Welcome to the weekend. In this edition, we reveal McKinsey’s new fintech fixation and ask if European banks are bringing a butter knife to a sword fight. We also take the temperature of Bitcoin, evaluate an InsuranceTech fantasy deal and note the dawn of the Reg A+ era.
McKinsey pens a “love letter” to a fintech crush. Financial services firms must make better use of machine learning, analytics and other tech tools in order to be positioned for the future, posits McKinsey in a recent opinion piece and white paper. “We see financial and nonfinancial regulation continuing to broaden and deepen as public sentiment becomes ever less tolerant of any appearance of preventable errors and inappropriate practices, or of bank failures,” McKinsey writes. To us, the implication of that clear and ominous statement is that banks will have to spend lots of money on the innovation and talent needed to meet rising regulatory standards. McKinsey is positioning itself to provide assistance, but RegTech companies should celebrate the white paper as it does a great job of making the case for many of the technologies they are developing. That kind of unequivocal support from a big name can be extremely useful when start-ups pitch firms to buy their tech products.
Are European banks taking a butter knife to a sword fight? Saying that Europe’s banks face a frightening future, as this Bloomberg article does, isn’t exactly a shocking statement today. Still, while the article argues persuasively that fintech and regulation have European banks on edge, it doesn’t adequately address the banks’ biggest challenge: the absence of cultures that foster innovation. Deutsche Bank’s John Cryan, who has commissioned a digital bank to “attack” the parent entity, seems to get it. So too do the Spanish giants Banco Santander and BBVA, Barclays and Credit Suisse. Still, that leaves many European banks in denial. Sponsoring an accelerator and attending events at Canary Wharf’s Level 39 are nice things to do, but that won’t cut the baguette. European banks should go further to create the organizational flatness and flexibility needed to enable their core franchises to keep pace with rapid change. They should also move to curtail high levels of cronyism often found on the continent by drawing on people from a wider range of backgrounds, universities and nationalities to fill their senior ranks.
Bitcoin is the best bet to de-fang the FANG. Despite critics’ predictions of doom, Bitcoin has nowhere to go but up over the next several years, says CryptoBrief.com’s Jacob Donnelly. In this guest post, Donnelly argues that while Bitcoin is beset with problems, its woes are growing pains, not death pangs. Too much hype? Check. Too many dodgy characters at the onset? Check. Dissent on how to scale the technology? Absolutely. Nonetheless, Donnelly effectively argues that the same kinds of problems plagued the Internet circa 1994. Donnelly also deserves props for citing one of Bitcoin’s most promising future use cases: micropayments on decentralized marketplaces. Who would lose in a world of millions of micropayments? Probably the so-called FANG (Facebook, Amazon, Netflix and Google). Who would win? Just about everybody else. Venture capitalist Fred Wilson and technology philosopher Jaron Lanier are two of the notables who have expressed support for such decentralized marketplaces, but the list is growing. A Bitcoin-based solution may represent the best way for decentralized marketplaces to become a reality and that’s one of many reasons why we are rooting for Bitcoin to overcome its obstacles.
Citi ignites a fintech fantasy frenzy. Wall Street and the financial media were aflutter over a provocative research report published by Citi’s insurance analyst Todd Bault suggesting that Alphabet, a.k.a. the company formerly known as Google, should buy AIG and turn it into a moonshot lab (full of fabulous experimentation and farm-to-table meals for all employees). The basis of his argument was that Alphabet’s forays into AI and other low probability/huge return bets could benefit by having access to AIG’s data and industry know-how. We like Bault’s creativity, but believe that the acquisitions should go the other way. Specifically, we think insurance companies should look to buy miniature versions of Alphabet to help them develop more relevant product offerings for changing economic and consumer landscapes. We are particularly attracted to the idea of P&C companies getting deeper with OnDemand/Sharing Economy players focused on lodging and work spaces (e.g., Airbnb, VRBO and WeWork). These companies are growing faster than their traditional peers and are driving the need for revamped insurance products and delivery methods. Rather than having to entertain fantasy merger talk, companies like AIG, Travelers and Allstate should be searching for start-ups possessing the mobile, analytics and risk technologies needed to fuel their future.
Building a field of dreams for InsuranceTech. Iowa is known for its presidential caucus, corn dogs and Ashton Kutcher. But did you know that Des Moines is the nation’s third largest insurance hub and that the state’s InsuranceTech accelerator program is attracting start-ups from around the world to its 100-day program? The Global Insurance Accelerator also provides a generous $40,000 of seed capital. That sum is sure to go a lot further in Des Moines than in coastal cities. Perhaps some of GIA’s cohorts will choose to plant roots and join payments company Dwolla in building a fintech hub in the Hawkeye state.
A new day for Reg A. This article from Crowdfund Insider reflects the optimism that the recently established Regulation A+ will encourage many smaller companies to tap public markets. The backstory here is that the old Reg A was rarely used because compliance was far too costly in relation to the amount of money that could be raised. Under the updated regulation, qualified companies can raise up to $50mm (vs. $5mm), receive some regulatory relief and “test the waters” to gauge investor interest before issuing securities.
Is Intel a looming corporate fintech giant? Google, Apple and Microsoft generate plenty of ink over speculations on whether or not they’ll take on fintech as a mission critical activity. Meanwhile, Intel is steadily building up its fintech portfolio. Check out how it’s using its venture arm to grow its fintech presence, especially in cloud and software categories.
Start using Cybersecurity as a weapon. That’s the view in this opinion piece that makes the case that financial institutions need to rethink how they frame the significant expenses associated with creating cybersecurity systems. “While accountants see the defense system as a black hole for dollars, it is important to shift the mindset and see cybersecurity as an immense part of a business that can be a competitive advantage.” DAR Partner's Rob Martinez agrees but cautions that reframing cybersecurity assets will take some time: "Cybersecurity, marketing and financial personnel often speak very different languages. Getting people within large firms to agree on a common messaging approach may take time and a lot of Advil."
Company of Note: ApplePie Capital.
As we’ve said previously, we think the online lending sector will experience turbulence throughout 2016. However, we continue to see some great companies building traction in specific niches. One of our favorites is ApplePie Capital, which is a marketplace lender that specializes in financing for the franchise industry. ApplePie’s loans are much larger than standard consumer loans and offer greater predictability than other small business segments. Moreover, its management team is comprised of seasoned pros. Check out the company’s site here.
Comings and Goings.
Ryan Thomas has left his perch as head of technology strategy for Bank of America to join Apprenda. The company enables large organizations, including several financial services firms, to develop and manage web applications without having to maintain the accompanying infrastructure. Also this week, Jason Nabi departed Société Générale to join off-the-shelf blockchain creator itBit in London.
This week’s little known facts about…Late Supreme Court Judge, Antonin Scalia.
Justice Scalia was very friendly with Justice Ruth Bader Ginsburg. In fact, the two Supremes were known to attend Washington National Opera together.
A 2004 study found Justice Scalia to be the court’s funniest member, triggering 77 rounds of laughter in the term, or about one per argument.
Scalia loved the television show ‘Seinfeld’ but hated Facebook: “I mean, what kind of a narcissistic society is it that people want to put out there, This is my life, and this is what I did yesterday? I mean … good grief.”