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Road to Perdition Unbundling

We have all been proven wrong one way or another since the advent of the fintech craze. What differentiates us from one another is the degree in how erroneous we were. In no particular order, we believed Silicon Valley could disrupt financial services, bitcoin would rule the world, bitcoin would fail miserably, blockchain would solve the common cold, robo-advisory would take wealth management by storm, p2p lending would revolutionize credit, banks would be doomed to fail, banks would not be impacted by technology changes, financial chatbots would take over customer service, AI would be the secret weapon banking or insurance was waiting for, software does not need to be regulated, regtech is a regulator’s best friend, open banking and API banking is the new black, PSD2 is our Lord Savior. Although I am most assuredly missing a few nuggets, and as you may notice, some of the above are still vividly being debated and experimented with, you do get my drift. We collectively suck at predicting what is going to happen as novel ways to apply technology are put to bear on financial services.

Be that as it may, we know of two evident truths since the internet graced us with its presence. First, intermediators in any given industry will be disrupted as new business models emerge and effectively unbundle old paradigms. Second, this unbundling has not happened yet in the financial services. The question we are all working toward answering and in the process elevate to a third truth or disprove altogether is: Will a great unbundling/rebundling occur in financial services?

If you are interested in learning more about unbundling as it has and still is occurring in various industries, I urge you to follow Ben Thompson and his web site Stratechery. Suffice it to say, that, at a high level, new business models will disrupt old ones by unbundling their offering, rebundling new features/functionality and leverage at scale by aggregate attention as a result of said unbundling/rebundling.

As noted, we have seen this process at play with Google, Amazon, Netflix, Spotify and countless others. We have not seen this at play in financial services in any meaningful way. First, because financial services processes are much more complex. (There is a logical path towards greater complexity in unbundling/rebundling text, audio, pictures, simple video, music, movies, live sports events – whether the complexity is technical or commercial in nature. I argue that any process that is money centric is eminently more complex to unbundle/rebundle per se.) Second because financial services are heavily dependent on externalities such as regulation and politics. Third, subject matter expertise matters and it does take time for the right entrepreneur to build such expertise that aptly balances fin and tech – the Flynn effect is in full force in fintech and every new wave of startups will be more sophisticated than its predecessor. Fourth, because, in the majority of cases, digital transformations in financial services, whether executed by startups or incumbents, eventually turn into what Ron Shevlin describes as “newish ways of doing things that are already done”. Fourth, because, unlike other commercial activities, many financial services processes pose serious systemic risks in ways unbundling/rebundling movies or music do not. As such unbundling/rebundling in the age of the internet, where in most instances a winner takes all or most stands, may be far from desirable in lending for example. Mariano Belinky, Managing Partner of Santander InnoVentures, often stresses the point that an Uber of lending, however unlikely for many reasons, scares the living daylights out of him.  For those that would like to explore further the reasons why unbundling has not occurred yet, I refer you to this excellent post by Ron which both augments some of my thoughts and serves as a healthy counterpoint.

By no means am I belittling the achievements of a few fintech firms that have reached escape velocity. PayPal (and Venmo) comes to mind as evidence that disruption at scale can happen. So does Klarna, Square or Stripe. Other firms such as Transferwise or SoFi show great promise. It is interesting to note that most of the fintech firms that have reached or are on the cusp of reaching escape velocity are in the payments sector. Arguably payments may be the easiest sector to unbundle/rebundle – as opposed to corporate lending for example –  or the sector via which unbundling/rebundling will occur at scale throughout the financial services industry.  Nevertheless, “Netflix” unbundling/rebundling of a retail bank, to take a specific example, has not happened yet. Why is that so?

Astute readers will have noticed bankers seem to be attracted to certain bank startups like bears are attracted to honey. It all started with BBVA’s acquisition of Simple during the Pleistocene. We were reminded of this truism in more recent times with the acquisition of Compte Nickel by BNPP. Contrary to popular opinion, bankers seldom acquire businesses for philanthropic reasons. The promise of a solid IRR needs to be included in an investment rationale, however fleetingly it is woven in an investment committee’s decision making process. Astute readers will also not have failed to notice that, after the relative lackluster performance of proto neo banks or pfm apps disguised as neo banks, the model is being refined and is delivering promising signs of success. For the doubting Thomas among you, please go check the traction achieved to date by Nubank or Compte Nickel, and even if it is too early to tell, by the likes of Monzo to name but one of the fresh-faced bank startups. (I sincerely hope UK challenger banks will be successful in the aggregate and show the way for future enterprising startups, but I digress.)

