The Return of Crypto DeQuorum – JPMCoin the XRP Killer

After a busy day, I sat down to have a late lunch at 3 PM on Thursday, and I saw a Whatsapp message pop up – and I stood up from my chair saying “Ohhh Ehhmmm Geee”. That was my reaction when I heard about the news of the JPM Coin. Of all the banks, JP Morgan led by Jamie Dimon had to be the first mover to launch their asset backed crypto. It is less than 2 years since Jamie Dimon called Bitcoin a big fraud.

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Will this bring back some decorum into the crypto world? Will this kill Ripple’s XRP? My head is abuzz with all these questions, so bear with me as I manage/struggle to lay them out.

The crypto world can do with some positive news and sanity as there is a sense of the crypto winter coming to an end. As much as I loved to hear the news, and was glad for the crypto industry as a whole, I felt for some of the early adopters of the technology. There is a good chance that we will see a BarcCoin, CitiCoin, GSCoin, and so on, with similar working models. There is more than a chance that we will see some existing players disappear. Let us quickly visit the salient features of the JPM Coin model.

  • It will use the Quorum Blockchain developed by JPM. It provides for
    high speed and high throughput processing of private transactions within a permissioned group of known participants
  • It will be a stable coin, whose value will be always $1 USD – so market volatility linked with Cryptos is mitigated.
  • It will be used for wholesale payments that JP Morgan processes, estimated at ~$6 Trillion per day.
  • The network can be a private or even a centralised network permissioned by JPM.

With real time cross border B2B payments as the core use case, JPM Coin may create some challenges for Swift. Last year, Swift announced that its GPI technology that has had good feedback from its banking customers.
GPI technology that let banks see where their payments were at all times, and that came with rules around response and confirmation times.

However, the challenge for the newcomers (then) that kept Swift going was the mutual KYC requirement from the regulators, which was harder using a DLT payment mode. And GPI let banks see where their money was at all times. Assume a London based bank is sending money to a bank in Mumbai, there may be a couple of correspondent banks in between. The London bank can see where the money is, and stay on top of any delays, issues etc., They can also stay on top of the Service Level Agreements (SLAs) that the intermediaries offer.

With a crypto based approach, the transfer will be instantaneous without any need for correspondent banks as long as regulatory and relationship hurdles are overcome.

Ripple and XRP have had their challenges in gaining adoption from key banking players. One of the key reasons why cryptocurrencies couldn’t be used for cross border B2B payments is because of the market volatility of the cryptos. With a stablecoin like JPM Coin, that fundamental issue has been addressed.

Also, with the banking and corporate relationships that JPM commands, most of their counterparties would be better off being part of the network. The JPM’s interbank network has about 157 global banks, and adoption should be pretty quick once the piloting is successful. Although the underlying Quorum blockchain is based on Ethereum, it offers both private and public transactions capabilities. So banks and corporates on the network will have privacy if they choose/need it.

However, the real pain hits them (corporates) when a bunch of tier 1 banks launch their own stable coins. This space has just started to get interesting, and we should see an avalanche of similar offerings from global banks.


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

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US Health Care: The $2.8 trillion opportunity

US health

 

Reposted from April 2018, as it is Chinese New Year for Zarc Gin, our regular Insurtech Expert based in China.

A couple of weeks ago, there were rumors of Walmart purchasing U.S. Health Insurer Humana.

I’ve written about the U.S. healthcare market a few times and thought this news was rather interesting.

As I started researching this topic,  I decided to take a look at the U.S. healthcare market a bit more broadly.  

During my research on Walmart and Humana, I uncovered some interesting facts and figures which help to further shape my opinion on the opportunities I see in the future of the U.S. healthcare industry.  

While the initial sections are numbers focused (be prepared for a lot of numerical data!), I do touch on technology as well later on.  

As such, I have structured this week as follows:

  • Getting a bigger slice of the $3,300,000,000,000 pie
  • What do all these (potential) mergers mean?
  • How Technology can help
  • Amazon vs. Walmart – which ‘category killer’ will it be?

Getting a bigger slice of the $3,300,000,000,000 pie

There have been a number of large potential mergers in the U.S. Health Insurance & healthcare space, including:

Albertsons and Rite Aid also happened this year which, according to this article, included 2,569 pharmacies (the other 1,932 of which were transferred to Walgreens as part of another deal.)

As I read more and more about these various deals, both qualitatively and quantitatively, it became more clear what was going on.  

And then, I read in this article, the following quote from Walgreens Chief Medical Officer Dr. Patrick Carroll:

Why not use those locations as a strategy for healthcare?

Then it all made sense.  Allow me to share.

According to the Center for Medicare and Medicaid Services (CMS) National Health Expenditure Data (NHE), NHE grew 4.3% to $3.3 trillion in 2016, or $10,348 per person, and accounted for 17.9% of Gross Domestic Product (GDP).

Healthcare expenses are $3.3 trillion in the U.S. alone.  That’s $3,300,000,000,000, folks.

I was curious as to what that $3.3 trillion broke down into, so I started digging deeper.  

Included in the CMS link above are tables that have a number of ways to analyze this expenditure data (24 different ways to be exact).  

