The Distributed Application Software Stack

Eris Industries has launched today the first components of its distributed software stack. Congratulations to the amazing team behind Eris on this first step, its the beginning of an incredible journey.
I am not going go over technical details on Eris (read https://decerver.io/ and https://thelonious.io/ to start). You can also find a lot of information on their various blogs https://blog.erisindustries.com/ , https://tao.erisindustries.com/ , https://db.erisindustries.com/ and https://eng.erisindustries.com/. I will just summarise a few thoughts on why I think what they are building matters.
- So far the internet has favoured the creation of monolithic highly scaled platforms. While they compete with each others, there is undeniably a moat in massive tech infrastructure and data aggregation. This is not necessarily a bad thing, but it was until very recently very difficult to think of an alternative model that would support a similar scale without building a monolithic platform. Distributed architectures (while not new) have shown with the emergence of Bitcoin that blockchain technology could support such endeavour.
- Building efficiently organised distributed organisations is often limited by the necessity of building a central platform to coordinate the interactions of their various members. In Financial Services, Mastercard, Visa are examples of such platforms. It is often only available for organisations with enough resources to start building these platforms and enough embedded margin to create their business model.
- These problems are often compounded when an organisation’s goal is to create such a distribution at the user level, for example recognising each user level of participation as experimented in the Assembly model.
In order to start experimenting with building organisations, services that smartly and leanly support the creation of distributed organisations at various level (between users, between companies, between countries ?), an architecture that allows the distribution of the data and the transparency of the underlying logic will play a fundamental role. This architecture does not prevent third parties to act as an intermediary but changes the way they can operate. By distributing the running cost of the platform to its various participants, they can experiment with new business models that don’t rely on their ownership of the data and the infrastructure.
So what happens next? Eris industries has built a software stack to support the creation of such organisations. As with any early phase, the experimentation that we hope will happen through developers leveraging the platform will be the groundwork for the creation of the services, organisations, companies of the distributed future. I am looking forward to see what they will build.

Innovation in the insurance market: QuanTemplate

Its now official, Anthemis has led the latest investment round in QuanTemplate and I could not be more thrilled about it.

QuanTemplate is a marketplace, communications and enterprise workflow technology that offers a secure web-based platform for trading risk, regulatory reporting and creating financial models for use across the (re)insurance market. Through QuanTemplate, underwriters and brokers can conduct all operational activities required to trade in the $4.7trillion insurance market while optimizing their risk in real-time, all the time.

To put it simply, QuanTemplate brings modern data analysis and reporting as well as communication to an industry still mostly relying on Office Tools, emails and hard to use internal systems (in the best case). Through the QuanTemplate platform, the risks of the companies and financial institutions that are driving the world economy are analysed, presented, shared and traded.

Quantemplate screenshot

There are 3 reasons why I believe QuanTemplate has the potential to be one of the leading startups for the insurance industry:

1/ The team. Adrian Rands and Marek Nelken have an incredible experience in the insurance / re-insurance market as well as financial services core technology. Just looking at the product shows they have a distinct vision of the needs of the industry and their ambition for the platform is very large. It is not often you find a team both able to speak to business customers and  build its own frameworks (See Mafic and X-Stitch)

2 / The market. Insurance in general is a market ripe for disruption. The Insurance industry has been so far largely insulated from the disruptive forces that have started to impact the other financial services industry. This is in my view largely due to the moat provided by the historical data insurance is based on, as well as regulatory barriers. For the most part, the B2B insurance market is run on Excel, Word and emails. Quantemplate focuses on the current issues and needs of the industry but builds for its more liquid future.

3/ The vision.The digitisation of the B2B insurance market could have a major impact on the industry. Better data management and modelling approach will affect the economics of the business as well as the capacity to measure risk holistically. A more standardised platform could increase liquidity in the market by allowing new players looking to diversify their investment opportunities to enter.

QuanTemplate’s reception within key players of the industry has been very positive and I am looking forward to working with the QuanTemplate team on an exciting journey.

Innovation in the Asset Management industry

While other sectors attract more mainstream press attention (payment, retail banking), the asset management industry is also deeply affected by “software eating the world”.

