£5m for 5 – the SME fintechs who’ve been awarded RBS grants

Financial disaster has had a silver lining for some fintechs, with many benefitting from RBS’s remediation funding scheme, that was established in the wake of the financial crisis.

Five fintechs are beneficiaries of the latest round of grants. We had a quick look at who they are, and what they do.

Swoop Finance

Swoop’s matching technology helps SMEs find the right funder for their business. Working with over 1000 providers, they can serve up lenders that are a best fit. Born in Ireland, they cover the local and broader UK market.

Funding Options

Matching technology is clearly where the excitement is, with Funding Options performing a similar role to Swoop, this time matching those in need with more than 50 lenders.

Form3

Unlike Swoop and Funding Options, Form3 operates in the payments-as-a-service space. They have access to the Faster Payments Scheme, operating as a Direct Settling Participant. They exist to plug the awkward payments gaps that have arisen as businesses try to make payments work, across an increasingly fragmented ecosystem.

Codat

Codat should call themselves the connecter of the connectors. The company’s API allows you to integrate once to multiple accounting software platforms. Think of it maybe like the Yodlee of accounting.

Fluidly

Last but not least, intelligent cashflow management software Fluidly is all about helping businesses predict their financial future. The also offer automated credit control, claiming they are able to save businesses over 40 hours per month on cash collections.

Here’s hoping some great things come from the £5m grants these companies have received. It is certainly not spare change, and there will no doubt be great expectations from the community, to ensure that money is put towards building great products and experiences that avoid the very disaster the grants were born from.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Jessica Ellerm is a thought leader specializing in Small Business and the Gig Economy and is the CEO and Co-Founder of Zuper, a new superannuation startup in Australia.

I have no commercial relationship with the companies or people mentioned. I am not receiving compensation for this post.

Subscribe by email to join the 25,000 other Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research)

Global Open Source Currency Index (GOSCI) is an independent volatility benchmark for Stablecoins

GOSCI logo.001

An independent volatility benchmark for Stablecoins

The GOSCI mission is to create an independent volatility benchmark for Stablecoins.

Many in the cryptocurrency community worry that Facebook’s cryptocurrency will usher in centralized corporate control on a global scale.

This what motivated us to launch GOSCI – Global Open Source Currency Index. We want a level playing field via a benchmark that is independent from institutional control (either corporate or government).

The best Stablecoin is the most stable (aka least volatile) Stablecoin. Low volatility not corporate clout is the measure of excellence.

The GOSCI Idea

GOSCI (Global Open Source Currency Index) is designed to be the exact opposite of Bitcoin and other cryptocurrencies in three ways:

1. GOSCI is Non Volatile by design. It is a model created from a basket of Fiat currencies, comprising more than 90% of global GDP.

2. GOSCI is a model/index, not a stablecoin. You can use GOSCI to benchmark any Stablecoin – including Stablecoins from corporate giants such as Facebook.

3. GOSCI does not compete with Fiat. GOSCI is not a threat to Governments that issue Fiat Currencies, because GOSCI cannot be used directly as a store of value or a currency/medium of exchange. Even if some governments decided they did not like GOSCI, it cannot easily be shut down because GOSCI is free and open source and does not require any regulatory approval.

From a regulatory point of view, GOSCI is not a Utility Token or a Payment Token or a Securities Token or an Asset Token. GOSCI is simply a spreadsheet formula filled with data that is in the public domain – which anybody can use (it is open source).

The model is a free/open source project, created by Daily Fintech, but with an independent governance structure.

You have the option to pay for the right to use the GOSCI name and to be involved in GOSCI model governance, see later.

How GOSCI can help the Stablecoin ecosystem

You can use GOSCI to benchmark any Stablecoin. We are not in the business of benchmarking Stablecoins. Our focus is to create the least volatile basket and invite anybody to benchmark any Stablecoin against that index. You can benchmark your own Stablecoin or any Stablecoin. 

There are three different approaches to creating a Stablecoin and each requires a volatility benchmark:

  • cryptocurrency derivative . You use algorithms to match supply & demand of an existing volatile cryptocurrency such as ETH to create a cryptocurrency derivative that is stable.
  • audit heavy/tech light. These ventures match each Stablecoin purchased with a corresponding deposit in a Fiat bank account. The Fiat bank accounts are audited so that investors can be confident that the Stablecoin is a real asset.
  • algorithmic central bank. You automatically buy your Stablecoin when it is below the planned peg/benchmark and automatically sell your Stablecoin when it is above the planned peg/benchmark.

Why License GOSCI when it is Open Source?

We publish the model and the formulas. The data for the model is in the public domain (GDP data by country from the IMF). GOSCI is free, open source and permissionless. There are two benefits of Licensing GOSCI:

  • You are licensed to use the GOSCI name in your marketing.
  • You get a vote on changing the model weightings (see Governance).

The Bitcoin volatility problem is not going away

Bitcoin is a great store of value but flawed as a medium of exchange due to volatility. Layer two services such as Lightning Network may solve the scalability problem, enabling low value payments, but they do not solve the volatility problem. For more on the limitations of using Bitcoin as an interim store of value for payments to enable it as a Medium of Exchange  please read this November 2015 post on Daily Fintech.

GOSCI is non-volatile by design.

USD Is Not The Gold Standard Of Non Volatility

USD is less volatile than BTC, but many sophisticated investors try to hedge against USD volatility risk with assets such as Gold, Bitcoin and Currency Baskets.

GOSCI is built from 36 national currencies that in aggregate account for more than 90% of Global GDP (vs about 25% for USD).

GOSCI is non-volatile by design.

Why & how we use GDP numbers for rebalancing the Index 

GDP data is widely available. Even if some GDP numbers lack credibility it is the best data available to track economic activity and over the long term economic activity drives currencies.

With 36 national currencies that in aggregate account for more than 90% of Global GDP we are confident that GOSCI is non-volatile. Chasing 100% of Global GDP would add a lot of complexity with little extra benefit. There are 164 national currencies, so the 10% long tail includes 128 currencies.

