It’s the technology, stupid!


The below post was first published on The Financial Brand.


As of December 2016, the Bureau of Labor Statistics shows the US financial services industry employing 8.4m people. This figure includes credit and non credit intermediation, securities and insurance activities. For good measure we may want to add payroll, collection agencies and credit bureau activities which increases the tally by an additional 400k for a grand total of 8.8m. Let’s label this “fact #1″.

For the past 6 years the financial services industry has undergone a transformation, attempting to shed its industrial age structures, rebuilding itself alongside new digital paradigms. The first transformative steps have focused the digitization of front end processes and systems. As we cycle through these first steps, we are made aware of the next steps the industry is or will undertake, digitizing middle office and back office processes and systems. Terms and technologies such as artificial intelligence, straight through processing, robotics, process automation, blockchain or distributed ledgers are all connected to a meta intent: to modernize and increase the industry’s productivity. Let’s label this “fact #2″.

Innovation is the process whereby technology is applied to human processes with the resulting outcome of increased productivity. In other words, innovation enables humans to do more with less. This has invariably led established industries to produce more with less labor, or die trying. Witness agriculture and manufacturing. Let’s label this “fact #3″.

Newly elected President Trump ran on a Make America Great Again platform which in part means the creation of domestic jobs, or the repatriation of offshored jobs to the US. Arguably this dialectic has focused mostly on the manufacturing, energy and extraction industries. Let’s label this “fact #4″.

We also know the Trump administration has made known its intent to free the US economy from its regulatory debt, which includes financial regulatory debt – which in and of itself is worthy exercise although the devil is in the details. I discussed the Executive Order regarding the US financial system here. The purpose of this intent is obviously to facilitate job creation. Let’s label this “fact #5″.

The US financial services industry has, much like its manufacturing brethren, engaged in offshoring. We need to unpack this statement though. Global banks (retail, commercial or i-banks) have offshored jobs, not the entire industry, and certainly not regional, community banks or domestic insurers. Further, global banks have offshored certain categories of jobs such as low level IT, risk management and compliance to locations with a lower cost of labor. Thusly the aggregate amount of US financial services jobs lost to offshoring is probably minimal. I would venture a guess of no more than 150k jobs lost to offshoring – arguably I might be completely off. Further, some of this “offshoring” might very well be grounded in sound business decisions such as the need to have global support operations in multiple time zones across the globe.

Additionally, it remains to be seen whether deregulation – or the lack of enforcement of current regulation – will help with financial services job creation per se. The demise of brick and mortar branches as the primary distribution channel for a financial product is not regulatory driven. It is borne out of societal changes enabled by new technologies. The slow unbundling and rebuilding of traditional financial services models is a  byproduct of the internet age.

I cannot avoid concluding that any push to force large banks to repatriate jobs back to the US will not yield significant results and that any deregulation push as a basis for job creation is a weak proposition at best. Therefore the desired outcomes powering fact #4 & fact #5 are questionable, regardless of how well meaning the intent is.

On the other hand, financial institutions, under the assaults of innovative fintech startups, ravenous tech companies (Google, Amazon, Facebook, Apple, or GAFA) and the drastically different appetites and behaviors of younger generations compared to their predecessors, have no other choice but to complete their transformations towards greater productivity. Tomorrow’s banks will discharge their regulatory burden with but a fraction of the number of employees needed today. Tomorrow’s insurer will reach consumers with a digital brokerage workforce at odds with current prevalent distribution channels. Buy and Sell side institutions are today actively deploying advanced technologies that makes them brutally efficient at pre-trading, trading and post trading activities. Everyone is betting on conversational banking/insurance via mobile social media apps.  I am not even attempting to draft a comprehensive list of transformational changes, yet readers will clearly decipher the inevitable conclusion, namely that the probability the financial services industry will employ fewer people in 5 to 10 years from now is much higher than the probability aggregate employment will remain unchanged or increase.

No amount of political nudging, deregulation, or trade re-engineering will prevent or reverse the consequences of technology innovation. We are left with attempting to decipher one unknown: How many jobs will the US financial services industry shed in the next 5 or 10 years, and how swift will the shedding occur? Fact #2 & #3 loom larger and stronger.

How will the impact of such dislocation be tackled? (8.8m workers is not a small number and, as the last US presidential election has proven, not paying attention to technology dislocation is unsustainable.) Do notice how certain European governments treat their domestic banks as “employment stabilizers” and do their utmost to ensure no material waves of redundancies occur. Will the US follow this path? If so will this further enable GAFA and fintech startups? More importantly, which will be the new demand curves created on the back of this dislocation?

I am sure the CEOs of most financial institutions have not failed to notice all technology companies have a much higher revenue per employee ratio than traditional banks or insurers. You have been warned – and make sure to check how the statistics behind fact #1 will behave going forward – it’s the technology, stupid!



Interpreting the new Executive Order on Regulating the US Financial System

President Trump signed the Presidential Executive Order on Core Principles for Regulating the United States Financial System on Feb 3, 2017. I encourage you to read it. It is succinct and instructive. Interpreting it is more complex especially when attempting to reconcile it with what Trump or his cabinet members have said about regulation in general and financial regulation in particular.


Let’s go over the main policy points:

- “a) empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth”

I support empowering customers. We, in fintech land, stress how vital it is for financial institutions to be customer centric as opposed to product or transaction centric. This policy goal implies that customers be given the right information at the right time to make the right decisions from a cost/benefit point of view. It also means that financial institutions or fintech startups adopt a transparent business and revenue model while selling to customers. This does not necessarily mean overbearing regulatory oversight. It certainly means smart regulatory oversight and strong customer/consumer advocacy and protection. It remains to be seen whether a repeal of the DOL rule or the outright elimination of the CFPB would be congruent with this policy goal. Admittedly, there may be ways to improve the CFPB’s approach or to come up with a transparent pricing framework for savings accounts. On the latter I note that the FCA, the UK regulator, was able to implement a sensible rule, similar to the DOL, without penalizing retail investors, see here. Frankly, the way one can achieve this policy goal is to craft regulation that encourages healthy innovation from fintech startups or new entrants, thereby making sure incumbents are nudged to better serve consumers and customers through competition.

- “b) prevent taxpayer-funded bailouts” and c) foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry”

I am in violent agreement with the intended goal here. We witnessed the destructive effects of the previous bailout that saw taxpayer money rescue major banks as opposed to shareholders bearing the cost of the mistakes made by the banks they were invested in. If current regulation fosters or encourages taxpayer-funded bailouts or moral hazard, it should be eliminated. In so doing, and in order to create vibrant financial markets that foster economic growth, which I presume needs to be resilient and sustainable as opposed to exuberant and unsustainable”, the inevitable conclusion is that financial institutions will have to be subjected to high or higher capital requirements and standards. Indeed, no taxpayer money and less systemic risk necessarily translates into more skin in the game for financial institutions.  In other words, less regulation is good, smart regulation is better but stringent capital requirements and standards best.

“d) enable American companies to be competitive with foreign firms in domestic and foreign markets” and “e) advance American interests in international financial regulatory negotiations and meetings”

These two policy goals leave much to interpretation. Are we meant to understand that we shall see the US engaging in regulatory competition while decoupling from international banking regulation or that the US will collaborate with other jurisdictions to ensure level playing field The global financial services industry is so networked and complex that an America First approach to regulation is difficult to fathom. Further, regulatory competition is fraught with danger and may lead to a “race to the bottom”. Finally, the US has had as much latitude as it wanted in adopting international banking standards such as the Basel Accords. In the eyes of many industry participants, a unilateral go-it-alone policy towards international markets may have negative and unintended consequences.

