Category Archives: Lending

The Core of the Machine – Banking as a Utility

I have been a strong partisan of Banking as a Service and posted several times on the topic on this blog. Recently I have posted more on the shiny outer layers that could be / are created in such a stack but not so much of the core services under it. So it was with interest that I saw @giyom‘s tweet

A banking utility doesn’t buy debts, issue liabilities nor do maturity transformation, it only is a trusted accountant btw borrowers&debtors

It’s an interesting view, a pure banking utility would provide the pipes to connect depositors and borrowers and maintain the accounting trust between the two, whether direct, in a P2P lending type model, or indirect by reporting aggregated assets and loans. @giyom pointed me also to Dan Kaminsky analysis of  Bitcoin: – slide 14 and 15 are interesting in his analysis that supernodes in Bitcoin are effectively banks.

In parallel, a second French bank announced the launch of its API: AXA Banque (Credit Agricole was the first one with CAstore). I had the chance to talk with people there and while the current API is READ only, the mention of WRITE capabilities was not rejected from the outset. A Bank that proposes a READ/WRITE API is in effect giving up on a part of the their customer access and accepting its role as a utility for other services (as I pointed out before, it is something well know in the banking industry)



It seems that from both end of the spectrum, whether its is the  technology enabled P2P or traditional Banking, we are moving toward the creation of banking utilities. But what would be the business model of such players?

On one hand, in the P2P lending example and as specified by giyom, the role of the core provider is track and ensure the relationships between borrowers and lender as well as provide additional services such as transparency in the capacities of the borrowers and loan recovery in the situation of a default. In this system, the trusted core providers would have no leverage nor insurance (as deposit accounts are currently protected). In theory, insurance could be provided by an external provider up to certain amount and based on the lenders selected. The business model of such a platform is fee based.

This is the system adopted by platforms such as Zopa,

On the other hand, in a banking platform world, the bank uses the top layer as a deposits aggregators. It can provide non-interest bearing accounts and base interest bearing accounts the aggregator, as well as transaction facilities to help move money between various accounts. It provides the underlying regulated insurance to the end users. This source of deposits become a part of its core assets mix, which can be leveraged for lending. The same or other providers could be provided these lending facilities, with various rates based on risk etc.. The business model of such a platform is spread based.

This is the system adopted by platforms such as Friendsclear

The distinction made above is not as pure in reality. Zopa, LendingClub etc are using banks to manage cash accounts, payments etc..

I think the total disintermediation for banks is not for now and the two systems will live at the same time. What do you think?


Collaborative consumption and financial services

From The Social Cost of the Loss of Job Stability and Careers

McKinsey had Yankelovich survey the attitudes of young people a decade ago, and even then, the results were pretty disturbing. Yankelovich projected that college graduates would average 11 jobs by the time they were 38 (!), yet found they were demanding of their employers, wanting frequent feedback (as in lots of attention) and quick advancement. But if you are not likely to be around for very long, no one is likely to want to invest in you all that much (McKinsey, which was competing for a narrow slice of supposed “top” talent and not offering Wall Street sized pay opportunities, might have been more inclined to indulge this sort of thing than other employers).

But these rapid moves from job to job, and now a much weaker job market, are producing behaviors that old farts like me find troubling. One is rampant careerism. I’ve run into too many polished people under the age of 35 where the veneer is very thin. It isn’t hard to see the opportunism, the shameless currying of favor, and ruthless calculations of whom to help and whom to kick, including throwing former patrons under the bus when they are no longer useful (I can cite specific examples of the last behavior). The world has always had its Sammy Glicks, but now we seem to be setting out to create them on a mass basis.

While I do not share the idea that this new behaviour is by choice only, the current job instability is probably here to stay.

In the same time, probably not uncorrelated, we are seeing the rise of collaborative consumption:

Collaborative Consumption describes the rapid explosion in traditional sharing, bartering, lending, trading, renting, gifting, and swapping reinvented through network technologies on a scale and in ways never possible before.

WHAT’S MINE IS YOURS from rachel botsman on Vimeo.

Leveraging assets’ idle time makes a great economic sense, especially if incomes are becoming less constant than in the previous career framework.