When GDP changes, the index rebalances. For example if China GDP grows faster than US GDP, this will impact the currency weightings.

Why Now

At some point in the future, USD will be replaced as the global reserve currency. No global reserve currency lasts forever. In other transitions, the currency shifted to the rising economic power (e.g from Britain to America). The problem today is that the rising economic power is China and the Yuan is not credible as a global reserve currency and many countries will resist China in that role for geopolitical reasons.

The transition to the next global reserve currency coming at a time when cryptocurrencies are gaining traction is a unique moment in history.

The question is what will replace the USD?

GOSCI is designed to avoid the control of large corporations over  cryptocurrencies. Many BigBank and BigTech companies, such as JP Morgan and Facebook, have announced plans for their own proprietary cryptocurrency. GOSCI is designed to empower a world that is decentralised and permissionless and not controlled by large corporations.

Any single Fiat currency will be resisted for geopolitical reasons, so the three non-corporate alternatives are a) IMF SDR b) Gold or Oil c) Bitcoin.

Why GOSCI is a better volatility benchmark than the IMF SDR.

The SDR is an international reserve asset, created by the IMF (international Monetary Fund)  in 1969 to supplement its member countries’ official reserves. So far SDR 204.2 billion (equivalent to about US$291 billion) have been allocated to members, including SDR 182.6 billion allocated in 2009 in the wake of the global financial crisis. The value of the SDR is based on a basket of five currencies—the U.S. dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling. The SDR was initially defined as equivalent to 0.888671 grams of fine gold—which, at the time, was also equivalent to one U.S. dollar. After the collapse of the Bretton Woods system, the SDR was redefined as a basket of currencies.

  • It is easier to change the GOSCI model index. We believe that 5 currencies accounting for 65% of Global GDP is not enough, but imagine the politics of getting 36 countries making up 90% of Global GDP (ie the GOSCI model) approved by the IMF.
  • GOSCI is a more neutral and open solution. GOSCI is neutral from a geopolitical point of view and no institution or country can control GOSCI.

Why GOSCI is a better volatility benchmark than Gold or Oil.

Gold is flawed as a volatility benchmark for two reasons:

  • Gold is traded by speculators. Therefore it is volatile.
  • Gold has an unpredictable inflation policy.  If new sources of Gold are found (or improved mining) there will be inflation, but that rate is unpredictable.

Oil has the same flaws as a volatility benchmark as gold.

Governance

GOSCI was created by Daily Fintech, but with an independent governance structure.

One License One Vote builds on a well proven principle. You can only buy one GOSCI License. If you pay the GOSCI Annual Licensing Fee, you get a vote on how to change the model (in addition to the branding rights).

The way Governance works in GOSCI:

  • Anybody can create a GOSCI Model Improvement Suggestion (GMIS). For example you may suggest adding Gold at a 10% weight. You do NOT need to be a Licensee to suggest a GMIS (only to vote for one). We want the brightest minds suggesting GMIS, regardless of their financial resources. We will publish the method for doing this within one year (ie the current model will be in place for at least one year).
  • Licensees vote on the GMIS. Once 10% of Licensees vote for a GMIS it is published (ensuring that the wider community gets a chance to look at it). Voting is done once a year on all GMIS submitted in the prior year.
  • Once more than 51% of Licensees vote for a GMIS it is implemented.

To have influence, you need to be a Licensee (but the annual fee is low enough for even bootstrapped or self funded early stage ventures).

Annual License Cost

0.1BTC (translates to USD1,000 per year if BTC is at USD10,000).

Why Licensees pay in Bitcoin not GOSCI or Fiat

GOSCI is not an asset. You cannot buy anything with GOSCI. So you cannot pay in GOSCI (but you will be able to buy things with Stablecoins that use the GOSCI model).

As Cryptocurrencies work globally and Daily Fintech readers come from all over the world, any Fiat currency we chose would incur exchange rate risk and fees – and it may seem odd for a site that writes a lot about Crypto enabled payments innovation to charge in Fiat currency. 

By charging in Bitcoin, we give Licensees an incentive to buy sooner rather than later. We assume that anybody who gets this far in a nerdy post knows how to pay in Bitcoin and is a long term Bitcoin bull (and therefore expects the price to rise from here). If you want to protect against Bitcoin increasing in value you can buy up to 5 years of License in advance.

Please send an e-mail to julia at daily fintech dot com if you are interested in licensing GOSCI.

The Model

You can see the model in this Google Sheet. We use data from the IMF for GDP per country.

References

How Emotional Banking can look like

Emotional bankingIt is Spring and officially in three days summer, so this is the time to open up and bring up topics like Emotional Banking. Several influencers have covered this topic – Chris Skinner, Brett King, Ron Shevlin – and Duena Blomstrom has been focused 100% on Emotional banking in her work and with her book `Emotional Banking : Fixing Culture, Leveraging FinTech, and Transforming Retail Banks into Brands`.

The core issue underpinning Emotional banking is the relationship we humans have with money. Undoubtedly not a simple one and clearly an emotional one.

When was the last time any of the three financial institutions you have relationships with, checked in with you as a person? The reality is that we each engage with at least three financial institutions but often with seven (consumer banking, business banking, wealth management, insurance, broker, etc) and the touch point is ONLY when and if we are ready to transact.

Sadly, most neobanks or challenger banks or Fintechs with banking services, are no different than the traditional financial institutions in that respect. And I am not referring to the fact that Revolut does remember my birthday whereas UBS doesn’t. I am referring to the fact that neither Revolut nor UBS, have any idea of what makes my heart beat, what would make me feel more secure, how I dream about the future, why I trained as a Kundalini Yoga teacher etc.

HOW Emotional banking looks like

Here is a concrete example of HOW Emotional banking can look like. Frost Bank is a 150-year-old Texas-based bank that started off as a small mercantile store and is now one of the 50 largest banks in the US. Frost bank has also been receiving the Greenwich Excellence award in the middle market and small banking category.