“f) make regulation efficient, effective, and appropriately tailored”

This is by far my favorite policy goal based what it promises potentially. Regulators also need to change. The FCA’s sandbox initiatives has shown a regulatory body can derive much value in engaging with startups, new technologies and new business models as early as conveniently possible. Regulators need to develop novel ways to conduct their own businesses and upgrade their own capabilities. Bottom up approaches such as testing environments or initiatives around regtech collaboration are the way forward. If this policy goal nudges US financial regulators to think outside of the box and help them regulate along the lines of what can be possible as opposed to what is not permissible, the US regulatory landscape will have been greatly enhanced. Interestingly enough, the financial regulation passporting concept between the US and the UK floated recently, takes on a much richer meaning when brought within the context of this policy. I expanded on this passporting idea here. Fintech will have recorded a major win.

- “g) restore public accountability within Federal financial regulatory agencies and rationalize the Federal financial regulatory framework”

My next favorite policy goal. Let’s face it, the US financial regulatory landscape is a mess: The OCC, the FDIC, the Fed, the CFPB, the CFTC, the FHFA, FINRA, the FTC, the MSRB, the NCUA, the SEC, the NFA, the Treasury & FinCen, 50 state regulators for banking, insurance, money transfers, debt collection and securities. All these independent yet interrelated agencies were built for the industrial age. Overlaps, redundancies and gaps plague the system and create inefficiencies as well as uncertainties, let alone unnecessary costs for market participants, startups and new entrants. While incumbents, ironically, have historically used this regulatory maze for their benefit as a defensive moat. A major rethink is needed. From this perspective, the intended goal of the OCC with its fintech charter is very interesting, even though in and of itself, due to the aforementioned balkanization, it is doomed to encounter major turbulence. I do understand the Federal vs State issues specific to the US Constitution, still some rationalizing needs to happen. The public accountability part of this policy is laudable too. There, the danger will lie with the potential erosion of regulatory independence should public accountability lead to undue political dependence and interference.

Now, what I find particularly interesting when reviewing the soundbites coming from the Trump administration is how jarringly different they appear compared to the Executive Order itself. Granted, the order may have been worded in a way that allows for latitude and blandness.

Still, let’s consider some of these soundbites:

1) “We expect to be cutting a lot out of Dodd-Frank, because frankly, I have so many people, friends of mine that had nice businesses, they can’t borrow money,” Mr. Trump said in the State Dining Room during his meeting with business leaders. “They just can’t get any money because the banks just won’t let them borrow it because of the rules and regulations in Dodd-Frank.” from this article.

2) “The number one problem with Dodd-Frank is that it’s way too complicated and cuts back lending.” from this article.

Are US banks not lending because of too many rules, too much regulation? Are they not lending across the board or only to specific borrowers – subprime as opposed to prime for example? Is the economy so muzzled by the lack of supply or has it been a lack of demand? To be fair, smaller banks may be hit harder by regulation than larger banks. Is it the case that smaller banks are not lending while larger banks are?

Here are two graphics I found on the FDIC site, from the FDIC Quarterly Banking Profile, 3rd Quarter 2016, which cover all FDIC covered institutions.

The first shows loans and leases as a % of deposits.

Screen Shot 2017-02-09 at 3.22.53 PM

As you can see lending decreased from a peak of exuberance of 2007/2008 up until 2012 and rebounded for smaller financial institutions from 2012 to 2016 while it stabilized for larger financial institutions for the same period. I guess there are several ways of interpreting this graph. First, the rebound could have been stronger, and if true we are still faced with the supply/demand conundrum. Second, financial institutions have been lending again, and actually smaller ones more so than larger ones which tends to invalidate the “too much red tape is killing lending” argument. Do we really want more exuberant lending to the tune of close to 95% of deposits as the ratio stood in 2007, especially for larger financial institutions?

The second graph, from the same source gives us more perspective.

Screen Shot 2017-02-09 at 3.23.16 PM


The change in domestic loans, blue line bar, is clearly on an ascending trend from 2011 to 2016. Net change is positive. Again, maybe not as much as we would like, but still positive, thereby showing banks are indeed lending.

I would venture to say that higher capital requirements and lower leverage ratios have been effective in reigning in exuberant lending. Relaxing these pieces of regulation is not the answer.

This last soundbite is interesting

3) “The biggest thing we have to fix is that we have to get the United States banking system working again” Cohn said. “We need to get capital available to small and medium size businesses and for entrepreneurs. Today banks do not lend money to companies. Banks are forced to hoard money because they are forced to hoard capital and they can’t take any risks. We need to get banks back in the lending business, that’s our number one objective.” from this article.

The wording is clearer here, banks are hoarding too much capital and we should allow them to take more risks and lend more by reserving less capital. If that is the case then the objective may not be to rationalize and simplify regulation per se but to relax capital requirements and standards. Should this goal benefit large banks or Wall Street in particular, how will Main Street benefit? Should this goal be achieved by predominantly helping community banks and regional banks then the path towards benefiting Main Street becomes clearer. Changing an existing law is not that easy and it will take Democrat votes for wholesale changes, which of the two paths will be chosen will depend on some type of Congress consensus.

Incidentally, any regulatory path that fosters innovation and competition benefits Main Street – my subtle nudge to help the fintech ecosystem. Clearly systemic risks, economic growth, consumer protection as well as the cost of regulation in aggregate need to be addressed. There is another equally crucial metric, the unit cost of financial intermediation.

According to Thomas Philippon, Professor of Finance at the NYU Stern School, for every $1 of financial services intermediated by financial institutions we pay 2 cents.  This metric has remained strikingly constant over time at around 2% for over 130 years. This shows that, despite technology and innovation in financial services for decades, the actual cost to retail and wholesale customers has not decreased at all. Corporate profits and executive compensation have been the overwhelming beneficiaries. Simply put, any regulatory path that will help drive down the unit cost of financial intermediation will benefit Main Street.

See this graph, link to the article here.

Screen Shot 2017-02-09 at 4.04.29 PM

While this Executive Order is promising in some way, how it will be carried out by the Executive and the Legislative branches, and how it will be viewed by the Judicial branch is what really matters in the end.


The Identity Startup Landscape

I am proud to have collaborated on this Identity Startup Landscape article. Digital identities are one of the cornerstones of the Digital Age and accordingly, I expect a vibrant ecosystem where entrepreneurs, incumbents, investors, regulators, legislators and standards bodies will create the identity frameworks of tomorrow.


This post as well as the attached Identity Startup Landscape were created as a collaborative effort between One World IdentityRegTech LabMichael Meyer and Pascal Bouvier. (Special thanks to Emma Lindley)

Identities are primary and central to virtually everything in the world.  Each person, place, thing, and entity has its own unique identity.  For example, with an assured physical identity, a person can own something, vote for someone or something, and access goods and services.

In the real world, physical identities have always been paramount.  Face to face meetings with bankers, wet signatures for contracts, or even a handshake were important parts of our economy and operating system.  But for distant transactions, how could one verify that the desired person was actually making a transaction?  Correspondent Banking and Trade Letters of Credit were early solutions.  The advent of electronic communications enabled wires: SWIFT was created etc. Together, these systems sped up the rate at which funds could be moved, significantly reducing settlement risk. However, the burden of other types of counterparty risk has not gone away. The systems were cumbersome but worked.  And then the internet and its interminable need for passwords…

All of these use cases rely on identities.  If an identity is known and verifiable, a transaction can move forward.  If not (ie “forgot password”) then the process grinds to a halt.

As we all know, the current Identity Management schemes are insufficient.  We are now moving, at near light speed, into a digital first world.  Therefore, DIGITAL IDENTITIES are a fundamental requirement of our new world. However, for identity, translating from the physical world to the digital one is not a simple process; we need innovation to make it happen.