If you are interested, please look for this link on the page:

Screen Shot 2018-04-16 at 4.17.39 PM

Table 4 in the Zip file had some really interesting data:

2016 NHE

Zooming in on that data, I found some even more interesting numbers:

Screen Shot 2018-04-16 at 4.55.00 PM

Of the $3.3 trillion being spent on Health related expenses, $2.8 trillion was being spent on Personal Health Care ($2,800,000,000,000).

That’s a lot of money.  

And of that $2.8 trillion, $2.2 trillion is being funded through Health Insurance.  

That doesn’t tell the whole picture though.

What do all these (potential) mergers mean?

In addition to the research I found above, I found some more stats which painted a much broader idea about the conclusions that I was beginning to draw.

US Health Insurer market share

According to Health Payer Intelligence, in 2016, the top 5 health insurers payers in the U.S. are:

  1. United Health Group – with $184.8bn in revenue and 70 million subscribers
  2. Anthem – $89.1bn in revenue and 39.9 million subscribers
  3. Aetna – $63.1bn in revenue and 23.1 million subscribers
  4. Humana – $54.3bn in revenue and 14.3 million subscribers
  5. Cigna – $39.7 bn in revenue and 15 million subscribers

With a population of 326m people in the US, these 5 companies have coverage for 162 million people (or 49.7% of the population).

Pharmacy market share

In terms of prescription revenues, the pharmacies in the US are split as follows:

Largest_US_Pharmacies_by_Total_Prescription_Revenues-2017

And in terms of number of pharmacies, the top 10 can be found here (according to SK&A Pharmacy Data):

Screen Shot 2018-04-16 at 6.50.01 PM

Pharmacy Benefit Manager market share

Pharmacy Benefit Managers (PBMs), according to Wikipedia, are third party administrators that ‘are primarily responsible for developing and maintaining the formulary, contracting with pharmacies, negotiating discounts and rebates with drug manufacturers, and processing and paying prescription drug claims’ and ‘As of 2016, PBMs manage pharmacy benefits for 266 million Americans.’ (that’s managing the prescriptions for 81% of the population…)

According to Statista, in 2016, the market share is as follows:

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Pulling it all together

Looking back at the potential mergers mentioned in the first section, we have a high possibility of:

  • Walmart (#4 in terms of number of pharmacy locations and #5 in terms of total prescription revenue), partnering with Humana (#4 Health Insurer in terms of revenue and # of subscribers, and which also happens to be the 4th largest PBM).  
  • Aetna (#3 Health Insurer in terms of revenue and # of subscribers) partnering with CVS (#1 in terms of number of pharmacy locations, prescription revenue and the largest PBM)
  • Cigna (#5 Health Insurer in terms of revenue and # of subscribers) partnering with Express Scripts (#3 in terms of prescription revenue and the largest PBM, tied with CVS).

Not to mention the fact that United Health Group (#1 Health Insurer in terms of revenue and subscribers) owns Optum Rx (third largest PBM).  They have upped their health care presence in the past few years by buying MedExpress Urgent Care, which has 203 locations.

One may think that Anthem (#2 Health Insurer in terms of revenue and # of subscribers) is missing out, but maybe they have some benefits to sitting on the sidelines and it’s no wonder there is some chatter relating to potential antitrust violations within these deals.

If I look at all of these facts and figures, it looks like these companies are aiming to build mini ecosystems for their customers, in an effort to start getting a bigger piece of the $3.3 trillion mentioned before…most specifically, the $2.8 trillion being spent on personal health care.

After all, if these companies can offer it all ‘in-house’; meaning prescriptions, simple doctor visits through their in-store clinics and a mechanism to have it paid for through Insurance benefits, then consumers may only need to go to hospitals for specialist visits and more serious ailments.  This should ultimately lower the cost of health care, while also shifting some of that $2.8 trillion to some different hands.

How Technology can help

Technology will play a key role in enabling this to happen.

Ecosystems

In an article a few months ago, I wrote about what I thought CVS and Aetna could learn from Ping An, which I consider to be offering the ‘gold standard’ in terms of healthcare Ecosystems.

From that article, I analyzed the Online to Offline (O2O) capabilities within their Ecosystem:

Online through use of the Good Doctor app, a policyholder can:

  • Search for, and book doctors.  This can be either online consultations or in-person (i.e. offline)
  • Have an online consultation with a doctor
  • Purchase medicine
  • Get access to information about various health topics – either general or specific to me
  • Monitor their own health plan

Offline, Ping An has developed a network of hospitals, physicians, pharmacies and more, which will allow the policyholder access to services they can’t get through the online platform

All of these players are aligning the essential businesses in order to build these ecosystems. The Insurers already have relationships with the hospitals as well, which should help in bringing it all together.

IoT

Florian Graillot, Insurtech influencer and partner at astorya.vc recently wrote a great article in Coverager on Digital Health.  A few points he mentions:

  • Wearables – ‘Technology started to enter in our lives with several players developing wearables focused on fitness, sport and wellbeing.’
  • Data – ‘By trying to collect more customers’ data, they (insurers) hope to better understand their needs and increase the level of engagement they have with them by adding numerous touch points.’
  • Teleconsultation – ‘To increase number of touchpoints and offer additional services, teleconsultation is now a must-have for most of insurers and mutuals’
  • Data Privacy and sharing – ‘To better predict and prevent diseases, technology requires a huge amount of data to be relevant, and we see many startups monitoring behaviors on a real-time basis. This raises the first challenge for both insurers and startups: make people agree to share their personal data.’

