Weekly Briefing No. 105 | Financial Innovation Moneyball, Amazon’s Healthcare Play, Insurance’s Quant Future

With a nod to the Houston Astros, we are delighted to present you with our take on the financial innovation news and notables of the week:

  • Reframing the tech talent ‘problem’ in finance
  • Amazon could dominate US healthcare
  • What’s the deal between AIG and Two Sigma?
  • FinTech Payments Corp’s Michele Tivey on payments innovation
  • Credit bureaus and blockchain; the CME embraces Bitcoin
  • Cannabis financial services mainstreaming
  • Company of Note: BondIt Media Capital

Recruiting tech talent in finance the Astros way.

Many financial services executives worry that a dearth of young tech talent is holding back their firms. That narrative dovetails nicely into theories on why some firms are putting a lot of effort or capital into their hackathons and others are highlighting their executive’s side hustle as a DJ. The thinking: such activities will appeal to young, electronic music-loving superstar data scientists and software engineers who would otherwise take generous six-figure jobs with stock options, designer hoodies and healthy bonuses at a Big Tech company. But here’s our problem with that view: it’s based on an assumption that there’s a giant shortage of tech talent. That may not be true. To see why, check out the post on danluu.com (See below) that was sent to us by our friend Jason Cowell at Uiba. In a piece titled “Programmer Moneyball,” a thinly disguised case study of "TrendCo" is used to point out that the tech talent bottleneck is caused by preferences for name-brand credentials and 10x unicorn developers. This results in everyone chasing the same engineers, creating astronomical hiring and retention costs, while ignoring other talented professionals. So while there are undoubtedly shortages for certain kinds of roles, a better approach could be to establish open-source projects with intellectual appeal. Combine that with an aggressive moneyball strategy targeting people trained in places like Madison and Minneapolis and you may just have yourself a Houston Astros in the making.

The fax on Amazon’s healthcare opportunity.

As Facebook, Google and Twitter were being sautéed on Capitol Hill, Jeff Bezos & Co. were probably in a good mood picking out HQ2 window treatments, registering cryptocurrency domains and reading the latest HQ2 predictions. If they turned their attention to world domination, perhaps they discussed their luck that Washington’s attention is not focused on their plans for the retail pharmacy sector. The CVS-Aetna merger possibility notwithstanding, there seems to be little stopping Amazon from bringing the margin-crushing heat to a corner of the healthcare market rife with opacity. Even drug company CEOs are excited by the prospect of Amazon disrupting distribution. However, they should be careful what they wish for, as Amazon’s modus operandi doesn’t know constraint once it sniffs waste in a sector. And as a terrific article by Sarah Kliff discusses (See below), fax machines remain the core mechanism by which healthcare data is exchanged among doctors, nurses and hospitals (seriously). Even worse, it’s intentional, which is the type of systematic arrogance Amazon loves. And here’s the kicker: other sectors, including real estate and education, should be rooting for an Amazonian invasion of healthcare, because Amazon is one of a few companies hefty enough to bend parts of healthcare spending before it crowds out everything from home purchases to college tuitions.

Two Sigma and AIG take fresh approaches to tackling insurance.

This week, AIG renamed its tech-infused commercial insurance business Blackboard. Although the name Two Sigma Insurance Quantified doesn’t appear on this press release, we strongly suspect that Blackboard will be relying heavily on TSIQ to offer a data-driven and turbocharged tech approach to commercial insurance. With Blackboard and most likely Attune serving as clients to TSIQ, the interplay between AIG and Two Sigma looks to be close but complex to say the least. However, if TSIQ is able to deliver fresh insurance solutions that are not weighed down by legacy systems and thinking, we suspect that a handful of other sophisticated quant funds will take notice and consider analogous partnerships. D.E. Shaw, for example, is already rumored to be collaborating with an insurance company, and for good reason: insurance is beset by legacy systems. Perhaps collaboration efforts with quant hedge funds that start with a clean sheet of paper (or blackboard) represent the best way to chart a new course.

The inside scoop on fintech.

On December 13th, Dr. Daniel Nadler of Kensho Technologies, Caitlin Long of Symbiont.io, Tom Jessup of Chain and other leading fintech executives are joining S&P Global Market Intelligence and The Financial Revolutionist for a full day of discussions on the impact of innovation on financial institutions. Want in?

