17

Dec

2017

It is that time of the year where pundits unabashedly flog the predictions market like a stolen donkey. I will not escape this tragic destiny and am adding my two cents to the mix.

I am doubling down on my macro risks optics – see my post for 2017. Indeed, if 2017 added a macro risk angle to the fintech narrative, 2018 will augment this angle and may have even more of an impact.

In as much as fintech is the act of optimizing or disrupting the financial services industry, this act has unfolded, so far, in an era of globalization and free trade. The rise of national economics and populism, which is a direct challenge to the flavor of globalization we have witnessed to date, will have an impact on fintech. Whether that impact is purely qualitative, reshaping the fintech space, or whether it will also be quantitative, restricting the fintech space, remains to be seen.

The “America first” policy the current US administration is espousing has created a leadership vacuum when it comes to multi-lateral trade and has halted further “business as usual” globalization. To be clear, other countries have espoused similar “me first” views to the point where the probability of a clear breakdown in globalization, as opposed to a reset along more balanced perspectives, is becoming more than a fanciful prediction. Extreme outcomes such as outright trade wars between various economic blocks will have a dampening effect on trade, investments and, as a derivative, on how the financial services industry will be impacted and adapt. Cross border activities such as trade finance, remittances, p2p payments and lending may suffer as a result. Further, cross border fintech investments may be delayed or halted (Chinese corporations investing in US fintech startups for example). Although trade friction is currently more of a US driven issue, we also cannot discount fully the unintended negative consequences of a “no Brexit” deal, although the latest indications introduce a ray of hope. Still, a less than satisfactory Brexit deal as it applies to financial services will put a damper on investment activity or will increase the cost of doing business for any fintech startup with pan-European aspirations. Might we see more UK based fintech startups naturally expanding to geographic locations (b2b or b2b2c models) other than the EU?

We are also witnessing the potential end of a regulatory cycle. The US administration has clearly indicated its willingness to repeal what it deems to be overbearing and costly financial regulations. In as much as these regulatory changes will only have a domestic impact, we should expect a fintech boost to all things lending. If these regulatory changes have an international impact (capital ratios, compensation, leverage) we may see the start of further regulatory divergence between US regulatory frameworks and international ones or the treatment and approach to financial legislation. This will have an impact on capital markets, cross border commercial banking activities and reinsurance to name but a few financial activities. We should expect regulatory divergence to both be a risk for regtech (as the cost of doing business rises, while servicing divergent demands from corporate users will be more complex) and an opportunity (as more sophisticated regtech providers, able to handle more complexity, will be in a high demand).

Macro risks also apply to the world cryptocurrencies and the blockchain space. Many blockchain applications are cross border – see my comment on Trade Finance above. How will these applications fare in a world of trade protectionism? As the world of cryptocurrencies defy Newtonian canon, it is attracting the attention of policy makers at an accelerated rate. The price of maturity is scrutiny. The price of maturity in financial services is regulatory oversight. The price of challenging the monopoly on violence a nation state enjoys is financial “excommunication”. The drums of war will beat louder in 2018 as central banks, bankers, regulators and legislators will rise, some to protect consumers, some to pretend to protect consumers in order to better protect incumbents and their entrenched interests. Interestingly so, this macro risk as applied to cryptocurrencies is a double edged sword as, to date, any governmental clamp down across the globe has had the effect of making cryptocurrencies more popular across a given population. Additionally, launching a fiatcoin (digital or crypto currency managed by a central bank, with the proper design and privacy/bearer caveats) may also be viewed as a macro risk, as it would definitely be a macro policy. It is not inconceivable we could witness the coexistence of fiatcoins and private cryptocurrencies. Even in this configuration cryptocurrencies will be subject to macro risk based on the following two statement: “She who controls mining controls the underlying cryptocurrency” and “cryptocurrencies can be an effective addition to a country’s sharp power arsenal” (disrupting a trading competitor’s markets via indirect manipulation of cryptocurrencies markets may end up the night job of various state actors, if it is not already the case). Paradoxically, the ICO phenomenon may be one which will unite legislators and regulators across the world as most have started to verbalize a common theme: stay within current securities laws.