Having more information on customers and being able to ‘track’ their health, will help to fuel the ecosystem.  This will enable all the participants in the value chain (doctors, pharmacies and Insurers) to know more about their customers on a real time basis, hopefully helping with more preventative measures and ultimately bring costs down.  As Florian states, ‘Insurers need to develop an ecosystem of technologies and startups around them to address their current challenges: increase number of touchpoints with customers ; understand behaviors to better prevent risks ; and reduce costs of healthcare.

I highly suggest reading the full article.  

Blockchain

Health Insurance probably has the most amount of data being transferred than other lines.  This is due to the numerous amounts of players involved in the process as well as the amount of information on a customer that can be available.

Further, Health Insurance data is the most personal of personal data.  

As such, something like blockchain, to help with the transfer and security of data seems like a solution that can help.

A Blockchain Health Alliance including Humana, Quest Diagnostics, Multiplan, and UnitedHealth Group’s Optum and UnitedHeathcare units has formed recently in an effort to ‘improve data quality and reduce administrative costs associated with changes to health care provider demographic data’.

Further, CB Insights has done a study on ‘5 Blockchain Startups Working To Transform Healthcare’.

Which ‘category killer’ will reign supreme (if at all)?

When it comes to ‘category killers’, two of the biggest and most famous are Walmart and Amazon.

We have been focused on Amazon coming into Insurance so much.  I wrote about this earlier this year, when Amazon, JP Morgan & Chase and Berkshire Hathaway teamed up to announce that they would be partnering on ways to address healthcare for their U.S. employees, with the aim of improving employee satisfaction and reducing costs.

I am still bullish on the prospects of this venture and I know Amazon knows a thing or two about building an ecosystem and how to use data.  However, the potential of Walmart buying Humana does have me very intrigued.

They have a massive head start to Amazon in terms of building their healthcare ecosystem.  After all, it was only 3.5 years ago that they announced the goal ‘To Be The Number One Healthcare Provider In The Industry’.  This includes:

Further, earlier this week, Walmart announced a redesign of its website and Amazon ‘put a pause on its plan to sell prescription drugs to hospitals’.

Summary

OK, are you still with me?  I know this has been a long article.

This topic interests me because it has been the single most mind-boggling item for me to deal with since moving back to the U.S.  I can’t believe how complex the system is here as well as how expensive it is.

It is really an area that needs a lot of help.

I know some of these mergers as well as Amazon’s foray into the larger picture of U.S. Health Insurance are still hypothetical.  However, they are important to monitor for the future of healthcare for people living in the U.S.

In addition to these events from the large Health Insurance incumbents and tech players, I also wouldn’t discount some of the work that Oscar are doing, as well as AXA, which has recently entered an agreement with Oscar and also acquired Maestro Health.

Now that I have looked at the breakdown of spending a bit more, I do believe the companies spearheading these large mergers are aiming to provide their customers with preventative measures, ‘offline’ one-stop shops (clinic plus pharmacies) and online facilities (teleconsulting and pharmacy refill/delivery).  

This will ultimately help them with getting a bigger piece of the $2.8 trillion.

Let’s hope all these efforts also help to reduce that actual dollar amount from a consumer spend perspective.

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Stephen Goldstein is an experienced Insurance executive and Insurtech dealmaker with a core focus on growing revenue, launching go to market initiatives and advising industry leaders.

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Nav on a mission to help SMEs navigate the valley of cash flow death

What does every human want when it comes to money, let alone every small business owner? Financial freedom, of course.

Freedom to have the ability to make decisions about your life, or your business, and not be beholden or limited by financial or information constraints.

Businesses like Nav, a SME focused financial management app that provides free access to credit reports, taps into this desire, handing back control on what is typically an opaque data point for a business, and which is often a limiting factor when it comes to accessing financing.

This week Nav secured $44.8 million in fresh funding from Goldman Sachs, Experian Ventures, Point72 Ventures, Aries, and CreditEase Fintech Investment Fund.

Since 2012, when the business was launched, the driving force of Nav has been a simple one – materially decrease the small business death rate. Mismanagement of cash flow is often the driver for this – studies point to over 80% of businesses citing poor cash flow management skills and a lack of understanding of cash flow as a failure reason. When the cash flow crunch hits – which it often does for many a small business – the only way out can be quick and timely financing. However quick and timely financing often comes down to how healthy that credit score is. It’s like ensuring your health insurance is up to date, just in case that ski accident leaves you in a plaster cast. Like insurance, your credit score is sort of like the one thing you have to have, that you hope you never need.

To date Nav claims it has helped over 400,000 businesses make better financial decisions and access capital. The company acts as a referral network for lending partners, and leverages affiliate and referral partners itself, to grow its base of SMEs.

Enabling financial freedom by making information available to the end user that changes the power dynamic, is a driving theme throughout all good fintech. If this was the only thesis you used as an investor, I’m of the firm belief you’ll be on the right side of returns, and history.

