Weekly Briefing No. 98 | In Defense of Dimon, Personal Data Weaponized, Amazon’s One-Click Patent Expires

This week, the world of financial innovation grew a bit hot under the collar. Grab a glass of ice water and check out our segments below:

  • Jamie Dimon goes all-in against Bitcoin
  • Stolen personal data is much more than just a financial problem
  • Amazon’s one-click technology goes off patent
  • Big Tech’s lever over Wall Street; Betterment diversifies
  • Comings and Goings: Jimmie Lenz joins FRG; SoFi ousts Cagney
  • Company of Note: Casa Verde wants to become King Cannabis

Dimon: Unplugged but not unhinged.

Jamie Dimon’s colorful rants in which he called Bitcoin a fraud and the trading of it a fireable offense ignited a firestorm of comments. Some of the counter-rants include: “He’s an out-of-touch Wall Street billionaire… Even Kim Jong-un understands Bitcoin better than him...  and he should refrain from commenting on Bitcoin” (more colorful words were actually used). What’s not so inflammatory is stating that Bitcoin has had a hell of run until recently. But will it become one of tomorrow’s dominant financial assets, or the enduring currency of choice for gangsters and smugglers? Smart people line up on both sides of the argument. Either way, Dimon’s words of caution should be considered for three reasons. First, while nobody has ‘God access’ to the global economy, Dimon is arguably one of the best-positioned people on Earth to understand it since he has highly privileged knowledge of how businesses, markets and governments interact. Second, even if you are a Bitcoinista, the level of fanboyism that’s overtaken the world’s largest cryptocurrency is reason for pause. Does hearing from the Bitcoin amen corner enhance anyone’s Bitcoin thesis in 2017? Finally, CEOs of major global banks usually aren’t so blunt when it comes to asset values because it exposes them to the risk of being wrong. But in this case, Dimon put all of his chips on the line. How many public bank CEOs would do that? So whether you agree with him or not, he’s re-earned his G.O.A.T. moniker in our book for flouting caution and calling it like he sees it. Thank you, Jamie.

Stolen personal data poses more than just a financial risk.

Imagine you’re a recruiter at a terrorist organization with tech savvy. You follow US tech news, of course, and have observed how Facebook has seemed only begrudgingly cooperative in going after the Russian groups that sought to hack the US presidential election. You also notice that another Facebook property, Instagram, was recently hacked and that millions of accounts from its young, impressionable user base were exposed. Then you come across the Equifax hacking and look on curiously at how flat-footed the company has been in mitigating the damage. And then a light goes off in your head: if you could secure some of the sensitive personal data stolen on 143 million people, you could combine it with insights from social networks and make some inferences about lots of Americans. Perhaps you could then create a database of Americans who are sympathetic to your cause and may be feeling economically insecure, because a very tiny portion of them could be receptive to radicalization. You then approach your cyber-terrorist head and request three hackers and a data scientist to assist you. He pushes back, but you then point to an article showing that Senator Elizabeth Warren seems to be the US official angriest over the Equifax breach. The cyber head then nods approvingly and says, “I see. The Americans are viewing the Equifax situation as a financial and potentially partisan issue, not a national security one. Your request is approved. Now go out and weaponize that data.”

IN BRIEF

Your patent expiration is my opportunity.

Apple’s special event probably overshadowed another notable occurrence last week: the expiration of Amazon’s one-click purchasing patent. The expiration has probably been on the minds of every major online retailer for some time, as it will allow them to implement their own one-click feature and/or not have to pay Amazon fees for using its IP. How big of a deal will it be for other retailers to be able to shrink the purchasing friction gap with Amazon? Consider this: According to the Baymard Institute, $260 billion could be recovered by ‘checkout optimizations.’ So if 20% of that big number can ultimately be saved thanks to broadened use of one-click tech, that’s $52 billion, or 52 million iPhone X units if bought in the US.

Mainframe Mad Men.