Assuming readers of this article are exposed to social media, they are all familiar with fake news in its many incarnations. Fake news (disinformation, misinformation, falsified truths, incomplete truths, errors and omissions) have so far been limited to how we consume news. I expect a natural extension of the fake news phenomenon to extend to the financial services industry in a more direct manner. Let us call this trend the “fake data” trend. It is obvious that various actors – private, state sponsored, hybrid – are motivated with sowing confusion and doubt to further various geopolitical goals. We should not be surprised if 2018 will see the rise of similar strategies applies to the financial services industry whether via outright manipulation – see cryptocurrencies – the introduction of fake data, or the corruption of existing data. This prediction becomes even more salient when coupled with cyber attacks. Current cyber attacks should also be viewed as a macro risk – after all the nationality and location of cyber hacks is a mystery – and have so far been passive. By passive I mean they have been for-profit motivated (ransomware, dark markets monetization, fraud). Our imaginations should not be stretched too much by envisioning active cyber attacks augmented with a “fake data” vector, where the goals are wider and deeper, like the destabilization of specific asset classes or markets, or systemically important financial actors. Might 2018 witness such attack vectors? Whether it is the case or not, the opportunity to arm financial services incumbents is an ever growing one. After all, the BIS has listed cyber attacks as its # 1 risk to the financial system for 2018. Fintech startups that address cyber security, the veracity and protection of data will thrive.

The above fake data/cyber attack hydra naturally leads me to my next point: Data.

Regardless which metaphor you are attracted to, “Data is the new oil” or “Data is the new asset class”, the undeniable truth is that the digital world we are building is a data creation engine that thrives on consuming the data it creates to further its growth. Nation states have caught on data’s importance and are presenting us with different macro visions. The EU has opted for stronger consumer protections with GDPR, and to a lesser extent PSD2. This will lead to innovation and growth opportunities for fintech firms and incumbents alike within clear boundaries. China has clearly opted for a more freewheeling approach whereby a more permissive use and monetization of user data is allowed. This will also lead to innovation and growth opportunities, maybe more radical ones. The US is caught in limbo in as much as legislative vision has been absent from the “data” agenda to date. This may mean financial innovation as it applies to the use of data will come from China and Europe rather than the US. This may also mean investment opportunities with innovative fintech firms that handle data may be more skewed towards the EU and China. Additionally, protectionism also applies to data. Russia, China and the EU are very specific when it comes to data generated within their borders and financial services firms with global aspirations need to navigate asymmetric landscapes. As such, fintech service providers that are able to harness these data complexities will thrive.

Let us now address my last macro point: Interest Rates & Stock Market valuations.

Both interest rates and stock market valuations offer risks and opportunities when it comes to fintech. Most analysts expect either 2 or 3 rate hikes from the Fed in 2018. We are undeniably in a rising rates environment across the globe. This is good news for savers, for banks, for institutional investors as they should expect higher yields to pad their respective bottom lines. (Bear with me here and assume either a flat yield curve will still allow financial intermediaries to make money on the short end of the curve, or that the curve will steepen at some point in 2018, making my argument doubly appropriate.) Higher profitability will mean more capital available for further digital transformation which should help fintech startups bent on arming incumbents for a shiny future. On the other hand, higher interest rates introduce more risk into the system. First in lending, where default rates might creep up, and second in how they may impact stock market valuations. So far, the expectation of interest rates has not resulted in major stock market jitters – the strength of the EU economy, the promise of US tax overhaul, stricter Chinese regulatory approaches to an overheated domestic market may have helped. Should this state of contentment not hold – others may refer to a state of complacency – and should rising interest rates, or other macro shocks such as a war, lead to stock market tumbles and worse another financial crisis as banks standings would be threatened, then the risk of the financial system at large may translate into an opportunity for those fintech startups still focused on d2c models designed to challenge incumbents. For that matter, the entire cryptocurrency space would also receive a boost of confidence as consumers at large may feel even more disillusioned with traditional financial services. Incidentally, the BIS also lists current interest rates and stock market valuations as a potential risk to the system.

In conclusion, we are living through a historical realignment both politically and economically. It is safe to assume this realignment will have lasting effects on the global economy and national economies, regardless of which vision steers government. The reintroduction of the political will in the economic sphere is now occurring as new “digital” technologies such as AI, blockchain to name but two, applied to financial services have global repercussions. Fintech startups will have to refine their understanding and sophistication when it comes to these macro risks. Their financial services incumbents are already acutely aware of these risks.

