Weekly Briefing No. 85 | Is Fintech ‘Brain Dust’ Enough?

Ahead of the summer lull, it was a jam-packed sprint of a week for financial innovation movers, shakers and bellyachers. Here’s our take on all of it:

  • Goldman self-disrupts, but will others follow?
  • Should Venmo be scared of Zelle? The future of ICOs
  • Far flung use cases for Big Data in insurance; Financial reform will happen
  • Comings and Goings: Uber, SoFi, Dash and DefenseStorm
  • Company of Note: Global Debt Registry

IN DEPTH 

Fintech brain dust vs. a CEO’s “inner Bezos.”

"I would rather die than let my kid eat Cup-a-Soup.” That’s a quote from Gwyneth Paltrow, who at her recent wellness conference in Los Angeles featured a product that contains “brain dust.” Laugh if you want, but consider that the innovation efforts of several publicly traded asset managers and banks are also on a brain dust quest. As we’ve said previously, fielding an innovation department or powerhouse lab is a smart step, but it’s only a step. For CEOs of public companies who must deal with the ever-present reality of shareholders looking to apply pressure, it can be tough to channel their “inner Bezos” and boldly act via investments or acquisitions at the expense of near-term earnings. But is the alternative, sprinkling a dash of innovation brain dust here and a small partnership there, any better? A few years ago, that approach may have been sufficient to check the planning-for-the-future box. But nowadays, even solid CEOs are ousted for not innovating fast enough. So despite an anticipated bumpy patch for some financial services firms in Q2, we hope an increasing percentage of incumbents use their 2018 budget processes to get more aggressive in making disruption happen ─ not just in the innovation department, but firmwide. Goldman Sachs, for example, has turned its attention to automating the IPO process with a vengeance (See below). That might scare some banks that have counted on underwriting fees, but the ECM process is long overdue for a technology-driven overhaul. Goldman is making the smart bet that if it doesn’t automate capital-raising, someone else will. And while self-disruption can be painful, it’s better than a long-term diet of Cup-a-Soup.

Can virality be manufactured by the suits? 

“We think the simplicity and shared experience around this will magnify the network effect.” That’s a quote from Wells Fargo executive Brad Pitts on why his bank is one of 30+ participants behind Zelle, the eagerly anticipated, newly launched P2P payments platform. So where does this leave Venmo (the current P2P payments king) and its parent PayPal? It’s too soon to tell, but our best guess is that while there is reason for concern, Venmo doesn’t stand to lose its multitude of millennial customers to Zelle (or Square Cash, Apple or Facebook) anytime soon. For one thing, the app has already established trust with its users, most of whom do not pay to use it (profitability is a concern for another day). In addition, Venmo is widely used as a quasi-social network that allows people to comment on purchases and economic decisions made by friends. (According to PayPal’s Dan Shulman, 90%+ of all Venmo transactions are visible to at least someone else, and a similar number have an emoji or commentary attached.) Finally, and perhaps most importantly, we turn back to Pitts’ quote. On paper, Zelle looks like a mature and secure alternative to the cheeky Venmo. But you can’t deny Venmo’s viral success, and network effects aren’t easy to manufacture, certainly not by a financial institution, let alone a consortium of them.

IN BRIEF 

Will Github repositories be the new S-1s?

The cryptocurrency market, which has seen certain flavors rise by over 20x in 2017, took a hammering on Thursday. Is this recent volatility a signal that the halcyon days are ending? Who knows, but those who have predicted gloom in the past have been confounded by the phoenix-like ability of Bitcoin and its more exotic cohorts to reemerge. That brings us to the ICO market, which has ridden the cryptocurrency wave and seen north of 60 token sales raising over $500 million in 2017. Unsurprisingly, several more offerings are on the way. However, if Bitcoin, Ether and others retrench, ICO sales should stall. That would be a good thing, because as in the IPO market, when too many new issues debut too fast, quality plummets. Then, when new issues return, investors ─ rather than riding the wave ─ dig in and read a deal’s S-1 cover to cover. Similarly, perhaps the chastened token investors of tomorrow will do much more due diligence on the characters behind ICOs, pour over a project’s Github repository and read white papers thoroughly before buying. Throw in some SEC rules (a master key?), and you may one day have a more durable mechanism for raising capital from customers.

Life-saving insurance use cases courtesy of Big Data.

We have nothing against using mobile technologies and the growing mountain of data, analytics and modeling techniques to provide insurance for camera gear and other electronics. We’re just glad that other insurance-related use cases are seemingly generating momentum as well. For example, Metabiota is working with insurers to help them better understand and forecast where epidemics are likely to emerge. Meanwhile, Richard Oduntan of Nephila Capital, a large reinsurance-linked investment manager, believes that thanks to the increasing availability of satellite data, there’s a “ripe opportunity” in the weather risk transference market, which in turn can promote greater sustainability of emerging economies. See his recent post below.

Required fintech reading: Treasury’s report and your PoliSci 101 textbook.

The probability of near-term legislative action on financial regulation is close to zero as Washington wrestles with the chaos surrounding the Mueller investigation and Congress looks to confront Obamacare, the budget ceiling and tax reform (maybe). But that doesn’t mean you should ignore the Treasury Department’s new report, the first of four, detailing some of the core principles associated with intended financial regulatory reforms. That’s because, in the words of Secretary Steven Mnuchin,“We think about 80% of the substance in the report can be accomplished by regulatory changes, and about 20% by legislation." How can that be so? Quite simply, presidents from both parties over the past 40 years have expanded the powers of the presidency at the expense of the other government branches. So as long as key roles in Treasury, the SEC, the CFTC and elsewhere can be filled, it looks like Wall Street is going to secure a fair bit of relief at some point.

COMINGS AND GOINGS: Uber, SoFi, Dash and DefenseStorm. 

SoFi, which just disclosed that it has applied to the FDIC for an industrial loan charter in Utah, has indicated that it plans to hire up to 400 professionals in Delaware. Also this week, Dash Financial Technologies hired Goldman Sachs capital markets veteran Robert Boylan to head business development, while DefenseStorm added Steve Soukup as chief revenue officer. On a final note, as we all know, losing a parent tragically can be a life-changing event. Our best hope is that as Uber’s Travis Kalanick grieves for his mother and reflects on his company’s raft of controversies, he uses his time to figure out how to fuse his brilliance with greater decency. In the future, it would be fun to root for, not against, an innovative company like Uber.

COMPANY OF NOTE: Global Debt Registry.

In recent years, the marketplace lending sector has gone through a sometimes painful but necessary maturation process. That process has been spurred on by an increasing number of sophisticated investors unwilling to accept anything less than institutional-grade data quality and transparency from originators and securitization issuers. One of the leading companies facilitating this important trend is Global Debt Registry, a provider of asset certainty and loan validation services for many of the marketplace lending sector’s most visible participants. Now based in New York City, the company recently announced partnerships with Equifax and Transunion, as well as the hiring of Michael Koenitzer, a structured finance veteran, to run business development. “Online originated consumer loans have become an important asset class serving many American borrowers and institutions looking for attractive risk/reward opportunities,”said President Charlie Moore. “In order for this asset class to live up to its potential, though, more needs to be done to shore-up confidence in the sector. At GDR, we’re looking to do our part.”

Quote of the Week

“A reckless king will easily fall into the hands of his enemies. Hence the king shall ever be wakeful.”

~ Chanakya