Swiss New Finance Conference – Bern 08/23/2012

Time to dust off my German and start learning Swiss-German (not that similar … at all). I have the opportunity to attend the Swiss New Finance Conference which covers the following:

Agenda

A lot of the topics cover funding innovation, notably via Crowdfunding. I am looking forward to learn more from C-Crowd, which as developed a legal crowdfunding solution in Switzerland. Now that they have several projects funded, I am curious to learn more how the companies manage large shareholders base.

I am also interested to learn more from the Open Bank Project. An API standard for bank connection is definitely an integral part of Banking as a Service. Whether individual solutions (such as the one created by Credit Agricole, Axa Bank for example) or standard project such as Open Bank will ultimately succeed is not sure (in my view), but they contribute in pushing this agenda.

Also interesting is the presentation from Pelle Braendgaard. I have followed Pelle on Twitter for a long time ( @PelleB ), if you are interested in innovation in financial services, this is definitely an account to add.

Finally, I am keen to get the latest update from the guys of Shareleap , they are trying to reinvent shareholders’ relations, a rather big and important problem.

Might never know, maybe some of you will be here  (… Bern …. in August …. ) > happy to meet if this is the case!

Underbanked? Not without financial services!

Who are the underbanked in the US? If we refer to Javelin Strategy latest study:

“Comprising an estimated 35 million US adults (or 15% of the US population), underbanked are typically young, ethnically diverse, and more likely to use the “computer in their pocket” (i.e. their mobile phones) to conduct their banking.”

But does that not mean that the services targeting them are less diverse than classic banking services? On the contrary, the bank-less (as personal bank account / most of these services leverage the banking infrastructure in some form) universe of services is exploding!\

- The most know is probably the prepaid card. Greendot is one of the biggest new players in the field. These cards allows people to benefit from modern payment means without having to open a bank account. While there are several fees attached to its use (list of Greendot fees available here) , they can have advantages over a bank account as they don’t allow overdraft and don’t require minimum balance.

63% of the underbanked population has access to broadband internet whereas 68% of underbanked consumers own a mobile phone therefore reaching the underbanked by mobile is ideal. Members of the underbanked population tend to use their mobile phones as a computer with 16% of the underbanked population owning a smartphones which is almost the same rate of all consumers in the U.S. who own a smartphone.

No more Credits? An opportunity for Facebook.

I will not pretend that I had even one tenth of an insight into Facebook decision to finish its Credits program (announced here on their blog: http://developers.facebook.com/blog/post/2012/06/19/introducing-subscriptions-and-local-currency-pricing/). Techcrunch as a review of what this could mean: http://techcrunch.com/2012/06/23/why-facebook-is-folding-on-credits-and-doubling-down-on-payments/ .

In the context of their Karma acquisition, this actually solves one of the issue highlighted in my previous post.

The difficulty in this scenario is that the 30% rate is not compatible with ecommerce. Facebook would need to maintain several different rates depending on the activity done through its platform.

With Credits, Facebook may have limited itself to virtual goods as it had its rate of 30% seemed both as a platform tax as well as an “interchange” type rate for processing payments. It was therefore difficult for it to apply different rates on its currency.

Without Credits and with the new focus on local currencies, Facebook can still apply its 30% rate on the use of its platform for in-Facebook apps while having the opportunity to drive more E-Commerce on its platform for social events. Though the question remains, is is this experience significantly better than the one provided by outside websites leveraging Facebook Graph.

Facebook got Karma for payment & commerce

While covered in the aftermath of the Facebook IPO, I think its acquisition of Karma was slightly hidden behind NASDAQ failures, IPO pricing debate and overall blessing for CNBC’s octobox.

What is Karma?

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On the outside it seems to be a simple and nicely designed gifting app, but looking the UX and what is known of the back end, it could become the platform for much more within Facebook:

1. Deep integration with social graph and events. Even before its acquisition by Facebook, the Karma experience was deeply connected to Facebook, pulling up your social graph details and proposing a list of events for gift situations, from birthdays to change of work, relocation, specific posts. This is information that only Facebook has at scale with respect to social graph, and this has a lot of value since an important portion of commerce is event driven.

2. A smart way of looking at lost shopping carts. When creating a gift on Karma for the first time, there are 2 times when your credit card information will be requested: once before sending the gift – the traditional way for processing payment in ecommerce and a second time when the gift has been opened and accepted by the recipient, meaning when they opened the gift email and input their delivery details. This create a peer pressure on paying for the gift and carries no risk for Karma as they have not sent the actual gift yet. This is very different from payment companies like Klarna which actually take the credit risk of payment made after physical delivery of products.