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11

Dec

2017

I have had the pleasure to collaborate with Aldo and his team over at Claro Partners on several occasions in the past. We also regularly brainstorm on innovation in general and on the future of financial services. This post is in direct line from this recent past.

Co-authored by Aldo de Jong and Yannick Rennhard from Claro Partners and Pascal Bouvier, fintech venture capital investor.

How can companies stay innovative, even when they’ve grown to a size where innovation is slowed down by processes, hierarchies, sounding boards, siloes and that cosy blanket of routine and habit?

Last January, we wrote that trying to innovate like a startup – throwing mud at the wall and seeing what sticks – is not the right approach. Organising hackathons, especially when they’re focused on developers alone, isn’t the right way either. So, how about building an external structure where ideas can emerge and grow… Why not set up an innovation lab?

Innovation labs, corporate accelerators and incubators, or however you call it, are places where corporate intrapreneurs get together – sometimes with additional partners, such as startups or external entrepreneurs – to explore interesting areas unbound by corporate bureaucracy and restrictions. At least that’s the idea. Innovation labs are meant to spark innovation that can be re-integrated into the company’s business, once its value proposition has been validated. They are extremely popular. Almost every large company has some kind of innovation lab these days, or is trying to create one.

Innovation labs should be like a laboratory of ideas, where people have room to experiment, to explore new ways of thinking, to fail and to create breakthrough products and services in the process. Unfortunately, innovation labs often turn out to be a lot more like chemistry shows for kids. There’s a lot of noise, a lot of colourful smoke and people wearing strange glasses. It’s a very enjoyable experience, yes. But apart from some ear-shattering explosions, nothing is really created in the end.

Where’s the innovation in innovation labs?

Let’s have a closer look at where expectations and outcomes for innovation labs diverge. The first and – quite obviously – the biggest problem is that innovation labs don’t seem to trigger innovation. The reality is that, if you define innovation as a new product or service offer that is validated on the market and creates value for the company, then innovation labs have a terrible success rate. Here’s why:

  1. Lack of tangible results
    Some innovation labs don’t create tangible results at all. They measure their success by the number of new ideas they’ve created, by the number of interesting presentations they held at any of the countless innovation conferences around the globe and the number of “likes” they got for their innovation ideas on social media.
  2. Lack of entrepreneurial commitment
    One of the big reasons for this lack of output is having the wrong people – more specifically – people who we call corporate experience seekers. These employees get recruited to contribute to the innovation lab on the basis of some misguided incentive or training program. The problem is that they usually lack the mind-set, the right incentives and the vigour needed to be successful in the startup world. They join the innovation lab, have a great experience playing entrepreneur (including table soccer, working with a laptop on a sofa, wearing sneakers and hoodies and whatever other innovation theatre clichés you can imagine) and they might hold interesting talks about their experience BUT they don’t create real, tangible results. The truth is that building a venture is a painful process and you should be in it for the right reasons.
  3. Lack of strategic alignment
    Another problem with innovation labs is that, if they do create ventures, then the resulting ventures are often not in line with the company’s core business or strategic priorities and therefore very difficult to re-integrate into the corporate offer. They are – quite frankly – a massive waste of time and money. Many innovation lab creators think that rules and limitations are bad for innovation, that people need total freedom to create good results. The opposite is true: the better you define the right area to innovate in, the better the outcome. First, you need to understand what opportunity area is most interesting for the company to explore – not just based on the corporate strategy but also an in-depth understanding of the ecosystem of the company and the current and future needs of its clients. Within those boundaries, though, individual freedom and possibility to make mistakes is important. At Claro, we call this autonomy in alignment, a principle that we used to summarise the new way of working as part of a project for Standard Bank, a South African bank.
  4. Lack of a problem
    Innovation labs that are focussed on exploring the implications of an emerging technology and creating new offers that leverage it (blockchain is a wildly popular example) often end up creating the wrong results as well. Exploring what a technological disruption means for a company definitely has its value. But if you start with a technology as the basis of your innovation, you’ll often end up creating solutions looking for a problem. If you just want to understand a technology, please call your initiative a “blockchain lab” or something like that. Calling it an innovation lab will raise expectations it will not be able to live up to. If you want to create innovation, think about the right problem to solve first and then select the technology that has the most potential to solve it.
  5. Lack of understanding
    The single biggest reason though, is that – driven by the need for fast results and the appeal of “just trying something” – innovation labs often practice a very loose methodology with a focus on doing things, rather than thinking about what to do first. This tendency to jump to the second step does lead to fast results, yes. But if you have to throw away your results because they aren’t relevant to your customers or don’t fit your market context, you’ll end up spending a lot more time and money than necessary. So, for example, if you want to create innovative financial services for digital natives, try to base it on understanding banking services for millennials first, instead of just throwing something at the wall and seeing if it sticks.