OWI is building a business around defragmenting identity and its myriad requirements.  RegTechLab believes that Identities are a critical regulatory challenge and opportunity.  Michael and Pascal, as FinTech/RegTech investors are focusing on identity innovations.  Together, we have worked as a team to build a database of identity companies as well as a scheme to help us understand the market structure.

The identity space is maturing into an industry in its own right with substantial, well established companies attempting to offer solutions – see OWI’s Identity Industry Landscape.  But the very nature of identity, its plasticity, how it is assured, how it is verified and provisioned, managed and monitored is being challenged as we enter the digital age. We are seeing a new world of digital identities being formed, partly nudged by governmental entities, partly built by free market forces, meshing with existing identity infrastructures in developed economies and springing out of nowhere in emerging markets.

Identity in general, and digital identity in particular, is of central importance to the future of trust, data privacy, cybersecurity, commerce, payments and individual affirmation in both the physical and digital worlds. We believe that this important sector will evolve slowly at first, and then rapidly all at once. In order to understand innovation at the edge, we set out to complement OWI’s Identity Industry Landscape which focused on established players by building an Identity Startup Landscape focusing on early stage companies.

Screen Shot 2017-02-08 at 11.56.07 AM

We have defined 7 segments and identified 189 identity startups. We grouped these startups according to their known main use cases even if some of them may overlap across more than one segment.

The seven segments are:

- Attributes: Point solutions designed to prove and/or verify identity or identity attributes of people.

- Authentication/Authorization: Point solutions designed to authenticate users, or authorize users for specific use cases or thresholds.

- Identity Access Management (IAM): enterprise grade access management software (may include governance and rights management, more than point solutions, may be delivered as a client/server solution or cloud based). This segment is the historical and traditional segment for identity solutions.

- Digital Identities: next generation digital identity solutions (built from the ground up for the digital world)

- Identity of Things: Identity solutions for things – connected or not – and assets.

- Monitoring: Solutions that address fraud or deliver fraud prevention, meet certain AML/KYC compliance thresholds and mandates, assess behavioral or transactional risks. Solutions that address on-going management of identities.

- Technology Providers: Technology solutions – enabling or building blocks – to one or more segments of the identity landscape.

The 187 identity startups breakdown as follows:

Screen Shot 2017-02-08 at 11.57.44 AM

We will watch this space closely as it is currently in flux. We expect many more new entrants over the coming year, especially in the Digital Identities and Identity of Things segments. As with every ecosystem, a fair amount of changes and pivots for many of the startups listed. It should be noted that not one day goes by without us adding a new startup to this list.

In a follow up blog we will analyze major trends within this landscape, potential convergence between the startups in this landscape and the incumbents in OWI’s Identity Industry Landscape, as well as a funding analysis to date for all startups.

Click here for the PDF version: RegTechLab_OWI_Identity Startup_Landscape_February 2017

In the meantime, should you know of new startups entering this space, do not hesitate to contact us at: info@regtechlab.io or info@oneworldidentity.com


About One World Identity:
One World Identity is a team of identity experts driven by a desire to create a neutral platform for leaders in the industry to collaborate, connect, and learn. Its debut event, the K(NO)W Identity Conference, will bring 150 speakers to Washington D.C. May 15-17, 2017.

About RegTechLab:
The RegTechLab is an innovation center that incubates, accelerates, and tests emerging financial technologies focused on solving Regulatory Requirements problems in financial services. We offer a global service for regulators, financial services companies, technology solution providers, and interested stakeholders that includes networking, advisory services, and use case testing. The RegTechLab will officially launch in Washington D.C. towards the end of the first quarter of 2017.


Are you sure you want to innovate like a startup?

 I have been thinking about the evolution of the innovation function inside financial institutions (innovation groups, labs, incubators, corporate venture function, R&D, IT) and outside (accelerators, consultancy firms) both from a structure and process point of view. This collaborative post with Claro Partners is one attempt at addressing process.


Co-authored by Aldo de Jong and Harry Wilson from Claro Partners and Pascal Bouvier, fintech venture capital investor

Let’s paint some broad strokes: a startup throws mud at the wall and see’s what sticks, with a 0.2% success rate or less. A corporation makes more planned, but slower, moves and hits around a 12.5% success rate according to a recent HBR article.

As large companies jump on the startup innovation bandwagon, the danger is that these collaborations represent the worst of both worlds: throwing mud at the wall, slowly and expensively.

As corporations reinvent their innovation processes, they have lots to learn from startups, but must realise that lean startup wasn’t designed for their context. They have different goals (serve a mass market, rather than a niche), different risks (a reputable brand, rather than the flexibility to start over), different constraints (legal regulatory, ownership) and of course, an ‘unfair advantage’ of resources to put to use – none of which is suited to lean startup. This institutional nature, which makes decision making slow and risk aversion high, busts the idea of lean.

In all the enthusiasm for the startup ecosystem, we need to re-address how corporations are using this for their own innovation. As the last few years have seen inadequate responses from different types of accelerators (an outside entity to the corporate) and incubators or innovation labs (being owned by the corporate), we are re-entering testing mode with corporate innovation once again. Now’s the time to create an optimal new approach.

Lean startup doesn’t stand up on its own

As with each in-vogue wave, there is preaching and swallowing without really understanding what it is, when to use it, and how to really do it rather than just redressing what was being done before. In the application of lean startup, the emphasis has been on ‘BUILD, measure, learn’, and this mantra has been used as justification to start with building on ‘unvalidated hypotheses’ (read: gut-feeling ideas not based on any customer insight in the worst cases, AKA mud). The focus is on ‘get shit done’ and ‘make shit happen’, while customer research and learning is often lost from sight.

When we start with ‘build’, we start with what we already know, and refine from there – but this restricts us to a narrow set of opportunities, that are not thought through. It’s the reason there are thousands of ‘startups that help startups start-up’ – they solve the problems in front of their nose. It’s the reason CES is filled with drones, robots and wearable devices which are fascinating, but have no indication of what real problem they are solving. It’s compounded by the view that developers and entrepreneurs think in a certain way, and incorrectly assume that their users will think and feel like them.

We find immersive research is the best way to uncover non-obvious, highly important customer needs. One of the classic lean startup fables is Airbnb’s experiment to hire professional photographers to shoot each listing, resulting in a 2-3X increase in bookings – but where did this hypothesis come from? Back when Airbnb was all air-mattresses and Obama-branded cereal, their cofounders travelled to New York City, met every single host, lived with them, and wrote their first reviews. Their ‘aha’ moment was seeing the mismatch of grainy photos compared to the real home; this insight gave life to what was, on paper, a mad experiment to run. As a human-centered designer, Brian Chesky lives this philosophy up to today (with guests on his couch every night). It’s this customer immersion that informs the lean experiments that have made Airbnb so different, and successful.

Lean startup experimentation is a hugely important way of working for corporations, predicated upon an important caveat: they have to be anchored in insights.

Screen Shot 2017-01-31 at 11.31.57 AM

Image: Lean startup, done right, fits into the innovation process. Starting with customer insight helps identify non-obvious, important opportunities.

Of course, lean startup on its own works out just fine on an ecosystem level. As long as you have thousands and thousands of startups throwing mud at the wall cheaply, 1% of them will stumble or pivot their way into a non-obvious, important solution. But when you isolate that effect to one company, blindly testing hypotheses is not efficient. For a corporation, throwing out new propositions in the dark is a very expensive way to innovate. Darwinism doesn’t work for their creationism. For lean startup to be effective at corporate scale, it needs a foundation in customer insight.

