Weekly Briefing No. 81 | Forget Cash. Trust and Data are King

Welcome to our 81st edition. Washington and the stock market may be shaky, but so far, financial innovation keeps chugging along. On our train this week:

  • Big Tech is the real threat to incumbents
  • The seeds of an alt coin meltdown can be found in one place
  • Nicky Minaj’s economics chops; a troika of notable fintech financings
  • The CFTC’s new lab; investment gamification
  • Comings and Goings: Duperreault and Fanlo take new roles
  • Company of Note: VestWell

IN DEPTH

 Forget cash. Trust and data are king.

As we enter the heart of 2017, it’s fair to say that most financial institutions have overcome their uneasiness about working with fintech start-ups. To be sure, we see formidable competitors to incumbents in lending, payments, asset management and insurance, but in terms of existential threats, we think Jamie Dimon’s famous warning, “Silicon Valley is coming,” was both correct and incorrect. He was absolutely right that Silicon Valley could disrupt Wall Street. But he warned about the wrong Silicon Valley.

Today, as a recent UK survey shows (See attached), the real threat to incumbents isn’t posed by fintech start-ups, but by tech giants. Last year, CNBC’s James Cramer referred to a subset of them as the FAAA (i.e., Facebook, Amazon, Alphabet and Alibaba). Add Apple and Microsoft, and you have six companies with a staggering depth of resources beyond cash. Specifically, they have two things that should keep incumbents awake at night: Dangerous Asset #1: Petabytes of data that can be synthesized with their AI and machine learning knowhow that is likely superior to anyone else’s; Dangerous Asset #2: High levels of customer trust enabling them to enter into many financial verticals, even without being a regulated financial entity (See the new Google-PayPal deal). So while we think it’s great that the financial innovation ecosystem has embraced collaboration, incumbents are far from safe. Because if the FAAAAM ultimately determines that financial services should be a core growth imperative, they can pose a ferocious challenge to incumbents — and innovation labs and partnerships may not be enough to blunt their charge.

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Poloniex who?

On May 7th and 8th, two of the main cryptocurrency exchanges for alt coins, Kraken and Poloniex, encountered DDoS attacks that forced the liquidation of leveraged positions. Now, a class action suit has been filed to determine if the exchanges themselves were involved in any manipulation done in connection with the attacks. This is especially notable for Poloniex, which doesn’t accept US dollar deposits but still enjoys a dominant position in the trading volumes of the Ripple, Ethereum and Litecoin currencies. Its big problem now can be summed up in one word: secrecy. We suspect that Poloniex founder Tristan D’Agosta has his reasons for maintaining a veil of murkiness and mystery, but consider the 2010 Flash Crash for a moment. When ETFs suddenly and violently fell to pennies per share, regulators had the authority to bust trades and restore confidence in the markets.  Would this kind of do-over enforcement occur on Poloniex if Litecoin went to a penny? Not likely, as it’s unclear if anyone has enough authority over or visibility into Poloniex’s order book. As such, the incentive for a bad actor (perhaps a WannaCry copycat) to place below-market buy-orders for an alt coin on Poloniex, then attack the same exchange, represents a clear and present danger. That’s true whether you’re a small fish or one of several savvy investors looking for digital currency diversification.

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IN BRIEF

Nicki Minajonomics.

SoFi, Commonbond, Earnest other start-ups have helped tens of thousands of individuals refinance their student loans and gain better control over their finances. But the bigger issue remains how the US copes with the skyrocketing cost of higher education, which continues to crowd out other priorities, including business formation, home purchases and iPhone 7 upgrades. Now, with the nation’s total student loan debt reaching $1.34 trillion, the time could be right for more dramatic ideas, which is where Nicky Minaj comes into the picture. Scoff at her if you want, but the “Super Bass” songstress is no dummy. She understands that education costs are a growing threat to our economy, and damage control will require tackling principal, not just interest costs.

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Sell in May and double down in June, July, etc...

The old stock market mantra of “Sell in May and go away” should be revised, especially if you just sold a big chunk of equity like Symphony or LevelUp. After all, when you consider the challenges associated with maintaining a dynamic growth trajectory and beating back competitors, the pressure only goes up when you take in lots more dough. Still, they have it easy compared to Neighborly, which just closed a $25 million round to modernize the antiquated world of public and community finance. So if you meet an executive from any of these firms (but especially Neighborly), consider refraining from offering your congratulations. If you really want to help, offer them your respect, and perhaps a Red Bull.

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CFTC gets into the innovation lab business.

This week, the Commodity Futures Trading Commission (CFTC) announced the creation of LabCFTC in an effort to modernize the agency’s approach to interacting with increasingly digital markets. CFTC Acting Chairman J. Christopher Giancarlo, who is one of the more forward-thinking financial regulators of his generation in our view, stated the twin goals for the new lab. First, the lab will look to improve the quality of commodity markets by embracing fintech and regtech innovations. Second, it will seek to take advantage of existing technologies to carry out the commission’s work more effectively and efficiently.

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More gamification, less stock picking.

“While we have no crystal ball to see the future, there seems to be widespread consensus that pension plan imbalances are going to affect all mature economies in the next decade, and risk destabilising those social systems and intergenerational pacts that have kept our societies together.” That’s the perspective offered by Paolo Sironi of IBM Watson Financial Services (and friend of The FR) in a recent thought piece promoting goal-based digital gamification as a key to addressing the major structural challenges faced by many advanced economies.

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Comings and Goings: Duperreault and Fanlo take on new roles.

This week, Brian Duperreault agreed to take the reins of AIG as its new CEO, marking the return of the well-respected insurance executive who spent 21 years at the company before leaving in 1994. More recently, Duperreault helmed Hamilton Insurance Group and had joined forces last year with Two Sigma and AIG to create Attune, a data-powered provider of commercial insurance to small businesses. Now that Duperreault is back at AIG, it’s buying Hamilton USA and doubling down with Two Sigma on Attune. Also this week, news hit that SoFi president and CFO Nino Fanlo is leaving the company to join Human Longevity Inc., a genomics sequencing start-up that’s tackling age-related diseases with data science. We’ve long believed that the “fintech way” can be applied to sectors beyond financial services, and while we’re sorry to see the departure of Fanlo, recently interviewed by The FR’s Gregg Schoenberg, fintech’s loss will be biotech’s gain.

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COMPANY OF NOTE: Vestwell.

Serial entrepreneur Aaron Schumm developed the idea for Vestwell when he was seeking to establish a retirement plan for his previous company, FolioDynamix. As Schumm encountered first-hand, the complexity and outrageous costs associated with starting and maintaining a 401(k) program for his employees was inconsistent with the advancements in financial services he was seeing all around him. Fast forward to the present, and Vestwell is now generating significant traction in delivering white-labeled retirement programs that are simple to administer, customizable and affordable (Vestwell fees are usually around 50 basis points less than a traditional plan of similar size). Rather than selling directly to end customers, though, Vestwell empowers RIAs by encouraging them to use its fiduciary-friendly platform to enhance their relationships with their corporate clients. In a recent discussion with The FR, Schumm shared his view that for the foreseeable future, most retirement plans will continue to be sold through financial advisors. When RIAs use Vestwell, “they can look their clients in the eye and deliver a modern, cost-effective retirement solution that everyone can feel good about,” he said.

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Quote of the Week

“The best teacher is not the one who knows most but the one who is most capable of reducing knowledge to that simple compound of the obvious and wonderful.”

~ H.L. Mencken