All of the problems described above are connected to companies trying to cut corners, sometimes just for the sake of looking innovative. At Claro, we have a different approach.

An insight-driven approach to innovation

We call it Insights-driven Venture Creation. It ensures sufficient time is spent on thinking and not only on doing. We’ve used this approach successfully with clients over the past year. Essentially, it is a combination of venture design and venture building, with the following key steps:

  1. Understand innovation context
    Make sure you create a broad understanding of your innovation context by first analysing disruptions, trends and emerging value propositions in relevant and adjacent markets. Then, obtain a deep understanding of your customer’s behaviours, needs and perceptions. Create the right frameworks and tools that summarise all your findings and help your teams innovate from a holistic understanding of your innovation ecosystem.
  2. Identify opportunity areas
    Based on that shared understanding of your innovation context, select the opportunity area(s) you want to pursue.
  3. Ideate on ventures
    Ideate on the right ventures to build within the opportunity areas identified, involving all relevant stakeholders in the process.
  4. Select ventures
    Select the venture idea that fits your innovation context best and recruit the right people (both intra- and entrepreneurs) for each.
  5. Prototype & validate idea
    Help the selected team define the right value proposition and business model based on an insight-driven product development bias and the corporate’s strategic priorities. Drive for market validation of the product as fast as possible, accepting that disruptive ideas will be more difficult to verify. Paper prototypes or digital “paper prototypes” are usually fine for this purpose. Iterate.
  6. Build and launch
    If the market validation is successful, grow the venture by planning the scaling of the offer and determining the right level of integration into the corporate’s organisational structure.
  7. Iteration
    Analyse your innovation process, learn from the past experience and try to adjust your innovation approach to improve it continuously.

Based on our experience, we believe that this approach has the best chances of creating relevant external innovation sparks for corporates because the innovation is in line with both the company’s interests and customer needs from the very beginning.

The right governance structure

But having the right approach alone isn’t going to ensure the sustainability of your efforts. If you’re thinking about upping your innovation game, you will also want to transform the core of your organisation:

  1. The right organisation
    Innovation thrives in a certain kind of organisational structure. Trying to make your innovation efforts fit the organisational structure of your company will most likely kill it. Allow for flat hierarchies and freedom, but still align the innovation efforts to your goals and strategy.
  2. Balanced portfolio
    Seek to create a well-balanced innovation portfolio based on short-term initiatives that drive your long-term, strategic innovation vision.
  3. Capacity building
    Build internal capacity within your organisation to internalise an innovation-friendly culture, and ensure the autonomy in alignment of your innovation department with the rest of your organisation.
  4. Timing
    Make sure to avoid the danger of killing good ideas too early because of your short-term financial goals, but also don’t miss the right moment to stop a failed venture.

In a project earlier this year with one of Australia’s large financial services providers, Claro did exactly that: First, we used our end-to-end innovation approach to help our client identify and understand the right opportunity areas to explore and transferred our knowledge into the client’s organisation. Then, we developed a toolkit that enabled the identification of the right venture ideas to serve the opportunity areas identified. While building a more resilient strategy, we also helped them develop a partnership engagement model to bring their innovations to market fast by collaborating with external companies. The first new ventures were launched to the market less than year after they created them with this approach.

The end of the innovation theatre

Corporations need to stop setting up siloed innovation departments or innovation labs that are just for show. Too many companies try to check the “innovation box” or – even worse – to make the company appear more innovative in shiny corporate brochures by establishing structures that are unsuited to create true innovation. The painful truth is that creating real innovation will always take time, commitment and the right approach. Even then, it is still a painful process. Unfortunately, it seems much more convenient to listen to the countless innovation gurus preaching “lean” innovation, promising an easy solution to the innovation challenge.