Beyond the echo chamber, the need to get out of the bubble

If a startup does do customer research, with limited resources, this insight is often too fragile. Taking stock of this fragility can take a while. First, you interview friends and family, or perhaps a wider but limited universe in your immediate ecosystem, and everyone (who is just like you) congratulates your great idea. The investors love the idea, because they’re in the same bubble too. The first sales look good, because they’re done in the same way – you start by selling to the people you know, and the people they know.

Indeed, it can take a while for someone to realise how fragile this process is. We are now seeing signs this fragility is being recognised. More than a fair share of initial fintech startups failed to reach escape velocity for example. Many smart home applications are built for tech enthusiasts, but don’t solve a real need at scale. Grounding and grounded customer insights are crucial and required. We need to not just ‘get out of the building’, we need to get out of the bubble.

Screen Shot 2017-01-31 at 11.49.12 AM

Image: getting out of the bubble will help new ventures ‘crossing the chasm’ (Geoffrey Moore) to the mainstream market.

Misplaced confidence

The way the startup ecosystem is innovating has made it very difficult to design a corporate-startup collaboration optimised for success. In one’s echo chamber, it’s hard to tell if a startup is a “success” that one wants to collaborate with, and if that “success” is a false positive or a false negative.

Corporations (particularly banks) are scrutinising the agility of the startup world with envy, and want to mash startups into their business units to overcome their inertia. Under pressure unit heads in need of a hero can snag the latest fintech poster child, while said poster child is confident of its impending success based on the validation derived from the trust its investors have thrusted onto it.

Startups approach the challenge without enough context – but instead of building context via insight, they jump right into lean development – one of their raison d’etre. They believe, as a startup, their job is to build at pace. While that might be okay in a startup ecosystem, it is an expensive and risky approach for a company with an existing customer base, history and brand.

The case for insight-driven venture creation

Corporations can take advantage of the huge advances in lean innovation, without innovating ‘like a startup’. To build a new process for tomorrow’s innovation, we must consider how the whole innovation value chain is being reinvented.

With the realisation that traditional internal innovation is not enough, and that external innovation is plentiful but unruly and difficult to digest, corporates are creating an “interface” to better interact with the external world, bringing it to their internal universe. This new innovation interface model is being built via a combination of a corporate venture capital arm, an incubator or innovation lab arm and/or a dedicated innovation group. In order to maximise success, this new innovation “interface” combining various functions needs a new process.

Based on many years of experience building products and services with corporates and startups from across industries, we believe this new process will marry the best of lean startup thinking with the best of customer insights to produce a different kind of venture building framework. Building products and services need to start from insights. We need to get out of the bubble. We need to build in agile, mixed-teams with subject matter and industry experts. We need to hardcode customer centricity into the innovation and venture building teams from the start.

Screen Shot 2017-01-31 at 11.54.40 AM

In other words, a new innovation approach without the right venture design process or the right venture design process without the the right innovation framework may be at risk of delivering sub par results.

Claro recently faced a real life example where insight driven venture creation produced tangible results in one week and allowed to identify flaws in early design, recalibrate the product vision and enabled both a reset of the vision and a new development path. Within a short period of time a compelling new prototype was shipped, saving months of “lean” development work which would have occurred off of a shaky base.

Ironically, Claro’s method was equally challenged and praised at the same time when the CEO of the startup stopped us all in the middle of prototyping and exclaimed ‘Guys, we should stop building our startup and start an app studio! Right now we are working better than most!’. Well, it’s nice to have a plan B. But first, let’s put down the mud, and start building better ventures together.



The Passporting Gambit

As it turns out, this past week was the wrong week to quit sniffing glue. You will be mistaken if you think I am alluding to various political gatherings that occurred first in the United States then all over the world. Nothing could be further from my mind. Of course I am alluding to the itsy-bitsy bit of news the Telegraph planted in this article. And before you believe I allude to the momentous piece of news where we learn President Trump refers to Prime Minister May as “my Maggie”, then you shall have to guess again.

Let me put you out of your misery. I am referring to the “passporting” system bombshell, and no, I am not referring to the EU passporting system. Let me put me out of my misery. I am referring to the US-UK passporting system bombshell, and I quote the Telegraph: “Donald Trip is planning a new deal for Britain… The historic trip comes as: – A deal to reduce barriers between American and British banks through a new “passporting” system was considered by Mr Trump’s team…”

Try that gambit on for size.

Screen Shot 2017-01-21 at 11.30.12 PM

I did and the thoughts swirling in my mind at the speed of light ended up making me dizzy.

First, given this is the Telegraph, I discounted the possibility of fake news. Second, we all know Trump has not been tender with the EU, so the possibility of sticking it to European countries by weakening them and creating further uncertainty cannot be discounted entirely. Third, Trump has now put the world on notice we have entered a new era of bilateral deals and America first, and a special deal with the UK, on the back of the Brexit vote and what can only be tense negotiations with the EU certainly fits the bill. Fourth, such a passporting system may benefit US banks in light of the threat Brexit poses them by coupling London and NYC as capital markets brethren – do note that several Trump nominees are former Goldman Sachs partners, most notably the Treasury Secretary nominee. Fifth, the US and EU have had recent trade disagreements, notably around the safe harbor agreement on overseas data transfers, thusly a banking passporting system threat may be a useful bargaining chip with the EU in the near future. Sixth, any weakening of the EU may further Trump’s plan for rapprochement with Russia – arguably the UK “elite” is not on the same wavelength. Seventh, we may be witnessing a Trump judo move aimed at softening the EU intransigent stance and, indirectly, secure more favorable Brexit terms for the UK, especially for the financial services industry – this would indeed be masterful. Eighth, could this move be part of the upcoming currency wars – surely this piece of news has the potential of strengthening the pound and weakening the Euro this coming week. I am sure we can come up with many more potential meta reasons for this move and I am looking forward to your comments and ideas.

Let’s us now switch to more practical matters. How easy would it be to build a financial services passporting system between the US and the UK. Fairly easy on the UK side given there is only one financial regulator, the FCA. Less so on the US side given we are dealing with several federal regulators (the OCC, the Federal Reserve, the FDIC, the CFPB, FinCen to name the main ones) and 50 state regulators on the banking side, as well as 50 state examiners on the insurance side. Quite a complicated landscape. For those who have followed the push back state regulators made recently once the OCC revealed its plans for a fintech charter, think of the issues raised by a federal level passporting system pushed by the Trump administration. Obviously, we will need to figure out the details of a potential passporting system. Will it cover only banks, and if so apply only to national charters on the US side? Will it cover broker/dealers, asset managers, payments companies and even startups too, let alone insurers? How wide will be the mandate, how deep? The devil will be in the details, as usual.

It is a truism to state that trade deals covering products are “easy” to ink, not so with services and last I checked banks or insurers are in the financial services industry. I am no expert but I suspect current international trade treaties will have to be scrutinized to analyze potential conflicts or limits – to be broken or renegotiated? We should also think of any implication and consequences, intended or not, with Basel III and other global financial services accords.

Further, UK financial regulators have historically had a principles based approach vs the US regulators’ rules based one. Two things to note here: a) UK financial regulation is based off of and integrated with EU directives and laws, and b) US regulators have recently toyed with the idea of moving towards principles. Be that as it may, it is clear a US-UK deal that includes a passporting system for financial services industry participants will have to wait for the UK to disentangle itself from the EU.