The impact for financial services is major. If we take the example of the 2 major purchases that require credit : house and car, the current credit score system is based notably on stability of income over time as a way to measure reimbursement capacities. However the current career instability will have a negative impact on lending, making it less easy to access property.

However, if you consider the supplemental income that could be generated over the life time of an asset (House via Airbnb or Car via Getaround), then the decision for lending could be made using another basis than stability of the main source of income. Especially if these assets are built around the possibility of collaborative consumption. Taking the example of a car, Ford could pre-equip cars with the necessary equipment for sharing, allowing a wider population the access to car ownership.

Calculating risk and evaluating value over time is at the core of financial services. Applying those to new behaviours is not innovation, it’s just servicing customers.

Why we need brilliant banks

I have been a strong advocate of disruptive startups in Financial Services on this blog, dismissing some of the banks effort to try and move as quickly as more nimble competitors. But in all respect, for these innovative startups to launch their services, we need brilliant established banks and payments players. That is why I was surprised to read Finextra’s post Citi slaps down Bank 2.0 rivals in Innotribe face-off.

Banking is, as it should be, a highly regulated industry. After all, its all about money:

It’s a crime
Share it fairly
But don’t take a slice of my pie
So they say
Is the root of all evil today

More than banking only , its Financial Services that need to be regulated, for the best interest of all parties (and no the bankers are not the most important one). There is no better example than seeing the young UK P2P lending industry calling for regulation on their activities and proposing a self regulating framework  while waiting for the regulator to define its own. P2P Finance Association

Financial Services, to work in a global way also need a level of coordination only achieved through mature players and global coordination. Swift is a prime example. The Society for Worldwide Interbank Financial Telecommunication, is a cooperative owned by its members. It operates the pipes that allows banks to communicate with each other. The most known feature is probably payment, but other messages types are supported, from buying securities, to informing of the merger of 2 companies. In most of the world (the US being one exception). Swift is the common language of most financial institutions.

These skills (operating in a regulated environment, coordinating with different players) are very important, because without them, in the current environment, there can’t be any BanksimpleWepay or Square. These Financial Services disruptors need a ground of base services (secure holding of funds, ability to communicate with other financial institutions) to propose innovative front-end solutions to their customers. There is no point in reinventing the wheel if you can find satisfactory services with a provider and focus on your core.

But this is where we need brilliant banks / financial institutions. Because what happens when they are not is a total disruptions of their business. The recent post of Kosta Peric, head of Innovation at SWIFT, comparing bank to bank payments and Paypal payments is a prime example: Paypal wins easily on the transfer of small amounts between countries.

It’s difficult, for some part of the financial services industry to realize that a winning strategy for them would be to become highly qualified service providers, top notch commodities. That there is a play in becoming the efficient platform of front end services, to be more like a water service company for a major city. I believe (or assume) that is what Citi has in mind when they announced the release of their B2B API:

If banks want to enhance their own brands they need to scale. And the best way to do that is to open up application programming interfaces (APIs).“Banks need to harness the power of the developers out there,” says Citicorp’s Benjamin. 


Disclaimer: My employer Anthemis is an investor in Banksimple. We have recently invested in an innovative licensed bank in Germany Fidor Bank I am a huge fan of Square.

Social Media relevancy is the new Credit Score

Techcrunch Disrupt just finished and I have to say it was a first class event (from the limited vision of the live feed at least). You can watch all the panels/interviews/announcement over at Techcrunch TV.

One of the panel I was most interested in was the New Mobile Frontiers panel with Laura Chambers (PayPal), Holger Luedorf (Foursquare), Keith Rabois(Square). The all conversation was top notch but one of the most interesting details given by Keith Rabois is how Square is using Yelp and Twitter to validate the existence of their customers.

Note: Square is famous for allowing credit card payment on the Iphone/Ipad with a small free plastic dongle, but what most people don’t realize is that one of Square key aspect is that you can receive those payments without opening a merchant account. There are almost no requirements to open a square account: no need to give years in activities / past years financial details / etc.. As described by Keith Rebois, Square is looking, in part, at helping the ebay vendors of real life. Small businesses that don’t want/don’t need to pass the hurdle of opening a merchant account but would benefit in being able to accept credit card payments.