What caught my attention is their Optimism campaign called Opt for Optimism. They chose to link Optimism with financial health.

First, Frost Bank embarked on a research study about the link between Optimism and financial health. Here are some of their findings:

 Optimists experience 145 fewer days of financial stress per year

Optimists are 7x more likely to experience better financial health

They published their research in Mind over Money showing how attitude and mindset toward money impact financial health.

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At the same time, they launched a campaign about Optimism through a 30 day challenge during which people can join in performing 30 acts of optimism. They also created a community sharing portal to inspire each other, explore the financial habits of optimists,  watch inspiring films the bank produced for the campaign and find out why Frost Bank cares about something like optimism in the first place.

Share in the comments other examples of HOW Emotional Banking looks like.

Efi Pylarinou is the founder of Efi Pylarinou Advisory and a Fintech/Blockchain influencer.

 I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.

 Subscribe by email to join Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research).

The FOMO crowd is back in town. Will Bitcoin have a blockbuster comeback?

bitcoin-rally

Last week our theme was “Are you buying BTC? How safe is your Bitcoin?”. Our theme for this week is “The FOMO crowd is back in town. Will Bitcoin have a blockbuster comeback?”

TLDR. Bitcoin and cryptocurrencies  are on the rise again. Over the last 10 years Bitcoin has been tested against all kinds of foes, ranging from hacks and scams to hostile governments, and showed its resilience every time. This time around it might have the opportunity to replace fiat currencies.

On Sunday, the price of Bitcoin (BTC) hit a 13-month high, above $9,300. This is the highest price Bitcoin has seen, since May 10, 2018. Trading volume peaked with over $19 billion worth of Bitcoin traded across cryptocurrency exchanges. BTC is dominating the market share for cryptocurrencies, rising up from 55% to 57%.

Screen Shot 2019-06-17 at 3.57.20 AM.png

Will Bitcoin have a blockbuster comeback?

Its looks like the FOMO crowd is back in town again and they are showing in hordes. According to CoinMetrics.io, there are now over one million daily active addresses, a number that is defined as the number of unique “from” or “to” addresses used per day. This is a number we haven’t seen, since November 2017. Bitcoin market cap has jumped almost 3x, going from around $60 billion in December 2018, to $170 billion now.

Screen Shot 2019-06-17 at 4.43.13 AM.png

One of the reasons Bitcoin has seen a strong comeback is due to the trade war between US and China. Usually during turbulent times, Bitcoin has always been a very strong safe haven for investors. Another is just natural price discovery. When you understand what Bitcoin really is, then you understand it’s importance. Bitcoin is the most powerful inventions, since the advent of the Internet, introducing digital scarcity in our lives, as we become exponentially digital.

Facebook upcoming roll out of its cryptocurrency, as soon as next week, has also helped fuel Bitcoin gains. With an array of heavyweight backers, that include Mastercard, Paypal, UBER and Visa, its expected that Facebook’s stable coin will make a big slash.

Unlike traditional cryptocurrencies like Bitcoin, Facebook’s cryptocurrency is centralized, and verification is controlled by a select group, rather than the public. The cryptocurrency is pegged to USD, a hard asset, as a way to manage volatile price swings, that have been associated with Bitcoin, Ethereum and other cryptos.

In a recent Q&A on Youtube, Andreas Antonopoulos, said that Facebook’s coin is not a cryptocurrency:

“What Facebook, or companies like Facebook, are proposing is not a cryptocurrency. It doesn’t have any of the fundamental characteristics of cryptocurrencies. It does not stand on the five pillars of open blockchains. In fact, it stands on none of those five pillars. What are the five pillars, that we talked about before? You have probably heard me say this a few times. A cryptocurrency is open, public, neutral, borderless, and censorship resistant.”

Even if Facebook’s Globalcoin ends up failing, the company’s foray in into the market is good news for Bitcoin and other cryptocurrencies. In the past, Facebook attempted to create its own payment system, developing a digital currency called Facebook Credits. but folded it in 2012. Yet, when big players like Facebook enter the cryptocurrency market, it only helps build trust and brings more credibility to the entire market.

Many are still wondering if this rally different from that in 2017 or if its just pump and dump, staged by a few investors.

History never exactly repeats itself, but always shows resemblance. This kind of parabolic rise in prices followed by a dramatic drop, has happened several times in Bitcoin’s lifetime. But, when we look at the of bull runs of 2013 and 2017, they very different and mainly driven by retail investors. This time around, things are different.

Recently, Bitcoin has been recognized as a new asset class, so what we’re really seeing is the mainstream adoption of Bitcoin. Today, the crypto market has attracted more institutional investors. Institutional investors have poured in over $30 billion into building platforms. Also, regulations are taking shape in different countries, which is why we are seeing big players like Facebook, Goldman Sachs, Fidelity and JPMorgan Chase, getting in the cryptocurrency market.

When it comes to digital assets, ICOs, STOs, IEOs, a lot of the new projects are coming up right now, trying to capture the money. Also investors are buying up Litecoin, as its halvening is expected this August. Since the beginning of the year, Litecoin’s price has gone up 300%.

Ultimately, over the next few years we are going to see nations and central banks buying up Bitcoin, as the new gold reserve. The true success of Bitcoin will be achieved, when we don’t have to sell our Bitcoins and convert them to fiat.

Image Source

Ilias Louis Hatzis is the Founder & CEO at Mercato Blockchain Corporation AG.

He writes the Blockchain Weekly Front Page each Monday and has no positions or commercial relationships with the companies or people mentioned and is not receiving compensation for this post.

