Weekly Briefing No. 78 | The Race to Zero Commissions and New York’s Fintech Week

New York was awash in fintech this week. Here are the things that reached our shores:

Oldsmobile
  • Robinhood is no myth
  • Enterprise fintech is key to Wall Street’s future mojo
  • What happens if a drone freezes in the air? New issue mania is back
  • White papers from Morgan Stanley, Oliver Wyman and Accenture
  • OCC’s fintech charter isn’t a done deal, life insurance via selfies
  • Company of Note: eSignatureGuarantee (bringing unsexy back)

IN DEPTH

Not your father’s Oldsmobrokerage.

Farhad Manjoo of The New York Times raised some interesting questions a few years ago as news of Robinhood, the commission-free trading app, began to spread: “Since people shouldn't buy individual stocks, why is this a good idea? Why make it easy, cheap (on) mobile?” Not surprisingly, a chorus of critics, including Interactive Brokers’ founder Thomas Peterffy, joined the nattering naysayers of the Palo Alto/Sherwood Forest-based start-up ─ inferring that the company could be violating SEC best-execution trading rules or improperly selling customer data. Our takeaway from the harsh barbs: Robinhood was making progress on its way to cracking the zero-commission code. And flush with $110 million of fresh capital from DST Global and others, it’s clear that Robinhood’s model (i.e., free trading commissions for a basic account or fees starting at $10 per month for Robinhood Gold) is resonating with young DIY stock and ETF investors.

The big question is when brokerage incumbents will recognize Robinhood’s user base of two million and double digit month over month growth and respond ─ not by shaving a few more bucks off commissions, but by eliminating them altogether at the entry level. In roboadvisor-land, Schwab, Vanguard and others have demonstrated that giants can move authoritatively when they’ve confirmed that a millennial trend is real. They should analyze the traction, financing and mission of Robinhood to become the Amazon of no-cost/low-cost trading and accept its staying power. Cash-strapped, debt-soaked, smartphone-loving young investors don’t care for stale research or other baby boomer or Gen X garnishes; they just want a simple, mobile, freemium deal ─ not your father’s Oldsmobrokerage.

Fintech is the key to Wall Street’s future mojo.

Gotham’s financial innovation ecosystem had a good week. As entrepreneurs, financial executives and investors descended on the Big Apple for FinTech Week, orchestrated by Empire Startups and FinXTech, it was clear that the line between incumbent and disruptor is blurring, particularly in many corners of the enterprise fintech market. That’s a good thing because New York (and Boston) really need fintech innovation to boost the growth prospects of financial incumbents who are critical economic pillars of those cities. As such, we were glad to see attention paid to issues including the importance of having a corporate culture that supports innovation, the value of a data-centric strategy and best practices for incumbent-fintech partnerships. Will New York ever be able to match Silicon Valley’s bleeding-edge tech chops? Probably not, but that’s ok. The last time we checked, Silicon Valley has made zero progress in disrupting Saturday Night Live or New York’s stranglehold in bagels and pizza.  Add in a tech-forward financial sector and we’ll be good.

Insurance coverage for flying taxis?

"How about sending me a fourth gimbal for Christmas?" That’s what Michael Collins of the Apollo 11 mission famously asked his command center when his lunar module froze. We remembered that quote as we watched Leez, the protagonist in the new promo for Kitty Hawk, breezily pilot her mini-drone to join Laura, Mark and their red sangria loving pals to the boat for din-din. The coolness factor of the machine isn’t in question, and while the FAA looks poised to permit the flyer in uncongested areas, other entrants in the VTOL (Vertical Take-off and Landing) sector ─ including Terrafugia, Lilium and Aurora Flight Sciences ─ are gunning for the sky travel mass market of tomorrow. When that market will become a reality in the US is anyone’s guess (it’s coming to Dubai very soon), but it’s real enough for insurers to start thinking about how coverage would work. The unmanned commercial drone market is already in focus, but who’s going to cover Leez (and the people and stuff below) when she hops into an Uber to fly to work?