Asset Class Competition
Traditional asset management companies are increasingly facing competition on both sides of the performance scale. On the “Beta” end of the scale, ETFs are steadily becoming one of the most successful innovation in recent decades. By automatically tracking indexes, they offer investors the possibility to obtain market performance at a lower cost than a typical managed funds.



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Additionally, more players are appearing making ETFs investment easier and more meaningful for private investors. Companies such as Betterment (disclosure, Anthemis is an investor & I am a customer) make investing in a diversified portfolio of ETFs easy and provide additional services such as automated rebalancing and tax optimisation.

On the other end of the scale (Alpha), access to alternative assets has become easier with the JOBS act. By lifting the ban on general solicitation and making crowdfunding easier, the JOBS act is opening access (for accredited investors for now) to the Venture Capital and Hedge Funds asset classes. Platforms such as Angelist, Seedinvest or Fundersclub (with differences in each models) are making startup investment easier to more people and are solving key pain points such as keeping cap table reasonable. In the hedge fund world, companies like Artivest are experimenting with opening up access to established funds to more accredited investors.

Other assets classes are also opening up and proving competitive. Lendingclub has provided attractive returns to individual investors who would never have had the possibility to directly invest in consumer lending with the necessary diversification. Realtymogul opens up direct access to large real estate investments.

Note: with companies seemingly taking longer to become listed and receiving more later stage investments (notably via secondary deals through platform such as SecondMarket), how much of their increase in value is extracted before they reach the listed markets? 

Scrutiny on Performance

Morningstar has played an important role in making the fund management industry more transparent and it is no surprise to see it as an active investors in the financial services transparency field. MorningStar recently acquired HelloWallet for $52.5M and previously acquired ByAllAccounts for $28M (all transactions in 2014!)

While generic performance comparison has been more open for some time, how it applies to each person’s investments universe is a more recent trends. Companies such as Billguard are already providing antivirus-like services for your personal accounts. FeeX aims to do the same with managed portfolio fees. Looking beyond fees, startups such as Riskalyze can help identify the risk profile of each client and rate their current investments accordingly. Platforms such as Blueleaf (an Anthemis investment) drill down to each funds underlying assets to verify detailed exposure across a customer’s multiple investments. Both Riskalyze and Blueleaf are advisors focused, empowering financial advisors to provide more transparent performance to their customers.

Broken distribution?

The distribution of financial services is facing a major shift over the next years. As showed by Brett King, the traditional brick and mortars infrastructure is fading away

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Number of visits per month / year

Younger generation are less and less engaged with the physical distribution of financial services. In growing urban areas they are also less likely to engage in transactions that require branch interactions (mortgage etc). This leaves an opportunity for startups such as Betterment or Wealthfront to fill the void left by banks and traditional players. It is limiting to define these businesses as just online, their capacity to craft a digital experience in line with the expectations of the younger generations is unmatched by traditional financial services players.

Additionally we are seeing an evolution in investment behaviours of Millenials that potentially in conflict with traditional asset management: 

Affluent millennials hold 52 percent of their money in cash and 28 percent in stocks, compared with 23 percent and 46 percent for older people, a UBS survey released in the first quarter found. The study focused on 21- to 29-year-olds with $75,000 in income or $50,000 in investable cash, and 30- to 36-year-olds with $100,000 in income or assets.

as the Blooomberg article explains: 

“We call them Recession Babies,” said William Finnegan, a senior managing director at MFS Investment Management in Boston, drawing a parallel to “Depression Babies” who avoided banks and investing after the 1929 crash. “If the cumulative return of the past five years didn’t convince you that the stock market might be an OK place to be for a long-term investor, I’m not sure what else is going to. These folks have been scarred.”

I don’t think it is right to think Millenials are just risk averse. After all we are talking about people investing in crowdfunding platform such as Kickstarter and a generation expected to have shorter job tenures than previously. We may see an overall shift of having both a highly conservative and highly speculative risk profile, with little left in the middle. 

However the Financial Advisors industry seems to be mostly focused on the current high value client base, mainly retirement focused. How many financial services company will follow Merril Lynch and name a director of financial gerontology?

Commoditization of Analysis

One of less talked about fundamental change on the analyst industry is the influence of the XBRL format (I wrote a first post on this topic in 2010: still valid imv: http://tekfin.com/2010/08/02/will-financial-information-become-the-next-commodity-data/). With the SEC making it mandatory for companies to report their accounts in machine readable format (include notes), performing core financial analysis and building baseline models will become a commodity. Trefis is a good example of how machine readable financial information can make model building different.