Nav is one example of this in action, and it’s clear these venture funds believe that thesis.

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.

Margin lending with no Counterparty risk– the Dharma open source protocol

In November 2017[1], I spoke to Nadav Hollander in California, the founder of Dharma.io, who had just “graduated” from Y-combinator. At the time, he described his vision to create on the blockchain a tokenized marketplace for loans. In February 2018, the Dharma open source protocol went into alpha testing.

Developers could easily use the Dharma libraries to:

  • Allow would-be borrowers and lender to generate open loan requests for debt agreements of any kind
  • Allow lenders to fill loan requests, formalizing a lending agreement with a borrower
  • Allow users to manage their lending portfolio by making repayments, collecting collateral, trading their debt tokens, etc.
  • Earn fees by underwriting debt agreements generated by Dharma protocol
  • Earn fees by relaying debt agreements between borrowers and lenders

Source Hello, Dharma.js

Dharma didn’t ICO because Hollander believed that token models were very immature right now. Hollander says “I’d rather build a community of constituent users and, only if and when it makes sense, issue a protocol token.” For now, Dharma open source protocol has no native token, but each loan that is created is a token itself

Fast forward to today, February 2019, one year later and Dharma raised $7 million from big investors including Coinbase Ventures who naturally are interested in crypto lending markets, especially for traders. Dharma has already launched the Dharma Lever product (in alpha mode) that deploys smart contract’s to offer margin loans for crypto traders from high volume investors.

No counterparty risk (smart contract risk, since assets are held there).

Instantly, at very low cost.

Lower borrowing rates than centralized exchanges.

Compatible with all wallets.

Screen Shot 2019-02-11 at 09.26.37

Dharma is in the same league as Maker – be your own bank or Defi[2] – that allow us to borrow against our Hodlings. Dharma involves no DAI and accommodates several cryptocurrencies beyond ETH. They are even looking to add WBTC soon which went live on Ethereum just last week.

WBTC – Wrapped Bitcoin is an ethereum-based token that is backed one-to-one by a regular bitcoin BTC.

It is already listed on several DEXs[3] including Radar Relay, Kyber Network, and AirSwap.

Dharma is changing the crypto lending space with their Lever offering that eliminates counterparty risk and replaces it with smart contract risk.

domino

The Dharma Lever is one way to mitigate systemic crisis due to the domino effect of counterparty failures.

[1] I introduced Dharma in my Feb 2018 post Bonds & loans on the Blockchain along with Tzero and Nivaura.

[2] Defi = Decentralized Finance, see more here.

[3] Read more about DEXs in `Are Decentralized Exchanges part oft he bottom up decentralized monetary policy?`

 

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

Get fresh daily insights from an amazing team of Fintech thought leaders around the world. Ride the Fintech wave by reading us daily in your email.

 

Blockchain Front Page: Security Tokens take center stage

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Last week our theme was “Lightning Network Gaining Traction”

Our theme for this week is “Security Tokens take center stage.

Despite the collapse of cryptocurrencies prices in 2018, dropping by more than 80%, for Initial Coin Offerings (ICOs) was a good year. Indeed it was a very good year. We saw more money being raised by more projects.

According to a report published by ICOBench, in 2018, 2,517 ICOs raised $11.5 billion, a 13% increase, compared to 2017. The country leading the pack was Singapore with 228 ICOs, followed by the US with 195, the UK with 165, and Estonia with 112.

In 2017, we saw the rise of utility tokens. Utility tokens were meant to be used to access some kind of service or utility. When the ICO market took off, everyone was issuing some kind of utility token, sold during an ICO, that allowed users of a blockchain platform to pay with tokens for a decentralized service, or earn tokens for providing value to the ecosystem. Utility tokens are very similar to loyalty points, just like those given by credit cards.

Bloomberg’s Matt Levine compares utility tokens to the Starbucks card: “A Starbucks gift card is probably not a security, even though you pay money to a corporation for the card and expect to get back something in the future, because you are not investing the money in the expectation of profit: You’re investing it in the expectation of coffee.”

The fact is that backers of utility tokens are purchasers of a service, and not investors in it. There are many examples of utility tokens in the market. For example, BAT (Basic Attention Token) rewards users with tokens for using the BRAVE browser and viewing ads. Filecoin, which raised a record of $257 million with its ICO, provides a decentralized cloud storage service that takes advantage of unused computer hard drive space. Users that need storage, pay other users that provide storage with tokens.

But, we’ve been seeing the market shift, with “utility” being replaced by “security” and ICOs by STOs. The increase for tokenized securities has many saying that 2019 will be the the year of the STO.

Asset tokenization and security tokens are not a new idea. But with the ICO model crashing, STOs (Security Token Offerings) and security tokens have taken center stage. Security tokens have the potential to disrupt the way investors and securities issuers operate today.

Security tokens are digital, liquid assets, fractions of any real asset. Security tokens can be real estate, funds, equity in a company, derivatives, hotels, licensing, restaurant chains, anything with monetary value. A security token’s value is derived from a real, tradable asset. Security tokens can be used to grant ownership rights or shares of the company, to pay dividends, share profits, pay interest or invest in other tokens or assets to generate profits for the token holders.

We’ve been reading more and more news about STOs in the past months, as more companies are leaning towards launching an STO.

