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.

Tradeshift’s Christian Lanng on Capital8, Financing, and Supplier Adoption « Spend Matters

Finally, the last parameter is funding cost, for supplier financing. This is important because Tradeshift already has very advanced semantic analyses of content (this is in fact how we build CloudScan). We use this to give CapitalAid and other financing parties access to a proprietary risk model to gauge factoring risk.

A lot of material is being considered in this model, including all past transactional data. This has led us to a model that has low funding costs with much less than 3% bad debt. We can guarantee a pretty high yield, and the rates of return are in the range where hedge funds are buying into the model.

via Tradeshift’s Christian Lanng on Capital8, Financing, and Supplier Adoption « Spend Matters.

< Interesting that it is Tradeshift that appears to supply the risk model instead of each financing company? Or is it because of Capital8 close relationship with Tradeshift? In a sense it could be a model that is close to what Lending Club has put in place with its investment arm. Standard grading and the level of exposure is defined by the portfolio strategy.

Payment startups: thoughts on acquisition cost, payment processing cost and marketing services

With the cambrian explosion of payment startups, clones tackling mobile, NFC, QR codes, cryptography etc. it is quite a confusing market, especially when looking for the startups and companies that will shape the market. One possible framework to look at payment startups is to focus on the 2 main competitive  forces in the market in terms of merchant services.

– Acquisition cost

Because in our current card dominated world there is a relative equilibrium on the payment processing costs (crumbling under government push?), the main (only(?)) way to compete is to lower acquisition costs. In my view any price premium will be driven down by market forces (relative to the risk component included). In this perspective the main trend in physical and digital world is self service. API driven payment companies (Braintree, Stripe for example) have lowered the acquisition cost of merchants by reducing significantly integration costs and in Stripe cases, documentation on the merchant side by accepting more risk internally.

The existing sales, software integrator model has difficulties competing with these new players. In a typical case of disruptive innovation use case, they are picking up first the lower part of the market, high risk merchants and startups. But they are doing it at a pivotal moment.

It is important to look at there merchant client base in the perspective of the ongoing digital transformation of all industries. In fact their merchant base needs to be looked at as a venture portfolio. Only a couple of winners make most of the gain. But if you are processing payments, it is quite phenomenal to have client with a 10% weekly growth rate. Paul Graham has a very good post on what growth means in the startup world (http://www.paulgraham.com/growth.html). Think what Airbnb meant to Braintree’s growth. There is also some network effect as winner attract winners and good reputation in the startup world matter a lot as referral. (note: I am being somewhat of an absolutist here, user support has also been one of Braintree’s forte).

 

Screen Shot 2013-07-18 at 18.46.15

 

 

–  Payment processing cost

This is the red herring of the payment world. In that perspective startups like Dwolla, Technology protocols such as Bitcoin, Supermerchants partnerships such as MCX are the same. They all target  much lower cost of transaction vs the credit card networks, in most cases a few cents vs a fixed percentage.

This is different from arbitrage business model strategies such as Paypal’s where you find a way to reduce the cost of some of your transactions which allows you: to have little/no margins on others, increase your overall margin.

However so far, the value proposition of lower transaction costs has not proven enough for massive merchants acquisition. Obviously this is because changing the rails of payment means changing the consumer behaviour at point of sales, getting him a new wallet or payment mean to complete the transaction. This is a long haul process .. and that does not prevent to have a successful merchant acquisition strategy beyond cheaper processing. Additionally, moving risk around does not make for a cheaper proposition overall. No chargeback  does not mean an insurance cost component will not be added in some forms to a transaction. 

I think for the rail changing players, a combination with the first strategy will be necessary to grow. Grow on the existing rails and switch the population to new rails, while committing to passing the price difference down to the merchant. Or focus on a market where cards have much less penetration.

What about marketing tools, coupons etc ? Aren’t they value ad services for the merchants? 