 

Additionally, with the improvement in distributed computing and AI, new models appears that are removing the pain from complex analysis. Companies such as Kensho with Warren makes complex correlation analysis a breeze (one of the most impressive demos I have seen recently). Signals are also becoming “free” with companies such as Estimize providing unique insights into Buy Side analysts expectation of stock performance, beating Wall Street analysts 69.5% of the time (now extending to economic forecasts and M&A deals).

In this new environment, how will asset managers differentiate and create above average returns? When more and more data becomes available, is information asymmetry gone as a differentiator? Is AmPro competition a growing threat? “Older” companies such as Covestor have been created on that basis and new competitors such as Motif also offer the opportunity for anyone to pick stocks and pitch their investment ideas. One of the main drivers of the new coming competition is in my view the lower transactions costs, new players coming out of the Robinhood (a zero fee broker) trading API will be interesting to follow.

Musings on Full Stack Financial Services startups

(This post has been long in the making). One of the posts that sparked my interest in the last months is a post by Chris Dixon, Full Stacked Startups. In it, Chris highlights several startups such as Nest, Uber, Tesla, Warby Parker as companies that have gone after the market as full-fledged businesses instead stacking on top or in partnership with other players. Notably the …

[…]  full stack approach lets you bypass industry incumbents, completely control the customer experience, and capture a greater portion of the economic benefits you provide.

Recent transactions, such as Twitter’s acquisition of Gnip, are also showing, in my view, the business tension by any tech startups to move vertically upstream or downstream to find the right mix of economic models.

There have also been more conversation around the idea of changing at its core financial services. Marc Andreessen has jumped in the discussion with the idea of building a full new bank: http://qz.com/175512/to-disrupt-banking-do-you-need-to-own-the-bank/.

Note 1: Bitcoin is a strong factor here, not so much from a direct technology perspective, but more from bringing into the public’s mind that the financial services sector can be disrupted / affected in its own core. 
Note 2: API banking has been at the center of what we are building at Anthemis and a personal passion of mine: http://tekfin.com/2012/04/10/the-core-of-the-machine-banking-as-a-utility/  http://tekfin.com/2010/08/16/banking-as-a-platform-coming-soon-with-banksimple/

Jack Gavigan answered with this excellent post on a blueprint for a new disruptive bank: http://jackgavigan.com/2014/04/14/disruptive-bank/.

nextbank_platform

 

A system blueprint is a great way to start but is one of the views of a fractal of perspectives that needs to be taken when considering financial services (I highlighted in red what I think is one of the key area). Another important one is the financial view. A full stack financial services startups is, in my view, a balance sheet driven startup. Balance sheet driven startups are a bit of an exception in the world of technology startups. In the past years, a lot has been made to make these less and less driven by balance sheet. From renting infrastructure to outsourcing functionalities to other companies, most tech startups have been driven at first with little focus on balance sheet. However in the world of financial services whether banking or insurance, balance sheet driven startups are the default structure for full stack startups.

That makes them more difficult to be considered from a venture capital perspective:

– First, they require capital, much more than a typical tech startup. Oscar’s minimum capital requirement for operating as a health insurer in the state of New York is USD 45M : http://www.dfs.ny.gov/insurance/exam_rpt/x9475o13.pdf , most/all of which will need to be kept aside. That’s a $45M raise just for the right to play. Additional funds will be required for development, marketing, …

– Second, they are very difficult to grow hockey stick. Think of balance sheet driven financial services startups as the weird cousin of multi-sided marketplaces startups. Taking the example of a new bank, for every new customer that will subscribe and deposit, a matching capital will need to be added following Basel III or another local capital requirement rule, invested in secure products. In parallel, you will want to deploy your customers’ deposits in money-making investments with risk profiles compatible with your capital requirements. Either you run your own lending / investment business which adds further complexity or you look for partners to deploy. Low risk with relatively good returns investments are chased by investors and your new bank is a small fish in that pond. All of this contributes to make growth more difficult than in a typical startup.

Even for a simpler version of balance sheet driven startups, say a lender with little/no prudential ratio, every growth in customers will need to be matched with an increase in available capital. Kabbage debt raise is a good example of that: ~$53M raised in equity for ~$345M raised in debt.