IN BRIEF

Partying like it’s 1999 in the new-issue market.

“We must face a hard truth that prediction markets, despite being rigorously tested, cutting-edge instruments for forecasting the future, will never reach their full potential if built on 21st century database technologies.” That’s a core insight behind ethereum-based Gnosis, a new decentralized, permissionless prediction market (in beta) that launched an initial coin offering this week via Dutch Auction. That auction lasted all of 15 minutes, generated a whopping $12 million in demand and left the unsold tokens (locked up for a year in a vault contract) worth almost $300 million for Gnosis co-creators Martin Köppelmann and Stefan George. While we love the ideas at play here, anyone who remembers the IPO frenzy of the late 1990s will tell you that even a compelling investment narrative usually doesn’t justify a stratospheric valuation on Day One.

May Day and mayday fintech white papers.

“Mayday” is used to express a sense of urgency, and should not be confused with the lovely and oddball holiday on the first day of the fifth month, which involves dancing around a maypole and hanging baskets of goodies on the doors of friends. We’re offering two thought pieces in recognition of these two similar, but different, meanings. The first, a distressingly titled report, The World Turned Upside Down, from Morgan Stanley and Oliver Wyman, addresses the need for asset managers to change their business models pronto. The second, Technology for People (See attached) comes from Accenture and highlights/celebrates the top five digital trends on the firm’s mind.

The OCC fintech charter isn’t a done deal.

Last Wednesday, state regulators reopened a can of regulatory worms by suing the OCC for allegedly overstepping its authority. The suit, brought by the Conference of State Bank Supervisors, claimed that the OCC would need “specific congressional approval” to create charters for nondepository institutions. Interestingly, a few days before the suit was filed, the Marketplace Lending Association quietly hired powerhouse lobbying firm CGCN to build support among Republicans for a “national regulatory framework for financial technology.” Coincidence? No chance.

Life insurance via selfies?

We firmly believe that the friction associated with purchasing life insurance is one of the main problems that can and should be attacked by insuretech start-ups looking to reduce the $16 trillion gap in life coverage estimated by industry trade group LIMRA. But even if technology can help close that eye-popping coverage chasm, it’s hard to believe that facial-recognition startups like North Carolina-based Lapetus Solutions and others will soon be able to predict life spans on the basis of biodemography and other advanced facial analytics tools. If they can, maybe we will one-day see underwriting via Instagram. Or perhaps people will no longer take selfies when fatigued, drunk or eating a calzone.

Silicon Valley is coming.

No, we’re not quoting Jamie Dimon. Instead, we’re pointing to TechCrunch Disrupt, which is headed to New York on May 15th - 17th. This year’s event will feature leading fintech thought leaders from firms including RRE Ventures, Canaan Partners, SoFi and AngelList. Medean, Emerge.me, Debitize and other emerging start-ups will also be on hand to give demos and exhibit in Startup Alley. Want in? If yes, act now to save $500 on each ticket by clicking the link below.

COMPANY OF NOTE

eSignatureGuarantee

Nobody is going to accuse 10-month-old eSignatureGuarantee of being a glamorous start-up. But its core service ─ providing a medallion guarantee for the transfer of securities ─ is so unsexy that it’s, well, sexy. Founder Seth Farbman, a successful serial entrepreneur, has spent most of his career wading in the mind-numbing technical minutiae around stock transfer and corporate compliance services. Bringing that expertise to bear on his company’s online platform looks to have significant upside because banks, which once offered medallion-stamp services gratis, have stopped providing the services mostly because of liability reasons. “If you’ve tried to transfer securities over the last few years, you know how time consuming, draining and almost impossible the signature medallion process has become," says Farbman. "We invested heavily in technology to reduce this friction and have succeeded beyond our expectations.”

Quote of the Week

“Fifteen years ago I gave speeches 200 or 300 times reminding everyone the Internet will impact all industries, but people didn’t listen because I was a nobody.”

~ Jack Ma