Subscribe by email to join the other Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research)

What the rise and fall of Basis Stablecoin tells us about the future of corporate Stablecoins such as Facebook GlobalCoin

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TLDR The brief history of the Basis Stablecoin is that it was founded in Brooklyn in August 2017, announced a $133m round from top tier investors 8 months later in April 2018 and then shut their doors just 7 months later in December 2018. All the news was announced on the Basis site. The ambition was huge – to be the global algorithmic central bank. Despite plenty of cash & brains, Basis failed. Now in the days when we wait for the launch of Facebook’s Stablecoin on 18 June 2019 and witness the stunning growth of Tencent/WeChat in China, we piece together the story of what happened and what it means for the Blockchain Economy. 

This update to The Blockchain Economy digital book covers:

  • Escrow type funding with Regulatory approval trigger
  • Tough borderless SEC
  • Algorithmic Central Bank vs legacy Central Banks
  • $133m is a drop in the bucket if you need to defend a peg
  • Context & References

Escrow funding with Regulatory approval trigger.

This funding strategy is key to understanding the Basis Stablecoin. This is similar to what we saw with Seba bank. Money is wired and held in an escrow type account until regulators give the green light. We may see more of this type of funding. It makes sense because a) there is no chance of getting regulatory approval without a lot of capital b) the prize is big if the venture gets the nod from regulators c) nobody will invest a lot of capital in the hope of getting regulatory approval.

This funding style means the demise of Basis is not a classic venture failure story. The scenario of non-approval by regulators is planned for at time of capital raising. Some capital is burned from funding to non-approval, but only a relatively small % of total capital invested. 

The investors were top tier (such as Bain Capital Ventures, Google Ventures, Stanley Druckenmiller, Kevin Warsh, Lightspeed, Foundation Capital, Andreessen Horowitz, Wing VC, NFX, Valor Capital, Zhenfund, INBlockchain, Ceyuan Ventures, Sky9 Capital) so this structure is hardly a surprise. We can expect this structure as the norm for ventures that plan to be regulated. However as the next section describes, a non-regulated approach of seeking forgiveness not permission might be the takeaway from the Basis story. 

Tough borderless SEC.

The SEC loves cracking down on tokens that they deem to be securities – which is pretty well every token (except ETH, Bitcoin and utility tokens that have zero resemblance to securities).  There is regulatory overlap in America by State and by asset type and the SEC has firmly planted its flag in the camp that says they regulate everything that is crypto. This scares investors and entrepreneurs. The SEC is also not afraid to take action cross border, so a venture anywhere that does any business in America needs to be wary of the SEC.

As Basis CEO Al Naji put it in a Forbes interview: “The SEC generally avoids saying that something will definitely be one way or the other. But from that meeting we got the impression that we would not be able to avoid securities classification.”

There are thee possible takeaways from this:

  • Be Regulated. If you want to be a regulated entity, have a big budget for lawyers and lobbyists and plenty of capital and play within the rules laid down by legacy Finance.
  • Be Unregulated. That means offering a tech service, not a finance service. In an earlier wave of disruption for example, Skype positioned as an unregulated tech service, not a regulated Telecom service.
  • Be Chinese. That is obviously not a real strategy unless you are Chinese, but it is interesting to see how Chinese tech companies such as Tencent and Alibaba have been able to launch and scale financial services.

It will be interesting to see what strategy Facebook unveils on 18 June. Obviously  Be Chinese is not an option for Facebook. They have probably chosen Be Regulated. Given that Facebook has announced a date, they must have already got regulatory approval. It will be interesting to see how this plays out as we are in uncharted territory.

Algorithmic Central Bank vs legacy Central Banks

The Basis white paper, published in June 2017, described Basis as an “algorithmic central bank”.

The Legacy Central Banks won’t give up their power without a fight. 

Like Legacy Central banks, the algorithmic central bank strategy was simple:

  • buy back Basis tokens when the price dropped below the benchmark peg

 

  • Create new tokens when the price went above the benchmark peg

The difference from Legacy Central Banks was:

  • Transactions were done on-chain.

 

  • Transactions were automated and baked into code ie could not be subject to political change.

Despite these two differences, the core strategy was exactly like Legacy Central Banks.

$133m is a drop in the bucket if you need to defend a peg.

Central Banks need a lot of capital to defend a benchmark peg. Just ask the Bank of England after they lost the battle defending the peg of GBP to the European Exchange Rate Mechanism (ERM) to George Soros.

In a history rhyming footnote, Stanley Druckenmiller (who worked with Soros) was an investor in Basis.

Facebook has a big capital base. Whether investors will be happy letting  Facebook use this capital to defend a benchmark peg is another matter.

Grab your popcorn for an epic rumble in the jungle (image source).

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Context & References

Investing in Payment Tokens and Stablecoins (aka new currencies).

Why StableCoins are so important (but also so hard to get right)

Facebook Ambitions in Fintech (note, from October 2014)

The Facebook GlobalCoin stablecoin won’t kill Bitcoin but many companies should be worried.

———————————————

Bernard Lunn is a Fintech deal-maker, investor, entrepreneur and advisor. He is CEO of Daily Fintech and author of The Blockchain Economy.

I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.

Subscribe by email to join other Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research).

Neobanks – Game changers, but do they really care about their customers?

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Image Source

Neobanks, digital banks, challenger banks – I don’t want to get into the exact specification of how and why we classify Fintechs across this complicated taxonomy. Neobanks have gone from strength to strength in the last three years. Especially in Europe, progress has been phenomenal.

Revolut, Starling, Monzo, N26, Tide and the list goes on. But apart from a cool customer journey at onboarding, better digital banking experience, do they offer anything meaningful? Do they really care more about their customers than the traditional high street banks?

Based on the news release yesterday about Revolut launching in Australia, their customer base was set to surpass the 5 Million mark. Monzo hit 2 Million users and are growing at about 150,000 customer per month. Starling have a relatively modest customer base of 600000, and also have a reputation that their services were as good as Monzo if not better.

I think atleast some of them have grown to a scale where they can be considered as operational banks. Let us therefore quickly go through how they are doing across different aspects of digital banking.

