Weekly Briefing No. 153 | Making a Fintech List and Checking it Twice

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Welcome to The FR. Our predictions always come true.

In this edition:

  • The Litany of 2019 Prediction Lists

  • Robinhood and the Great Re-bundling

  • Debating the Merits of Index Funds

  • Is CircleUp the New Blackstone?

  • The Rise of the Challenger Banks

  • Tech Innovation in Financial Planning

  • Fintech is Bringing Financing to African Small Businesses

OPINION

Here come the 2019 fintech prediction lists.

It’s the most wonderful time of the year. The time when anyone and everyone – from major media organizations to individuals with a Wordpress blog – lists their top fintech trends to watch out for in 2019. Many of the “trends” appear on various lists and are fairly obvious – the continuing partnership of traditional finance firms and fintechs, the role of AI, whether Amazon, Apple or Google will become a bank, etc.

Indeed, many of the “2019 fintech predictions” lists could just as easily be culled straight from their 2015 or 2016 counterparts. We’ve heard a lot of predictions on real-time payments or how the bank branch of the future will be like a “financial spa,” and we’re still seeing many of these themes appearing on lists of trends for 2019.

However, one piece from a Bloomberg list on 2019 trends caught our eye: Experts polled for this list predict that fintech funding will show minimal signs of slowing down and continue apace. There’s long been talk of when the fintech funding bubble will burst. But those polled by Bloomberg said they thought the money would keep flowing, though with a caveat that a turn in the economy could change that dynamic.

“2018 was a year for massive funding rounds, and I can see that continuing into next year,” the head of Citi Ventures, Vanessa Colella, was quoted as saying. It will be interesting to see if the spigot of fintech funding stays on in full force for another year.

The great “re-bundling”.

News broke late this week that digital trading platform Robinhood would be joining fellow fintechs such as SoFi, Stash and Acorns in offering checkings and savings accounts in addition to its existing service. The initial promise of fintechs was the great unbundling of financials services, with consumers getting to pick and choose the best services from cutting-edge firms; a personal loan here, a budgeting tool there, and a student loan refinance on the side. 

But the move by Robinhood and other fintechs in recent times perhaps portends to a “great re-bundling;” except this time driven by fintech firms. It’s certainly an ambition of many financial technology startups (see our item on challenger banks below), and one wonders how many more fintech (or perhaps even big tech) firms will follow suit.

Taking aim at those taking aim against those taking aim at index funds.

We respect the career, accomplishments and sound analysis provided year in and year out by Barry Ritholtz. However, we disagree with his defense of index funds, in part because his arguments in the opinion piece below only tell part of story. Yes, index funds represent one of our nation’s most significant innovations (which in turn has given rise to digital investment advisors and other great fintech ideas). Yes, they are a fantastic, low-cost  mechanism through which individuals can gain exposure to the securities markets. But as the nation’s George Washington of index funds (i.e., Jack Bogle) wrote recently in The Wall Street Journal (subscription), “If historical trends continue, a handful of giant institutional investors will one day hold voting control of virtually every large U.S. corporation.” Even if the portfolio managers of these firms are wise and noble investors, it’s still unsettling to consider the long-range impacts of Bogle’s prophecy. So while Ritholz is right to criticize the motives and inflammatory rhetoric of some index naysayers, that’s an attack on select messengers. But as far as we’re concerned, the underlying warning deserves everyone’s attention, and Bogle — not some investment newsletter purveyor or hedge funder — is the world’s most credible messenger to deliver it.

TROVE

Is CircleUp the new Blackstone?

“Once CircleUp proves that it can be done, you know that KKR and Blackstone and BlackRock’s private markets division are going to be copying CircleUp… They’re going to be emulating CircleUp because there’s alpha on the table.” That’s the view of Pluribus Labs CEO Ken Kroner, who used to run scientific equities at BlackRock, on the efforts of CircleUp to bring a systematic investment process to private company investing. To be sure, a host of VCs, including EQT (See Motherbrain), are also employing Big Data approaches to the private markets. But CircleUp’s recent efforts should be taken seriously given the private equity orientation of the firm (and its founders), its formidable team that includes ex-AQR manager Ying Wang, and its prescient focus on consumer goods and retail long before it was cool to do so. However, not everyone is convinced. One such skeptic is Research Affiliates’ Rob Arnot, who warns against finding patterns in the amount of private company data available: “If there’s not a lot of data, you can wind up fooling yourself into thinking you found something that really isn’t there.”

NEWS ANALYSIS

The rise of the challenger banks.

Digital-only “challenger banks” have slowly gained steam over the last several years, particularly in the U.K. and Germany. These upstarts have been making a play for consumers’ loyalty by offering cutting-edge digital services with a fancy, slick UI and what they say are more customer-friendly products than banks offer.

The challenger bank craze hasn’t quite caught on in the U.S. like it has in Europe, and there have been some false starts when it comes to U.S.-based fintechs becoming full-fledged banks. But it seems only a matter of time before some hotshot fintech or another will successfully apply for and receive a full banking charter here.

This is especially true because the challenger bank craze shows no signs of slowing down across the pond; the latest example is the announcement by U.K. P2P fintech lender Zopa that it plans to become a full-service bank in 2019.

The fintech firm is looking to launch a fixed-term savings product, a credit card and a money management app, its chief executive told CNBC. It’s no doubt many monoline fintechs here have similar ambitions.

REFLECTIONS

Financial planning is a tech leader.

It’s safe to say tech innovation has been adopted in some areas of financial services more than others. P2P payments have become fairly commonplace transactions conducted on mobile devices. On the other hand, despite hype going back almost a decade, mobile wallets have mostly failed.

One area where consumers have shown an appetite for digital adoption is budgeting and money management. In the investing world, this extends also to financial planning. In fact, according to one report, financial planning is the most commonly used technology among advisers and their support staff. This is followed by client portals, risk profiling and analysis, compliance technology and digital trading.

The takeaway for financial firms, we think, is that customers are not necessarily looking to use technology just for the sake of it; they don’t care much about being able to conduct a transaction in a new and shiny way if it doesn’t add any new benefit for them (see: mobile wallets). Rather, they want to be provided with tools that will help them manage their finances and, ultimately, live life better.

Using fintech to bank African businesses.

Providing access to credit for small business in developing countries has long been an issue, one that has drawn increased interest in recent years as different parties have sought to tackle the problem of how to increase access to finance in these localities.

The ability of small- and medium-sized businesses to access credit is critical for any economy to thrive and grow. With that in mind, micro-credit fintech firm 4G Capital recently announced a new product called NxtGen, a credit solution developed specifically for the banking industry that aims to  provide working capital credit to micro and small businesses across Africa. It’s another example of how fintech can potentially be used to solve long-standing problems within the financial services industry.

It will initially partner with TSF, a Ghanaian financial institution, to reach this underserved sector across Ghana with access to credit products in a digital, automated and ideally cost-effective way.

Quote of the Week

“Never make predictions, especially about the future.”

~ Legendary baseball manager (and noted wit) Casey Stengel