So far we have not seen much success on this front and I think this is because using transactional data has put too much emphasis on discounts, coupons, instant buy strategies. Mobile, connected devices will not make people more discount, coupons push marketing addicts than television and comfy living room has made QVC shopping the most popular way to shop. Impulse buying, coupons are an important part of advertising/marketing but is not the solution to everything. Especially when you have Amazon in the picture. In the end most merchants prefer to sell at full price vs discounted price. 

On the same idea, selling CRM tool to small merchants is somewhat of a contradiction. Most small shops, if they are successful don’t need to know who their best customers are, they already do. They know what they buy, like etc. Even a giant like Starbucks is successful at it, any morning regulars is known by name and type of coffee. There is a potential for marginal improvement (still a good thing) but no revolution /”I cant wait to get this” factor.

However they are other services that can be tagged to payment and in my view bring more value to merchants (think Square business dashboard as a start)…

The payment startup market is crowded and only  a few will survive. The coolness factor of mobile, code will not be enough to succeed.  On the startup front, it seems to me the merchants will make the winners,  in the same way as a few startups tend to make a whole portfolio successful.

 

 

 

Google I/O payment announcements: is a revolution with no insurgency possible?

Google’s megafest was happening last week, with big announcement for Hangout, Google +, Android and Search / Maps. Among these were a couple of announcements related to Payments (but no major push from Google since Wallet 2.0 last year  and no Google Card):

– The headline-grabbing announcement – send money via email.

Wow, dollar button in Gmail, massively sexy and headline worthy …..

Pay_by_Gmail

… with the main issue that, in my view, P2P payments do not drive behaviour changes. Various startups, established players (Obopay, ClearXchange, Popmoney etc..) have tried and not succeeded. I am betting Barclays Pingit has not found major traction with this use case. The main reason is not implementation quality. It’s just that people don’t do that many P2P transactions relative to Commerce transactions and are much less attached to those. Frequency is a major driver in behaviour changes (as with contactless cards) people just forget they have it if they don’t use it enough. Also this is currently limited to the US only and while free with a linked bank account or prepaid Google card, it will cost you 2.9% (minimum 0.30$) from a debit or credit card (note: Google is not willing to take a loss on these non-commerce transactions …)

Also, while I am sure Google is focused on this, this could become a massive risk challenge with compromised Gmail accounts. Extending it beyond US only (it could be really powerful in remittance markets) will require much more work

My prediction: in this current form this will have limited traction and remain relatively small. 

The more interesting announcement was in my view Google Instant Buy:

Per Google, 97% of mobile shoppers abandon their cart. The solution is broadly known, with a central point for registering Id, address and payment means. Google’s solution appears quite complex:

– It works on the existing credit card rails. In more details, it interfaces a virtualised Mastercard debit card with the users payment means to connect with the merchant processor as a Card Not Present Transaction. As a consequence, Google is taking a loss on every transactions made through the system.

– It still requires merchant / app creators on boarding. While it runs before the payment processor, it still requires implementation on the merchant side (though Google claims this is an easy implementation).

There are several issue with this solution:

– It leverages Android to help on adoption but this may not be as much of a strength position as it looks. Every app with a strong enough sign in infrastructure could  provide the same simplicity or has done so. Amazon is the main example. Airbnb, while part of the Google Wallet launch, uses Venmo Touch (from their payment provider Braintree) on the iPhone. iOS is just the start if we are to believe this: https://www.braintreepayments.com/company/careers/new-york-city/android-engineer-venmo-touch-venmo-p2p. Paypal can do this as well.

– Instant Buy may become major on the Android platform, for new mobile only services, but will face strong competition from other devices platforms and cross devices platforms (Amazon, Ebay etc…). For a strong enough merchant, driving customers through their payment system while not disclosing additional data to Google will become a major focus. It’s no surprise that Google Request full line items details in the Instant Buy implementation.

“The full wallet request specifies purchase details. You should include information such as the line items in the user’s shopping cart, purchase total, and a few other parameters. Google recommends that you include the description field so that you can use it in the receipt to describe purchases made with Google Wallet. This parameter describes the backing instrument with the last four numbers, such as “VISA-1234 via Google Wallet”.”