According to an article on MarketWatch, tZERO announced a partnership with Dinosaur Financial Group to facilitate customer trading for the tZERO tokens. In August, tZERO, the security token exchange arm of e-commerce and retail company Overstock, raised $134 million with its STO. tZERO issued to investors tokens in October with a three-month lockup and now the first trades of their security token are already happening.

In July 2018, SPIN an electric scooter company launched an STO to raise $125 million for its start-up. In September, the Malta Stock Exchange signed an agreement with Binance to launch a security token trading platform.

Various platforms have emerged to assist start-ups with their STOs, like StartEngine, Harbor, Polymath, Dusk Network, TokenSoft, Republic, and Atomic Capital.

The ecosystem of security tokens is in its early stage and there is a certain lack of legal practices. As security tokens are investment contracts, in most places around the world they are covered by securities laws. There are people who argue that cryptocurrency tokens are an entirely new asset class which deserve their own laws outside of the existing ones, but this is not reality, at least not as of now. For now, strict regulations concerning securities could pose obstacles, but they could also be a blessing in disguise, legitimizing security token offerings and ensuring compliance from the start.

Security tokens have the potential to attract additional capital from new investors who previously haven’t been interested in this kind of investment. STOs are projected to have a market cap of $10 trillion by 2020. Also, STOs and security tokens could prove to be the answer be the answer to the government’s woes, protecting investors and ensuring operations within the law.

STOs provide a more intelligent and innovative approach to capital funding that frees access to both investment and capital ways, while providing transparency to all of the services in question. The security token ecosystem could lead to the emergence of a new equity ecosystem separate from the public stock exchange, as security tokens allow for compliance, automation, and interoperability all across the securities stack.

For more about the Front Page Weekly CXO Briefing, please click here.

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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.

Open banking – Keep calm and saddle up for a five year run

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A year on – and that’s a big milestone for many. But in the legacy banking world, nothing gets done in a year. And it’s not surprising that open banking has been more of an introvert than we expected. Eventful or not, open banking is one of the best things that could have happened to consumers, and will eventually turn out to be a case study for other global economies to learn from.

Open banking is not just a movement to get banks to relinquish their ownership of consumer data. It is more of a data revolution to identify consumer behaviour and use data analytics to provide personalised services – not just banking services.

There are multiple stakeholders involved in the process of making the most of this data revolution. Getting a consolidated view of a customer’s financial products is perhaps a low hanging fruit.

For a consumer focused data driven use case, that is more integrated into their lifestyle, more work needs to be done on open banking data.

  • Downstream apps need to build their interfaces with banks that have opened up their APIs.
  • That will be followed by proprietary intelligence that these downstream apps will add.
  • Proprietary intelligence using machine learning, predictive analytics etc., need critical mass of data – which only builds over time. For this these firms will also need to onboard customers.
  • Customer onboarding is easily said than done – comes with serious cost of acquisition for a small firm – that happens when they have backing such initiatives from Venture capital.

Every step above takes time. It would be a few years before a real data driven use case can reach the customer and for us to start seeing some success stories. But where are banks largely, and where are the startups in the journey?

A year ago the Competitions and Market Authority (CMA) set the pace for a bunch of banks (9 of them) to open up customer data through APIs. And 12 months on, there is more noise about a lack of noise in this space. I don’t believe there is any action missing, and this is why.

Banks had to open up customer transaction data through APIs – but CMA only came up with this idea in 2016. For banks to get it, plan it, and execute the APIs within even 24 months was always an aggressive timeline. HSBC’s Connected Money app was perhaps an exception to the usual pace of banks. Barclays seems to have a similar capability as well.

However, the integration that legacy Banks have provided to downstream systems are not the most intuitive. APIs exposed by banks use apps like Yodlee (who create the plumbing for the data) who then integrate to downstream customer facing apps like Money Dashboard for example.

One quick look at the apps show that the the experience offered by legacy banks to integrate into a customer facing app are so outdated. Especially for a customer segment that are used to a frictionless Monzo like experience. That is an area where banks can definitely do better. However, most Millennials and Generation Z customers directly bank with neo-banks, so this will be less of an issue with that customer segment.

Startups are still building the intelligence to make the most of the data revolution. However, most firms that I know of that are looking to provide PFM services, lending (underwriting, brokering or credit scoring), SME loyalty, or simply cleverer product switching, are all focused on growing their customer base in search of more data volumes.

Most of the clever applications need machine learning algorithms to feed on a lot of high quality customer data. That is when their results get accurate as the machine learns from continuous feedback. Releasing half trained machine learning apps to consumers can actually result in poor customer experience and churn.

Most firms I speak to, are focused on identifying product market fit for their data driven use case this year.

Customer acquisition has to be cleverly managed to ensure there is growth in data volumes, but also the predictive analytics is accurate enough to cut down churn. Its a hard game to play.

In a recent interview Tom Blomfield, CEO of Monzo mentioned that he wasn’t afraid of legacy banks or even the Neo-banks. But he was wary of new open banking powered apps just bringing clever capabilities and acquiring customers to dwarf the likes of Monzo. Open banking will be a slow burner, it would have failed if we didn’t see some success stories in the next 5 years.