A few other thoughts intrigue me. We all know the FCA’s ground breaking initiative with its approach to fintech and financial innovation in general and its sandbox in particular. If a passporting system allows for a transfer of knowledge and purpose and US regulators espouse new ways to engage with technology and innovation, then I am all for it – note to all, US regulators abhor the word “sandbox”. As my friend Mariano Belinky from Santander InnoVentures stresses, the US banking market is saturated, certainly so on the retail side. It is also fragmented. The UK banking market is highly concentrated. What would be the consequences of passporting for both markets on the retail side? The US banking market has seen few if not any new banking licenses granted of late. New entrants spur innovation and competitions is, in my opinion, somewhat stale in the US. On the other hand, the FCA has now allowed a certain number of challenger banks in the UK to foster innovation and enable competition. If another byproduct of passporting means the US shores will see more challenger banks, I am all for it. Finally, if passporting talks usher an era of simplification and integration between US regulators, as well as be the impetus for global regulatory rethinking, then I will become a huge fan – London+NYC is a rather formidable financial services axis. The deregulation touted by Trump may not be enough alone to usher a new regulatory era in the US. Add a new alliance to the anticipated demise of Dodd Frank and all bets are off. On the other hand, I wonder if the FCA is or will be a champion of deregulation for deregulation’s sake. If smart deregulation ends up permeating both sides of the Atlantic while speaking a different but common language – regulatory and linguistically speaking – then I am all for it.

Be that as it may, and we need to be cautious given we know so little, we can say the possibilities are as endless as the volatility created by this announcement is high. On the other hand, this may turn out to be one of many crazy ideas without a future. Welcome to a fascinating 4 years trip.


My Current Fintech Wishlist

There are many nitty gritty problems that need solving in the financial services industry. Technology, common sense, thoughtful regulation and new business models will address these over time.

There are also complex problems, bigly ones, that will require either deceptively simple solutions and/or intricate collaboration among many stakeholders.

I invest in solutions that address either, depending on scale and economics, and am passionate about the latter.

Here is a non-exhaustive list of solutions that address complex solutions which I am passionate about.



1) Low cost reliable banking: We know many consumers are underbanked, non banked or unhappy with their banks. We still have not cracked the code for low cost reliable banking. I have invested in neo banks as well as digital startup banks in the UK. I still think there is much to do in this field and am interested in digital startup banks in the US to foster further competition and usher new simple licensed banking business models. I am equally interested in retail and SME low cost banking models.

2) New core banking/insurance systems: There are no new core banking systems in use by banks, same with insurers. This is a technology anomaly in need of being rectified. What with new technologies, new needs centered around data analytics, edge computing on the horizon and interoperability, we are in dire need of new core systems that are low cost to develop and low cost to maintain. I am keenly interested in open source initiatives in this space as a means to unlock this major issue.

3) Open Source financial technology: This is linked to the above core banking systems item. The power of open source software is tremendous. We see it with blockchain technology, we see it with AI. Developing business models around open sourcing of basic code that powers financial services will deliver untold riches.

4) Bank as a Service platforms: I have written about this subject extensively. My interest lies in technology platforms that will drive the marginal cost of delivering a set of financial services or products to near zero. One can argue this is linked to points 2 & 3 above. (I need to think about Insurance as a Service).

5) Low cost savings platforms for the US: The 401K market is woefully inefficient, fees are too high, the value chain is too sclerotic. A new cheaper 401K platform would be ideal, but maybe there is a need for a new product altogether which would need legislative & regulatory nudges. Either way this is a massive investment opportunity in the US.

6) Secure micro payments platforms: There are no inexpensive and secure micro payments solutions for either digital goods & services, person to machine or machine to machine interactions. I do not see credit or debit card rails addressing this need. Maybe new models built off of Ethereum, maybe something else?

7) Regtech as a Service platforms: I believe regtech solutions will still be needed going forward for certain use cases even if we move towards a financial deregulation era. I do not believe in the viability of point solutions in regtech. I also do not believe one vendor will be able to provide a best of breed portfolio approach – the needs are too heterogenous, the technologies too varied. Hence, applying the concept of Bank as a Service to Regtech as a Service, with platforms that allow demand to meet supply in a frictionless way will be winners.

8) Digital Identity solutions: We live more of our lives digitally, we buy, sell, interact with one another, on social media platforms, on mobile apps. Our data is insecure, our payment data is insecure and our identities are are nightmare to manage. Comprehensive digital identity solutions that allow us to build trust, interact with one another and with companies, while securing our data and our privacy will emerge. I am keen to participate and collaborate with the winners in this space. Incidentally, I am equally interested in digital identities for things and for enterprises. Whoever cracks this space will have a very large success on their hands.

9) Data Marketplaces: By that I mean data marketplaces to monetize financial services data whereby at least one stakeholder (the seller or the buyer) needs a very different level of assurance with regards to data privacy & financial regulation. If we are enterting the digital age, and if data is a key ingredient of that age, then ways to monetize, exchange, buy, sell data that is tied to the financial service industries will be big businesses. Think the NYSE or NASDAQ, but for data and data sets.

10) House Purchasing/Renting platforms: Face it, buying or renting a home is a pain. It is a pain to show you are a good tenant, and it is a pain to secure a mortgage. There are many documents to procure, many signatures to make, many steps to go through, much due diligence on the buyer/tenant and seller/landlord side for buying/renting. Any solution that helps make the experience a delight, with little friction and with embedded financial services/products is a winner.

11) Cybersecurity insurance: Nascent space for sure, with lack of understanding of the risks. I dream of a marriage of reason between a insurtech startup and a cybersecurity consulting firm, backed by a forward thinking reinsurer. Definitely interested in exploring this space, especially knowing about the untold risks of IoT security or lack thereof.

12) Securitization markets for insurance: Admittedly I know little about this space, but the potential for pooling risk, segmenting risk, providing liquidity to certain asset classes seems rather interesting. Big problem to solve, bigger opportunity.

13) On demand micro insurance platforms: Mostly for retail, tailored for new usages of any type of asset, or new behaviors – gig economy or otherwise – on the fly. We have barely scratched the surface on this one.

14) Specialized Climate *Change* Insurance platforms: For farming in developed or emerging markets for example. Enough said.

Let me know about what makes you tick and which solutions/problems in financial services should be tackled.

ps: I have several other pipe dreams that are not as investable as the above, the main one being digital fiat currencies (physical fiat be gone). Maybe the subject for another post.

pps: Even though I am bullish on enabling technologies – AR/VR, blockchain, AI, advanced data analytics, quantum computing – I have not focused on these in this post, believing any of the above will be powered by one or several of them, hence my agnosticism.



2017 Fintech Predictions – the year of macro risks

It is this time of year again where most of us willingly and willfully make fools out of ourselves trying to predict the future of our industry. The momentous electoral events we have witnessed and those coming up in 2017 remind me that, even more so for the next 12 months, macro risks will rule and influence the state of financial services and fintech. I will limit myself to comments pertaining to the US and Europe.


I have already attempted to decipher a Trump presidency in a previous post, see here. Suffice it to say there will be winners and losers in the five sectors of the industry – lending, capital markets, asset management, payments and insurance. Regtech may be impacted the most if the US experiences a wave of deregulation. Although I still ascribe to a secular and long term trend towards regulatory harmonization, we may see deviations at the margin, especially within sectors that are more domestic than international by the nature of their activity. I would not be surprised if US domestic lending regulation, compliance and enforcement be loosened while European consumer protection remain tight for example. Another area where one may see changes at the margin would be domestic payments. Still, when it comes to such sectors as capital markets, cross border payments, interbanking activities I do not expect much deviation from one jurisdiction to another and certainly no loosening up when it comes to clamping down on illegal activities, fraud. Hence cybersecurity, AML/KYC and reg/compliance thereof should be interested ecosystems with plenty of investment and operational activity. On another regulatory note ,2016 was the year of the FCA with it’s sandbox. The FCA’s initiative was so popular we ended with more than 8 regulators launching their copycat initiatives. I will make three predictions in the sandbox space for 2017. First, regulatory sandboxes will be renamed – sandbox is just a poor name everybody dislikes. Second, the US and the EU will see their own “sandbox” initiatives launched (where in the EU is a mystery) as hybrid collaborative efforts between regulators, technologists and incumbents. Third, there will be more collaboration at the “sandbox” level between regulators. Be that as it may I also expect the FCA to go from strength to strength given its clear leadership and first mover advantage (same for MAS, the Singapore regulator).

