Weekly Briefing No. 48 | Can Fintech Bridge the Partisan Divide?

Can fintech bring together a divided Washington? We explore that question, look at the closing of Perry Capital and consider a clicks-and-mortar future for retail banks. Also hitting our screen this week: evolving marketplace lending models, a powerhouse insurance troika, Venmo in the crosshairs, MIT’s fintech seduction in Germany and an AI spoof of the venture capital industry. Finally, we are highlighting OneTitle, a title insurance start-up that probably won’t do well on Mars.

IN DEPTH

Can fintech bridge the partisan divide?

Amid the acrimonious presidential election/circus, it’s easy to miss something rare going on in Washington: a highly constructive dialogue among regulators, politicians of all stripes and the Fed to find the right balance between promoting financial innovation and regulating it. Yes, there are tensions emerging on issues such as a national fintech charter and automated investment oversight that can split loyalties between pro-incumbent and pro-disruption camps. But by and large, there’s receptivity to differing perspectives and consensus on the transformative potential  of fintech disruption. A case in point is Republican Mick Mulvaney and Democrat Jared Polis, who have joined forces in the House to establish a blockchain caucus. This occurred soon after lawmakers overwhelmingly passed H.R. 835 in support of a national policy on financial services innovation. Although the bill may not move to the Senate, let alone to the President’s desk, the fact that both parties signed on to this bill says: 1) Politicians are waking up to the fact that unleashing financial innovation can serve as a major boon to economic growth; 2) They realize that other countries, like Singapore, are following the UK’s “all-in” approach; and 3) The time is right to capitalize on the Wells Fargo scandal as large banks may not want to appear as enemies of progress. Over the next few months, we expect hearings across Washington to stoke fintech’s momentum. As a result, next year, the new president will face a Congress already primed to get down to work on an important issue. What a nice change that will be.

A big hedge fund stops waiting for Godot.

Last week, Perry Capital announced it was closing up shop after 28 years. But Perry Capital isn’t just another hedge fund that simply couldn’t outperform. Richard Perry and co-founder Paul Leff are investment hall of famers. A protégé of Robert Rubin (and one-time babysitter to Rubin’s kids), Perry had successfully navigated a host of different market environments to build an empire that managed more than $15 billion of assets at its peak and returned an average of 15% without a down year until 2008. So when an investor like Perry who has most of his liquid assets in Perry funds looks at market structure, information flows and the march of machine-learning and sees no pathway to achieving alpha, that’s meaningful. But rather than hang on and continue to hope his investment process could return to favor, he has instead done a more noble thing by exiting the stage.

A clicks-and-mortar future for retail banks?

Kudos to E&Y for its survey highlighting this key insight: most consumers (65%) want their bank to have a digital presence, but 60% also believe a physical presence is highly important. Of course, as technologies improve and more Generation Z and Alpha consumers come of age, that 60% could drop. However, E&Y’s survey confirms that banks with a heavy retail footprint have time to prepare for an era when most people look to their phones as the first-but-not-only stop in doing their banking. The more interesting question is how digital-only banks perceive these findings. Our hunch is the most successful disruptors will realize what companies like Warby Parker, Bonobos and Blue Nile have concluded: digital plus physical experiences maximize customer satisfaction and loyalty.

IN BRIEF

Goldman or Greensky? In the wake of Goldman Sachs’ recent salvo extolling its balance sheet-driven approach to online lending, we appreciated this blog post from Lend Academy’s Jason Jones. His assertion is that a hybrid approach, in which an originator lends from its own balance sheet but also serves as a platform for others to fund loans, provides the optimal lending model. Moreover, Jones suggests the new premier independent players will be ones like GreenSky, which have products that can be sold directly to the “credit box” of good old-fashioned banks. So those ‘boring banks’ that used to get mocked are now back, and catering to them can be a key to securing a toehold in an evolving sector.

