Welcome to our 80th Weekly Briefing. More importantly, we wish all the moms out there a Happy Mother’s Day. Without you, there would be no financial innovation. Here’s what caught our eye this week:
- Will cyborgs own Wall Street’s future?
- Music as a fintech lab
- Whether it’s cryptocurrencies or stocks, fear isn’t in the air
- Two $12 million deals we like, parametric insurance
- A market sage slams passive investment, Fintech71 launches
- Company of Note: FiscalNote
A Peter Lynch cyborg?
As is widely known, Elon Musk has started a new company named Neuralink that aspires to enhance the human brain’s memory and processing functionalities through ultra high bandwidth brain-machine interfaces. DARPA, meanwhile, is focusing on Targeted Neuroplasticity Training (i.e., next generation brain shocking). Whichever approach wins, the thinking that’s driving these techniques is similar: the only way humans can keep up with AI is to transform people into cyborgs who can merge biological and digital intelligence.
At a more modest scale, that bionic future has been unfolding in financial services as dozens of well-financed start-ups are developing human-AI approaches designed to empower analysts, traders, salespeople and compliance personnel to outperform all other alternatives. An articulation of this cyborg future can be found in this blog post from Prattle. The former Company of Note asserts that while it’s understandable why finance pros fear technology, the reality is that software does some things better than humans and vice versa. To help illustrate this point, see the attached interview with Peter Lynch, perhaps Warren Buffet’s only rival in the investment living legend category. (During Lynch’s tenure running Magellan Fund, AUM grew from $18 million to $14 billion.) Lynch retired in 1990, but imagine if this avuncular ex-PM were running Magellan today. “The person that turns over the most rocks, wins the game,” says Lynch (2:45). On that basis, if you linked Lynch’s wisdom-packed brain to Neuralink or an electrical stimulation program, you’d have quite a fund manager. Maybe one even good enough to beat the bots.
Let it be cashless.
In 1989, Apple Computer reached a settlement with the Beatles’ Apple Corps in which the tech company agreed to stay out of the music business. That agreement didn’t work out so well as the two Apples continued sparring until 2007. This past week, on the 47th anniversary of the release of The Beatles’ last studio album (Let it Be), we’ve been thinking about the dance between music and tech, or more specifically, between music and fintech. It all started when we took note a few weeks ago of Spotify’s purchase of Brooklyn’s Mediachain Labs as a way for the music service to improve its channels of payment to artists. Other companies, such as Ujo Music and PeerTracks, are also utilizing blockchain tech to facilitate the fair flow of royalties. But perhaps an even bigger convergence between music and money can be found at music festivals, which have been at the forefront of creating innovative solutions for the temporary economic systems created at Coachella, Tomorrowland and others. Of course, it’s easier to introduce fully cashless environments that make use of RFID wristbands when a “try anything” spirit is in the air. But that’s precisely why music festivals could be the ideal labs for fintech innovation. And with an increasing percentage of Americans eager to experiment with new payment services (according to a new BofA report), the time is right to get into the fintech-music lab.
There’s nothing to fear but no fear itself.
This week, Goldman’s Lloyd Blankfein appeared on CNBC to express the biggest fear currently gnawing at many financial pros: most investors aren’t scared. The narrative behind that reasoning is fueled by the Chicago Board Options Exchange’s VIX index, which is a flawed-but-widely-used proxy for market angst. So with the VIX falling to depths not seen since Justin Timberlake starred on the Mickey Mouse Club (1993), people in the know are worried. Meanwhile, in the far less regulated world of digital currency, the price action in Bitcoin and some of the alt coins have produced astounding movements in recent days. Perhaps it’s the knock-on and derivative effects associated with Japan’s decision to legalize Bitcoin, or a more technical factor. What’s interesting to us, though, is that in contrast to stocks, many of the smartest people in the know aren’t too worried.
A good-looking pair of $12 million deals.
Despite data showing that overall fintech financing levels are down, we are impressed by the high quality of deals that have been getting done as of late. One example includes a $12 million financing for Capella Space, which focuses on providing cost-efficient hourly imagery of any location on the planet, regardless of weather. Also this week, brotherly entrepreneurs Frank and Mike Sanchez raised $12 million for Finxact, a cloud-based core banking platform that will be equipped with an Open Banking API and other features to allow for faster delivery of new digital services. This too looks like a promising start-up with seasoned founders.
No insurance adjusters necessary.
For good reason, the attached post from law firm Steptoe & Johnson generated some nice social media buzz this week. It clearly articulates the benefits of parametric insurance policies and demonstrates that technologies like blockchain-powered smart contracts can create new product categories. For the non-insurance obsessed, parametric policies are those where payouts are determined through objective parameters, not by an adjuster who surveys damage. Some types of agriculture, auto, catastrophe and P&C insurance coverages are within the grasp of objective indicators, especially with the help of sensors and third-party data sources.
Market maven slams institutional passive investing.
Normally, we wouldn’t be taken aback by an active manager slamming the rising tide of ETF strategies. But we’re highlighting DoubleLine’s Jeff Gundlach who used his appearance at the Ira Sohn conference to blame momentum behavior behind index flows as leading to a worldwide distortion in valuations: “In essence, going institutional into (a) passive S&P manager is abdicating your fiduciary duty.” Gundlach’s case, which was bolstered by allusions to German expressionist painting legend Max Beckmann and the writings of Friedrich Nietzsche, is helpful to note given his venerable grasp of market structure and fund flows.
Are bank accelerators just cosmetic?
Alex Jimenez of Utah’s Zions Bank has referred to most bank innovation programs as “innovation theater” done to impress investors and/or to establish favorable PR. While Jimenez is a highly respected banking innovation professional, we’d suggest covering that short position as 2017 progresses. Sure, you can still find empty programs out there, but are bank investors circa 2017 really going to fall for innovation theater? On the flip side, we think some bank in-residence programs and even some new banking accelerators are poised to benefit from the lessons learned by predecessors. One such new program could be Fintech71, a new accelerator based in Columbus, Ohio, that is being backed by JPMorgan Chase, KeyCorp, Fifth Third and SVB Financial amongst others.
COMPANY OF NOTE: FiscalNote.
When you’re analyzing how legislation or a regulation can impact your industry, and your livelihood for that matter, it’s hard to separate emotions from the equation. The OCC fintech charter and the DOL fiduciary rule are two such examples in financial services where well informed professionals (and their government affairs advisors) can easily allow bias to creep into analysis. That’s why we’re highlighting Washington D.C.’s FiscalNote, which is delivering a predictive analytics SaaS offering to a myriad of enterprise customers including Blue Cross Blue Shield, Fidelity and Freddie Mac. Specifically, the company’s Open Data solution, FiscalNote GRM, is designed to help clients determine the probability that new laws and regulations being considered at the Federal, State and Municipal levels will be enacted. The latter is of particular interest to us given that most of the battles over sharing economy rules are taking place in city councils across the world. Led by CEO Timothy Hwang and backed by a laundry list of savvy investors including Visionnaire Ventures, Renren and Green Visor Capital, the company recently added former U.S. Army General Stanley McChrystal to its board of directors.
Quote of the Week
“You're not famous unless people's mothers know who you are. Everybody else, you think you're famous, but you're just hot, and heat cools off.”
~ Chris Rock