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

Get fresh daily insights from an amazing team of Fintech thought leaders around the world. Ride the Fintech wave by reading us daily in your email


Cyber Risk Insurance translates Nerd-Speak to Boardroom-Speak

 

Cyber Risks Extra Extra

Reposted, as it is Chinese New Year for Zarc Gin, our regular Insurtech Expert based in China.

Why do Banks exist? That is not some deep, philosophical question about the role of money in society. Banks exist to protect your assets from thieves. Because they do a good job of this, they can make a lot of money lending some multiple of what they store in the vaults. The only difference now is that the modern version of Butch Cassidy and the Sundance Kid are getting monitor tans as they cyber-attack the vaults from their computers.

Money is one asset to protect. Data is another. So is data about assets. In the digital age, it is all about data. And data is easy to steal.

All the good things that we write about on Daily Fintech – all that agility/productivity enabled by data and connectivity – also benefit Butch Cassidy and the Sundance Kid.

Cyber Risk is one nerdy subject that gets Board level attention because the risk is so high. Global 2000 companies can lose $ billions from a single hack. The problem is that cyber security is also an intensely complex subject technically.

One reason that so many influential leaders subscribe to Daily Fintech is that we are good at translating Fin to Tech and Tech to Fin. So we are attracted to the challenge of translating Cyber Security Nerd-Speak to Boardroom-Speak. It is one of the toughest translation jobs around. Even with a lot of technical experience, Cyber Security can be daunting. Even with a lot of business experience, understanding how a Global 2000 Board thinks can be daunting. Both are tough on their own. Translating between the two is even tougher, because they could not be further apart.

That translation, though hard, is ultra-critical. The Board has to really understand Cyber Security and they are currently failing at this task. This article on LeadingBoards describes the problem very well

Cyber Security technology = big budgets & bigger risk

The global cybersecurity market reached $75 billion in 2015 and is expected to hit $170 billion in 2020 (source, Forbes).

This is one market where the “you never get fired for buying (insert Big Tech vendor)” mantra breaks down. In most other enterprise technology markets, the big vendors tend to win because the Boardroom does not really care who is picked. So the senior IT managers making the decision go for the vendor that is competent enough to do the job and big enough that if it all goes wrong they can say “but all our well-respected peers made the same decision”.

That defence breaks down in Cyber Security because the risk is so high. Nor can a Board simply say “the CISO who made the decision has already been fired”. The Board has to take direct responsibility. Which means the Board has to understand Cyber Security.

How is the Board supposed to understand something as nerdy as Cyber Security?

We take a lot of briefings on cyber security technology, because we know how important it is. Listening to all these super-smart tech guys explaining the latest cyber security teaches us that a) it is hugely complex and b) there is no silver bullet.

We use a simple mental map that translates Cyber Security to the analog world:

  • Perimeter Security is where most money is spent. Think fences, guards, dogs. The fundamental problem is that somebody will always get through. The bad guys also benefit from Moore’s Law and can use SMAC (Social Mobile Analytics Cloud) to collaborate and share (what has been dubbed Crime As A Service). You can be the biggest bank or the biggest government and you still get hacked.
  • Digital ID. Think body part scanners (finger, eye, voice etc) that determine who can get into the building. We have written a lot about Digital ID technology and it is improving at a remarkable pace. The problem is collusion with a trusted inside-person who is part of the crime gang; the person with perfect Digital ID is a criminal.
  • Protect from the inside. This assumes that both Perimeter Security and Digital ID is imperfect. One way to protect from the inside is process controls (for example needing more than one person to send a wire). This also suffers from the collusion problem, but it is better as it is harder for criminals to corrupt the two individuals in a process. Another way is to write code that is secure. The problem is that both better process and better code hit the agility/efficiency problem. Banks have to move fast and efficiently to beat competition AND be secure. One alone is not enough. For example, Banks want to use high level languages and tools that enable rapid time to market even if that means the developers are not thinking much about security.
  • Protect when data leaves the vault. This assumes that all three methods above will fail. The analogy here is marked banknotes used in a kidnap ransom. Again, the bad guys have very sophisticated technology to get rid of these markings, so this is yet another arms race.

If you cannot measure it, you cannot manage it

That is one of the oldest truisms of business. If you listen to the pitches of any Cyber Security vendor, you will hear that they have the solution. The problem – as any reasonable attentive business person can observe – is that even companies with all this smart technology still get hacked. The empirical evidence is that there is no silver bullet.

Insurance has historically worked on statistical models. This works fine – until it no longer works. When something fundamental changes, the models become deeply flawed. We have tracked this as it relates to catastrophes created by climate. The use of data and connectivity by cyber-criminals is analogous. The risk went up in unpredictable ways. It is no longer good enough to rely on historical models. Cyber Risk is like Climate Risk – the historical models do not predict the future accurately enough.

What companies want is something as simple as a cyber security safety rating. Insurance Companies have the right motivation to give an honest rating (unlike credit rating agencies that are paid by the seller). Insurance Companies won’t award a AAA cyber security safety rating to a BBB company, because they will pay in claims for getting it wrong.

That means Insurance Companies need to turn into cyber security experts. A tech vendor may say “we have the secret sauce” to change your rating from BBB to AAA and thus lower your premiums. The Board will say “sure, if you can convince our Insurance Company that this will lower our premiums, we have a deal.”