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IN BRIEF

Payments innovation is kicking into gear.

This week, US Bank added to the Zelle momentum by announcing two new payments solutions designed to make it easier for businesses to transition from paper to electronic payments. However, Zelle isn’t the only player with innovation on the brain, which is why we’re featuring the perspective of Michele Tivey, co-founder and CEO of FinTech Payments Corp. In a piece recently published in The FR, the one-time New York City prosecutor lays out her case that customizing payment processing logic for every merchant is important in moving to more frictionless commerce.

Credit Bureaus: From Brooklyn to Blockchain.

Can distributed ledger protocols be the answer to storing sensitive personal identity information? American Banker’s Penny Crosman asked that question in a thoughtful piece this week (See below). With a healthy balance of perspective, she cites experts who indicate that the big credit bureaus should be working toward a blockchain solution because they “remain in control of the goose that lays the golden eggs every year.” But to understand the power of these eggs, it’s helpful to go back into history — specifically to 1870s Brooklyn, where two brothers started one of the world’s first credit bureaus. We’ve come a long way from the origins of the credit information business, but as this Planet Money podcast suggests, credit bureaus have always sat in an uneasy place between consumers and credit providers.

The CME’s journey from butter to Bitcoin.

Also in the 19th century, butter was hot. In fact, it was so bubbly that some smart Chicagoans began salting kegs of it and storing it for later use. That practice gave birth to the non-profit Chicago Butter and Egg Board, which was subsequently renamed the Chicago Mercantile Exchange. This week, the hell-yeah-we’re-for-profit CME Group announced that it would launch Bitcoin futures trading by the end of the year. That news, in turn, helped send the price of Bitcoin past $7,000 and warm the hearts of executives at firms looking to create Bitcoin ETFs. Although it’s harder to launch an ETF than a futures product, experts believe that the CME announcement — along with Jeremy Powell’s neutral Bitcoin views — serve as helpful steps towards greater Bitcoin adoption.

Cannabis financial services mainstreaming is coming.

Those interested in the business of banking cannabis should take note of a landmark transaction announced this week. Alcohol beverage giant Constellation Brands, owner of Corona (a.k.a. the only beer you should drink with a lime) and Canopy Growth, an Ontario-based medical marijuana leader, announced that Constellation had agreed to acquire a 9.9% stake in the three-year-old start-up. Together, the two companies will look to develop non-alcoholic cannabis beverages. But for Constellation, a major US public corporation with a market cap over $42 billion, this transaction is more than just a pot deal. This transaction further legitimizes the broader cannabis market and should open the door for more M&A and financing opportunities. That’s because beer companies have seen wine consumption erode their market share and are unlikely to sit on the sidelines as cannabis firms grow.

COMPANY OF NOTE

BondIt Media Capital.

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Thanks to today’s variety of digital distribution outlets and technologies, filmmakers and musicians are able to create quality work more cheaply than ever. But unfortunately, banks aren’t equipped to finance the lion’s share of films and other content because their structures lack the agility necessary for today’s entertainment industry. That’s why we’re highlighting BondIt Media Capital, a tech-enabled specialty finance firm that is serving to bridge the gap between producers of entertainment and the buyers of content (e.g., Netflix and HBO). With BondIt, creators are provided with factoring and lending options to access cash before a bank would provide a credit facility or when traditional credit is unavailable. For the firm’s existing investors, including Accord Financial, or those targeted for its soon-to-be-launched participation pool, BondIt makes it clear that it takes no box-office performance or creative risk. Nevertheless, CEO Matthew Helderman asserts that there’s an attractive risk-adjusted opportunity in this niche. “We’ve helped finance over 250 films, including projects directed by Rob Reiner and James Franco and starring Uma Thurman and Robert Duval,” says Helderman. “But the muscle behind a project or the creditworthiness of the end buyer is secondary to the overall budget. That’s created a big market opportunity for us.”

QUOTE OF THE WEEK

“There is more faith in an honest doubt, believe me, than in half the creeds.”

~ Alfred Lord Tennyso