These last weeks have been busy with events, announcements and new startups! Great material for future posts but this one is on markets and how new exchanges have become an interesting field in financial services innovation. Recently Exchanges have had a poor reputation. The flash crash has highlighted the multiplicity as well as complexity of stock markets. But since its creation in the 13th century, there is no better system that allows liquid, transparent, risk free (default on transaction) exchange of virtual goods. It’s therefore not surprising to see that innovative start-ups in financial services are trying to create exchanges to address the transaction needs of new goods.
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.
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 http://www.ericscc.com/ 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.
On Bankervision, I read this great post Using people as glue. It is often the case, when you move from a legacy system to a new system that you have to face the struggle of moving your data and user experience from one to the other. As described by James Gardner:
You know that, even if you mandate a new systems approach, you’re always going to have to spend piles of money doing legacy integration, because that’s where the data is. It is data on which the business relies, so it has to be available, and, obviously, the job of moving it all, and the business rules and all the rest, to a new system in one go is far to large and politically charged.
And then, you wake up one morning and realize on top of everything, you have the "die or retire problem". Everyone who knows the guts of legacy is either dead or about to retire.
You have to do something about legacy, so you sigh, and sign up for truck loads of integration anyway. (emphasis added)
Gardner proposal is to use people to do these tasks instead:
What about, for example, using people as glue? Why can’t they look up data in both systems and perform appropriate updates?
Now, I’m not suggesting that anyone put people back into systems permanently. But as temporary, good enough, solution while something better is worked out, surely it makes sense to at least consider the option.
First, there is a quote from Dave McClure’s post Subscriptions are the New BLACK. (+ why Facebook, Google, & Apple will own your wallet by 2015)
Well at this point i hope you’ve pieced it all together. The key to success — one might even say DOMINANCE — in payment systems is to begin with the foundation of frequent-use products, so that users won’t forget their passwords. Whether intentional or not, Facebook has played this game to perfection. Not too far behind is Apple with iTunes, iPhone, and other related frequent-use media & entertainment products, and an App Store that people use regularly. And even Google has a shot here, with both Gmail and YouTube as two very large, frequent-use products, along with the upcoming Android platform. Twitter is probably a dark-horse here, but if user #’s continue to improve they could also have a shot. And i’d also keep an eye on Skype too, which still has a lot of frequent users and value.
Second: Facebook’s announcements at the f8 conference. As summarized by Mark Zuckerberg:
We are building a Web where the default is social.
In more details, it means several technical implementations which could, in the long term, change completely the way you interact with the Internet:
– Social plugins: A set of plugins that will allow websites to better interact with you as well as allowing you to share more. The most visible is the Like plugin, with which you can instantly highlight content you like, linked back to your Facebook wall and profile. The Like plugin is different because you don’t need to specifically connect to Facebook to use it; you are automatically recognized if you have connected to Facebook previously. Interestingly, websites can also use your public details to customize their contents to your public profile.
– The Graph API, which standardizes the Facebook social graph and makes it easier for developers to read and write data with Facebook. This should happen in real time using webhooks. Looking at the current specification, there is no indication that Facebook Credit is part of the current roll out, however….
Facebook could have set itself to become a major player in payment:
You would assume that, for sure, people in Indonesia would be happy to use their mobile for making payments as it would be convenient. But wait a minute … are you able to make payments from your mobile through SMS ? Can you do other transactions? Most likely not, whereas 8 Million people In Kenya do mobile payment through M-Pesa. The next innovation in mobile payment will be most likely coming from developing countries.
Let’s take a couple of lines to explain why this would actually makes sense. Drawing a parallel between innovation and evolution (if you live in Texas, there is a probability this might not resonate too much with you). An arsh environment is a good ground for innovative, out of the box adaptation : if you live at the ocean floor, you end up living on methane through several microorganisms instead of light and oxygen. Let’s take financial services in so called third world countries, they face critical challenges for the “regular” banking system :
– Lack of infrastructure
– A lower disposable income per people
– A limited communication network (except increasingly mobile)
Much as been said about the Ipad. If you are connected to the internet and Twitter, you most probably have suffered Ipad information overload this week end. If you went to an Apple store, you’ve seen how much attraction the numerous demo Ipads are garnering.
Along that launch, another one has happened: Square is now publicly available, both as an application in the App store as well as a web application and a free dongle (disclaimer, I haven’t received the latter one, as stated on the Square app it may take some time to receive one but they are ramping production)
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:
– 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?
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.
Cisco through its Cisco Internet Business Solution Group has published a very interesting and detailed study on the expectations of U.S Consumers towards their banks, especially for the younger generations: Gen X and Gen Y. Here are the key learnings for me but I really encourage you to read it in detail and make your own selection (Give me your feedback in the comments!)
All graphs and statement are quoted from the CISCO study, my personal comments are in blue.
While providing the necessary eye candy ( 2 ways interactive wall, screens everywhere!) I have mixed feelings on the solution proposed: Continue reading Reviewing Citi’s bank of the future: a mixed bag of ideas