Weekly Briefing No. 28 | Fintech’s Silver Linings Playbook

Lessons from Lending Club’s capsizing, a clash of investment tech CEOs and Google’s stand against payday predators and are on deck for this week. We also take a look at a new robo-powered bankruptcy “lawyer,” invisible payment solutions, Q1 blockchain trends and highlight payments start-up Plastiq.

IN DEPTH

Fintech’s silver linings playbook.

Whether you compete with Lending Club as an incumbent banker or as a marketplace lending rival, don’t succumb to schadenfreude now that LC’s appalling lack of internal controls, immaturity and its founder’s efforts to goose loan demand have come to light. Although the company’s reputation is in tatters, let’s not forget its sizable contribution in elevating the role of innovation within financial services. Our hope is that the rise and possible demise of the company will serve as a lesson for other fintech companies and investors, and perhaps accelerate the maturation of the sector. Some silver-lining lessons: A) Don’t be overly impressed by a company’s superstar board members and/or VCs.  Malfeasance and stupidity can occur regardless of who backs a start-up; B) Stratospheric valuations are a two-edged sword. The higher multiple derived on each dollar, the less tolerance there is for anything less than massive, consistent growth; C) Fintech areas such as marketplace lending are first and foremost financial services businesses, not tech businesses. Be skeptical of those who claim otherwise; D) Even if your start-up ultimately achieves scale and glory, stay humble, and whatever you do, don’t commission a sailing team. Oracle Team USA wasn’t started until 23 years after Oracle was founded. 

Two investment tech stars clash.

Jon Stein, CEO of roboadviser Betterment, and Vlad Tenev, CEO of commission-free brokerage Robinhood, went at it over the issue of investor advice at the recent TechCrunch Disrupt NY conference. And while we appreciate TechCrunch’s reporting of the debate, we think it misses a question more interesting than whether people should have guidance when they invest. The maxim “if it’s free, you are the product” may be a cliché, but it’s still relevant. Will a company like Robinhood, which claims to make most of its money from margin lending and interest, stay true to that business model or begin to monetize its order flow? Down the road, we think Robinhood will follow the path of Facebook, Google and others, and transform its users’ activity into the feedstock of a business model. Betterment, on the other hand, is pursuing a more traditional financial services route by charging straightforward fees. We suspect that the latter approach, however old-fashioned, will be favored by regulators. Financial services consumers on the other hand, really like “free,” but it remains to be seen if they will ultimately tolerate the creepiness that often follows.

Google bans payday loan ads.

Joe Camel may be the most evil ad campaign of all time, but the payday lending industry’s predatory ads deserve dishonorable mention. That’s why we want to highlight Google’s recent decision to ban them. It’s tough to know what pushed Google over the edge, but this article in The Atlantic mentions a comprehensive, damning report by consulting firm Upturn, which makes the case that “payday lead generators promote risky online payday loans, help lenders skirt state laws and can expose consumers to fraud.” With APRs that can exceed 100%, marketing techniques that target minority communities, and other terms that can trap borrowers into toxic, rollover cycles, payday loans represent the worst aspects of the lending industry. Google has made a great choice.

IN BRIEF

What do you call 100 lawyers at the bottom of the ocean?

Answer: victims of ROSS, a legal research robot built using IBM Watson and currently helping BakerHostetler’s bankruptcy department. Gallows humor aside, we view the legal world in general, and financial services legal practices in particular, as ripe for the kind of tech-inspired disruption that is decimating bank and brokerage rosters. With ROSS’s coming out party, it may only be a matter of time before the ranks of junior lawyers in securities, banking and bankruptcy roles are joined by AI-powered robo-attorneys. These bots may never develop into rainmakers, but they can analyze billions of legal documents and instantaneously track legal changes without sleep or bathroom breaks. Learn more about ROSS here.

Will invisible payment solutions provide a compelling use case?

We liked this article, which acknowledges the underwhelming trajectory of Apple Pay and Android Pay, but highlights the promise associated with “hands free” payment solutions. Technologies trying to enable customers to keep their wallets in their pockets include Bluetooth Low Energy (BLE), Wi-Fi and ambient context identification via beacons.

All things blockchain rose in Q1.

A comprehensive slide deck on Bitcoin and blockchain tech just released by CoinDesk puts some numbers behind a trend that shouldn’t surprise anyone: blockchain tech is hot right now. How hot? The number of blockchain start-ups observed has increased fourfold in a year and the total investment flowing into the area now exceeds that of Bitcoin.

Former CFTC commissioner writes open letter to Obama on digital currencies.

“Many regulations in the U.S. are actually state-level guidelines as they relate to what are termed ‘money transmitters.’ Without some proactive step(s), such as a self-regulatory organization (SRO) and/or word from on high by the president, the U.S. could lose out on what are potentially enormous economic benefits.” That’s the view expressed by Bart Chilton on Bitcoin and blockchain tech.

The ABCs of encryption explained.

Encryption is like wine in one respect: people like to pretend that they know more about it than they really do. Our suspicion is that many of the politicians and businesses commentators advancing points of view on the encryption of financial data and other sensitive information really don’t get it.  Do you know the difference between a Diffie-Hellman key exchange and Lattice-based cryptography?

Company of note

Plastiq. 

Plastiq’s founders started with the simple question: Why can’t you pay your tuition with a credit card? Since then, the Boston-based company has launched an app that allows users to pay bills by taking a picture of them. Moreover, the company helps users pay their bills with credit cards, which maximizes rewards points and simplifies finances.

Comings and goings.

Sindeo, a San Francisco-based start-up seeking to disrupt the mortgage industry, has announced the hiring of Deepak Kumar as its new COO and CFO. Previously, Kumar had been a senior relationship manager at Fannie Mae tasked with building strategic alliances with mortgage banks and credit unions.

Quote of the week. 

“When somebody says it’s not about the money, it’s about the money." 

~ H.L. Mencken