Onboarding: This is perhaps what digital banks have all been amazing at. A few months ago, when I moved from an iPhone to an Android phone, it took me about a minute or two to move my Revolut account to the new phone. My Barclays app is still not completely set up on my new phone.

This is true if you looked at business banking accounts as well. I had to wait for weeks to get a Barclays or a HSBC business bank account, whereas opening a Tide business banking account was a breeze. This is nothing new about Neobanks – we always knew they were champions at the onboarding customer journey.

Product Offering: I have found Neobanks good at their core proposition. Revolut for example, had a phenomenal uptake for the FX card and the app they have with it. However, they have taken a narrow and a deep approach to their product offering. That’s a very startupish way of developing a proposition.

I think, it’s high time Neobanks started to cross-sell products to their clients. Their product suite has been shallow in comparison to mainstream banks. Interest rates on accounts have been lower, business bank account balances have been lower, and some of the more advanced multi-user functionalities a business bank account needs are still work in progress – and those are just a few examples in already existing products.

They have all been focusing on growth and it’s understandable why they haven’t got the breadth of product offerings. However, the execution of their core offering has been excellent. For example, the user experience on tagging and managing transactions is good on these platforms. However, integration with ATMs or services like Paypal have been missed out by some of these Neobanks.

Customer Service: This is perhaps one area that decides if Neobanks are really providing the service quality they claim. Revolut have been making headlines for several wrong reasons recently and have almost got the “Spoilt Child” tag amongst Neobanks. Monzo recently had a breakdown of systems and that caused some noise on social media. Complaints data give us a bit of a perspective of what customers feel.

With 5 Million customers Revolut had 171 FOS complaints registered

With 2 Million customers Monzo had 82 complaints registered

With 600,000 customers Starling bank had 51 complaints registered

I have seen some illogical comparisons between them and the high street banks based on the number of complaints. Some high street banks have 100,000s complaints registered with the Financial Ombudsman Service (FOS). But they also provide so many different product lines which the Neobanks don’t.

Therefore, it can’t be a like for like comparison. Comparisons could be at a product line level between a high street bank and a Neobank, however, I am not sure if that data is available.

With a simple AUM like calculation, Barclays at £1.13 Trillion AUM is 23 times bigger than Revolut that is £50+ Billion. Revolut’s 171 complaints feels pretty low even in that sense as 171*23 is ~4000 complaints. Although Revolut took some negative PR for its recent misadventures, the number of complaints per customer is not too different between them and the other top Neobanks.

Financial Inclusion: Let us look at some of the steps towards inclusion that the Neobanks have taken. 50% of UK bank branches have shut down in the past 30 years. However, Neobanks are creating new on the ground contacts to allow for more inclusion in a seamless way. Starling bank have partnered with Royal mail to accept cash from their customers. Monzo used paypoint in a similar manner creating over 30,000 points for customers to deposit cash.

They are also looking to be more inclusive from an age perspective. Less than 5% of Monzo’s customer base are over 60 years old, and that data can improve. Monzo, Revolut and Starling bank are all ramping up efforts to reach out to people of all age groups. This also makes commercial sense as people in their 60s generally are richer than people in their 20s.

As we can clearly see that, based on the data, Neobanks have just arrived. They have a long way to go before data can categorically drive conclusions on how well they have done (or not). With China’s Techfins piling money into the Neobanks of the west, may be it will not be long before we see Neobanks punching above their weight against high street competition.

Whether they compete with the mainstream banks is one question, but whether they will keep their culture of innovation and customer centred approach intact as they grow is yet another question.


Arunkumar Krishnakumar is a Venture Capital investor at Green Shores Capital focusing on Inclusion and a podcast host.

I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.

Subscribe by email to join Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research).


 

Is InsurTech missing a $2 trillion opportunity?

Here’s an interesting contradiction- the insurance industry is heavily focusing on innovation, but letting others take the lead in cyber issues.  And those ‘others’ are not always the good guys.

TLDR   This column typically focuses on insurance innovation/InsurTech, and all the whiz-bang artificial intelligence, algorithms, pain points, data analysis, blockchain, and innovation integration points that accompany that pursuit.  Of course those of you who have read much of what this author has written over the past year realize that there is a clear contention carried forth, that insurance and InsurTech is comprised of many parts, all of which comprise the Insurance Elephant- serving the insurance customer.

What does that have to do with the point of the opening paragraph?  A thought that while the industry chases disruption of legacy/incumbent methods there are many who are truly disrupting business (including insurance businesses) through cyber gambits, and that the risk posed by cyber disruptors makes the potential outcome of ‘traditional’ InsurTech efforts (can innovation be traditional?) tiny in comparison.  $2 trillion is the estimated 2019 global cost of cybercrime per Juniper Research (see bullet point 7 of 14 Most Alarming Cyber Security Statistics in 2019.)   Let’s see, global insurance business is just over $5 trillion, so $2 trillion in a relatively new risk is- a lot!  That amount makes the valuation of all the InsurTech unicorns seem like a relatively small school of InsurTech seahorses in a vast cyber ocean.

What brings the focus to cyber cover and cyber crime is a recent occurrence of cyber crime suffered by an upstate NY manufacturer.  A good company, 50+ hard working employees, steady business growth, well run and until a few weeks ago, not concerned with cybercrime.  Then came the digital wolf at the door- a ransomware gambit that adversely encrypted the firm’s entire set of digital books and operations, making the firm virtually blind, deaf, and dumb.  The management of the company was simply unaware of what the next steps should be, who to contact, how to act, and unknowing of the immediate or long-term effects the attack would pose to the firm.  And no real insurance coverage in place for the event or ensuing damage- typical CGL coverage hardly touches on the risk other than to mostly exclude the effects from coverage.  First party property coverage doesn’t apply unless there is some ensuing physical damage caused by loss of computer operating capability.

Huh, I thought.  How is this not an insurance and InsurTech opportunity that is front burner stuff?  There are tens of millions of SMEs (small or medium enterprises) in North America alone, millions in Europe, more millions spread across the globe.  Talk about pain points!  But then, relative to many other business concerns few talk about it.