So why are full stack financial services startups interesting?:

– From an operational point of view, these activities are enormously inefficient in existing banks. The software they are using (Core Banking Software) is old, batch based and difficult to replace – understandably, once you have built a full balance sheet, something that can affect its management is high risk. Anything build on top of this software base is affected, from your customer front end to your risk management software to your lending activities. This leads to more operational margins being taken to ensure you are operating within regulation. A new player will have tremendous opportunities using the flexibility that current software allows. I am playing our book here (Anthemis) but Fidor Bank‘s ability to connect to P2P lending platforms, virtual currency exchanges or to manage multicurrency /commodity accounts is a good example. This is an incredible opportunity space.

– From a business point of view, once you are past the more difficult early stage balance sheet growth phase, you have built a resilient, flexible company. Flexible is not an adjective often used for banks, but with the right infrastructure and API layers I think modern banks will have the opportunity to open themselves to many business models. Built in-house or in partnership with others. This is also the case in terms of their capability to deploy assets. Financial products, liquidity providers, exchanges are evolving at a rapid pace. New platforms appear to access private companies equities, alternative debts (P2P but also factoring, data driven SMB debt). Non banks are becoming investors as well, investing in their own supply chain to guarantee its performance. And these platforms are becoming more and more digital, creating new opportunities for a bank to connect and invest.

Note 3: This is also where the evolution around contracts in the blockchain such as Ethereum, or distributed open ledger such as Ripple (which recently partnered with Fidor Bank) are really important. Making transactions fully electronic and real-time has massive implications for banks in terms of their investments as well as their risk monitoring.

There are a lot of additional perspectives to consider and I will gladly take additional insights, critics, comments. However if you are working on building a full stack financial services startups, whether in banking or insurance, I am really interested in talking with you. There are very few now but I am betting we will see more and more people try in the coming years.

Disrupting Insurance: The Other Financial Services Opportunity

In the last years, most of the focus on innovation in financial services has been, it seems, on banking (investing and lending) and payment. Comparatively, fewer startups have been addressing the insurance space. This is about to change and the opportunity space is amazing. To give a few numbers, non-life insurance market world-wide in 2011 was estimated at $1,877.2 billions. The global life insurance market had total gross written premiums of $2,464.2 billion the same year.

As banks, insurance companies are a balance sheet driven business, more specifically a float driven business. In the past 20 years, arguably the investment side of the insurance business has seen the most innovation. New financial products have been created  (not to the most benefit in some cases – AIG and MBS for example), access to markets have become more global and cheaper.

However on the distribution and actuarial front not much disruption has happened, as highlighted by IBM in its Insurance in 2020 report:

Changes in value chain automation, data management, and the use of online mechanisms made over the course of the last several decades were at the tail end of larger technological or societal changes and were directed towards improving existing processes and mechanisms.

This is about to change, and as most digital driven disruption, it is start with the distribution model. Now, insurance distribution has important variations by country but overall the industry distribution model has been built around agents and brokers, a physical distribution network.

Distributors

What has started happening in the last years to bank branches is happening and will happen to the insurance agent networks. As more and more people spend their life in a digital world and value convenience there over other factors, digital distribution increases. More than with banks, it creates a complex competition dynamic for insurers as a direct digital distribution is at cross against their agent network. A classic case of Innovator’s dilemma. Some insurance companies have responded by branding their direct offer differently and playing with their pricing strategy to ensure their agents will not too negatively affected but in my view, this strategy will not last long as from a customer behaviour perspective, more business will shift online over the next years.

From a startup perspective, this creates an opportunity space in online brokerage, there is a small step from online distribution to online comparison and this type of void is filled quickly. In the UK, comparison websites such as MoneySupermarket have been quick to jump on the bandwagon (or in Switzerland Comparis). Google has seen an opportunity as well and is promoting its own comparison engine in that space. In the US, websites such as CoverPath offer the same type of service for more complex product like term life, and their online experience is much better than any of the existing competitors.

One of the unanswered question is that space is up to which level of complexity can a customer be self-directed? In an insurance world, there is a conflict between the requirements of the underwriting algorithm for being able to price the premium and the optimal UX for users to be able to obtain a product. A term life insurance product for example, cannot be properly priced with just a few field. Also, what if a startup could have its own data sources for underwriting insurance?

