Weekly Briefing No. 36 | The Yield Curve is Set to Light a Fire in Digital Banking

The direction of the yield curve is set to light a fuse for digital banking. This week, we look into why, as well as blockchain lobbying in Washington, the annual Allen & Co. conference, Fred Wilson’s take on corporate VCs, the next phase for Quantopian, American Express’s new SMB lending program, KKR’s latest venture investment and Overbond, a fixed-income fintech play.

IN DEPTH

The yield curve is set to light a fire in digital banking.

If our current world of ultra-low interest rates hasn’t already created lots of unusual effects, even lower rates — as predicted recently by Mohamed El-Erian and others — could make for even more unprecedented change. One we see likely is a boom in mobile-first banking. That’s because as conventional banks find it increasingly difficult to earn a suitable spread on lending money, the costs of maintaining a network of physical branches become more untenable. (Attention city landlords and developers: Watch out too). That in turn will lead them to do the worst things possible for their longer term competitive positions, which is offering APYs significantly lower than online-only banks (the national savings APY now stands at a paltry 0.18%) and resurrecting ‘gotcha’ and overdraft fees. Those fees, amazingly, are on the upswing even though nothing turns off younger consumers more than being nickel-and-dimed by a bank. We don’t believe we’re alone in our assessment that mobile-first platforms are ready for their moment. Look for large fintechs like SoFi and well-funded upstarts like Almond to soon join the ranks of digital banks. Also, look for more financial heavyweights to get involved as our “inconceivable” interest rate environment tempts more consumers to pull the ripcord out from their brick and mortar banks. Because while some physical branches will continue to be necessary for certain activities, we think the time has come for a sea change. And retail banks sitting on millions of square feet of real estate can thank the yield curve for dramatically adding to their troubles.

For more on the interest rate environment, see Larry’s Summers’ recent op-ed.

What to make of blockchain lobbying.

IBM has joined the effort to lobby on behalf of blockchain tech applications in financial services. But before you get too excited about prospects for a pro-business, regulatory-lite approach to blockchain technology, consider the political reality. According to the Congressional Research Service, the 541 individuals who constitute the 114th Congress consist of 22 former public relations professionals, 29 former ranchers or farmers, 102 former congressional staffers and a whopping 267 former state legislators. And as far we can tell, there’s only one software engineer in Congress, Rep. Steve Scalise (R.-La.), and he has chosen to make advancing the interests of the oil and gas industry his signature issue, which is logical considering his home state. So while it’s good to see that the Digital Chamber of Commerce and others are advancing blockchain tech issues with key financial regulators, we wonder if Congress will be able to keep up.

An Allen & Co. conference for financial services?

This week, Herb Allen’s elite investment banking firm once again held its media conference amidst the backdrop of Bald and Dollar Mountains in Sun Valley. It’s the ideal place for members of the media’s old guard and entrepreneurs to rub shoulders in a “safe space” devoid of too many prying reporters and hanger-ons. Year after year, it’s proven to be an invaluable place for deals — really big deals — to get done. And as much as we think the financial services industry could use a comparable event, we don’t see it on the horizon. The most compelling reason: the financial services/fintech conference business is a really good business. What makes the Allen & Co. conference so special is that it’s not a business. Sure, Allen & Co. wants to monetize it, but unlike sell-side investment banking conferences or straight-up industry conferences, there’s no near-term ROI or monetization imperative. If two CEOs do a deal five years after they met in Sun Valley, then that’s a victory for Allen & Co. Find us a fintech conference with that kind of long-term view.

IN BRIEF

Corporate VCs are the devil. That’s the view from Fred Wilson who made the remark at CB Insights’ recent fintech conference, which was posted this week to CBI’s website. Perhaps this sentiment may be true in other sectors, but we humbly disagree with him as it relates to fintech (more on that in a future issue of The FR). But in the meantime, consider the source of the comment. Asking Fred Wilson, a successful VC who wants to pay the lowest price for the best companies, about corporate VCs is akin to the famous point-disguised-as-a-question by Warren Buffet: never ask a barber if you a need a haircut. Of course, you do, says the barber, and of course, corporate VCs are the devil, says Wilson.

The morphing of Quantopian. Since its founding in 2011, this Boston start-up has generated buzz for its development of a deep community of freelance quants. Now, the company is seeking to evolve into a full-blown crowdsourced hedge fund, replete with a seasoned CIO in Jonathan Larkin. Read more here.

Amex finally gets into small-business lending. It took the company forever, but this week American Express finally leapt into online lending for its small-business customers. By charging 1.5% for 90 days, its fee structure looks to be highly competitive with many other online SMB lenders.

The places blockchain start-ups call home. According to Outlier Ventures, the US and the UK dominate as domiciles for new blockchain enterprises, accounting for nearly 40% and 17%, respectively, of the total. No other nation even cracks 5%, which tells us that either Outlier’s start-up tracker collection process is biased, or that most blockchain innovation will be coming from here at home and from across the pond. One notable underperformer is Japan, which lays claim to just 1.5% of all blockchain start-ups. See the tracker here.

KKR leads round for a baby Palantir. Darktrace Cybersecurity would probably dispute the claim, but the Cambridge, England based company, which employs several former spies from the UK and the US intelligence communities, seems well positioned to become a next generation leader in cybersecurity for financial services and other industries. The company, which employs advanced machine learning and mathematics, recently announced that it raised $65 million led by buyout king, KKR. KKR isn’t a typical lead investor for a company like this, but then again, Darktrace doesn’t strike us a typical company.

Bitcoin’s raison d’etre under attack. Anonymity has always been a core driver of Bitcoin adoption. That’s why we are taking note of this article highlighting several emerging companies that are seeking to de-anonymize Bitcoin in the name of crime prevention. Of course, nobody talks about the role of traditional fiat currency in facilitating crime, but that’s really not up for discussion. The facts are that: a) Bitcoin is being used to do terrible things; and b) companies are working hard to break the code of Bitcoin’s architecture.

Insurance industry fumbles for keys to self-driving vehicles. In the wake of the recent fatality involving a Tesla Model S that was in autopilot mode, car insurance companies are scrambling to determine how best to price the risks associated with autonomous vehicles. That’s the thrust of this New York Times article, which suggests that auto insurers have a lot more work to do.

Company of note: Overbond.

Fintech for fixed income doesn’t attract nearly the attention of equity-related platforms. That’s why we are noting Toronto-based Overbond, which recently raised $7.5 million and is focused on providing a fully digital bond market platform that connects issuers, dealers and investors. Check out the company’s site here.

Comings and goings.

Kevin Turner has resigned from his position as Microsoft’s COO to become the new CEO of Citadel Securities. Turner, who started-out as a Wal-Mart cashier, served as the CEO of Sam’s Club before leaving to join Microsoft. Also this week, StockTwits, which is like Twitter for the stock market, has appointed Ian Rosen as its CEO. Rosen, who co-founded Even Financial, takes over the reins from Howard Lindzon, a StockTwits co-founder.

Quote of the week.

“A government that robs Peter to pay Paul can always depend on the support of Paul.”

~ George Bernard Shaw