Weekly Briefing No. 97 | No Growth is the New Extinction

This week, we’re back in action with heavy hearts ahead of the sixteenth anniversary of the 9/11 attacks on Monday. In the wake of that tragedy, France’s Le Monde ran the headline, “We are all Americans.” This year, a similar show of solidarity should be directed to those who have suffered terribly in the wake of Hurricanes Harvey and Irma. We are all Houstonians, Caribbeans and Floridians.

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  • Cryan for revolutionary change at Deutsche Bank
  • Allianz just got the Shakespearean memo; Equifax’s hack is nauseating
  • Banking the cannabis industry; Is Steve Cohen the future of trading?
  • AI’s impact on emerging-market banking
  • Comings and Goings: Paul Rosen, Lewis Kaden and Young Park
  • Company of Note: Episode Six

No growth is the new extinction.

Kudos to the team who put together this recent report from the World Economic Forum that makes two important points. First, although fintech companies have changed the basis of competition, they have failed to become existential threats to incumbents; second, banks should be increasingly worried by ‘Big Techs’ in the US and China. These tech giants either command the infrastructure needed for banks to keep pace, or, in cases like Facebook, they could become outright competitors, particularly if they partner with fintech start-ups (See Slides 27 and 28). Unlike the original fintech enthusiasts who once confidently predicted that incumbents were headed for extinction, we don’t think Big Tech poses an existential threat to Wall Street or The City. Instead, Big Tech seems well positioned to do something almost as bad by squeezing out much of the traditional financial industry’s growth, margin and talent. If you don’t believe us, check out Deutsche Bank’s John Cryan’s remarks from this past Wednesday. In a remarkable speech to a group of Frankfurt bankers, Cryan told the audience that he will impose a “revolutionary spirit" in his firm and that a “big number” of employees will be replaced by technology. We take his words at face value and believe that they signify a continuation of the belief-trend where nothing short of radical action will do. Charming he is not, but Cryan’s words should serve as a call to anyone or any firm who exhibits even the slightest shred of complacency as we head into the year’s home stretch.

Allianz to put some skin in the game.

In Shakespeare’s The Merchant of Venice, the dreaded Shylock requires that the protagonist Antonio commit a pound of his own flesh as collateral for backing up a loan to his bon vivant friend Bassanio. Years later, noted Shakespeare expert Warren Buffett borrowed from the bard when he praised corporate insiders who bought their own company’s stock (aka putting skin in the game). Of course, some hedge fund, start-up and VC professionals treat this ethos as gospel too. Now, joining the club is Allianz, which, along with AllianceBernstein, finally seems to have gotten the memo that it shouldn’t get paid unless its fund managers share in the risk and prove their worth. More specifically, the firm recently revealed that it will launch US actively managed mutual funds that will charge close to $0 if the funds fail to outperform their relevant benchmarks. Skin-in-the-game fintechers should take special note here, because if big fund houses like Allianz are successful in aligning themselves with their end customers, it could spark a wave of creative fintech applications ─ not to mention a new business model for traditional managers that makes sense for this era.

Equifiasco

If JP Morgan traders somehow lost billions in a trading day, you can be sure that its CFO, Marianne Lake, would know about it ASAP. If Bloomberg furnished a huge amount of incorrect stock data to its customers for a few days, its leadership team would be on it. And yet, it was revealed that after Equifax experienced a massive security breach that looks to have exposed information on 143 million people, top executives, including its CFO, were unaware of the incident for days. We’ll repeat: days. How do we know this? Because as Bloomberg and others reported, three senior executives sold $1.8 million worth of stock, which was not part of a 10b5-1 program, days after the breach was internally discovered. Astonishingly, the company’s defense for the questions that began to swirl was that the executives simply knew nothing of this. Is there a cyber rationale here for keeping part of the C-Suite in the dark about a hack that could directly impact 44% of the entire nation? We hope so, because while every company is vulnerable to hacks, Equifax owes it to consumers to have a well coordinated, senior management-sponsored plan in place when big, bad things happen. Equifax is a public company in the judgement business. It presides over financial DNA that can dramatically impact the lives of millions of Americans. If  ─ and we say if ─ its processes were found not to be up to par with its awesome responsibility, it deserves to be held accountable and its credibility score lowered significantly.

The English 101 guide to earning 9.25%.

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IN BRIEF

The cannabis industry needs a 19th century Wells Fargo.

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In the 1850s, the founders of American Express created Wells Fargo to provide financial, transportation and, most importantly, security services to California’s rapidly growing mining-based economy. Now, 170 years later, legal cannabis is a new gold rush, and it needs a similar kind of help. Sure, the industry’s financial development rides on software-enabled compliance, anti-money laundering, inventory tracking and supply chain solutions, but what’s equally pressing right now is how companies can deal effectively with the mountains of cold hard cash that can’t find a home at a major financial institution. Cannabis may be legal for medicinal/recreational purposes in some states, but it’s still illegal at the federal level. As a result, says cannabis lawyer Mitchell Kulick, many legal dispensaries can’t get bank accounts.

Is Steve Cohen ready for the 2018 market?

There’s no denying the legendary status of Steve Cohen, who posted phenomenal returns for his SAC fund. There’s also no denying that he and his family office, Point72, have been voracious investors in fintech-oriented solutions ahead of his intention to manage outside capital once his settlement with the SEC expires. (Wall Street’s worst kept secret).  A better kept secret is the activity of funds like Domeyard, which was founded by three twentysomething quants and is now slinging about $1 billion worth of securities per day from a small Boston office. Do next-generation quant funds like Domeyard represent the new face of trading, or will ‘Stevie’ be able to return to the top once his new fund goes live?

AI’s potential impact in emerging markets banking.

News hit this week that Danish shipping giant Maersk lost between $200 million and $300 million as a result of a malware attack by NotPetya (or Petya, depending on your geekiness). Can Maersk handle the expense? On a one-off basis, sure. But a few million here and a few million there and pretty soon you’re talking real krone. That’s why we’ve been interested in the development of a tech-infused cyber bond market akin to the catastrophe bond market. As the article below point out, though, insurance securitization is complicated, so don’t look for cyber bonds anytime soon.

Boston Fintech Week is coming.

Sponsored by Fintech Sandbox

Fintech is powerful. Fintech in Boston is wicked powerful.

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COMINGS AND GOINGS

Paul Rosen, Lewis Kaden and Young Park

Insurtech Coverwallet has hired OnDeck’s chief sales officer, Paul Rosen, as its new COO. Also this week, Citigroup Vice Chairman Lewis Kaden joined the advisory board of Baton Systems, a newly hatched Fremont, California-based payments platform for managing transactions between financial institutions. Finally, Young Park, previously an executive at D+H and CGI Group, has joined the board of Calian.

COMPANY OF NOTE

Episode Six.

The torrid pace of change in payments technology is exasperating many financial institutions and large retailers, which are struggling to keep pace. Payments technology veteran John Mitchell understands this challenge, which is why Episode Six ─ which has offices in Austin, Hong Kong and Tokyo ─ has built a software solution that provides enterprise customers with a way to modernize their payments offerings regardless of their core infrastructure. In commenting on of one of Episode Six’s core use cases, Mitchell described to The FR’s Gregg Schoenberg how the company’s software enables clients to offer commingled loyalty and redemption plans. “Our clients are on the hunt for ways to provide more value and choice to their end customers,” he said. “With our software, they can adapt to whatever new innovations hit the marketplace without having to rebuild their entire payments system from scratch.”

QUOTE OF THE WEEK

“Talent hits a target no one else can hit; genius hits a target no one else can see.”


~ Arthur Schopenhauer