The distribution model is also bound to be changed by players that provide value added services out of which insurance is just a component. Trov (an Anthemis investment) is a good example of this new type of potential distribution platforms for insurers. Trov’s objective is to unlock the value of all your physical assets by making them digital. Protection on stuff you deeply care about (as in insurance) is a phenomenal value proposition but creating liquidity can be equally as important. From a customer perspective, there is more value add in a platform that can cater to all their needs than in an industry specific one. Insurer will need let a little go in the direct client relationship to leverage these customer oriented platforms.

Hybrid Model

Insurance is a data and calculation model, ie amassing enough data on events to calculate and price risk. This is an important barrier to entry as the historical data of insurers is impossible to reproduce (you have to bear the risk to get the data). However, from a technical perspective, the cost of acquiring, storing, managing and calculating on data has become lower and lower. The technical moot of the insurance business is disappearing or even reversing (considering their existing technical architecture is expensive to maintain vs new technical solutions).

Take the example of MetroMile based in Portland. As telematics (for end customers) is a new field for the industry, there is much less historical data advantage. Whoever will amass the most data on instant driving behaviour and use it for actuarial purpose will have a strong advantage.

At the same time, insurance pricing is based on average, which means if you are on the low-end of an average, the economic deal you are getting is pretty bad. A person who drives his car on low mileage is probably paying too much insurance. The solution so far has been to reduce coverage, but the reduced risk of low mileage for the insurer does not mean a reduced risk for the driver in terms of his protection. Telematics devices such as Metromile’s, by tracking actual miles driven, allows for more flexible contracts with lower overall premiums but high coverage.

For a new player, a way to enter this field is to propose first a new insurance distribution models, like insurance by the mile. However, my assumption is that the long-term objective from Metromile is to record enough driving behaviour information to be able to underwrite motor insurance based on driving criteria as well as nudge behaviours to reduce the overall risk of Metromile drivers.

Now Metromile is not an insurance carrier and the actual insurance is provided by National General Insurance Company. It is unclear how much the underwriting model is controlled by Metromile or their partner but I am assuming Metromile had input into it. I am expecting to see (and interested to discuss with) more companies adopting this approach. A combination of online customer acquisition and proprietary data sources / data relationships on top of an efficient balance sheet is an interesting business combination and is less capital intensive than a full new carrier. 

A new carrier? Alternative to carriers?

Creating a new insurer is expensive. If we take the example of Oscar, a New York based Health Insurance firm. Their minimal capital requirement for operating was around USD 45M (http://www.dfs.ny.gov/insurance/exam_rpt/x9475o13.pdf). As is the case with most balance sheet driven business, hypergrowth is not an easy possibility as capital requirements keep increase with more customers (ie the better you perform, the more your need to raise capital, from a requirement perspective). Not impossible but it takes a certain type of investors to fund this type of startups, from a capital deployed to return ratio, other businesses may appear more interesting.

Another interesting possibility is in peer to peer insurance. Peer to peer insurance is very much different from peer to peer lending. Peer to Peer lending is about increase your investment returns by cutting on intermediary fees, while managing risk exposure through diversification. Peer to Peer insurance is about reducing your cost of insurance by co-managing your own pool of money and claims. Peer to peer lending is about managing several one time low implication relationships (loan agreements), peer to peer insurance is about managing one high implication relationship with many people. Failure in peer to peer lending is on an individual basis, failure on peer to peer insurance is on global basis.

While still very much far fetched, the algorithmic approach to peer to peer insurance is really interesting. Climate Corporation (previously an Anthemis Investment) has proven that with automated data feeds, claim management can be made into a seamless experience: a weather event would be registered by the nearest station and the claim would be reimbursed automatically. Algorithmic and programmable ownership ledger, such as Ripple and Ethereum set an interesting groundwork for expending this to other types of insurance (say your Iphone sensor register a bad fall and trigger an automatic claim reimbursement). Peercover was an interesting player in that space (but has since pivoted).

Other models?

Last, an interesting number of players have emerged in the “behaviour nudging” space. From wearables à la Up to Sherpaa, several companies are tackling the gap between historical health behaviour and digital life. An interesting space indeed.