The cyber cover issue can be seen from multiple perspectives, but I considered three points:

  • Sales/agency knowledge
  • Customer awareness/preparation
  • Protection and response

 

Sales/agency knowledge

My colleague and all around great agent, Michael Porpora, was one of the cyber insurance gang with whom I discussed the sales end of cyber risk (thanks also to Brett Fulmer, Ben Guttman, and Joe Hollier).  Michael summarized the SME cyber insurance market in this fashion:

  • There is limited technical acuity (read as cyber product knowledge) within agencies that serve SMEs
  • The risk is poorly understood
  • The language of the risk is not understandable by customers or agents
  • The product is as well known as something at the bottom of the vast depths of the ocean.

 

Well that’s comforting for a $2 trillion problem.

As we continued the discussion it was clear that typical policies afford little or no cyber cover, and the number of options for specialty coverage are not great.  However, the opportunities for agents to educate their clients are many.  As Michael said, “I use cyber insurance as a wedge,” or an entrée into a client’s office.  Right now it’s an each time, every time offering for his clients.  Seems an easy offering to businesspersons if the product knowledge is there- so why isn’t it?  Seemingly an easy product to underwrite as the coverage limits are currently finite, so why isn’t the cover more commonly discussed?  Is the risk the virtual asbestos of our era?

I considered that there may be an underground problem that simply hasn’t hit the mainstream press, i.e., there are many cyber occurrences that are resolved through payment of ransom, or are simply an added expense to the firms that experience the events.  No one wants the public to know of an attack because there may be cascading liability concerns.  Of course not acknowledging the problem doesn’t make it disappear.  In the instance of the NY manufacturing firm, the approach was to address the issue in house, with the in-house IT staff wrestling the demon.  Until the attack went from inconvenient to disastrous, and the perpetrators went from hackers to extortionists.  It was coincidence alone that caused the firm to realize their CPA firm had resources to help the company deal with the layers of issues.  Have they contacted the FBI?  Not yet.  Wonder how many ‘not yet’s exist such as the authorities remain unaware of the specific extent of the attacks.  These instances are not all ‘Wannacrys’ so cyber issues remain akin to a thousand virtual paper cuts.

 

Customer awareness and response

What can companies do to identify exposures?  Few SMEs can afford large IT staff, and the attack environment is continuously changing.  Is there an InsurTech ‘wing’ that is focusing on the unique challenges of a business that is comprised of information/data and money?  Not so much, but there are information security specialists whose primary business is to anticipate and identify cyber problems, to the point where they conduct ‘ethical hacking’ of client firms to detect digital weakness.

John Strand of Black Hills Information Security (BHIS) was kind enough to spend some time with me explaining how many Fortune 500 firms engage companies like BHIS to conduct (among other services) penetration tests in order to confirm the relative security of an organization’s tech superstructure.  He mentioned that many cyber policies require ‘pen’ tests as part of the underwriting and renewal process, not unlike a building needing a risk assessment before cover can be bound.  But even with a good cyber policy in place, ongoing diligence is needed because risks are changing and financial exposures are increasing.  John mentioned this reality- most insureds that suffer an attack have more challenges at the initial stage- because there is a need for immediate resources and assistance that an indemnity only policy may not afford.  Consider companies operating in GDPR environments- sure the fines can be extensive, but the need for immediate action requires resources.  There are some parametric programs available that have as triggers identified GDPR violations, and as such a need for immediate operational changes to prevent ongoing problems.  Other concerns John mentioned- not many carriers have specialized cyber claims departments, or tech programs that are commonly used or are becoming ubiquitous, e.g., payment programs, HIPPA, PCI, ISO, etc., that may be exposed to attack but not considered by users that way (their use is becoming a focus of required pen testing.)  An optimistic note- the ethical hacking community is mutually cooperative because at this time there is plenty of business for all.  John compared the business with the child’s game ‘Hungry Hungry Hippo- plenty of marbles on the playing surface, one simply reaches out and grabs.

 

Protection and response

Sales and customer knowledge concerns and needing technical expertise to identify issues up front.  Is there a reasonable blending of the two?  Seems there is, if the discussion I had with Andrea Holmes of Boxx Insurance is an indicator.

While not in a lot of jurisdictions- yet- Boxx Insurance is introducing a hybrid cyber product, one that not only provides cyber cover through brokers, but also educates customers, focuses on preparation for cyber issues, and provides monitoring service for clients.  The four ‘legs’ of the firm’s approach could easily be an industry mantra- Predict, Prevent, Respond, Recover.  The service is focused on SMEs, and the full suite of membership services places the participating firms somewhat on par with the bad guys who work at cyber 24/7, even affording cover for ‘rogue’ employees’ actions, or infections that may have been in place prior to signing on with Boxx.  One might even consider services such as that provided by Boxx as being the virtual model of insurance IoT- the service potentially senses issues prior to damage occurring and advises the client to take action.  Kind of like the water heater sensor that shuts off the main valve when a failure is imminent.  How about that IoT, Matteo Carbone ?  Customers in Ontario, Canada are enjoying the service, and it’s soon to be available in Chile and Singapore (and perhaps Quebec).  The firm has some solid leadership (thanks for the intro, Hilario Intriago ), solid tech, government certifications, and proprietary processes, but it seems the approach is solid enough to encourage other InsurTech entrants.

Cyber risk cover- it has uses for every level of customer, because the effects never stay within the bounds of the customer that has the direct exposure.  It is a risk that is a virtual Insurance Elephant, many unique parts but in the end it’s the whole beast.  A $2 trillion beast that should be attracting a variety of entrepreneurs in any place on the globe.  I wonder what a $ trillion valuation company is referred as?  Unicorn’s unicorn?

 

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Patrick Kelahan is a CX, engineering & insurance professional, working with Insurers, Attorneys & Owners. He also serves the insurance and Fintech world as the ‘Insurance Elephant’.