Unfortunately, the truth is, innovation is hard. It requires deep, quality thinking and time. There are efficient and inefficient ways to achieve it, but there are no shortcuts. Yet your ability to innovate will determine if your company is able to survive in a fast-changing world.

So, ask yourself the following:

  1. Do you really understand your customers, their problems and unmet needs? Do you know how you’re going to solve these with your innovation efforts?
    2. Do you know which area of your business has the most potential to innovative in? And can you explain why this is the right one for your company?
    3. Do you have a strong innovation vision and the right portfolio of innovation projects in place to guide your organization in that direction?
    4. Is your organization and culture suited for innovation? Do your employees understand where your innovation focus lies, what your customers will ask for in the future and how your company is going to serve those changing needs?
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06

Sep

2017

“Most punters were not alive during the Dutch tulip craze. Thankfully, they can now experience the Initial Coin Offering (ICO) craze.” Unknown Techno-Optimist.

If you follow Preston Byrne on twitter, you will have read his view on the legal issues facing ICOs: here and here.

If you follow Stephen Palley on twitter, you will have read his views on the silliness and bubble-like moment we are witnessing in ICO land – most of them guppy centric:

If you have not, then you most assuredly heard about the recent SEC comments on ICOs – see here – or the SEC’s recent enforcement action – see here – or the even more recent declaration from the People’s Bank of China (PBOC) – see here for a full english translation – banning ICOs altogether. Basically, winter is here for ICOs, ranging from a benign and restrained SEC winter, to a full blown “Night King riding a dragon” PBOC winter.

If you have not, then you must have just come back from a year long trip to Mars and need to read below attentively.

We are blessed with several “crypto” experiments: a) bitcoin (the reserve asset), b) blockchain technology (in its pure bitcoin forms), c) ethereum (both the asset and the blockchain), d) distributed ledger technology. Any number of projects under each of these main experiments will yield meaningful economic breakthroughs (think what +20 years of internet experimentation brought us). This time around, these crypto experiments are able to propagate at the speed of light thanks to the maturity of the internet as well as the early successes of bitcoin and ethereum – not to mention a little “thing” called globalization. Further, these crypto experiments have to deal with money (whether fiat or non-fiat). All these factors raise the stakes substantially when it comes to either legislation or governance for the greater good.

It is impossible to deny that we are living in a crypto bubble where most, if not all, assets are being bid up based on the triplet effects of the promise of real opportunities (good), FOMO (not so good) and nefarious activities (outright bad). The ICO craze can be filed under the “nefarious activities” bucket at this stage given the overwhelming majority of such schemes are neither legal nor grounded in any sound business reality.

The lack of sound business reality is usually dealt with by the swift and cold application of market forces. Illegality on the other hand has a tendency of being treated with a lag – the long arm of the law, whether legislative, judicial or regulatory, tends to move at a slow pace. This slow pace is usually not an issue, except when the rate of change enabled by a set of technologies reaches such a frenetic pace that unintended consequences become more negative than positive in real time.

I think we can safely state the ICO craze has happened swiftly, over a short period of time, and been very “successful” based on one kpi, the amount of capital raised. We can also safely state the overt activity has been illegal (speculation) and that inevitable failures will occur thereby threatening sound and needed experimentation. Left unchecked such activity may produce even more negative consequences – think of widows, orphans and their precious savings. Thusly, I welcome the PBOC’s definitive action as it will provide a welcome breather to the crypto space and allow, hopefully, sounder thoughts to prevail. Yet, outright bans come with negative consequences too, namely in the form of a chill over experimentation and innovation.

Be that as it may, I also think regulators need to rethink their approach to new technologies and business models in light of the instantaneous, distributed and decentralized properties exhibited by ICOs. Outright bans as well as permissiveness or lack of clarity should be avoided. Clear guidelines and strong enforcement when illegality is patently proven should be prompt and decisive. Yet, this is not enough and I believe regulators also need to upgrade their technology expertise, engage earlier with the startup world and provide continuous guidance along the way.