Startups in this risk metrics space include CyenceBitSight and Security Scorecard.

Cyber Risk Insurance is a data game and that is a problem

Cyber Risk is one of the fastest growing parts  of the Insurance market, accounting for over $3 billion in premiums.

Banks are in better shape than others. Protecting against thieves has been a core competency for longer.

Cyber Risk Insurance people differentiate between Micro and Macro. The latter is the news-worthy hacking between governments (cue image of the nerdy young Q in recent James Bond movies). Our concern is the more boring Micro Cyber Risk Insurance – exciting enough as this is about whether huge companies can lose $ billions from a single hack. The Micro could become the Macro if a number of Micro hacks led to a crisis of confidence in the financial system akin to September 2008.

Talking to experts in this relatively new field it is hard to get a lot of on the record quotes. That indicates a market that is nascent enough that the solutions are not obvious. To entrepreneurs that signals opportunity.

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

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Square launches SMB Card and POS platforms hit payday

This week Mastercard launched a report in collaboration with CB Insights where it made the not so terribly startling prediction that SMBs would ‘become the next battleground for fintech’ in 2019. I think SMBs have been the battleground ever since the word fintech was coined, however the market has proven incredibly hard to crack.

One key area that the report did zone in on, which I think is interesting, is the renaissance of the point-of-sale system, or POS. Its centrality in the SMB ecosystem, both in driving business for an SMB and in providing a platform for fintech plugins is still widely under recognised, and under-utilised.

The report notes a few companies who are starting to embrace this privileged position, by branching out of pure hardware and basic software capabilities and into payment, sales enablement, inventory management and CRM hubs. These POS systems are generally also compatible with cloud accounting packages, the hub on which many fintech lenders sit. All these parts of the ecosystem are heavily dependent on each another, creating a symbiotic and hopefully stronger financial infrastructure, ultimately powered by a layer of dynamic data.

The report calls out some of these POS systems – Toast, Upserve and Toronto based global player Touch Bistro, a company I remember working directly with on an Australian integration, during my time at Tyro.

Square of course is rapidly deploying into this ecosystem, having seen the forest for the trees years well before many others. That, or Jack and co were simply brave enough to act on their foresight.

Proof its continuing to lead the charge in the SMB battle came in late January, when Square launched Square Card, it’s SMB Mastercard debit card. The card allows business owners to draw on their Square takings, and also offers an instant discount on purchases made at other Square sellers. Deceptively simple, and an idea Amex could and should have monopolised on long ago via their Shop Small initiative. It’s one of those ideas a ruthless focus on the core customer – SMBs – allows platforms like Square to launch.

Keep an eye on the POS platforms, as this is where a good degree of the action will take place going forward.

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.

What is the problem with Money being a claim on an Institution? Reflections from the AxessThinkTank event

axessThe first full day event focused on what is now `Alternative finance` was of high quality and non-tribal. Organized by the Geneva based, Axess Think Tank, with four themes

  • The future of money
  • The Regulatory landscape
  • ICO-STO and Capital markets
  • Blockchain and the Token economy

I had the great pleasure of moderating the last two topics.

Watch Alpha Point the US based leader in digital Exchange software white label solutions and DLT software. Both team members were extremely upbeat about the growth prospects of their market sector. The CME group and the Royal Mint of England are already their customers and Novogratz invested in them last summer.  I felt that they are out there for a mass distribution of Crypto Exchanges that will allow for the tokenization of all kind of illiquid Assets. While selling exchange software, they are disintermediating the oligopolistic conventional exchange software business.

Cryptofinance is a Swiss quality business that offers asset management services, brokerage and custody. Lewin Boehnke CTO of Crypto Storage AG and head of research and shared insights from their journey, seemed to have a card up his sleeve when he repeatedly stated that

`there are a few major players that will join the digital asset class soon`[1].  Stay tuned on their news.

SCX is the new fully regulated Swiss Crypto exchange live since last summer. The Chairman of the board Christian Katz joined our panel. He is the former head of the SIX exchange and is now devoted to building an institutional grade business. A secure and transparent crypto exchange is undoubtedly needed and C. Katz knows the inside outs of the exchange business.

Taurus is a new Swiss player offering brokerage and trading services. Recently also added storage solutions.

LakeDiamond & Monart, were the two specific tokenization use cases that participated. One in tokenizing the industrial production of diamonds and the other in the contemporary art space.

Capco shared lots of insights from their clients and the projects that they have working on.Romal Almazo, Capco’s UK DLT & Crypto Lead continuously emphasized that we need to go back to the core issue

`What is the problem we are trying to solve?`. Five words please. Then we see whether blockchain can do the magic and solve it.

He was also assertive, in his belief that only what is FCA approved will be the dominant tech that will scale. He announced a CAPCO pilot project that is by invitation only, in which CAPCO will use its global network of SMEs to participate in a solution around digital assets that will be led by CAPCO. The aim is to develop a blueprint in solving market problems via digital assets.