Smart Commerce will only succeed with Smart Banking

Bill Ready had a great post at PandoDaily on the growing importance of smart mobile driven commerce. In my view this is one side of the equation of the future of commerce, the other side being the creation of smart banking services.

Using Bill’s example: I book a flight to San Francisco, my financial service app warns me that my travel budget will most likely be exceeded this month and has pushed back the budget allocation for new electronics by 1 month. My extra rental revenue from Airbnb should help cover cash flow needs for the month so that new MacBook is still a go. I take an Uber upon landing and check a restaurant for the group. Bills is split between us automatically, referring back to our positions in a global distributed ledger including interests owed (built on the Bitcoin protocol foundation). After the lunch, I check recent communications from my Angellist portfolio. My portfolio allocation to startups is split across various syndicates. Through tasks performed to help these startups, I have also earned additional exposure to a few. A good way to not only increase my upside potential but build my skills and experience.

Is this future far away? With the increase in sensors in mobile, shops, objects and the digitisation of money, the capabilities of financial services are changing quickly. A lot of this effort in calculation is currently focused on market activities (high frequency trading being probably the most discussed) but I am convinced we will see the same push start in consumer finance. The current push to integrate more data sources, including social data sources, in online lending is a good example.

Mobile is becoming an integral part of people’s financial life. Starbucks success with its mobile app proves that people, when given a good use case for mobile (increase in convenience and additional services) are more than ready to use their mobile. Payments on mobile are increasing at an amazing pace: Paypal’s total payment volume increased to $27 billions in 2013. But the increase in payments on mobile also highlights the gap between how easy it has become to spend online and how little has been done in helping people manage their spending.

Cash was the base budget management tool for a lot of people. A wallet is probably one of the best UX for money. Visually checking how much is left in a wallet is one of the most used and simple budget management tool. The rise of prepaid card with underbanked and neobanked is in some ways following the same trend, as closed cards, especially with easy to access mobile balance reminders, are the modern equivalent of counting the number of $10 left.

However, as highlighted above, as more and more of our purchase experience will not only shift to mobile online or offline but also to 1-click / no click payment, having a single credit card or debit card as a default payment mean can potentially increase the tensions in budget management and understanding of personal finance. In a world where payment is bound to disappear, the pressure for financial understanding will increase further.This is a vast opportunity for financial services startups.

The same technology that let applications recommend you what to purchase, how good a restaurant is or how to manage a fleet of cars / pricing to match demand can be used to optimize your personal financial management. As the age of mobile concierge is coming, the age of mobile financial advisors is coming as well. I am biased, professionally and personally on Simple but they are, in my view, a good example. Smart balance and goals are the beginning of a payment experience based around managing and optimising personal finance. And while this effort begins with spending, it will soon integrate as well with saving and borrowing. Paying overdraft fees with a saving account or other type of liquid assets is an incoherence in a time where a simple excel spreadsheet can compare borrowing and savings rates.

If we push this idea a little further, there is a potential for algorithmic finance becoming even more intelligent. We are on the verge of being able to record how people feel at any point in time. What about a financial algorithm that would help people maximize their happiness over time? What about a mobile agent that prevents you from buying stuff at checkout by automatically reminding of the other activities you would like to do that will be more rewarding?

The battle for the POS is the battle for digitization of physical retail

The POS market has recently seen interesting transactions and announcements:

First Data acquired Clover end of2013 and launched its Clover Point of Sales in 2014. First Data Quietly Buys Payments Startup Clover; Launches Point Of Sale Platform For Merchants

Amazon acquired GoPago’s asset and team. Amazon Bought GoPago’s Mobile Payment Tech And Product/Engineering Team, DoubleBeam Bought The POS Business


Trends in retail and their impact for the POS.

In a world of horizontal e-commerce behemoths such as Amazon or vertical specialized online stores such as Fab, the pressure on physical retail is high whether it is through showrooming or easier commerce. Reinventing retail around usage and experience is a possible solution. The percentage of non commercial square footage in Apple stores is telling.

Because the payment component will disappear from the customer’s experience (the absence of checkout registers for the last years in Apple stores is telling), the Point of Sale is becoming the customer interaction interface within stores. The focus on personal names (introduced notably by Square) is key in this evolution. Recognizing people by their first name is a great feature for IRL CRM.