I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.

Subscribe by email to join the other Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research).

Prospa proves fintech is a prosperous investment, skyrocketing in IPO debut

This week the fintech community in Australia celebrated a new SME success story – the long awaited float of SME online lender Prospa.

After stalling at the IPO finish line last year, the venture backed startup came back with a roar, with shares debuting at $4.50, a significant uplift on the $3.78 IPO price, with a market cap in the $720 million region.

Since launching around 7 years ago, the business has originated an impressive $1 billion in loans to the local SME community. Through a strong sales and partnership model, they have done the unthinkable in business banking – made lending to SMEs work.

Not content with just originating loans, and plugging what it believes is a $20 billion lending shortfall to the sector, the company is also innovating. It recently launched a buy-now, pay-later service, Prospa Pay, for equipment and stock. It’s a savvy move, especially given the shift in personal borrowing behavior amongst millennials, thanks to Australia’s fintech success story Afterpay. More and more of these consumers will become business owners over the next decade, and will be hunting for products that look and feel similar to what they have been initiated in.

Prospa joins a growing group of Australian fintechs in the lending space who have found success listing their businesses, albeit at far earlier stages than Prospa. This group includes Afterpay, which has built a sizeable $6 billion market cap. The company now has its sights set firmly on US expansion. Zip has also cracked the $1B market cap mark, and is making significant inroads into the buy-now, pay-later space.

These are huge milestones for the fledgling industry, and a great reward for early stage investors, who have backed founders and businesses in the face of stiff competition from a well-funded oligopoly.

Zip, Afterpay and Prospa are proof it can be done, and should give other early stage investors’ confidence in taking bigger, bolder bets.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Jessica Ellerm is a thought leader specializing in Small Business and the Gig Economy and is the CEO and Co-Founder of Zuper, a new superannuation startup in Australia.

I have no commercial relationship with the companies or people mentioned. I am not receiving compensation for this post.

Subscribe by email to join the 25,000 other Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research)

Saas offerings, re-bundling and the pot of gold

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Jessica Ellerm wrote about `Something as a service`, the new fintech paradigm while looking at Raisin`s offering. This prompted a discussion with Richard Turrin and Aki Ranin around Saas models for banking. Richard is a proponent of `Buy versus build` which allows for rapid deployment. Aki is a proponent of shared infrastructure because it allows for economies of scale and expansion in additional markets.

Increased Saas model adoption and APIs, make it difficult to predict whether incumbent banks or Fintechs are becoming the plumbing of financial services. For me, we actually need to reconsider whether this should be a question at all.

Two or three years ago, the `dump pipe` debate was hot and terms like Big banks becoming Dumb Pipes or Dumb pots, were trending as discussion topics in articles, conferences and debates[1].

`The “dumb pipe” debate originated from the telecom industry and there is a lot of literature on the subject. The grandfather of the debate is David Isenberg who in 1997 published the seminal paper The Rise of the Stupid Network.` Excerpt from Andra Sonea`s post On banking “dumb pipes” and “stupid networks”

We have been using the `dumb pipe` term because it works in the attention economy which is dominated with trendy jargon. But we each map the term to a different concept.

We are actually even biased. When we look at a Fintechs with a B2B Saas offering like Mambu, then we may think that it if Mambu powers an incumbent bank to offer lending, then maybe the bank is at risk of becoming a dumb pipe. On the other hand, when we realize (if we do at all), that Mambu is powering N26, we don’t classify N26 as a bank with a high risk to become a dumb pipe.

Mambu is a great example of a Fintech specialized in a Saas core banking offering. It powers up Oak North bank, which is the No.1 UK challenger bank. It is the heart and brain of the ABN Amro`s digital banking spinoff, New10, that focuses on SME lending; and more.  Mambu does not offer the banking license (a different approach to Solaris Bank). Just by looking at these two examples – Mambu and Solaris Bank – that have unbundled financial services in different ways; we have to pose the question `Where is the value being creating?`

  • Powered by Mambu means: Go to market fast with a Saas cloud-native solution – Client has the banking license; Fintech has the tech – Who is the dumb pipe?
  • Powered by Solaris Bank means: Get into banking with a Saas cloud-native solution – Client can offer banking services without a banking license of its own – Baas – Fintech has the license and the tech – Who is the dumb pipe?

The `dumb pipe` threat was native to the digitalization phase of unbundling as the disruptive force that was going to dominate. Now we are in a re-bundling phase and fintechs are growing their stack of offerings, incumbent financial institutions are transforming their offerings, and tech companies are also stepping in. From Sofi moving from lending into wealth management and Habito powering the mortgage offering of Starling bank; to Kabbage powering Santander`s business loan offering, to Motif launching structured products for Goldman Sachs; to Goldman powering the Apple card and Solaris bank powering Alipay`s acceptance in Europe.

I hope you are convinced that we can’t spot easily dumb pipes in this kind of world. If business expansion is powered through a Saas cloud offering, then the next question to ask is whether this powers your ability to offer advice by analyzing what is processed in the pipes and whether it enhances your brand through strengthening your trusted relationship. As the re-bundling continues and the commoditization of transactional banking services also continues, the

Last man standing will be Brand and Advice[2].

If you use Saas offerings towards offering advice and enhancing your brand, then there is no reason to fear becoming a dumb pipe.

Last minute footnote – As I am finished posting this article, a Linkedin post from Richard Turrin grabbed my attention about Tencent`s investment in a UK startup, Truelayer which is tech company leveraging APIs within the PSD2 and Open banking progressive European regulatory frameworks, to give access to financial services.  TrueLayer powers neo bank Monzo.

[1] Are Banks Destined To Become The Next “Dumb Pipes”? via Tech crunch

Banks May Be Turning Into Dumb Pots Of Money via Forbes

The Big Banks Are Becoming `Dumb Pipes`; As Fintech Takes Over via CBinsights

[2] Inspired, copied and stolen from Gary V`s tips from his the recent at The Financial Brand Forum’s. See 9 Priceless Tips For Financial Marketers From Gary Vaynerchuk

 

Efi Pylarinou is the founder of Efi Pylarinou Advisory and a Fintech/Blockchain influencer.