I note Nickel, Nubank, Monzo and their brethren have a few things in common: a) repeat entrepreneurs/founders, b) deeply experienced financial services executives, c) opened to more rather than less regulation, d) positioned their value proposition precisely where banks have been ineffective and where retail customers feel the most pain; and last but not least, e) developing new core banking capabilities or even new core banking systems altogether. These startups also have benefitted from the lessons learned from previous fintech waves as well.

The core banking point I allude to is essential. A core banking system is made up of a deposit module, a lending module, a general ledger and a CRM module (KYC module if you prefer). To these core modules, one of course has to add a myriad of other functionalities. Let’s keep things simple for the purposes of this article – even at the risk losing the core banking purists amongst us. To my knowledge, there is no legacy core banking system that can handle real time processing, although some startups are trying to address the issue lately. All are architected around batch processing in one way or another. Now, picture Transferwise successfully achieving the throughput of Netflix or Facebook for example. There is no core banking system in the world that could process such a volume in real time. The same applies to the first startup that successfully unbundles/rebundles a bank checking account at scale and finds itself with 200 million users overnight. As an aside, the CEO of one of the small banks that provides services to the likes of Transferwise admitted the limitations of existing core banking technology to me recently. Framing the issue another way, we can all be assured that Facebook’s or Netflix’s “core banking system” equivalent is architected, built and managed for the massive unbundling and rebundling success they have achieved. Core banking innovation will happen and will be essential to further banking disruption – I will attempt to address this specific point in another post.

We are now at an intriguing junction in the fintech driven evolution of the financial services. Retail customers are relatively more aware of new services than in the past. Banks are more aware of the threats they face. New fintech startups are more sophisticated both from a fin and a tech point of view. Regulators and Legislators are more “engaged”, from the FCA’s willingness to foster competition by nudging a new generation of challenger banks, to the EU’s willingness to pry open the banking industry with its PSD2 directive. Technology companies are establishing themselves as formidable competitors in the payments space – not a day goes by with an announcement from Facebook, Whatsapp, Amazon, Apple or Google. Further, we all are scrutinizing the phenomenal success of WeChat and, redolent with envy, trying to emulate it in our respective geographies while warily noting WeChat’s slow encroachment in the US and Europe.

I argue that all of the above trends are coming to maturity in a synchronistic way and raising the probability that further unbundling/rebundling will occur in financial services in ways that make the past attempts pale in comparison. I also argue that many banks are not prepared for such possibility and the ones that are the most prepared are located in the EU as they are forced to face the consequences of PSD2 – API banking, open banking here we come. Still, most of the strategic moves have been either defensive in nature or prophylactic. Acquiring Compte Nickel may be viewed as a defensive move with optionality for example. Preparing for PSD2 by ensuring one meets a mandate while limiting potential damage may be viewed as a defensive move too. Building an app marketplace and tying it to one’s existing client base may also be viewed as a defensive move.

For the purposes of our discussion, let me outline what I think would be an offensive move while taking full advantage of both attention aggregation and unbundling/rebundling of a feature/functionality set. I will not attempt to weigh in on who may be able to successfully prosecute such a blue print. A well-heeled startup, a forward-thinking incumbent or an ambitious tech giant could equally achieve such a vision with the proper execution and necessary luck.

  1. Isolate and unbundle a checking account. Define the core functionality you want to offer around as simple and functional of a checking account as possible. Simple is good! Basic functionality even better. Not too basic that you do not appeal to a wide enough group of individuals to start with. Compte Nickel is a perfect example.
  2. Build a new core banking system around this unbundled checking account, comprised of a core deposit module, a customer centric general ledger, a KYC module, a kick ass set of APIs, a marketplace interface and real time processing capabilities – no batch please. The goal here is to build the core tech platform that fits a checking account unbundle, no more no less PLUS the ability to plug in n+1 services to that checking account. Note that I do not mention a lending module (I will get back to this later). I believe this may be Monzo’s vision, also what Fidor tried to do before it got acquired.
  3. Once the unbundling occurs, then rebundle by offering, in a marketplace environment, best of breed services. There is a long tail for this, just check Amazon or Netflix’s offerings to convince yourselves of such assertion.