I continue to worry about alt-lending or marketplace lending as rising interest rates will benefit banks first and while there is some room to increase the cost of lending, in a competitive market with regulatory oversight there is a limit to how high the cost of borrowing can go. On the other hand banks cost of capital will not rise as fast as those of alt-lenders. Therefore the next 12 months will prove delicate for this industry. I expect banks flexing their muscles and acquiring some platforms as well as mergers between alt lenders while the weakest competitors close shop. Whether this pattern will evolve in sync across the US and Europe I do not know. It depends on how US, UK and EU yield curves will behave. I certainly expect this pattern to occur in the US. On the other hand, infrastructure spending, if it is on a massive scale in the US, will have a positive impact on lending and fintech lending actors will benefit. One might even see fintech startups funded on the basis of infrastructure services for example.

In the retail asset management sector we have witnessed a wave of consolidation in the US, notably with roboadvisors. Most incumbents have placed their bets and the few remaining independent startups have survived, so far. We have yet to see consolidation in Europe. Arguably, there are fewer roboadvisors in Europe than in the US and most are younger so we might not see full consolidation yet. I would not be surprised if a European incumbent or two makes an acquisition though. I remain interested in roboadvisor models, especially those that will make effective use of ETFs, micro investing or micro saving and build a social layer that enables high engagement. I think there is still space for these types of models. Additionally, there is still much to be done to modernize incumbents and to date few fintech startups with a b2b model have emerged in asset management. Some are due to pop up.

In the payments sector I will go out on a limb and call for the rise of micro payments platforms in 2017, most probably powered by a distributed ledger technology. Most startups addressing micro payments have failed so far but it is only a matter of time before a startup or an incumbent hits the right note. Given the rise of m2m, p2m transactions with IoT and the continued growth of p2p as well as the explosive growth of other types of activities (esports, different models of media consumption from a la carte to subscription) it is only a matter of time before micro payments make it big. My bet is on both platform plays that provide backbone and infrastructure and front end models. Other than micro payments, I continue to be interested in b2b payments and services to SMEs. We have barely scratched the surface and financial services to SMEs are still antiquated. The prospects of a global trade war will not play well with trade finance and supply chain finance activity though.

As for the blockchain ecosystem, 2016 was a fascinating year. We now have a pretty good picture of the landscape with up to 10 companies being the potential winners. Most of these winning companies have opted to open sourcing their code, collaborating with standards setting bodies, or working as a consortium with many incumbents. Other than a few financing rounds for some of these leaders, I do not expect much investment activity. Indeed I expect many casualties, acquihires or outright failures for the other weaker competitors. 2017 will be a year of consolidation in the DLT space while the winners go about their deployment business quietly. I expect further standardization efforts to bear their fruit – “yesterday and today” in the capital markets arena, “tomorrow” in the insurance space. Finally I expect the start of the patent wars in the space. Most serious contenders have filed patents – incumbents and startups alike – and it is only a matter of time before some try to enforce these patents. Sooner rather than later is my bet.

In the insurance industry, I expect more of the same, both in terms of level of activity and types of insurtech startups. I also expect emphasis on cyber risk coverage and on climate change given both are top of mind and material risks going forward. Cyber risk coverage is particularly interesting to me, given the rise of IoT and the security risks associated with both hardware and software in the space.

On a more general level, I expect five themes to pick up steam in 2017. First, all the business models we have seen created and funded in fintech over the past 8 years will be revisited with an AI component – be it machine learning, deep learning or other. This is bound to happen as AI is sweeping the business world. If mobile is eating the world, AI is the chef that is orchestrating the menu. Whether in lending, asset management or any other sector, I expect to see much activity in this domain and this includes new fintech startups getting funding, especially in b2b. An inevitable trend towards the cognitive financial services firm. Second, the convergence of software robotics, AI and automation will be applied at scale in what is called robotics process automation for banks and insurance companies alike. This is a pure b2b play for sure and I expect this sector to be a fertile ground investment wise. Third, platforms and ecosystems will continue to take shape as various banks further build their API strategies, their marketplace strategies, or even their bank as a service strategies. Whereas 2016 was the year industry thought leaders spoke about platforms, 2017 will be the creative phase for these types of business models. Some startups are already picking up funding. Expect more over the coming 12 months. One should note that platform business models require standards and interoperability. As such, I expect the beginning of standardization and open source in the field of bank as a platform or bank as a service, in a similar vein to the movement we have seen in the DLT/blockchain space. Fourth, the messaging platforms wars will be in full swing as Facebook, Apple, Google, Microsoft vie for dominance and expand their respective ecosystems. I expect more financial services incumbents to jump on the bandwagon and more startups to build their own apps. The lure of reaching millions of users – customers and potential customers – is strong. To me AI powered chatbots fall in this fourth category as few will be successful on their own and most will want to align with at least one messaging platform. In as much as PFM startups were not particularly successful and neither were account aggregation models, the messaging platform wars with their myriads of skills or applets or bots (voice or text or voice+text) present both an opportunity and a threat to the financial services industry. The threat is well known and lies with being further disintermediated and removed from the end customer. The opportunity is less obvious. Indeed, most fintech startups focused on retail use cases have failed to make any significant traction because either the service did not generate excitement and engagement (simple aggregation of data or accounts), or was too obtuse (too complex) or was too superficial (giving you options to consider) whereas what works usually hits on at least one of three dimensions: enhance an experience, accelerate a process, simplify a process. You can bet that the bots within the messaging platforms that will win the day will enhance, accelerate and simplify. It is up to fintech startups and incumbents to emulate best of breed as they will coexist within the same ecosystems. Else, fintech AI chatbots will  fail to impress much like PFM models did before. I should add that the messaging platform wars will be a wedge for GAFA to further encroach in the payments sector. Fifth, 2017 will be the year of digital identities. By that I mean most of the investment activity will be focused on identity business models. Some may consider this field not part of fintech. They will be wrong. there is no identity without trust and vice versa. Further identity and trust impact and influence payment methods and enable or disable currencies. I view digital identities as the corner stone of the future of financial services industry. I expect the investment pace to pick up in the identity space.

A few random thoughts in closing. Should a Trump presidency usher an era of instability and trade wars, we will undoubtedly encounter currency wars. Should the EU further weaken in 2017, currency turbulences will be exacerbated. Should the renminbi further weaken, capital flows leaving China will accelerate. Thusly, it is not inconceivable that cryptocurrencies will benefit, notably bitcoin, along with its ecosystem. In this macro case figure, and assuming legal and regulatory house sorted out with the SEC, I expect much activity with Initial Coin Offerings in 2017 (ICO).

Finally, I expect subdued venture investment activity in Europe and the US in aggregate, especially in the first year of a new US administration which is still an unknown for many.


Digital Waves & Financial Services

Even though the digital age finds its root in the 1950s with the rise of computers, we had to wait until the mid 1990s and the rise of the internet to witness a first wave of tectonic shifts and the creation of what many defined as the New Economy. Innovation, characterized by the application of technology to productive means and resulting in driving down costs relentlessly over time, was hard at work. This first wave did not escape the rule and we saw the cost of “discovery” plummeting. By discovery I mean the ability to find any type of data. Google benefitted from this trend and built an empire based on hyper efficient search. We also benefitted from another wave that saw the cost of “communication” dropping and the rise of various forms of connecting between humans. Facebook can be viewed at the intersection of discovery and human connections. Apple benefited from the connection/communication wave. Finally, Amazon mined the decreasing cost of discovery in the e-commerce field.