3. Ecommerce organisation, from order management to delivery. Whether this has much value to work with the necessary scale for Facebook remains to be seen. It is actually not sure in my view that Facebook would like to keep and expend this competency. There is an important gap between being a digital only platform and building the physical capabilities to deliver a real world experience.

4. On the other hand, Facebook is looking at Facebook Credits has an important driver for future revenues. Currently they are only used for virtual goods with a 30 % tax rate taken by Facebook for the use of its credits by developers. A possible opportunity is to expend Facebook Credits to real world goods. Karma ecommerce platform could be an important stepping stone toward that. Credits could work as a closed loop currency on the platform. The difficulty in this scenario is that the 30% rate is not compatible with ecommerce. Facebook would need to maintain several different rates depending on the activity done through its platform.

Facebook has announced that Karma will remain an independent app, like Instagram. But it will not prevent it from leveraging the competencies of its team in creating a mobile social commerce experience. More than expending a full e commerce stack internally, Facebook could create a social platform for e commerce companies that would like to leverage its graph. There are challenges in this strategy. As Karma as demonstrated before its acquisition, Facebook current graph capabilities can be leveraged to create a close experience outside of its control. The difference between the two might be too thin. 

Equity Pressure and Alternative Funding Solutions

Funding startups, projects is being fundamentally transformed with both technology and regulation: Currently what makes the most headlines is the typical startup funding, with angels and VCs making investments decisions on the potential for high multiply exits, the basis to create returns. That pressure for growth is making Equity a challenging source of funds.  See under at 1.01.50

New regulations, such as the JOBS act in the US, which makes to possibility for companies to raise funds with individuals more flexible.

see here for a detailed review of the Act // the application details will have a strong impact on its effectiveness.

This is basically geared toward an extension of equity driven funding.This is an interesting move and a valid idea that investment can be extended further for smaller businesses, especially in the light of the relative dysfunction of stock markets for long term shareholding.

Though because it is based on equity it is still suffering from the additional organisational cost of managing shareholders as well as the exit imperative, as the most plausible gain on investment.

Therefore it is interesting to see alternatives to this model being developped:

- Websites such as Kickstarter offer individuals and teams the opportunity to find funds for their projects, by proposing their future users and customers to pre-fund the projects, in most cases for an amount equivalent to the object or use of it. Its a great solution that has come to maturity with the relative lowering of the cost to receive and manage funds via intermediaries as well as the virality and critical mass of internet users. A mentioned by Kickstarter co-founder Perry Chen in an interview on GigaOm:

We’re going to keep funding creative projects in the way we currently do it. We’re not gearing up for the equity wave if it comes. The real disruption is doing it without equity. The real disruption is when you break down the funding of a project into all these little bits. We’re going to keep funding creative projects in the way we currently do it. We’re not gearing up for the equity wave if it comes. The real disruption is doing it without equity. The real disruption is when you break down the funding of a project into all these little bits.

The last piece is interesting, I think the current equity focus is creating a strong opportunity for other investment types to be further developed or invented.

Among the different ideas, Revenue Based Financing is a potential solution. See this very detailed post on AVC by Lighter Capital:

http://www.avc.com/a_vc/2011/10/revenue-based-financing.html

A revenue-based finance (RBF) investment provides capital to a business by “selling” an ongoing percentage of a company’s future revenues to the investor.  For simplicity, you can think of it as a revenue share type of arrangement. Investor gives capital to company in exchange for a small percentage of gross revenues. RBF lives as a hybrid of bank debt and venture capital. This kind of financing has been around for a while in non-tech industries such as mining, film production and drug development, but it’s recently been gaining traction in the world of growth finance and early-stage technology funding.

There maybe some potential on coupling these types of solution with the increased transparency and diffusion of data that web based technologies allow. Among other things, SaaS accounting systems could be leveraged to provide instant financial transparency on a company performance, at a much lower cost that current public company reporting.  

3615, L’arrivée d’internet dans le monde de la finance – [French]

Sean Park and myself had the chance to be invited to the swiss radio show 36 15: http://www.facebook.com/3615emission to speak Finance innovation and startups.

While recorded in the English speaking swiss radio, it is in French only (well frenglish …)

EPCA Payment Summit – Innovation in the Payment space

I had the chance to be invited by the team of the EPCA Payment Summit to present on how innovation is changing the way we pay. Here is the Prezi of my talk:

The startups mentioned are:
http://squareup.com
http://paypal.com
http://izettle.com
http://movenbank.com
http://bill.com
http://tradeshift.com
http://xero.com
http://simple.com
http://stripe.com
http://braintreepayments.com
http://kabbage.com
http://facebook.com
http://bitcoin.org
http://picomoney.com

also referenced:
http://carlotaperez.org
http://www.shirky.com

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: http://www.slideshare.net/dakami/bitcoin-8776098 - 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?

