Welcome to The FR, where we never drop the ball.
In this edition:
Another World Economic fumble
Fintech funding shows no signs of slowing
Where can banks best deploy AI?
Varo Money’s bid for digital dominance
Can a bank be at the center of its customers’ lives?
Market data fee imbroglio
World Economic Fumble.
In recent years, it’s been made evident to us that the World Economic Forum never misses an opportunity to miss an opportunity. That became abundantly clear after speaking to several people who recently returned from Davos. Yes, it’s true that the foundation behind the annual Davos forum has increased the amount of programming dedicated to acknowledging the problematic effects of globalism. But as the economist Branko Milanovic recently said, Davos has evolved into an event where elites love to advocate for equality — so long as nothing gets done.
But an even worse aspect of the 2019 event emerged this year: the demonization of Alexandria Ocasio-Cortez. Keep in mind that we in no way support her call for a raising of federal tax rates on incomes over $10 million to 70 percent. But here’s the reality: Ocasio-Cortez is a freshman member of Congress with no seniority and little support from the leaders of her caucus. As such, while she can cause a big stir on Twitter, the chance of her pushing the Democrats to back her proposal is as likely as Mexico coughing up $5.7 billion to pay for a wall along the southern border. And yet, luminaries were teed up to take shots at AOC. Instead of deflecting the topic, they took the bait, thereby energizing a proposal that deserves no serious consideration.
Fintech investment still going strong.
There’s always talk of whether investment in fintech firms will begin to slow down, or even dry up one day soon. Some have spoken of a fintech bubble; but things appear to still be going well for fintechs... or at least the more established and notable ones.
This week’s big funding news was that digital savings and investing platform Acorns raised $105 million in its Series E round, bringing its total valuation to $860 million. The six-year-old fintech received the cash injection from investors including Comcast Ventures, NBCUniversal, Bain Capital Ventures, BlackRock, TPG's Rise Fund, DST and Michael Dell's MSD Capital, according to CNBC.
In particular, the savings and investing space has been a particularly hot area for fintechs; and with this latest funding round, Acorns has now topped the valuations of two of the other well-known players in this space, Wealthfront and Betterment.
Overall, fintech companies raised $39.6 billion in funding in 2018, which is a record, according to CB Insights. It doesn’t seem like the money spigot for fintechs will be turned off anytime soon.
Where can financial services best deploy AI?
Artificial intelligence has probably at this point displaced the blockchain as the most buzzed about (and written about and falsely characterized) technology there is. There’s no shortage of Ted talks and think pieces about how AI will affect — or replace — workers in virtually every industry.
But in banking, actual working implementations of AI are still in their infancy. There’s quite a bit more conversation around uses cases than demonstrated benefits. And much of what we have already seen deployed are virtual assistants that offer a basic but limited amount of functionality. This includes Bank of America’s Erica, as well as some banks that have started offering services through Amazon’s Alexa.
Meanwhile, we’re also seeing investment funds implement AI and machine learning in their investing strategies, specifically when it comes to environmental, social and governance strategies.
But interestingly, one recent survey of bank executives found that creating back-office efficiencies is just as high — if not higher — on the list of priorities for using AI than creating a robot that can tell you how much you spent at Starbucks last month. A survey of executives conducted by American Banker found that only 5% had deployed a virtual assistant. Meanwhile, when asked about their level of interest in various applications for AI, areas such as fraud detection, client analytics and risk management topped the list — well above virtual assistants. Chuck Monroe, the head of artificial intelligence enterprise solutions at Wells Fargo, is quoted in the article as saying this is likely due to banks “having to pause and say, ‘Where are we going to start with AI that has the most impact within our organization?’”
Varo Money’s play for digital banking supremacy.
As foreign challenger banks and US financial services entities of all stripes eye the US digital bank market opportunity, Varo Money is a name to watch closely. Led by Colin Walsh and backed by Warburg Pincus and the Rise Fund, Varo was granted preliminary approval by the OCC to form a de novo national bank last September. We’re not surprised that Varo was the first all-mobile firm to earn this charter, as its management team represents an impressive mix of traditional financial services and Silicon Valley veterans. A case in point is Walsh, who in a recent interview with Rebank’s Will Beeson demonstrates his thorough understanding of the regulatory and competitive hurdles Varo will face as it seeks capitalize on its first-mover advantage.
Can banks be at the center of customers’ lives?
One thing that’s clear is that the future of retail banking is all about the customer journey. For example, take The Financial Brand’s Top 10 Retail Banking Trends for 2019. The annual report found that “For the first time ever, the use of data, artificial intelligence (AI), and advanced analytics was ranked first, replacing improving the customer experience as the number one trend…the importance of innovation was also a trend that increased in importance in this year’s survey.”
Contributors to the crowd-sourced report almost all see an expanding role for banks: financial wellness, not just savings and investment; help finding a new house and moving; not just a mortgage but tailored products that meet customers’ needs, although the examples are sparse.
Time and again, banks’ idea of holistic financial management has been to push over-priced in-house products at clients.
Underlying the report is an exaggerated idea of the role banks play in the lives of customers and a toned-down concept of the digitally enabled customer. For most people, a bank’s function is to receive payroll deposits and store them until they are spent, saved or invested — just a money motel in the words of Ron Shevlin, research director at Cornerstone Advisors. For the customer, it is often a low-touch relationship. Occasionally, maybe every three to eight years, a customer might want a car loan, and even less frequently a mortgage. And as even mortgages can be arranged on a mobile phone, the customer relationship may become even more transactional.
Kerfuffle over market data fees.
Stock exchange operator IEX Group made waves this week when it released a report claiming that rival exchanges charge much more for market data compared to what it costs to produce.
This analysis estimated that in 2018, firms paid about 10 times to 30 times more than they had in 2010 to receive the same market information. This is partly owing to the proliferation of charges incurred for the same basic data, according to The Wall Street Journal.
The Nasdaq and New York Stock Exchange, competitors of IEX, in return pointed to the higher transaction fees associated with IEX in dismissing the findings of the report.
Either way, the report certainly reignited the debate about rising fees at the major stock exchange — something oft-complained about by institutional market participants.
Quote of the Week
“It is where billionaires tell millionaires what the middle class feels.”
~ JP Morgan Chase CEO Jamie Dimon’s 2016 summation of Davos