More recently, we have benefitted from the wave of “personalization” where a myriad of applications have unbundled past needs, uncovered needs we did not know we had, or disintermediated needs that were poorly serviced. Again, this wave resulted in the cost of personalization plummeting.

Crucially whenever costs plummet, demand grows in both expected and unexpected ways. The New Economy and our demand have certainly exploded.

It is interesting to observe that the financial services industry did not immediately espouse these waves, nor did it find itself materially impacted by them, or at least it appears so to the naked eye. For example, banks were not particularly diligent in their internet banking efforts at that time. Even though new technology companies won the early stages of the New Economy and even though the financial services industry did not register any “win”, we also can categorically state that banks or insurance companies did not lose. They still command, to this date, market share and dominance in all five sectors  – lending, capital markets, insurance, asset management, payments – in every geography.

The fintech movement, in its first two phases, the “direct to consumer” phase and, once that first phase failed, the “partnership pivot” phase were essentially driven by the necessity to play catch and for the financial services industry to capture the lower costs of “discovery” and of “connecting” with users. Much needs to be done as most participants have not completed their digital journey. Even though startups and incumbents alike are still mostly focused on digitizing front end processes – on-boarding, distribution, sales, underwriting amongst others – we have now seen a broadening of the digitization movement towards middle and back office processes.

Still this has not resulted yet in a dramatic lowering of costs in financial services and an increase in demand. To be clear, the cost of lending will never “decrease” below an incompressible cost of capital. The cost of delivering a loan should decrease, and in other sectors, the cost of of a payment (be it domestic, p2p, mobile, cross border, b2b) has yet to decrease across the board.

Meanwhile, the technology world is busy reinventing itself and as the waves of discovery, communication, connection and personalization are flattening, new waves are engulfing us. I will focus on two technologies which I believe are the leading candidates to usher the next wave – again characterized by reduced costs and demand explosion: Artificial Intelligence and AR/VR

Artificial Intelligence holds the promise of bringing our decision making to the next level. Any of the AI vectors – machine learning, deep learning, nlp/nlg/nlu to name a few – will drive down the cost of “decisioning”. By decisioning I mean the ability to arrive at optimal decisions via superior analysis of mountains of disparate data and in the absence of clarity. Most technology companies are locked in an epic arms race hiring the right talent, developing their own AI tech stacks and applying their technology breakthroughs to their fast evolving business models. The next wave may indeed see the rise of cognitive enterprises and cognitively enhanced individuals.

AR/VR holds the promise bringing our interaction with the world to the next level. I understand there are differences between AR and VR and for the purpose of this post will assume them away. AR/VR will drive down the cost of “immersive discovery”. By immersive discovery I mean discovery in action, using the full capabilities of our bodies in movement, in our three dimensional world;  as opposed to the discovery we have done to date from behind a laptop or a smartphone. Given the explosion of supply and demand ushered by the plummeting cost of “discovery”, I leave you to imagine what this wave may be able to bring about.

Although it seems AI holds a slight edge over AR/VR currently based on maturity and traction, I do not definitively know which wave will be dominant first at scale, either in the enterprise or retail world. Suffice it to say that either wave will pose unique challenges to the financial services industry. Challenges inherent to customizing, designing, implementing and integrating each new technology paradigm. Challenges inherent in making use of and making sense of these new technologies with the right human skills. Finally, competitive challenges in the face of what we can only assume will be renewed pressure from non financial services enterprises ever more willing to capture poorly defended margins in lending or payments.

Although  threats from fintech startups or tech companies have not been successful in eroding meaningful market share yet, many industry analysts believe that up to half and sometimes more of incumbents’ revenues are under threat. I believe this analysis does not fully include the implications of the lower cost of “decisioning” or “immersive discovery”. As such financial institutions may be under even more threat than we realize.

Be that as it may, a reasonable and well educated practitioner will healthily push back and raise two objections to the demise of financial institutions at the hand of the potential dislocating effects of the above digital waves. One is articulated around regulation, the other around core systems.

Regulation is tedious, complicated and costly and serves as a defensive moat. In some instances it can be a drag as financial incumbents cannot act as flexibly or nimbly as non-regulated entities. Still, regulation acts as an effective digital fire retardant. Regtech not only holds the promise of lowering the cost of compliance, it also holds the promise of lowering the cost of developing and disseminating regulation to the market. Should regtech lower the cost of compliance to such an extent that fintech startups become more competitive or non-regulated tech companies become less averse to regulation, then regulated financial institutions will come out weakened, all else being constant. I am not predicting this will happen, yet the likelihood should not be discounted altogether

Core systems in the market today are cumbersome, expensive to build, expensive to maintain. Even though financial institutions – banks or insurers alike – dislike their vendors with the intensity of a thousand suns due to the woeful inability current core systems exhibit operating in a digital world, the fact is not everyone can afford core systems. Imagine a world where the cost of building, provisioning or deploying a core system would plummet and you are one step closer to another incumbent competitive advantage vanishing.

Although the future of regtech and core systems is more difficult to predict than a presidential election, the trends clearly point towards cost and complexity reduction and even though the full effects of either the lower cost of “immersed discovery” or “decisioning” are still be be felt, they cannot be avoided. These new digital waves hold the potential to drastically lower the cost and complexity of “building a bank” or “building an insurance company”. Obviously, regulatory capital, liquidity and solvency issues will still hold, but picture a world where building a core stack will be as easy as building a web site and where the cost will be a fraction of what it is now – to the dismay of the entire value chain of third parties currently feasting on any implementation, from consultants to systems integrators – and you can start grasp the monumental changes afoot. Digital waves keep coming and most financial institutions are still standing. How will they respond to the coming waves is an important question to ask. How will incumbent service providers cope is equally intriguing. How fintech startups exploit gaps will be fascinating to witness.

ps: no blockchain was harmed while writing this post.




We know the next POTUS but we do not necessarily know what his policies will be at a granular level, although we know some of his pronouncements at a high and vague level. I will refrain from passing judgement on some of Trump’s promises, how he managed his campaign, some of his specific messages and the various forces that helped him get elected, such is not my purpose with this post.

We know, for example, that part of Trump’s platform is to create more US based jobs, which he intends to do partly via tax cuts, partly via the renegotiation of trade deals and potentially erecting trade tariffs, partly via smart infrastructure spending and partly via deregulation.

Without going into budgetary and economics details, a combination of tax cuts and increased infrastructure spending sure looks to me like a recipe for larger federal deficits, i.e. more government borrowing and the potential for inflation. Indeed, financial markets expect just that as the yield curve started steepening with long term rates spiking up immediately after the election.

Bank stocks also rose after the election, which is great news for bank investors as well as bankers. I believe this can be explained by two factors: the first being renewed expected inflation which I just explained and the second being potential deregulation. The former seems a foregone conclusion, the latter needs further examination.

Trump is no fan of regulation and has stated it on many occasions. We should expect many federal initiatives to be toned down, de-fanged or outright destroyed, based on how POTUS and Congress will collaborate. Think of the EPA, the Clean Air Act, Obamacare as being in the immediate line of fire. Trump has also indicated he is no fan of financial regulation, although his pronouncements have been less clear, and we have heard pundit chatter focused on repealing Dodd Frank in whole or in part – the Volcker rule comes to mind – or even bringing back Glass Steagall. He also has stated he is no fan of the current Fed Chair. Further, some of Trump’s supporters have also publicly criticized the recent DOL fiduciary rule intended for the asset management industry or their profound dislike for the CFPB. I am sure I am missing other financial regulatory flash points. At the same time, Trump needs to fill many positions for his incoming administration and the rumor mill is already hard at work, with industry insiders and/or lobbyists names being circulated to help with the transition effort or as outright candidates for prominent positions.