– Google is losing money on every transactions (on difference between cost of customer card and their rate of 160 bps), that should be compensated via advertising. This is not new for Google in terms of Business model but the difference here is they have no control over the costs. In every other services, their infrastructure cost structurally trends down (Moore’s law, etc..) but payment is one of the few area where this has not happened. Nothing in their current implementation shows a focus on addressing this problem (they are limited to Mastercard CNP). They still need to convince merchants to use Instant Buy (vs pushing a standard for checkout information), I hope they can leverage it in some ways to propose new payment rails.

My prediction: this will face strong competition even on the Android platform and will have difficulties expanding beyond.

Taken at first view, these two Google I/O announcements show a great potential … but appear limited, in some was because they are constrained by the payment platforms they are built on. Google’s “revolution” is a derivative on existing rails; I wish they would show a more insurgent approach and build to improve / replace those. They need to convince merchants to onboard Google Wallet, a radical approach could help was well.

Note: this post is indebted to Tom Noyes twitter exchange and blog post: http://tomnoyes.wordpress.com/2013/05/16/google-in-payments-why-yesterday-was-big-news/

Shadow banking: a platform for innovative financial services

Shadow banking has become a focus of media in the last years, with many headlines on its growing size, its supposed incomprehensible structure and how it was superseding the existing banking system . This view has often been biased toward rejection and misunderstanding. After all, one can argue an independent hedge fund has a better aligned risk-reward structure vs a tax payer propped up bank. (yes, this is an extremely pro-biased view, yes there is a question of size and systemic / structural impact)

Interestingly, the development of shadow banking (broadly) is one of the fundamentals in the development of innovative financial services. A very good example is LendingClub in the US. Structurally, Lending Club is an important securitisation company in the US. Each of the p2p loan is an unsecured obligation from LendingClub with the lenders being the pool of investors. Structurally, it fits very closely the definition of shadow banking.

shadow-banking

Other models are being explored, receivables based lending companies are structured using multi compartiments funds, crowdfunding platforms use multiple limited partnerships to simplify the impact of many shareholders on startups (see Fundersclub)

The development of prepaid products as a replacement of banking products can also be seen in the same light. In Europe, for example, the emoney licence is one of the leading platform for innovative financial services. The recent announcement of the Mangopay platform by Leetchi, on the back of of their acquisition of an emoney licence in Luxembourg proves it. In no way this would have been possible if they had pursued a full banking licence.

What is next? There is a risk that the regulator (under various pressure) will want to further restrict these structures (in the name of protecting the consumer). We may see this happening in the US where bank charters have become harder to acquire (Acquiring a bank charter is way harder in most European countries – ask Metrobank)

On the surface, the regulators might be satisfied with this, because the fewer the banks, the more healthy the remaining financial institutions. But this is a fallacy of epic proportions. The lack of bank charters is creating a myopic ecosystem, whereby existing banks — whether they are qualified or not — have an ever-reducing impetus to innovative or improve their service to  customers. Why regulators would want that is beyond me.

I think it is in the best interest of the market if regulators where trying to open the bank market, making it easier to acquire a bank charter (even if limited in some forms in the beginning). Its already fascinating to see the services born out of shadow banking structure, it would be even more interesting how entrepreneurs would leverage a bank charter.

 

 

Bank hacking: power to the financial services makers

With the Maker Faire movement growing over the last few years, Hardware hacking has finally been making the headlines. It is one of the root causes of the recent startup hardware trends that are also fueled by platforms such as Kickstarter. What is interesting to me is that independent, smart  and techno savy people put the same effort in building hacks around financial services to make them fit. It’s not always pretty, but it gives strong indication of where things could be going.

Hacking hardware. For people living in a card contactless environment, getting to one platform via mobile can’t happen soon enough. The solution? Cutting and soldering.

From this post on RFID transplantation in Singapore.