The subtlety here lies in starting with a simple offering, the core checking account, with a defined targeted audience (where traditional banks do not offer good service cost effectively) and turn the PSD2 mandate (if no PSD2, the market will mandate it) upside down. Rather than meet it defensively, make it a core strategic proposition for your customers.

Think of a traditional bank value proposition as a bundle that includes certain features provided for free, others subsidized, and yet others that are revenue/profit leaders. Retail bank customers all use their checking accounts and use to varying degrees the services associated with their account. Some are heavy users of certain functionalities, other light users of other functionalities. The current bundling obfuscates the asymmetry between customers needs and uses and what the bank charges. The entity that first unbundles the checking account and provides it at a cost level that attracts users at scale (first order of aggregation and the beginnings of network effects) while providing a choice of “a-la-carte ancillary services at scale (second order of aggregation and network effects) will blow up the pricing models banks have successfully used to sustain their business model. This I believe lies at the core of a true unbundling/rebundling with proper user aggregation. Customers pay for the bundles of services that more closely meet their needs at an appropriate cost. It should be noted that both the manufacturing capability and the distribution capability of a bank get upended in this scenario.

A few more questions are worth considering:

  • Can this scenario occur if the unbundler does not own the new core banking system? Several pundits believe there is no need to own a core system pointing that a third party could own and operate a “banking infrastructure”. Before hastily answering ask yourself this: Could Netflix or Facebook have achieved their phenomenal success by only focusing on the client interface and customer service while a third party owned and took care of their own core systems? I think not. Actually a new core bank system is one of the competitive advantages necessary to capture value.


  • Can this scenario occur without the need for a license? Several pundits believe so, arguing, in similar fashion to Silicon Valley advocates that new distribution models are only software code and thusly not worthy of licensing requirements. While I am sympathetic to this line of thinking and while I explicitly excluded lending activities from the blueprint above, relegating it to the marketplace, I think some type of bank licensing is needed to reflect the intricacies of segregating, securing, handling consumers’ money and facilitating a host of third party services. One could think of a new type of banking license, less than a full banking license, more than a narrow payment or money license.

Let us now switch our focus to how value is created with the new model I propose from a strategic point of view. The traditional banking model is predicated upon ownership of both manufacturing – production of products and services –  and distribution – whether via brick and mortar branches or digital channels. Ownership of the entire stack and mingling of both distribution and production is what used to create value and what, many bankers hope, will continue to create value. The only rub is if consumers stop using traditional points of distribution or if distribution gets to be reinvented. With the new model, the point of contact is the checking account per se as opposed to a branch or an app and the value springs from two very specific actions which reinforce one another. On the one hand integration between the checking account and a variety of third party services. On the other hand aggregation of a plethora of third party services available to the checking account holder. These two reinforcing mechanisms not only create value differently but they also, relatively speaking, concentrate power with the owner of this new operating chain to the detriment of the legacy producer/distributor. In a model with a long tail of options and informed choice the value of a bank brand diminishes.

Do keep in mind the above can be tailored for many different target markets in banking: SMEs, HNWI, corporate, mass affluent, non-banked. Not only can this blueprint be applied to different segments, I also believe it can be applied to specific subject matters, one example being regtech as a service where a platform could serve as the integration/aggregation layer for many regtech solutions on the supply side and many financial institutions big and small on the demand side.

The Compte Nickel acquisition will make many take notice. BNPP signaled to the market this approach may be the most significant threat to banking – from a bank that already has its very own “digital bank startup” no less; proving that innovation is easier achieved outside of a corporation than inside. On this latter point, further proof of Conway’s law.

I expect the above blueprint to be copied, tweaked, optimized and deployed in the coming years. I expect EU banks to hold an inherent advantage compared to US banks in so doing, due to the pressure they face with PSD2. I expect both EU & US banks to weigh with all their might in favor of delaying regulatory or legal initiatives that facilitate this model. I expect the WeChat success, whether delivered by WeChat or copied by GAFA, to keep incumbents honest and help them recognize defensive plays alone are losing propositions. Basically, I expect the unbundling/rebundling of financial services for the coming 5-8 years to be drastically more vivid than it has been over the past 5-8 years.  One last parting thought, it is inevitable that credit intermediation will be upended as a result of this blueprint. How money is created as well as how capital requirements are engineered in the aggregate will have to be revisited should this model take hold at scale – food for thought for another post.





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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!






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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.

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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.





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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.