‘Three Amigos’ form Attune to automate small business insuranceLast week, AIG, the largest US commercial insurer, announced it has joined forces with Hamilton Insurance and quant hedge fund extraordinaire Two Sigma to bring a systematic approach to offering insurance to US small- and medium-sized businesses (SMEs). The opportunity for SME insurance is estimated at $76 billion per year, which is arguably why a fund like Two Sigma is willing to venture beyond its core business. But rather than go at it alone, the fund has wisely partnered with entities that understand the quirks and challenges of the SME insurance market, because not everything comes down to data, even really Big Data. Read more here

Venmo in the crosshairs. Citigroup has joined ClearXchange members including Wells Fargo, Bank of America and JP Morgan to develop would-be Venmo killer Zelle. But to understand what these banks are up against, we suggest checking out this article, which points to the staggering use of emojis alongside Venmo’s core payments service. We think Zelle will be billed as a more secure payments system than Venmo. But ClearXchange, which is owned by the big banks through an ominously named company called Early Warning, may have trouble matching Venmo’s emoji game. Rogue eggplant and ‘fineapple’ emojis are not just whimsical; they infuse a great deal of stickiness and loyalty into Venmo’s platform. 

Even the Swiss are all in on blockchain tech. Swiss central bankers aren’t known for jumping indiscriminately into the financial trend du jour. So when SNB head Thomas Jordan recently said blockchain tech has the power to turn the financial world on its head, we take notice. And while he didn’t say it exactly, we think the reasons for his support seem apparent: systemically important banks need a cost game-changer to restore their health. Politicians are clearly not going to ease the regulatory or capital burdens facing the banks and the interest-rate environment continues to be inhospitable. So what else is there other than more blockchain? Real growth? Perhaps one day, but cost savings via blockchain tech looks like a surer bet. 

German firms dig MIT’s fintech approach. Early last week, BMW announced it has selected the first cohorts for its fintech incubator based on the “Disciplined Entrepreneurship” method espoused by MIT senior lecturer Bill Aulet. Then later in the week, beleaguered German heavyweight Deutsche Bank announced it would double its “digital factory staff” (how German) to 800 workers by 2018. It also said MIT would be its partner in this new endeavor.

Will AI disrupt venture capital? That’s the question posed by the clever jokesters behind the recent launch of the AI VC fund. Although the fund, powered by chatbots and an automated pivot function, isn’t real, the underlying message is, says co-conspirator Katy Turner. “What’s really ironic about venture is that VCs sit in board rooms all day long assessing the innovation levels of entrepreneurs and different companies, but they don’t often innovate themselves.” Read more on the motivations behind the AI VC here

A marketplace for human organs? In the haunting novel Never Let Me Go, author Kazuro Ishiguru imagines a world in which selected children are bred for the purpose of donating their organs to more privileged people. That book came to mind upon reading this Business Insider article explaining why economist Nicola Lacetera believes people should be allowed to sell their organs. As for the obvious issues such a system could create in a society already bursting with socio-economic divisiveness, Lacetera asserts we shouldn’t worry because a “third party, like the government or insurance companies, could ensure the list of people who need transplants remains ranked in order of need.” Yes, that’s very comforting.

Company of note: OneTitle.

If Elon Musk’s bid to put one million people on Mars proves successful, some aspects of the Earth’s financial services system may take root on martian soil. But one area not poised to make the interplanetary jump is the quirky world of title insurance. Still, we are highlighting OneTitle, a New York-based title insurance start-up, because we aren’t ready to give up on Earth-bound opportunities. Company CEO Daniel Price has secured the backing of NYSE listed White Mountains Insurance Group and recently recruited a new head of sales, Rebecca Mason, a veteran of Stribling & Associates. Check out the company’s site here, especially if you don’t plan on entering the Mars condo market.

Comings and goings.

The Empire Strikes Back with JP Morgan’s recent announcement that it has hired Alex Sion, a co-founder of digital bank Moven, to be an executive director in the bank’s digital team. Before embarking on his start-up career, Sion headed Sapient’s Financial Services Center of Excellence and had been a senior vice president in Citigroup’s personal wealth management unit.

Quote of the Week:

“The opposite of play is not work — the opposite of play is depression.”

~ Brian Sutton-Smith