Because of Square’s specific strategy described above, they need to innovate and one way to reduce their risk is to validate their customers in new ways (see video at 12:10) . It’s a clever strategy because there is a unique alignment on that perspective between Square, and companies such as Twitter and Yelp. For Yelp and Twitter bots/fake reviews are detrimental to the quality of platforms and they are actively implementing strategies to reduce those making it more probable that active users are companies/people with a relevant real-life existence, for Square, how long you have been on the platform, how many reviews you have, how many followers can help them make their underwriting decision (maybe satellite imagery next per Keith Rabois, who did not want to go into too much details on the algorithm) Continue reading Social Media relevancy is the new Credit Score

Is P2P Lending the next frontier for covesting platforms?

An interesting tweet from @giyom is at the origin of this post:

Will reintermediation happen in #P2PLending? i.e. investing in good performing lenders instead of borrowers.less than a minute ago via Tweetie

If we look at what is happening in the investment management sector, perhaps we can extrapolate a possible evolution in P2P Lending.

The development of electronic trading and discount electronic brokers such as E*Trade, have granted a better access to the stock markets. People are now able to trade most products and markets, without having to use a broker, financial advisor, or other intermediary. But trading successfully requires good financial knowledge and time, which most people may not have.

Companies such as Kaching or Covestor, allow investors to follow the investment of “managers” (other investors for Covestor or qualified investment managers for Kaching). A reputation score (performance, followers) helps investors select their managers. A “management fee” is paid to the lead investor for its services. This fee should be less than for a regular mutual fund because most costs outside of management do not apply.

This reintermediation strategy could be applied to P2P lending. For some strategies, finding the right borrower, minimizing write down risks and maximizing return requires as much time and knowledge as investing in stock markets. Following the strategy of a successful lender for a fee could be an interesting offer.

Addendum: as mentioned by Tuomas Talola in the Comments: the basis of such a website exists at where you can review the performance and portfolio of each Prosper Lender. I would be interested to know how Prosper share that information and the rational behind it.

Is it time to challenge Banks’ business model?


BankSimple motto

The crisis has had a profound impact on how people perceive banks. Because they are identified as the root of the crisis and because they have played an extremely negative role during it (mortgage foreclosure, collection, limited credit) there is a strong resentment against banks. This is especially true for retail banking activities which have been recently put under the spotlight for how they handle credit cards, debit cards and fees.


To name of few of the recent weeks highlights:

– The New York Times has a detailed article on how banks are trying to push people into overdraft fees opt-in program

– A video on YouTube of a person who used to work in the collection department of a major bank (BofA) has also gained attention: link to Finextra blog

This resentment has generated some changes in the retail banking industry:

– From the regulator which has passed bills recently that further protect the consumer

– From the bank themselves that are trying to self police as shown by BofA announcement of the suppression of overdraft fees.


However, some new players think this environment allows them to try and challenge existing banks on their core business model:

Virgin Money, for its launch in the UK as a bank has announced that that it has plans to bill a monthly fee to clients and thus wave other fees such as credit cards.

BankSimple , an “under the radar” startup aims at creating a new retail bank that would not charge overdraft, transfer, monthly fees, and minimum balance fees.

– On a side note The Boring Bank of Cambridge (personal shout out for the best bank name) promises to make bank trustworthy again but nothing much is known of its business model so far.


Do you think these challengers have any chances to grab market share with such strong incumbents?

Introduction to Semantic Web’s “Wave Hits Financial Services”

Semantic Web has published a very interesting and detailed blog post on disruptive innovation in Finance listing the main activities of banks (by source of revenue) and the players that may challenge the incumbents.

Here is a spreadsheet summarizing the bank’s activities listed as well as the disruptive innovations and key players.

Link to the companies listed:

I would personally add a fourth category: Wealth Management. I think players such as Mint and Simplifi are opening a new market for wealth management, making it affordable/free for people to have a comprehensive view of their wealth and make informed investment decisions.