Weekly Briefing No. 55 | Hunting for Fintech Truffles

Still whipsawed by the election? Perhaps it’s time to regain focus by tasting the truffles of Fall. On the docket this week:

  • McKinsey's new white paper
  • SoFi gets a life [insurance partner]
  • Quant funds, Bitcoin's price surge, trial balloons in DC
  • Company of note: Symbiont

Publisher’s note: We will be taking off next Saturday. In lieu of our regular format, we will be sending our favorite segments from 2016. Happy Thanksgiving to all.

IN DEPTH

Hunting for fintech truffles.

After the root canal surgery that was the US election, we serendipitously came upon McKinsey’s new fintech white paper at the same time as we were listening to a podcast on white truffle hunting in Italy and France. With respect to the McKinsey report, it’s a short and sweet primer on the state of fintech today and tomorrow. Replete with a Copernicus meets Domino’s Pizza graph and an understated pitch, the white paper is far preferable to the dense “punishment” papers offered by some others. Its core point: 2017 will be a year of maturation that sees healthy levels of M&A, collaboration and fuzzier lines between incumbents and startups.

And the truffle connection? Did you know there is no systematic way to cultivate the prized winter white truffles that grow near Alba in northern Italy and the Drôme region of France? Sure, there are secret hunting areas and advanced ways to analyze soil data, but well capitalized and creative attempts to industrialize the magic associated with finding a white truffle have failed time and again. Similarly, while there are great banking and consulting advisors out there willing to help incumbents find a magical fintech partner or acquisition, there is no quick and easy shortcut to finding a successful solution that makes sense financially and culturally. Remember that if you find yourself at an expensive Italian or French restaurant in the coming weeks. Truffles taste great and we always want more, but getting them to the table takes lots of hard work in the dirt.

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Regarding HENRYs.

A major reason for SoFi’s success is its customer base, which is built around HENRYs  — high-earning, not rich yet millennials — who are usually great credits. While defaults on consumer loans are rising across the marketplace lending industry, SoFi’s funders have the benefit of holding paper backed by top-tier borrowers. That’s an advantage to keep in mind now that the company has announced a partnership with Protective Life to market term life insurance to SoFi’s customers. Many affluent millennials should have life insurance but are turned off by dusty processes still prevalent in this insurance niche. On that basis alone, this deal looks like a smart one as SoFi will be adept at marketing life insurance with some much needed freshness. But the real beauty of the alliance is the low risk and price variability involved in setting rates for 30 year-old educated non-smokers who go to yoga classes and do triathlons. SoFi undoubtedly has plenty of data on its customers, too. So when you it add it up, it looks like the SoFi and Protective Life teams should be able to expedite underwriting and make the entire process far more HENRY-friendly.

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IN BRIEF

Quants are on the march... “Frankly, we expect to see assets move from human managers to machine managers.” That’s a recent comment from a well known alternative asset manager. However, the sentiment isn’t coming from someone at Worldquant or Two Sigma. The author is Tony James, Chief Operating Officer of Blackstone. But as the attached article indicates, Blackstone, which has over $70 billion invested in hedge funds, has been a big backer of quant funds in recent years, even if it remains known first and foremost as an elite private equity firm.

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...But even quant funds can be disrupted. Fisher Black (of Black-Scholes fame) once commented that markets look a lot more efficient from the banks of the Charles than from the banks of the Hudson. But while there is a brainy bent to the Boston-based team at Quantopian, the crowdsourcing algo company is definitely not for theoretical types. Stocked with a fresh $25 million of capital announced this week, the company added Andreessen Horowitz to a cap table already loaded with Tier A VCs and strategic investors. With the fresh capital, this company now seems well positioned to create waves in the arcane world of quant trading. (Thanks to Martin Zagorsek for the quote).

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Bitcoin is on a rampage. In case you haven’t noticed, Bitcoin’s price has been rising at a torrid pace as of late. Drivers behind the Bitcoin bull appear to be declines in China’s yuan and rising demand in India on the back of Prime Minister Modi’s decision to withdraw 500 and 1,000 rupee notes from circulation. Another factor may be rumors that China’s large miners are ready to support larger block sizes.

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Did any pollsters study the financial crisis? As this article in Quanta magazine points out, America’s pollsters made the same fatal mistake many banks and hedge funds made during the financial crisis. Specifically, all of the swing state polls contained a “correlated error” much in the same way that financial analysts failed to see that individual defaults could be correlated. Practitioners of financial analysis have come a long way since the crisis; perhaps they’ll find new opportunities to share (i.e., sell) their expertise to a still-shocked polling industry. (Thanks to Beni Gradwohl for the article)

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Bannon and the bond market. It’s trial balloon season in Washington, so we’re not getting too worked up over the fintech turf battles, talk of Dodd-Frank repeal, swamp draining, et al. Once the time draws near for Team Trump to make some sausage affecting financial innovation, then we’ll focus. However, in anticipation of the tax less/spend more approach advocated by Trump, we are noting the steeping in the yield curve, which should be heeded by everyone connected to the financial world. We also note that Steve Bannon, Trump whisperer and newly announced chief strategist to the President-elect, is no friend of incumbent financial firms. To wit, Bannon supports

the return of Glass-Steagall, has stated that Wall Street’s values are “unmoored” and that capitalism has “metastasized.”

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COMPANY OF NOTE: Symbiont.

Despite the hype surrounding blockchain tech, we are always happy to come across interesting companies that use distributed ledger technology to address thorny financial issues. That’s the case with Symbiont, which is targeting massive, inefficient and expensive processes that remain prevalent within many fixed income and private markets. The company, whose smart contracts platform technology is powering highly visible blockchain projects with leading financial services firms, counts former NYSE chief Duncan Niederauer and former Morgan Stanley exec Caitlin Long as board members. Joining them this past week were Daniel Gallagher, a former SEC Commissioner, and Todd Ruppert, former CEO of T. Rowe Price Global Investment Services.

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STRUCTURED DATA

Security firm Kryptowire has discovered a vulnerability that allegedly involves the pre-installation of software in Android-powered devices that can send personally identifiable information (PII) to China.

  • 700 million: The number of total active users claimed by the maker of the software
  • Every 72 hours: The frequency of the data transmissions to China

Source: Kryptowire.

CAREER & INSIGHTS

Comings and goings: Nasdaq COO Adena Friedman will become CEO upon the retirement of Robert Greifeld on January 1, 2017. Friedman has also served as Nasdaq’s CFO. Her only detour from her Nasdaq career was a three-year stint at The Carlyle Group where she navigated the firm’s IPO listing. Also this week, online commercial insurer CoverWallet announced Jim Ermilio was joining the company as its new President of Insurance. Previously, Ermilio held leadership positions at online auto insurer Goji and the Massachusetts Office of Business Development.

Wisdom: The best jobs are the ones that have not already been put on a job board and haven’t gone out to an executive recruiter, says Mark Suster, a partner at Upfront Ventures. See here for his most recent post, “Why You Can’t Search for a Job From a Remote Location.”

QUOTE OF THE WEEK

“If you think you are too small to make a difference, try sleeping with a mosquito.”

~ Dalai Lama