Welcome to The FR, where we constantly disrupt ourselves.
In this edition:
The Fed Needs an Update
A Brave New World of Media Advertising
Not All is Bad in China-U.S. Relations
The Next Recession
Sweden’s Cashless Revolution
InsurTech and the Gig Economy
The Fed needs to disrupt itself.
Despite the breezy nature of Planet Money podcasts, the hosts in the episode below have retold a revealing Fed story that has growing implications for America’s economic health: how the Fed arrived at a two-percent inflation target. Originally, the innovative idea of targeting inflation, and telling everyone about it, was hatched by a New Zealand economist named Arthur Grimes. When it ultimately worked in the Land of the Long White Cloud, the idea began to spread until it was finally adopted, in secret, by Alan Greenspan’s Fed in the summer of 1996 . But rather than do a thoughtful study or have a careful, ongoing debate about the specific figure, two percent stuck thanks to Janet Yellen and a quirk in the Fed’s conversation style. That’s it, and while Ben Bernanke disclosed the target in 2012, the number has remained the same ever since. Never mind mobility, Big Data, AI/ML, cloud computing, robotics, social media and many others. When it comes to the Fed’s official inflation watermark, the US remains in an economy of The Cable Guy and Mariah Carey duets with Boyz II Men. That’s scary.
The next evolution in media advertising.
It’s not breaking news that media organizations have struggled over the last 20 years or so to find new sources of advertising revenue. The shift from print to digital, starting in the early 2000s, hit many traditional news organizations hard. They lost a large chunk of revenue—print ads—and found that banner ads and other digital marketing products could not be sold for as much money as their print forebears. Some tried paywalls to make readers cough up dough to access content, but outside the very largest and most influential news organizations—such as the New York Times and Wall Street Journal—paywalls have largely failed, as readers will generally flock to the free content they can find as opposed to paying for it.
The fact we still see almost daily headlines of layoffs in the news media means that publishers still quite haven’t figured out how to monetize their product in the digital age. The latest company to pop up attempting to solve this problem is a start-up called Memo, which is trying to sell the the cash-strapped news industry on a new revenue stream: selling readership information about articles that mention brands, the WSJ reports (SUBSCRIPTION—oh, the irony).
As per the Journal, Memo seeks to “capitalize on advertisers’ growing demand for data by creating a marketplace where they can buy audience metrics for editorial coverage—measures such as page views, scroll depth and engaged reading time.” It also plans to sell its service to PR firms to help them pinpoint how brands they represent are being covered in the media. Only time will tell if Memo has created a model for spurring ad revenue for news organizations, or if the quixotic journey will continue.
It’s not all bad for U.S.-China relations.
In recent years, China has not only become an increasingly innovative place when it comes to technology, but also specifically a fintech hub. The country has all but eliminated cash in favor of mobile payments. Services like Tencent’s WeChat and Alibaba’s Alipay have effectively conditioned the Chinese consumer to embrace digital payments as a way of life, combining ease-of-use with messaging and social media functions to create a unique experience.
In an attempt to tap into the ever-lucrative China market, some U.S. firms could now be looking to partner with these messaging behemoths as a way in. This week, TD Ameritrade announced it is partnering with WeChat to allow U.S. customers to use the portal to check market data and other features. TD Ameritrade is eyeing the most popular social messaging app in China. This comes at a time when foreign financial firms look to move into the world's second-largest—and generally closed to outsiders—economy. For greater Asia, China, there is obviously a large number of customers here who are interested in investing in U.S. markets," said JB Mackenzie, the managing director of TD Ameritrade Asia, according to CNBC.
In many ways, digital innovation in financial services in China has exceeded what is available in the U.S., as the generally newer financial ecosystem there doesn’t have to deal with things like replacing legacy technology and antiquated payments rails.
QED’s Frank Rotman discusses the next recession.
“Back in the Capital One days, we did some analysis and figured out that the worst segment to be involved in going into a recession was Prime.” That’s a comment courtesy of QED’s underwriting sage, Frank Rotman. In a recent Money2020 interview conducted by Bloomberg’s Julie Verhage, Rotman discusses how to weatherize underwriting models for a recession, the inherent toxicity of the student loan asset class, why it’s important to overlay belts and suspenders on top of credit models, the crucial benefits of banking charters and Capital One’s evolution from fintech company to bank. Last but not least, Rotman gives his early-stage-investor take on fintech valuations: “As an early-stage investor, the day that you put money into a company that has no revenue, on any metric you look at, it’s overvalued. It’s about the optionality of what you’re building and how you can build it with the founders.”
Sweden is king of the cashless revolution.
When it comes to moving towards a cashless society, Sweden is far ahead of most other nations. That makes the country’s cashless initiatives especially useful for policymakers, financial executives and law enforcement personnel to observe. Unsurprisingly, 18-to-24 year-olds are the most enthusiastic jettisoners of cash, making up to 95 percent of their purchases via a smartphone app named Swish, which is run by the nation’s largest banking institutions. However, some Swedes are getting nervous that the cashless revolution is barrelling ahead too quickly for older and disabled people, as well as immigrants that may not have full access to the banking system: “We need to pause and think about whether this is good or bad, and not just sit back and let it happen,” according to prominent Swedish economist Mats Dillén. Last but not least, there’s also the disturbing trend (at least to us) of implanting RFID chips into people's hands (i.e., microchipping), which is showing traction in Sweden (and the UK) thanks to Biohax. According to recent press reports, the founder of this company, Jowan Österlund (who is also the president of Sweden’s Association of Professional Piercing), believes that implanting chips into people's hands can save them time, money and the frustrations of losing their wallet or smartphone, not to mention enhancing corporate security. What could ever go wrong? Keep tabs on Sweden to find out.
InsurTech targeting the gig economy.
This week brought news that insurance giants The Hartford purchased managing general agent Y-Risk, which specializes in serving the sharing and on-demand economy. With the acquisition, The Hartford’s goal is to become the leading position insurer to this customer segment of what it terms the ‘new economy’—which can be generally defined as those who work multiple freelance or contract jobs as opposed to one full-time job.
This is the latest example of financial services firms trying to cater to those working in the so-called gig economy, usually with digital products. This includes a spate of fintechs seeking to offer banking and lending products to this customer segment, as well as tools to help them get paid more easily.
Given that the Bureau of Labor Statistics says three out of four people who work contract jobs as their main employment don’t have insurance, plenty of opportunities to serve this segment in a meaningful way are sure to arise.
Quote of the Week
“The key is to embrace disruption and change early. Don't react to it decades later. You can't fight innovation.”
~ Ryan Kavanaugh