CVVC and Amazix, participated in the panels, sharing their experiences from the growth and pivoting of the startup ecosystem.

e-Money, CBDC, and BTC

When you have a board member of the SNB Andrea Maechler, a senior research advisor to the BOE Michael Kumhof, a research fellow of the Fed St. Louis & Professor at univ. of Basel Aleksander Berentsen, a research fellow of the UCL Center for Blockchain Technology Daniel Heller; there is a lot to absorb from their talks and panel discussions. Add to that the moderator Michel Girardin, from the Univ of Geneva and Jean-Pierre Roth, the ex Governor of SNB, in the audience.

They agreed that payments are the very heart of any economy and that we live in a world that customers expect payments to be like WhatsApp messages.

The SNB is actually following the innovations around payments, whether Fintech or Bitcoin originated. Andrea Maechler, emphasized that the SNB`s mandate is to support and promote cashless payments and this done through SIX. Fintechs that hold a FINMA payment license will be granted access to the SIX system.

Regarding CBDC[2]`s they have concluded that it is not a tech issue but rather a policy issue. The SNB believes that while there are advantages, the main disadvantages, make CBDCs a no-no fort he SNB. They see that a CBDC would increase the risk of a bank run and would make monetary policy ineffective when it is actually mostly needed.

This is where Aleksander Bernesten actually stepped up and provoked the thinking. He firmly believes that Central Bank electronic money would increase financial stability.

Give access directly to the CB to all.

His motto is that

the Censorship resistant attribute of Bitcoin, is priceless!

He makes things simple by focusing on this attribute. Since there is no free lunch, we have to choose between

A Censorship resistant database which is inefficient and slow

Or

An efficient and fast centralized database which is not censorship resistant

 

He thinks that a central bank decentralized currency has no meaning at all. Forget about a Fedcoin type of idea. However, he proposes that Central banks issue electronic money for all! So instead of having the authorized commercial banks exclusively access directly the CB, we should all have direct access to the CB. Forget about the RTGS system.

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For those that want to understand more details read The Case for Central Bank Electronic Money and the Non-case for Central Bank Cryptocurrencies

Note: This post is not comprehensive coverage of the event. By joining the Axess think tank you can access the video recordings and more. Check it out here.

Don’t forget that currently

MONEY is a claim on the Central Bank or a commercial bank!

Will this change? How and when? The Why has been answered: For a Censorship resistance monetary system.

[1] Check https://www.linkedin.com/feed/update/urn:li:activity:6497140631427694592

[2] Central Bank Digital Currency

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

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Blockchain Front Page: Lightning Network Gaining Traction

lightning-netLast week our theme was “New York regulators approved new Crypto ventures”

Our theme for this week is “Lightning Network Gaining Traction.

Since it went live early last year, the Lightning Network has skyrocketed. With over 630 Bitcoin (BTC), more than 23,000 channels and a total network capacity of $2 million on the Bitcoin mainnet, according to data from 1ML, LN’s capacity for BTC has had crazy growth, going from 4 to over 600 BTC since last February.

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In the last three months, LN’s growth has been even more steep. The release of Casa Lightning Node has been a huge factor driving this growth, making it very easy for non-technical users to run an LN node.

But, Casa is not the only reason. Campaigns carried out by the community, like Lightning Torch and the growing number of wallets that support LN, are some of the other reasons for this growth.

The first Lightning implementation by Lightning Labs was launched in beta in March 2018. The other two, by ACINQ and Blockstream, were launched in late March and late June.

Last week, Casa announced the launch of a new browser extension. The software will allow Bitcoin Lightning Network-enabled nodes, to be accessed directly from crypto websites. Casa Extension will make interactions seamless, allowing users to click on a button and make a payment on a website that accepts BTC.

The original Lightning Network white paper was released in February 2015, by blockchain researchers Joseph Poon and Tadge Dryja. Since LN’s introduction, we’ve seen different projects developing on the Lightning Network and others working protocols that use some of the same technology.

One of these projects is Arwen, that wants to be for trading, what LN is for payments. With $865 million lost to hacks on centralized cryptocurrency exchanges in 2018, and more than $1.5 billion in total up to now, Arwen is trying to solve a big problem. Arwen has developed a new protocol that allows traders to have control over their private keys, even when their coins are stored on an exchange. Users maintain self-custody of their coins in their own hardware or software wallet, without having to transfer their keys to a third-party. Last week, KuCoin announced a partnership with Arwen, to offer a non-custodial service to its customer base.

While the technology is still in testing, LN aims to make Bitcoin transactions faster and cheaper. The most remarkable growth metric for LN is the growing number of nodes, with active channels. On average, each node has nearly 8 channels and each channel has an average capacity of $110.

The Lightning Network has become one of the most promising approaches to making Bitcoin a fast, cheap and secure payment network. The technology is still in its infancy and for most people, LN is not relevant. But given the growth we’ve seen, it may very soon be. At this rate the LN’s capacity could exceed a billion, over the next year.

Whether LN is successful or not, in many ways depends on how successful Bitcoin is, in maintaining its lead over other cryptocurrencies. Currently the entire crypto market is valued at $113 billion, with BTC representing 53% and Ripple, the second in line, at 10%. But prices and market cap will not be the only factors, it will also depend on how quickly competition can scale and how seamless the experience becomes for users.

For more about the Front Page Weekly CXO Briefing, please click here.

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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.