 

Rooting Android to support more NFC scenarios. Cherian Abraham has an excellent post on the limitation of NFC in native Android (linked to a controlled Secure Element) and how a rooted Android Environment can help make NFC more open for payment for example with SimplyTapp

SimplyTapp appealed to an early segment of Android enthusiasts who abhorred having been told as to what functionality they are allowed to enable on their phones – by Google, Carriers or anyone else. And to any who dared to root an NFC phone (supported by CyanogenMod) and install the Cyanogenmod firmware, they were rewarded by being able to use both SimplyTapp as well as GoogleWallet to pay via NFC – the former where credentials were stored on the cloud and the latter – within the embedded SE.

Scrapping Personal Banking Data. Truth is, it’s not easy to acces your own banking data. Most of the bank websites have an average to bad UI, non-existing archiving functionalities (being upgraded to 9 months archive is considered amazing) and API access does not exist in 99% of the cases. If you want to automate movements between your bank accounts, get your bank account balanced pushed by email to you every morning then start by building your own scraper: https://github.com/tubaman/bankscrape . You can also find wrappers to access swedish banks: https://github.com/klr/bank and many more.

Bank account simulationhttps://github.com/search?p=2&q=bank+account+management&ref=searchresults&type=Repositories I was looking for more of these examples and I am sure they exist as this is an area where I expect an increase in interesting work. Accounts management is currently a very manual activity and there is no reasons it will not become automated in the future. 

In my view the financial services industry should keep a close eye on the fringe of banking personal hacking. These are early signs and indicators of major trends and innovative services. Hacking challenges, idea crowdsourcing, clients on-boarding are essential tools for the future bank.

 

 

2013 – First Notes

2013 starts very strong and time is already a precious resource. Some notes on what I am interested in:

– Redefinition of Employment: 
Crisis may recede, but long term changes to employment structure will not. Rise of the Robot Economy.
http://ftalphaville.ft.com/2012/12/10/1303512/the-robot-econ…
Information employment less stable (as detrimental to knowledge expansion)

Possible impacts: Underwriting, Lending Structure

Robots distrupt music (courtesy of parkparadigm)

– Redefinition of Ownership: 
As employment is less stable, alternative source of revenue in leveraging existing assets. Compounded with diminution of Marketplace costs. Implies rise of the Sharing Economy / Collaborative Consumption:

http://blogs.hbr.org/cs/2013/01/from_zipcar_to_the_sharing_e…

Possible impacts: Underwriting, Lending Structure, Redefinition of Merchants and their Financial Services, Increase importance of Insurance

– Redefinition of Commerce
Physical Goods becoming Digital (books as best example), Distribution of remaining Physical Goods becoming mostly Digital. Physical distribution frictions reduced for Advice to compete.

Death of the existing physical retail structure:http://qz.com/39035/the-largest-retailers-in-the-us-do-not-l…

Possible impacts: Acquiring and POS systems, Risk Management, Payment Pricing Structure, Digital Pricing, Real Estate Financing, Currencies

– Redefinition of Production
3D printing, direct sourcing in Asia, lowered production costs (?). Will we see same change in hardware startups as in digital startups?

http://www.wired.com/business/2012/12/hardware-funding/

Possible impacts: Alternative forms of financing, Embedding of id and payments, International Payments and FX, Escrow services

– Rise of Alternative currencies
Gap between existing currencies, underlying payment/compensation systems and digital age potential is becoming too important to remain for a long time. While existing and imperfect payment methods are commoditized, alternative currencies will strive on their capacity to challenge existing status quo of imperfect payment.

http://spectrum.ieee.org/tech-talk/telecom/internet/bitcoinc…

Possible impacts: Payment, Merchants, Risk Management, FX, …

Fortune 2.0 – small assets management

I have highlighted in the past several major trends affecting financial services :

– Digitization of transactions, especially receipts from purchases.

– Improvement and democratization of marketplaces, lowering the cost of liquidity on transactions

– Improved leverage of assets from the emergence of collaborative consumption (Airbnb, Getaround)

Private Banking is sometimes offering to their high net worth clients the management of both their financial and non-financial assets. Is a similar approach possible for retail clients?

Continue reading Fortune 2.0 – small assets management

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