Impact of the reorganization of hardware and softare for the POS

The Point of Sale market is following the reorganization of hardware and software that is seen across other industries. Software wins over hardware. The mobile phones and tablets are at the core of the hardware experience (run the applications, connected). The customer’s mobile phone will become the main interaction screen (I tend to be skeptical of additional tablet screens in store, customers already spend most of their time glued to their own screen).

iBeacon in an Apple store

Physical adds-on, such as Bluetooth beacons (Apple, Paypal, Estimotes) provides the ultra-localized experience to interact with the products themselves, but should disappear when products become connected themselves

Market dynamics

There has been a flurry of POS and wallet startups following Square’s success. However not a lot of them have shown as much success. More established players, such as Paypal, getting in the market have not helped.

User acquisition is particularly difficult in B2B markets, especially for small and medium businesses (though signing mainstream chains is another important challenge). This plays a role in the vertical acquisitions we have seen were acquirers/processors have moved to buy Point of Sales startups. Their customer acquisition weight is just too important and their margins are being compressed by rates reduction and competition.

On the other hands, the demands of data enriched services is pushing for more horizontal organizations where connectivity to payment, accounting, global CRM, ecommerce and devices are becoming key. This is where Amazon acquiring POS software could fit. Square’s success as a stand alone company also depends on it.

Where will it start?

We are still very early in this game but there early indications can be found:

In service businesses. They have been facing less competitions than merchants businesses from the online world and, after the Groupon experiment, are looking to build repeat business.

In the expension of Bluetooth LE. It couldbe the first local connectivity technology to reach the masses. Bluetooth LE success might not come from marketing but from recreating value with the customer in enhancing support.

In online businesses going offline. New stores opened by brands such as Bonobo, Warby Parker are interesting to follow. But more importantly Apple is leading the way here, the Apple Store App is probably the most undervalued example of the new Point of Sale paradigm.

As the POS is moving from accepting payments, to accepting wallets, to enhancing the customer relation, there is plenty of opportunities for startups to help reinvent retail in the digital world.

Understanding a Bitcoin advocate

After an eventful last year, 2014 is starting with more debate and conversations around Bitcoin.

Bitcoin 2013

It is often said that understanding Bitcoin is too technical for the average user (and at core it is, for a good summary of Bitcoin, this things the following is one of my favorite posts : http://brokenlibrarian.org/bitcoin/ ), but understanding Bitcoin advocates might be an easier tasks. In my view they split among 3 categories:

> The Libertarian: he is most likely an early Bitcoin supporter. As mentioned by the ECB, his economic background comes from the Austrian school , they see in Bitcoin a competitive currency with the main advantage of not being linked to any State. Often a goldbug as well, he considers  the limit of 21 million (or so) Bitcoins an important advantage as well. The deflationary nature of Bitcoin is an asset.

How to spot him: look for mentions of Hayek, fiat currency, algorithmic currency

> The Speculator: he bought Bitcoin at X and now it is at Y. Will share any rumours mentioning a high Bitcoin price. Bitcoin the new currency in China: share. Bitcoin coming from Alpha Centauri (thanks @azeem): share. He is a Libertarian when needed and a Protocolist as well.

How to spot him: look for retweets of Bitcoin going to $1M posts

> The Protocolist: often a techie, he sees Bitcoin as the equivalent of the internet protocol for payment or even further as a distributed ledger for all contractual agreement between a number of parties. Notably, the much lower transaction fee on the Bitcoin network appears as a great alternative to the 2.x% of credit card networks.

How  to spot him: look for mentions of interchange, remittance and http for payment.

In truth the distinction is not that clear and most people interested in Bitcoin are a blend of various proportions of these different types (and most likely different at different times).

There is also a Fourth category, one that does not have so much public exposure and that would be interesting to know more about:

> The Consumer: I am talking about the Chinese investor that use Bitcoin for Tax/Currency evasion. The underground population that transacts with Bitcoin. But also the buyer on Overstock.com, Zynga or other more mainstream ecommerce sites. Maybe the best way to start is to look for technical services providers such as hosting, etc. Because it is difficult to isolate commerce from other flows, the actual volume is tough to estimate at the moment. If you have bought (as more than an experiment) services and products using Bitcoin, I would love to hear your feedback.

