Welcome to our 11th addition of The FR. This week, we discuss the coming of the robots to financial services and the Bitcoin civil war. We also take a look at “stack fallacy,” Max Levchin’s Affirm, IEX, Cornell’s tech-infused MBA and the little digital bank on the prairie.
Is Wall Street destined for Planet of the Robos? According to George Mason University’s Robin D. Hanson, it’s not a question of if but when the jobs of highly skilled, specialized workers are automated, since computers eventually will have the “mental powers” to do everything humans now do and more (See here). That means they’re likely to invade many high-touch Wall Street functions — research, investment banking and risk management, not just trading. Given the Street’s history, don’t be surprised if its leaders figure out a way to harness artificial intelligence in very profitable ways. If you need more convincing, listen to Don Duet, Co-head of Technology at Goldman Sachs, describe his firm’s interest in machine learning and artificial intelligence (See here at around minute 23.00). We put little stock in Hanson’s prediction that a robot-driven economy is a few hundred years off. Movies like Her and Ex Machina have captured the public’s imagination precisely because we know a robo-powered future is coming sooner rather than later. Clearly, some powerful people on Wall Street believe that too.
Bitcoin Battle Royale. An ugly war of words has broken out between Bitcoin developers. It started when Bitcoin luminary Mike Hearn announced he was quitting the Bitcoin “experiment” because the community had failed to support the move toward “Bitcoin XT,” which would have created a protocol for expanding the Bitcoin network. According to Hearn, the failure to move to XT means that the network won’t be able to keep up with so-called transaction loads, creating congestion, higher transaction prices and slower transaction speeds. Hearn pinned the blame on two Chinese Bitcoin miners, who he says control more than 50% of the currency’s current “hash” or mining power. “Nonsense,” say several Bitcoin enthusiasts, including the co-founder of Bitfury, a Bitcoin infrastructure company. Bitfury and other miners have thrown their support behind “Bitcoin Classic” as an incremental solution to expand the capacity of the network and foster added input from the mining community. Check out both sides of this debate here: The Resolution of the Bitcoin Experiment and Keep Calm and Bitcoin On.
Flashboys hero may be less than heroic. It doesn’t look good for Brad Katsuyama, who has come under increasing scrutiny for the controversial trading feature he defends in his upstart stock trading exchange, IEX. That feature — a speed bump to slow high-frequency traders and put all market participants on an equal footing — remains in place for everyone but IEX itself. Katsuyama defends the exchange’s exception by saying that there’s “regulatory precedent” for it. That may be the case, but when the fuel behind your start-up is fairness, it’s not a good idea to rely on a legalistic sounding justification for seemingly self-serving behavior. See here for more.
Adding an app is no snap. That insight is well argued in this article by Anshu Sharma of Storm Ventures. Sophisticated tech companies often believe that if they hire a few smart people, tacking an app to their core competency will be easy. But in tech speak this is a “stack fallacy,” or the mistaken assumption that building a layer above your existing competence is easy. Sharma warns that if building a customer-centric app isn’t in a company’s DNA, it will dramatically underestimate the degree of difficulty associated with the app and overvalue its in-house capabilities to get the job done. Some great examples of the stack fallacy include Google’s trouble in building a social network and Apple’s difficulty in building a maps app. Financial services companies rushing to enhance their own app offerings are on the right track, but they would be wise to heed the hard lessons learned by tech giants.
Affirm is poised to make serious waves. There are some fintech CEOs who couldn’t find Wall Street if you loaded it into Google Maps for them. For these clueless geniuses, fintech is just another tech vertical to be disrupted by better data and technology, and quirky roadblocks like regulation, security and customer acquisition can be dealt with Uber-style. Max Levchin, founder of PayPal and Affirm, a point-of-sale, installment lending company, isn’t one of the ignorati. As his recent interview with Kara Swisher in Re/code demonstrates, Levchin is braced for the hard road that lies ahead for his company. He also makes it clear that while he wants to create a fair lending product for consumers, it’s just a first step towards building a comprehensive financial services company that people trust. Apart from his other activities, Levchin sits on the CSFB’s advisory board and speaks convincingly about how traditional consumer banks — and their reliance on FICO and penalty fees — have failed everyday people. With well over $200mm of capital and 100+ merchant partners, the company has the capital, savvy leadership and momentum needed to create new headaches for leading credit card processors and bank issuers.
See the full interview, “Banks are ripping you off,” here.
Finance MBAs get techie. This week, Cornell’s Johnson Graduate School of Management became the latest business school to announce a new digital technology program. With the help of Twitter, Amazon and Yahoo, Cornell hopes to satisfy the demand for more tech talent from Corporate America, including the giants of financial services (See here). The announcement comes soon after USC’s Marshall School of Business said it is offering a new fintech course that will cover topics including marketplace lending and blockchain technology. In the wake of the financial crisis, the value of an MBA in general and for financial careers in particular has been called into question. With Johnson’s tech immersion program and fintech initiatives at other elite business schools including Stanford and MIT, top institutions are making positive strides to promote greater relevancy in their curricula.
Company of note: CBW Bank.
This small bank located in the southeastern corner of Kansas has become a test kitchen for financial innovation. Founded in 1892, CBW was bought in 2009 by a management team that included executives from Silicon Valley and Wall Street. Since the acquisition, CBW has forged alliances with financial services giants and with respected fintech companies Moven and Simple to create a payments powerhouse on the prairie. Still, if you check CBW’s website (www.cbwbank.com) the bank looks positively normal, opting for understatement over self-promotion.
This week’s little known facts about…OPEC.
Founded in 1960, OPEC’s 13 members share a goal of maintaining stability in oil prices. Really?
With nearly 300 billion barrels of proven reserves in its territory, Venezuela, not Saudi Arabia, is OPEC’s “largest” member. But although Venezuela has 25% of OPEC's total reserves, the high costs of extracting its “heavy” oil helps to preserve Saudi Arabia’s organizational dominance.
Legendary Saudi OPEC Minister Ahmed Zaki Yamani once famously warned: “The Stone Age didn't end for a lack of stones, and the oil age will end long before the world runs out of oil.”