 I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.

Subscribe by email to join Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research).

Are you buying BTC? How safe is your Bitcoin?

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Last week our theme was “Why is Bitcoin going up? HOLD on Bitcoin?”. Our theme for this week is “Are you buying BTC? How safe is your Bitcoin?”

TLDR. Digital currency needs to be safe, accessible and provide complete peace of mind to anyone holding cryptocurrency or to anyone that is considering getting in the market. Coinbase, North America’s largest cryptocurrency exchange, holds only 2 percent of its coins insured with Lloyd’s of London. Major insurance companies are starting to offer protection against cryptocurrency theft, rather than missing out on a volatile and loosely regulated, but rapidly growing market.

At the end of May, Bitcoin hit $9,000 and for the last week its been hovering around $7,700.  Many have been predicting that when Facebook launches it’s stable coin, Bitcoin will break $10,000. That’s a lot of money for a single coin and we can expect this value to go even higher, as Bitcoin use cases sprout. Even news stories like India’s proposed ban for crypto that could lead to a jail sentence for up to 10-years… crazy, will only cause citizens in the country to become increasingly interested in Bitcoin and other cryptocurrencies.

But, one thing that scares most people, when it comes to cryptocurrencies, is safety. The average user wants to buy and sell Bitcoin using their phone and be sure that their funds are safe.

Even though we’ve seen great improvements, the risk of cryptocurrency exchange hacks is always there. According to the Wall Street Journal, more than $1.7 billion in cryptocurrency has been stolen over the years, with 61% of the thefts in 2018 alone. Most of the hacked exchanges were based in Asia. Here are four major hacks in 2018:

Last month, when Binance got hacked for $40 million, it was great to hear that they were going to offer a full refund. Binance users didn’t lose money, thanks to its “Secure Asset Fund for Users (SAFU),” an emergency insurance fund created in July 2018.

On large US based exchanges, like Coinbase and Gemini, US dollars are FDIC insured, for up to $250,000. Currently, the U.S. government does not provide insurance for any digital assets, which means as soon as you convert any sum of money from fiat to crypto, it is no longer insured.

Most people assume that their cryptocurrencies are insured, but that is not always the case. Bitcoin and other cryptocurrencies stored on an exchange or a custodian service, most likely are not insured. Regulations for Bitcoin vary for each country. The crypto space is still highly unregulated and news of big hacks make many insurance companies hesitant to offer coverage to exchanges. While, some countries require exchanges to follow strict guidelines, some don’t require anything at all.

When an exchange claims to be insured, it’s difficult to know if it really is insured. Also an exchange that’s insured could suffer an incident, that’s not covered by insurance.  Even the few exchanges that have a concrete insurance policy, offer very limited cases to make a claim. Insurance is primarily for cases where an exchanges systems are hacked. A user with poor quality passwords or a user that doesn’t follow basic security measures, most likely will not be covered.

The volatility of crypto markets has sidelined many big insurance companies. Until recently, the crypto industry mainly consisted of volatile exchanges and startup companies, which posed high-risk without large enough revenues to encourage the major insurance companies to get involved.

But the situation is slowly changing and we’re starting to hear more and more from exchanges that are offering a safety net to their customers.

Last year, the Winklevoss twins announced that cryptocurrencies on their Gemini exchange and custody services were fully insured.

The Gibraltar Blockchain Exchange (GBX) announced an insurance policy to cover its digital assets, in partnership with Gibraltar-based Callaghan Insurance.

In February, BitGo announced it had secured the industry’s most comprehensive insurance protections for crypto currencies and digital assets will be insured for up to $100 million through Lloyds.

In April, Coinbase revealed the details of its insurance arrangements for cryptocurrency held for customers. In a blog post, the exchange confirmed that it is covered for up to $255 million for coins held in so-called hot wallets, in other words, assets which are essentially online and open to potential hacks.

In South Korea, four exchanges offer insurance: Upbit, Korbit, Bithumb, and Coinone. However the insurance limits on these exchanges are less than $5 million, with is barely enough to cover users in the case of a major hack. Hanwha Insurance, a South Korean insurance company, has introduced a cyber insurance product, that provides compensation for hacking damages to domestic crypto exchanges.

Insuring cryptocurrencies is very important, especially when you consider the valuation of Bitcoin and other cryptocurrencies. Protection against potential hacks could be an important source of revenue, with huge annual premiums for theft coverage. Annual premiums could be as high as 5 percent of coverage limits.

If you’re considering getting individual cryptocurrency insurance, some companies like Allianz, Chubb, XL Group and AIG are quietly offering protection for cryptocurrencies. Allianz offers individual insurance to cryptocurrency investors: “Insurance for cryptocurrency storage will be a big opportunity, Digital assets are becoming more relevant, important and prevalent on the real economy and we are exploring product and coverage options in this area” said Christian Weishuber, a spokesman for Allianz.

Incidents of hacks and stolen funds can damage a market trying to build consumer confidence. As the crypto space is maturing, cryptocurrencies represent potential areas of growth for the insurance industry. Insurance adds a layer of security and ensures that users are properly compensated and reimbursed, in the case of a security breach. Binance has chosen to take on the costs of insurance by allocating 10% of their trading fees to SAFU. It remains to be seen how exchanges around the world approach this issue, and if they build their own coverage or work with insurance companies to guarantee customer funds. Either way, safety is important and needs to be addressed, if we will ever see the mass adoption of cryptocurrencies.

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Ilias Louis Hatzis is the Founder & CEO at Mercato Blockchain Corporation AG.

He writes the Blockchain Weekly Front Page each Monday and has no positions or commercial relationships with the companies or people mentioned and is not receiving compensation for this post.

Subscribe by email to join the other Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research)