I venture that the complex system that is Trump’s vision and gut decisions on the one hand, his transition team on the other hand, and the influences both will be subjected to will flesh out exactly how populist the Trump administration will be or how friendly to the private sector, financial services firms included. Let’s take one example: the CFPB is one of the few entities that has battled banks’ wrongdoings. We also know that banks are still deeply unpopular due to their role in the great recession. Will a Trump administration rein in the CFPB and in so doing risk alienating part of their electoral base which is surely not pro-banks. As far as this example is concerned I sense a tension between Trump and his inner circle and a Republican Congress and Wall Street. In other words, how will “drain the swamp” will be interpreted and applied. The same lens can be applied to all other financial regulations which are deeply unpopular with the Republican establishment but may be interpreted as rightful banker punishment by the electorate.

Be that as it may and given that the Trump administration will be busy with dismantling other regulations and that the DOJ may be focused on other targets than the financial services industry – based on Trump’s goals – it is safe to say that in the most benign case, financial regulation will not increase and enforcement will move into neutral, essentially hitting the pause button, or in the most extreme case, deregulation will be actively sought. In either case, financial institutions will breathe a sigh of relief – small win vs major win – and will enjoy the fruits of renewed inflation expectations. Indeed, the more reliable story here is that of rising interest rates, obviously far out on the yield curve – this has already happened and will continue to happen I believe – and at some point also with short term maturities when the Fed will stop signaling and start raising. Even more so if the Fed Chair is replaced?

Rising interest rates is good for banks bottom lines. A fatter net interest income does wonders to the income statement and return on equity. The important question here is whether renewed profitability will halt further digitization of the industry or further enable it? Will fintech suffer or go from strength to strength? Will banks, which have resisted change up to only recently, use the excuse of increased profits to stop investing or collaborating in/with startups, stop rolling out ambitious innovation plans and return to a conservative stance? I suspect that in the aggregate the answer may be yes, the more so if return to profitability is swift and material. I also expect leaders to accelerate their plans to reinvent themselves, knowing that secular trends are too important to ignore and that tech giants are the real threat. Thusly a relative retrenching of US fintech related investments may be expected – arguably a continuation from the recent retrenchment – especially in the direct to consumer space. I also expect the third fintech wave to accelerate: deeper digitization via the adoption of enabling technologies sold to incumbents by new b2b startups.

This aggregate vision gives us only partial clarity though. What will be the impact within the fintech sector?

Banks have a natural competitive advantage against alternative lenders or marketplace lenders. In a low interest rate environment this competitive advantage was blunted. In a rising interest rate environment this competitive advantage will be used with ruthless efficiency. Thusly, I expect fintech startups in the lending space to come under pressure – natural outcomes would be further bank collaboration, mergers between alt lenders, acquisitions by incumbents and the inevitable bankruptcies of the weaker platforms. Should regulatory pressure on lending practices abate, this will further strengthen banks. Either way I expect banks to increase their domestic lending activities.

From a capital markets perspective – and to some extent in asset management too –  less enforcement actions coupled with potential outright repeal of complex legislation or regulation and the introduction of simpler frameworks will reduce compliance pressure as well as regulatory dislocation. From that perspective some regtech business models may end up having a hard time finding traction. What is clear though is that any regtech solution focused on fighting fraud, illegal activities, tightening AML/KYC and identity verification as well as strengthening security and cybersecurity will remain strong given the broad consensus towards doing more rather than less in that space.

Based on my current understanding, I think the net effect of Trump administration will be neutral for the insurance sector and insurtech – not including health care obviously. I do not have enough data points though so I might be completely off the mark.

We also must deal with the payments sector. Considering an extreme deregulation scenario, might we see further changes targeted at interchange fees, on the credit card side, or more particularly on the debit card side? One cannot discount this entirely – again think of the interaction between a Republican Congress and President Trump. Needless to say that payments solutions that address infrastructure spending, directly or indirectly, will be potential winners. Incumbent cross border solutions that process or finance trade may be hit by a populist Trump bent on renegotiating trade deals and starting a tariffs war – trade finance or supply chain finance platforms come to mind given they cater to onshore/offshore manufacturing/trade value chains.

Switching back to higher level concerns, we should also keep in mind the potential for a global recession. Should the actions and choices of the Trump administration hurt the US economy and via domino effects trigger a deep recession, the financial services industry will be the first to be hurt: weak $, lower growth, less payments to process, less investments to make, less lending, increased risk. “Mainstream” fintech would definitely suffer if this were to happen. I believe this to be a remote event but one cannot discount it entirely.

Based on the last two points, it is therefore logical to infer that cryptocurrencies, blockchain solutions  and bitcoin in particular – due to their disintermediated nature – may become even more attractive as alternative modes of payments, stores of value and means to build new exchange rails; whether new policies have a benign negative effect and especially whether we head towards more sever outcomes.

On another note, even though a majority of the tech industry did not support Trump, it is hard to imagine his administration being directly hostile to the technology sector, fintech included, and in so doing hurt job creation – indirect and unintended consequences of supporting “made in USA” and threatening the intricate global supply chains of most tech companies aside. Yet it is far from clear what Trump’s stance is with regards to Silicon Valley and on advanced technologies such as AI, robotics, blockchain, advanced analytics, IoT. Although these have the potential to augment humans, they also have the potential to eliminate them too. How would self driving cars play to his electoral base and his theme of creating mainstream jobs? What about the knowledge economy, the sharing economy, digital natives, digital workers, p2p networks, AI chatbots that would displace bank tellers. All these themes are imbedded in fintech, from payments to helping with lending, to capital allocation, to new financial services.

The above thoughts are focused on US fintech which is somewhat disconnected on the tech side from Europe or Asia. Domestic US payments is a beast in and of itself for example. European or Asian fintech is linked to US fintech via the $. Should Trump’s impact be a net negative on the $ and reduce confidence in the US economy, I would expect an acceleration towards decoupling away from the $ for international trade, international settlements, international payments. Alternative solutions such as a new basket of currencies, the rise of one to one currency settlements such as Euro-Yuan or in the more extreme case relying on a cryptocurrency as proxy for a new standard would de facto re-align global financial exchanges in a drastic new way and global fintech business models accordingly.

In summary I see several potential paths:

1) Extreme populism and no material financial deregulation lead to a global recession:  fintech startups and financial services incumbents will suffer; crypto currencies and blockchain will get a major boost.

2) Benign populism and some financial deregulation lead to a slight positives and a middle of the road path: some fintech startup models will suffer and financial services incumbents will be stronger, all else being constant.

3) Watered down populism aligned with major financial deregulation lead to strong growth, at least in the short term: financial services incumbents to be the clear winners along with fintech startups tightly aligned with incumbents’ needs.

The fact that we are faced with such a divergent array of paths speaks to the unique and quasi-quantum state of Trump as a politician and businessman, exhibiting potentially pragmatic and radical intents simultaneously. I will even go further and state – Nassim Taleb who I respect immensely already made this point – that Trump was the ultimate antifragile candidate and that he may reveal himself to be the ultimate antifragile President. (Antifragility works up to a point, see path 1 above with clear winners and losers.) As such, thinking about fintech investment/operating strategies also need to be antifragile. I have already re-aligned my investment themes accordingly.

Trump’s administration picks as well as the decisions he will make in the first 100 days in office will enlighten us as to which is the most likely.