According to OpenFin’s CEO Mazy Dar, the problem with banks continuing to patch up their legacy mainframe infrastructure is that “with every new feature that you are adding to the existing system, you are making migrating off that system harder.” Given that difficulty, how can banks deal with near-term earnings expectations on one hand and ‘spaghetti connections’ on the other? The good news, says HSBC’s David Knott, is that cloud-based systems offered by Google, Amazon and Microsoft have made great strides in bolstering the security around their cloud offerings. The bad news: Google, Amazon and Microsoft have made great strides in bolstering security around their cloud offerings.

Betterment connects with Goldman and Blackrock.

When The FR’s Gregg Schoenberg referred to Betterment as a roboadvisor that millennials love in a conversation with CEO Jon Stein earlier this year, Stein politely held back his inner bristle. As Stein explained, Betterment uses technology to meet the needs of a diverse client base and didn’t want to be tied to any particular moniker. A case in point is this week’s announcement by Betterment that it will expand its offerings to include a smart beta strategy created by Goldman Sachs Asset Management and an enhanced fixed-income approach courtesy of Blackrock. The reasons for the product expansion seem clear: Betterment wants to evolve with its clients as their wealth grows and to attract new higher-earning new clients. The new products geared to this market segment don’t target individual securities, but they certainly offer more spice and personalization to the firm’s lineup.

Modernizing modern portfolio theory.

Sponsored by Fundrise

In 1952, economist Harry Markowitz created an investment framework that proceeded to influence how most people allocate their investments. That approach, known as Modern Portfolio Theory (MPT), worked pretty well for several decades. Unfortunately, thanks to a host of changes that have occurred in public bond and stock markets, MPT fails to provide the kind of diversification needed to maximize risk-adjusted returns today. That’s where Fundrise comes in. By unlocking access to private market real asset transactions, Fundrise is seeking to offer private investment opportunities to the public in order to enable investors to better diversify their portfolios and generate higher yields with less volatility. For more, check out the company’s recently released white paper entitled “The Shortcomings of Modern Portfolio Theory in Today’s Macroeconomic Environment.

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COMINGS AND GOINGS

Jimmie Lenz joins FRG; SoFi ousts Cagney.

This week, Dr. Jimmie Lenz, a friend and contributor to The FR, left his role at Wells Fargo and announced that he will join Financial Risk Group (FRG), a leading risk management advisory firm. Also, on a troubling note, SoFi, a company we’ve covered extensively as a fintech force, announced that co-founder Mike Cagney would resign immediately from his role as CEO and board member. The announcement comes in the wake of credible assertions that he had inappropriate relationships with employees, which fomented a toxic workplace environment. Executive Chairman Tom Hutton will serve as the firm’s interim CEO during the search for a permanent leader. We expect that confronting allegations that SoFi’s troubles extended to its business practices will also be high on Hutton’s priority list.

COMPANY OF NOTE

Casa Verde Capital.

We believe that the legal use of cannabis for medicinal and recreational purposes represents a notable long-term secular growth opportunity in the nation. That’s why we’re highlighting Casa Verde Capital, an early-stage venture capital firm focused on becoming a major funder to the ancillary cannabis sector, which encompasses companies that don’t ‘touch the plant’. Backed by Calvin Broadus (aka Snoop Dogg) and a partnership network that includes well-established cannabis services providers, Casa Verde has invested in a handful of companies, including ones involved in payments and marketplaces. More financially-related investments are likely to follow when you consider the backgrounds of the fund’s two lead partners: Karan Wadhera and Evan Eneman, who held significant roles at Goldman Sachs and PwC, respectively. “Cannabis is going mainstream and will likely create more American jobs than manufacturing by 2020,” said Wadhera. “Putting capital to work in best-in-class start-ups that are enhancing financial flexibility and risk management capabilities for the industry should see exponential growth.”

QUOTE OF THE WEEK

“You learn to swim by swimming. You learn courage by couraging.”

~ Marie M. Daly