I do not necessarily believe regulators need to undertake a complete overhaul of their rule books  – I will defer to the specialists amongst us as to the applicability of current rules with regards to ICOs. I do believe regulatory process and discovery need to be rethought in an age where the propagation of a specific technology and/or its use unfolds at a different pace than in a purely analog world. As such, unintended negative consequences will impact a given ecosystem faster. Today, ICOs were able to raise hundreds of millions relatively fast, and other than investors – whose activities are circumscribed to the crypto space – losing money, there is not much of a risk of contagion with the “outside” world. Yet, think of what tomorrow will bring, with a next wave of fund raising around a new crypto-techno scheme. It is not unreasonable to think that one logical outcome could be see tens of billions being raised, even a few hundred billion and that such a raise in the aggregate could have more than an endogenous impact. A “digital ready” regulator engaged and active rather than passive and reactive would be able to foster safe and useful innovation.

Finally, jurisdictional cooperation and collaboration is essential. Clear SEC guidelines and enforcement only impact the US and are undermined by permissiveness in different jurisdictions, given the very nature of the crypto ecosystem. Outright bans can also be undermined by permissiveness in different jurisdictions. In other words, regulatory competition, and its ensuing arbitrage, may not helpful for optimal innovation in crypto. (Incidentally, the same could be said of other technologies such as AI – for different reasons maybe.)

Alas, the world of bottoms-up regulatory cooperation will take a long time to emerge and we are now faced with a PBOC ban and its immediate consequences which I believe will be:

  1. a relative and welcomed cooling down of the price of BTC and ETH
  2. an absolute curtailing of dubious ICO activity both in China and the US (assuming we do not witness a PBOC reversal)
  3. the bulk of upcoming US based ICOs to be fully legal and compliant, more business minded and less focused on the absolute search for empty enrichment.

I remain unsure whether smaller jurisdictions will swiftly follow or play regulatory arbitrage. For the health of the crypto space, I hope all jurisdictions will fall short of the PBOC’s stance and be more insightful and engaged than what the SEC delivered to date.

ps:  thank you to Stephen Palley for his invaluable feedback.

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07

Jul

2017

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I landed a full day ahead of M20/20 in Copenhagen to ensure I would be rested and to fully maximize my week in Copenhagen – I used to live in Denmark many moons ago. Restful I was, mournful and despondent also as Loki tricked me, with Tyr‘s help no doubt as the deed occurred on the SAS plane I landed with. I got districated and left my ipad on the plane. Loki’s dirty work for sure. Ensued a full fintech week armed with only an iPhone and my dextrous fingers. I was tech-light in a fintech heavy conference, the male equivalent of Sarah Lund without a gun, ready for the Killing. Imploring the Norse Gods did not help, I was on my own and could only rely on my wits. A tough challenge, so say my most ardent critics.

Be that as it may, let me attempt to relay my impressions and learnings.

First, let’s dispense with the small stuff. “Banks are dead”. There, I said it, and I realize this may sound like pure folly at a time when many seek bank licenses, but more of that latter. Fintech evangelists had said so and no one believed them. Fintech entrepreneurs said so and no one believed them. After all, there was little tangible proof of such outlandish assertions. A year ago, the talk was still about fintech startups partnering with banks, the likes of which would not be out of place with the fairy tales Hans Christian Andersen‘s fertile imagination birthed.

I did not hear many tales of partnership. I did not hear many tales of business as usual. I did not hear many tales of oversold fintech hype or pushback thereof.

I heard many bank CEOs and high ranking executives saying that banks as we know them are dead, each with their own words- and I paraphrase:

 We just launched our corporate venture arm, but frankly, if you ask me, we are not doing enough with startups and with technology

– We want to be a technology company with a bank license

– The future of banking is this intelligent mobile application that will figure out all your needs

– We need to be successful at hiring technologists

– Frankly, what Amazon or Apple is doing gives me much more concern than any other startup or direct competitor we are facing

– We need to learn how to be much more open 

– We are behind technology wise and we need to redouble our efforts

– There is no going back, open banking, APIs, marketplaces are models we need to master very soon

I heard or read similar statements shortly before M20/20 and I am sure I will hear more of the same over the next year. Lest you believe this line of thinking is limited to banking and banks, follow what the major insurers and payment company executives are saying, and the refrains are eerily similar – so said the few insurers present in Copenhagen.

Past the initial mourning phase we all experience after a “close” relative has been pronounced dead, matters tend to get complicated post haste. Although I am now certain most bank executives are convinced a bleak future lies ahead for the complacent ones, there is no consensus for what needs to be done, no universal truth to follow. Succinctly put, the astute observer will have fleshed out two lines of thinking: a) build better with new technology or b) build something radically new.

