Weekly Briefing No. 29 | Why Make Trillions When We Can Make Billions?

This week, we read between the lines of the massive opportunity behind SEC chief Mary Joe White’s call for more fintech cyber security. We also discuss BCG’s new financial services report, the first decentralized corporation, Buffett’s backing of a fintech legend and the B-Corpization of a hot insurance start-up. Rounding it out is a new launch from Acorns, RBC’s fintech guru and a look at Simplee.

IN DEPTH

Why make trillions when we can make billions? That famous question from the misguided but lovable Dr. Evil in the Austin Powers movie trilogy came to mind this week upon reading the remarks of Mary Joe White at the recent Reuters Financial Regulation Summit. White essentially begged for much more private investment to combat the menace of cyber attacks, asserting that major exchanges, dark pools and clearing houses did not have the infrastructure in place to combat the huge, systematic risks facing Wall Street. Part of the problem/opportunity is that the SEC is hobbled, operating with less than a full slate of commissioners and a requested budget of a meager $1.8 billion for the 2017 fiscal year (we say “meager” because it should be placed in context to US equity trading volume, which exceeds several trillion dollars per year). Reading between the White lines, we are concluding that she is: A) scared to death by the risks she sees, and she knows more than she can say; B) convinced that other US governmental bodies also lack the resources to wage the cyber fight; and C) committed to jawboning private entities to ramp-up their own spending on cyber security until her term ends in 2019. According to Dow Jones Venture Source, VCs invested about $3.34 billion in cyber security in 2015, not all of which, of course, has financial applications. That’s a big boost from 2014’s tally, but when measured against the unprecedented warning issued by White, it seems to us that fintech VCs should be putting more billions into an area where the size of the threat can reach the trillions. The world doesn’t need another online lender, but it could use more innovation to combat real-world Dr. Evils.

A fintech must-read from BCG. In a new report entitled “The Value Migration,” BCG asserts that asset management will overtake investment banking as Wall Street’s dominant activity. Along the way, BCG sees major disruption in capital markets that will wound many businesses lines and fuel other, mostly tech-powered activities. Our only quibble with the report is that its main conclusion is predicated on the assumption that asset management’s current fee structures will remain in place (see page 3). BCG does highlight low-cost investment products and passive investment strategies (pages 11-12), but frames these more as revenue expansion opportunities than threats to margins. That’s a big assumption, and not necessarily one to which we subscribe given the degree to which low-cost, passive strategies have been beating active portfolio management strategies. Nevertheless, the report is one of the best we’ve read in recent months on the current state of financial services. As such, we would encourage you to persevere over the difficult anti-bot security test to access the report.

To download the report, take out a large Aspheric magnifier and click here.

Will blockchain tech deconstruct the corporation? The basic concept of a corporation has remained largely unchanged since Sweden’s King Magnus Eriksson granted a charter to the community behind the Falun Copper mine in 1347. The arrangement, in which assets are pooled into a single entity separate from its owners, has had its ups and downs (but mostly ups) throughout history. But the concept has always required a governmental body to grant the incorporated status. That may change thanks to a DAO (decentralized autonomous organization), an Ethereum-powered initiative that has crowdfunded more than $100 million in assets for a kind of corporation-VC-hybrid. The legal issues associated with ownership, governance and voting rights of a DAO are too numerous to explain here, but the idea that blockchain tech can be used to pool capital in a totally new way is a trend to watch closely.

IN BRIEF

Buffett backs fintech legend on Yahoo. Dan Gilbert founded the predecessor of Quicken Loans in 1985 and has built it into America’s largest online retail mortgage lender. Along the way, he bought the Cleveland Cavaliers and is fueling Detroit’s comeback. So net-net, the guy knows what’s he doing. Warren Buffett agrees, which is why he issued a symbolic but highly consequential statement that he would provide financing for Gilbert’s bid for Yahoo. So far, it’s unclear whether Gilbert would somehow fuse parts of Yahoo into Quicken Loans if his bid wins. But it looks to us like the gambit to get Buffett on board, which may have been elicited by Yahoo’s bankers, ups the probability that Gilbert’s consortia will emerge victorious.

Hot insurance tech start-up now a B-corp. Lemonade, the stealthy but eagerly anticipated peer-to-peer insurance start-up backed by Sequoia and Aleph, has joined the ranks of Warby Parker, Etsy and 1,600 other companies in receiving B-corp status, which is akin to fair trade certification for a food product. The certification comes from the non-profit B Lab, which grants the status to for-profit companies that meet rigorous standards for social and environmental performance, accountability and transparency. Lemonade’s designation, the first for an insurance company according to this article, seems fitting given the company’s goal of transforming insurance into a social good from “a necessary evil.”  

Lending Club meltdown aftermath. We’re not surprised to see some leading P2P participants (from Europe) trying to pretend that Lending Club’s woes are an isolated occurrence that won’t spread to the rest of the sector. We think that’s wishful thinking. As far as US consumer marketplace lending is concerned, reality is setting in, which translates into lower platform multiples, more regulations, less enthusiasm for loans and more balance sheet exposure for the platforms. Last but not least is the likely emergence of Goldman Sachs, Wells Fargo and others who are poised to pounce on difficulties being felt by Avant, Prosper and others.  

New Acorns program is juicy. How will Acorns’ key round-up feature evolve? This week, at least one answer emerged when the company — now backed by PayPal — announced partnerships with several established e-retailers (1-800-Flowers, Jet.com, Dollar Shave Club and others) to create a “Free Money” program that works like a credit card point system. Instead of receiving cash back, a reward is placed in the customer’s Acorns account. As a customer-acquisition channel for Acorns’ partners, we think the concept is interesting, albeit expensive (Dollar Shave Club, for instance, will contribute 10% of each transaction). For Acorns, it sounds like a great way to drive account growth.

RBC’s secret weapon is in Florida… Yes, you read that right. According to this Bloomberg article, RBC’s Eddy Ortiz is one of the few people who has a Batphone connection to the bank’s CEO David McKay. That’s because Ortiz, who is based in sunny Orlando, has been credited with hatching several of the bank’s patents involving cloud-based payments and artificial intelligence. As North America’s fifth largest lender, RBC has a major stake in keeping pace with fintech disruptors — and Ortiz is the person leading the charge.

Company of note: Simplee.

The Palo Alto, California-based company was established to transform the nation’s highly dysfunctional health care payments system. The company, which has raised nearly $40 million to date, will likely need all of that capital and much more as it seeks to enhance the patient financial experience and boost net collections. So far, the company works with nearly 900 hospitals and physician groups. Check out the company’s site here.

Comings and goings.

Axoni, a provider of blockchain solutions for capital markets participants, has hired Thomas Chippas, a former Citadel Technology executive, to serve as its COO. In his new capacity, Chippas will be charged with scaling the company and broadening ongoing client engagements.

Quote of the week.

“Only put off until tomorrow what you are willing to die having left undone.” 

~ Pablo Picasso