Quick ramblings on Mobile Wallet UI

MWC is going full speed in Barcelona and each day has its new payment solution, mobile wallet, magic integrator. I was particularly interested in hearing more from Isis, the Super PAC of US mobile networks (AT&T, T-Mobile and Verizon Wireless).

ISIS wallet solution starts with a list of cards, based on the real world wallet paradigm. This is based on a constraint of  the real world. All your cards have to physically be present in your wallet and you choose them based on the provider (hence the leather wallet cards organization). This requires a particular thinking on the user side, reviewing cash level and benefit of each card vs the payment to be made.

Note: the feed is interesting, I could not find much details. It seems like people will be able to follow businesses for offers and information.

Google Wallet follows a rather similar scheme, with cards put upfront, and a swipeable Wallet. The history is the equivalent of the receipts mess in the wallet, though in a much organised way.

For me, this shows either in the best case a conservative fear of changing things for customers or in the worst case a difficulty to understand how much the mobile platform offers. Because the wallet looked like this for centuries does not mean it is supposed to look like this on a mobile.

It may be cliché but worth repeating:

A modern cell phone has more computer power than all of NASA back in 1969, when it placed two astronauts on the moon.

I would add that: not only that but it has an incredible array of captors: camera, GPS,etc.. and access to information and computing power via internet connectivity.

Lets use Square Card Case as an example:

From the outside it looks just the same: Wallet (with skeuomorphism – thanks @aden_76 for the word), Slots, Card. Except they are not Credit Card, they are Store Cards…. As I have said before Card Case is built around the Buying Experience, not the Payment Experience so it makes sense they highlight merchants and products.

“But wait, there are tons of merchants, how would they fit on my phone screen?” Why would they need to all be on your screen? The merchants’ cards can dynamically adjust based on location, time during the day (restaurants put forward during lunch time), past buying experience. Sponsored merchants could be given a preferred space in the wallet.

This is one possibility, but there are others. As Brett King pointed out in Mobile Banking vs. The Mobile Wallet

Whether it is simply the fact that I can see my balance before and after I make a payment (not possible with plastic, cheques or cash) or whether you can start to advise me day-to-day on how to utilize my money better – the opportunity for mobile is not the wallet, and not mobile banking. It is re-imagining the utility of banking from a mobile perspective.

The technology offer us the opportunity to help people in doing what they currently almost without thinking try to do (badly). What is my balance, what are the advantages of each card, what should I pay with? Not only a big part of this logic is better computed by a machine than by a person, but a well designed UI can inform and help in this decision.

Instead of showing cards the mobile wallet could show payment options cost and opportunities.

I am hopeful we will see more and more of the latter, designed by people who have no preconception on how it should look like. 

Financial Services and Data exhausts

I had the luck to be invited again to Finovate 2012 as a blogger, the leading conference for financial services startups and innovation. The mix of participants is always interesting, from startups claiming banks are dinosaurs on stage to core system providers demonstrating tablet interface using Arial 10 fonts and stylus on an HP table (not kidding). You see my bias.

But one of the most interesting piece of news I got was in a conversation with Kabbage. I have written before on Kabbage and its use of outside source of information for underwriting purpose. With Ebay / Amazon / Etsy score and information, it was conceptually easy to understand how this data could be a direct link into the financial performance // risk of loan.

But it takes things to a next level when Kabbage announced me that they will partner with UPS to access delivery data to better underwrite their loan. This has been publicly released since then:

Banks, payment networks,… potentially sit on top of valuable data, in the aggregated data exhausts of their clients (payments, allocations, assets etc..). But banks, financial services startups also need to consider there are other sets of data out there, generated by their users diretly or indirectly that can be leverage to disrupt their activities. These data exhausts may contain useful signal for underwriting, marketing, intelligent banking, etc..

These source of datas may be as close as trying to leverage prepaid card data spending patterns to see if they could add information to someone’s credit score or as far (for now) as understanding what role reputation and social media activities could play (with services like Peerindex or Klout / Anthemis is an investor in Peerindex). Business reputation could also be leveraged, with reputation score on platforms like Yelp being used to verify the quality of a business to allow him to accept various payment methods.

But, as seen with Kabbage, we may have to expend our view further. The best way to do it would be to start from the customers’ multiple data exhausts, with no preconceived view on how useful they may be. If someone’s ability to manage a farm on Farmville is a possible indicator of their capacity to manage their money, why not use it?

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More startups working on integrating other data exhausts in financial services:

Lenddo: Lending integrating social scoring:

What is Lenddo?

Lenddo is a scoring engine that analyzes your online social footprint (sometimes called a social graph) and provides a score that can be used to access financial services such as personal loans.