The former line is equivalent to a wall building exercise – shiny new walls. The historians amongst us will quickly point to the follow of such endeavor. The latter line is equivalent to building bridges, a more exciting endeavor, full of promises shaped in the forms of platform strategies, network effects, “as a service” and so on and so forth. I am inclined to favor the bridge building exercise.

Indeed, we were treated to all sorts of panels and discussions around open banking, APIs, API strategies, PSD2 strategies, bank as a service – yours truly moderated a BaaS panel with a stellar group of panelists.

We were treated to some excellent conversations with crucial points being made, such as 1) business strategies for BaaS or open banking are as important as the technology underpinning such efforts, 2) the purpose of open banking or BaaS is to drive down the marginal cost of delivering a product or service to near zero, 3) one can only achieve BaaS or platforms strategies with a complete rethink of core banking systems. The last point is a key learning which I have harped on over the past three years and in previous posts on this blog. Core banking systems are antiquated and in dire need of rejuvenation. Whether new service provider entrants will take the lead, existing ones will overcome their legacy offerings, or new and mature fintech companies such as Zopa or Klarna, to name but two, will take it upon themselves to build new systems from scratch and succeed remains to be seen. What is certain is that all will try. The industry demands it.

A point which I did not hear being discussed, which is equally material, is how network effects are important to any new financial services model. Arguably few if any new entrants have captured network effects and many incumbents are protective of their current business models, which are not conducive to capturing said effects in the digital world. One way of capturing network effects is to build marketplaces, another is via unbundling and rebundling of a given set of products or services. On both counts we are still in the early stages financial services wise. The rebundling which I discussed in a previous post, is slowly picking up steam. Witness, Klarna and Adyen securing bank licenses, or the likes of Transferwise, Revolut, Monese, N26 adding to their initial offerings (apologies for those I am forgetting). Some of these firms vie to capture network effects as they build their platforms, AND, by the way, they should all be viewed as tech companies with a banking license.

We were also treated to the news that Visa had invested in Klarna. Add to the mix MasterCard’s purchase of Vocalink, and post M20/20 Vantiv’s bid for WorldPay, I am now eagerly anticipating the next acquisitions of payment assets with a strong European presence. Which are the next targets? Who will be the next acquirers? Are these plays defensive or offensive? How valuable will these assets prove to be? My bet is more than we currently realize.

We also were treated to excellent conversations around digital identities (there were a number of ID startups in attendance), blockchain, AI, as well as many panels specialized on one aspect or another of payments. We were also exposed to regtech and regulatory sandboxes. All are subjects I was expecting would be expanded upon.

I did note, with some surprise, omissions or under-representation of certain topics which are bound to pick up steam and become of some importance for the industry.

I list them in no particular order:

– The impact of IoT on financial services at large (for insurance, for payments, for lending, for savings)

– The necessary intersection between IoT and digital identities (identities of things)

– The rise of edge computing and its impact on financial services (banking, insurance, retail, wholesale) especially as the industry is finally espousing cloud computing which is by definition centralized

– The tangible threat posed by Amazon, Apple, Facebook, and more particularly by Alexa and its sisters to brands (last I checked banks or insurers are also brands)

– Marketing to millennials (Instagram, Snapchat and organic brand building, Facebook or Google and paid search)

– How the next generation smartphone operating systems, which incorporate AR/VR (think ARkit with iOS 11) will fundamentally change search/discovery/interaction/education and the implications for fintech and financial services.

– WeChat (anything about WeChat) and AliPay (anything about AliPay), learnings, which can be replicated in the Western World, and which cannot (especially in the context of platform strategies, BaaS, marketplaces)

These last two points are to me the most material blind spots.

Finally, although I am sensing a dearth of interesting new fintech concepts and startups in the US, I see no such marked deceleration in Europe, at least for the time being. I also see many more venture funds active in this space, which may lead to either funding of startups that should not be funded, or valuation creep, or both.

That’s about it for me, and I now ask you: What were you learnings? Your observations?

I wonder if Loki and Tyr will visit me in Amsterdam next year. I also wonder if the organizers will outdo themselves next year. This event was very well put together.

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