard have also aggressively cut fees on ETFs. Now, with J.P. Morgan offering fee-free trading and access to research and portfolio building tools to their 47M customers, it just may become the industry standard.

And while Robinhood gained attention for attracting more than 5 million users, and a $5.6 billion valuation, in just a few years, J.P. Morgan, the biggest U.S. bank, has a distinct advantage: it already has financial ties with half of American households. In other words, market share is up for grabs and while low fee or no fee might hook customers in, what will keep them needs to be more thought out than simply “free stuff.”

Tales of the Crypto

While none of the large retail brokers have added direct trading of cryptos, there have been a few interesting developments. TD Ameritrade and E*TRADE allow crypto futures to be traded on their futures trading platform and Fidelity and E*TRADE both have innovation labs exploring uses of blockchain and crypto. “It’s no secret that we are actively exploring cryptocurrencies, including Bitcoin and other digital assets in our Blockchain Incubator at Fidelity.”

For a large conservative financial firm, Fidelity was early to realize the potentially transformative impact of cryptocurrencies and blockchain technology, even allowing users to link Coinbase accounts via a web widget. But while they’ve been experimenting, other FIs have been diving in, from big traditional exchanges that offer bitcoin futures, to companies such as Square and Robinhood that allow users to trade digital coins.

Robinhood, which earlier this year added crypto trading, only offers this feature in select states. Square added crypto trading to their Cash app in late January, with Square Cash averaging 2M downloads per month, 3x the growth rate of Venmo. Coinbase surpassed Charles Schwab in the number of open accounts in late 2017 (11.7M vs. 10.6M), but the value of those accounts is still a fraction of the value of Schwab ($50B vs. $3.26T)

Not everyone is on the blockchain bandwagon. As E*TRADE’s Lance Braunstein says, “For me…it feels more like a solution waiting for tangible problems to emerge. We don’t have a dying need to use blockchain.” But as we’ve written about in previous posts, with blockchain’s ability to greatly speed up processes and reduce cost, why doesn’t everyone have a dying need to use it?

Amazon of Investing

While all of the challengers in the investing space have well-defined customer journeys and easy to use interfaces, there’s still a large difference in the breadth of the offering. Customers with specialized needs (securities lending, bonds, futures, trust capabilities, advanced options tools) will probably be better served by more established players. While customers seeking to simply capture market returns with excess cash will probably enjoy the better digital experience and onboarding provided by the newer players in retail brokerage.

What interests us is how both facets are pushing the others to be better. FinTech is pushing the incumbents to simplify, while the incumbents are pushing fintech to be more than just a pretty interface. But the question is, will anyone become the Amazon of investing? Will anyone ever have everything for everyone? And what will that look like? Time will certainly tell.

 

Time’s Running Out to Adopt an API Strategy

As the connective tissue linking ecosystems of technologies and organizations, APIs allow businesses to monetize data, forge profitable partnerships, and open new pathways for innovation and growth.

So why isn’t everyone using them?

Adoption of APIs

More and more APIs are being adopted across all industries—travel (Google Maps), food/entertainment (OpenTable, Spotify), communication (What’sApp, Messenger, WeChat). Companies like Button are partnering with brands to help distribute their offerings to a large developer community and that are eager to strengthen their mobile experience via the use of APIs. APIs, to these organizations, equal opportunity, and access.

In fact, companies that have moved aggressively to embrace APIs have profited handsomely. Salesforce generates nearly 50% of its annual $3 billion in revenue through APIs and for Expedia, that figure is closer to 90% of $2 billion.  And, as Professor Rahul Basole has demonstrated through infographics and a simulation, first mover advantages matter for API strategies. Just look at this graphic contrasting Amazon and Walmart.

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Finance is Far Behind

However, when looking at the Finance industry, banks and brokerages are lagging behind in API adoption. Screen-scraping—which we’ve written about numerous times—doesn’t allow for reliable data connections to banks and is a huge security risk. However, screenscrapers are widely used and via the halo effect, end users are tricked into submitting their information that results in loss of control over their own data. All of that can be alleviated with the adoption of APIs which use information in a more effective and efficient way. APIs still allow data sharing but in a way that creates a safe, seamless experience for both users and creators.  

A Change, She’s A Coming

Luckily things are changing. In Europe with PSD2, APIs are becoming the new standard. The U.S. is likely a few years behind, but Asia, always an early-adopter, has already recognized the need for APIs in order to have a competitive edge. Frankly, the entire finance industry should be looking to find ways of unlocking the potential which will impact and, ultimately, provide benefits for all involved.With the objective of stimulating competition in banking, monetary authorities across Asia are looking at this themselves and starting to put in place a number of Open API directives and specifications designed to dramatically reduce barriers to entry, create opportunities for nimble and innovative players in the market, and encourage competitiveness within Asia’s banking sectors.

Open for Business

Singapore got on board early with Open Banking and their open market strategy saw DBS, a financial services group, launch the world’s largest API developer platform last November. “A platform-based approach, underpinned by an extensive ecosystem of participants that all adhere to common standards, is crucial in enabling banks to quickly access, integrate and deploy new APIs from Fintechs and developers.” In other words, it’s time for everybody to get into the sandbox and play nice.

Follow the Money

McKinsey estimates that as much as $1 trillion in total economic profit globally could be up for grabs through the redistribution of revenues across sectors within ecosystems. Even more, reason to adopt APIs which are integral in bringing together organizations and technologies in these ecosystems, creating a significant competitive advantage. One bank created a library of standardized APIs that developers could use as needed for a wide variety of data-access tasks rather than having to figure out the process each time. Doing so reduced traditional product-development IT costs by 41% and led to a 12-fold increase in new releases.

And yet, there are still just a small number of firms with fully developed API programs, making it now or never time to capitalize on this window of opportunity.  “Today, a firm without APIs that allow software programs to interact with each other is like the internet without the World Wide Web.” For FIs, even with systems that might be more antiquated than others, APIs can help

bring your processes into the 21st century, better connect you to your customers, create money-saving efficiencies and drive brand loyalty.

So the question we have to ask is, what are you waiting for?

 

 


1 Venkat Atluri, Miklos Dietz and Nicolaus Henke, “Competing in a world of sectors without borders,” McKinsey, July 2017

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.