Welcome to Banks’ new competitors

Founded in 2006 by a single repeat entrepreneur. IPOed the next year. Raised a total of USD 232 M, including a last round in 2013 of USD 150M that puts it firmly in the dollar billion valuation club (aka the unicorn club) …… If you have not figured out which company it is, I will just add 3 words:

– All Blacks

– Sailing

– The Lord of the Rings

If you still have no figured out which company it is or why I am starting to speak about Xero on a financial services / banking blog, then you are pretty much in the same position as most Banks.

Xero

 

The same can be said of Amazon. Founded in 1995 by a former Wall Street Hedge Funder, starting as on online bookstore and now the biggest ecommerce seller and platform online.

How Big is Amazon

 

What do these two companies have in common? They have both started to distribute financial services products via their platform, whether it being working capital loans on stocks or data on small and medium business financial performance.

One way to look at Banking is that it is a data arbitrage business, whether by exclusivity on data itself or control over the aggregated value of data. That data to simplify enormously is used to arbitrage interest rates between deposit and credit. As software is hacking the world, the ownership of financial data is moving from the existing financial players to the new global platforms. 

Interestingly, businesses are more and more leveraging several of these platforms at the same time. For example, online retailers may use both Amazon and Ebay to distribute their products or local competitors. Several online accounting platforms are competing for medium and small businesses, with the aggregated accounting data across companies distributed across them.

Therefore  lot of the early competitive pressure we are seeing is whether each of these platforms have a critical size (and the business appetite) to be an exclusive channel for financial services? Or whether innovative cross platforms financial services providers, such as Kabbage or Fundbox will prove that most of the value lies in cross platform companies? One thing is sure, the market for non-bank financial data, whether productized internally or distributed via APIs, will boom on the next years. 

 

Braintree takes Venmo Touch international with AMEX > what it means for credit

With Simple and now AMEX on board as preferred marketing partners in the US and UK, expect Braintree to follow a similar playbook in future markets. There also could be some significant competition in these initial two markets from other payment card companies (Visa, Mastercard, Discover, etc.) seeking to get their cards installed into Venmo’s valuable default payment card real estate.

via One small step for Braintree, one large step for mobile payments: Braintree takes Venmo Touch international | PandoDaily.

Spot on, multiple card selection on mobile within 1 click payments / facilitated payment (à la Uber) is not a UX problem to solve. It just won’t happen. 

This is why it is so smart from Simple (disclosure, Anthemis is an investor) and AMEX to partner with Braintree to become the default card. But the implications are much more important. With a single default card, the position of credit card is put at risk. Credit Cards are tools made for a card selection environment, with people doing arbitrage while looking at their wallet between debit, credit, credit limits and points. This behaviour is not possible in a 1 click environment, even less in a seamless environment.

Additionally, studies show Gen Y is moving away from credit cards (I am definitely part of that population). According to a recent FICO study (http://www.learnvest.com/2013/06/gen-y-shuns-credit-cards/). “16% of people aged 18 to 29 had no credit cards in 2012, up from 9% in 2005. As a result of lower credit usage, Generation Y’s average outstanding credit card debt was $2,087 last year, down 32% from a $3,073 average for young people in 2007.” According to Frederic Huynh at FICO “it stands to reason that the Great Recession has influenced, to a certain degree, consumer credit behavior as well.”

There is also pressure to move some or all of payments off the card network to direct debit. A potential in Paypal’s acquisition of Braintree is for Paypal to export its arbitrage business model to Braintree. And Dwolla’s effort in building an alternate network is the ultimate push in the direction of direct debit.

This is a great opportunity for credit innovation. What we are seeing in B2B online lending with Kabbage, Paypal and Amazon will very soon spill over in the consumer world. B2B is the low hanging fruit as the market places (Ebay, Amazon), einvoicing networks (Tradeshift), online accounting tools (Xero) act as booth data providers to support credit risk scoring and aggregators to improve cost of origination. But Consumer Credit will be next and the mobile payment providers have an amazing opportunity to act as the future credit platforms. New Banks, such as Simple will also be the winners of this world. The card is only a tool for payment, credit is better managed within the budgeting, goal setting, savings experience of a smart bank.

Credit Card is an obfuscation, the credit and the payment mean are two disconnected products, the digital unbundling machine will soon make it a reality.

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