Welcome to our 12th addition of The FR. This week, we look at the connection between Wall Street’s short-term thinking and the rise of fintech, Ethereum’s challenge to Bitcoin, SoFi’s upcoming Super Bowl campaign and the business model behind TransferWise. We also take note of the two heavyweights who have joined Betterment’s retirement committee and OpenDoor Labs, a real estate start-up.
Wall Street’s short-termism fuels fintech piñata party.
While there are two credible sides in the argument about the effects of quarterly reporting (See here and here), this American Banker article should warm the heart of every entrepreneur looking to disrupt a big bank. The key takeaway: Bank CEOs talk a good game about fintech initiatives at innovation conferences, but when it comes to earnings calls, for instance, tech takes a back seat to traditional metrics. In our view, the research analysts who drive the agenda at quarterly calls aren’t being myopic. Instead, they are merely reflecting shareholders’ near-term focus. The upshot is that while bank leaders may agree with Jamie Dimon’s famous warning that “Silicon Valley is coming,” beating back fintech challengers is not today’s top focus. As we have said, large banks face little risk of being fully Uberized, but that won’t protect the slow movers from being this year’s piñatas at the fintech party.
Ethereum: Bitcoin bête noire?
It’s been a big month for Ethereum. Two weeks ago, the R3 CEV consortium successfully connected 11 of their members on a private peer-to-peer distributed ledger experiment. Then, news hit that the Ether currency became the second largest digital currency by market capitalization. So with banks’ support, is it only a matter of time before Ethereum overcomes Bitcoin? Maybe not says blockchain and Sudoku entrepreneur Gideon Greenspan, whose Coin Sciences is arguing for a “double-decker” Bitcoin-based solution. His proposal: create two pathways with one for simple asset transfers and one for more complex smart contracts. His reasoning is based on the principle of parsimony, which is a scientific way of saying one shouldn’t overcomplicate things. Given that Coin Sciences has a vested interest in the double-checker blockchain, he could be accused of talking his own book. Still, we think Greenspan’s rationale is worth a look.
SoFi kicks field goal but flubs touchdown.
Silicon Valley darling Social Finance Inc.’s decision to air a Super Bowl commercial marks fintech’s entry into the marketing big leagues. The campaign represents the online lender’s bid to reach a wide audience and make a bold statement about its brand. The company also chose to release a warm-up ad, which recently hit the airwaves. Our take: the warm-up is excellent. It’s beautifully shot, conveys its message in well-crafted language and has a clear voiced narrator who effectively delivers some stinging jabs to Wall Street. Nicely done, SoFi. The message in the Superbowl spot, on the other hand, couldn’t be less inclusive if it were produced by Marie Antoinette’s ad agency: “Find out if you’re great at SoFi.com. You’re probably not.” While we understand that crème de la crème millennials are SoFI’s target market, why take the chance of alienating so many people in the 100-million-plus audience? If we were at an ad agency retained by a SoFi competitor, we’d propose running a counter ad during the NCAA Final Four. See SoFi’s spots: the warm-up ad and the Superbowl ad.
Apple Pay is killing it.
That’s the assertion made by Brian Roemmele, whose company PayFinders.com helps people find places that accept Apple Pay. His interest in making such a claim is clear. Still, we think his recent Quora piece on the topic is worth a read because it lays out the credible argument that introducing a new payments mechanism takes a long time, and that by historical standards, Apple Pay is the industry’s Usain Bolt. See more here and check out this story suggesting that Wells Fargo and Bank of America are working to incorporate Apple Pay into their ATM payment networks.
Dissing TransferWise’s business model.
TransferWise is a unicorn straight from central casting. It’s attacking a big problem (costly friction in sending small sums of money internationally), and it has a great mobile interface, traction, major VCs and Richard Branson on its cap table. The problem, says remittance pro Nick England, is that the core business is “smoke and mirrors.” England — who has his own company (VFX) in the sector — believes the idea behind TransferWise is flawed. The way that a peer-to-peer money exchange works is that a sender of money in Market A is crossed with an individual in Market B who wants to send the same amount of money the other way. By creating this match, traditional and costly remittance intermediaries are cut out of the transfer. But England notes that imbalances exist between markets (i.e. more people are likely to be sending money from the U.S. to Mexico than vice versa). Therefore, he says, a platform like TransferWise must commit its own capital to make up the shortfall — a very un-unicorn thing to do. Our guess is that England is exaggerating the “problem” with TransferWise’s model, but a company like TransferWise, which loudly espouses transparency, should disclose how much of its volumes are backfilled. Read more here.
Hedge funds jump on AI bandwagon.
Neuroevolution, or using evolutionary computation to build deep learning algorithms, is coming to hedge fund land. This Wired piece focuses on the trend by looking at Hong Kong based, Aidyia. The article also notes that “data-centric hedge funds like Two Sigma and Renaissance Technologies have said they rely on AI. And according to reports, two others — Bridgewater Associates and Point72 Asset Management, run by big Wall Street names Ray Dalio and Steven A. Cohen — are moving in the same direction.” Not everyone believes a trading edge can be gained from this approach because deep learning algorithms are at risk of becoming a commodity, especially as more funds employ AI systems. Aidyia’s response is to blend its deep learning algorithms with a wide range of other technologies. Sounds like an arms race for the new, new thing that won’t end any time soon.
Arrivals and Departures: Ray Kanner and Tom Clark.
In conjunction with the official rollout of its 401(k) service, Betterment announced the formation of an advisory board that will include Ray Kanner and Tom Clark. Kanner, who runs IBM’s $140 billion savings and pension program, was named chief investment officer of the year by Investor Intelligence in 2014. Clark hails from the Wagner Law Group, a well-regarded ERISA and retirement law firm. These appointments look to be very smart as Betterment prepares to take on a huge market with several entrenched participants.
Company of note
A few weeks ago, we expressed skepticism over the business model behind real estate startup Point Digital finance (Is it Christmas Time or April Fool’s Day). However, we are bullish on the real estate subsector of fintech because we think that residential real estate transactions remain too complex given available technologies. Our interest behind OpenDoor Labs, fresh with $80mm in new funding, is in that spirit. The company aims to simplify and expedite the home sale process in exchange for a discount to what the open market might yield to a seller. The so-called cash for homes business has been around for decades and it’s definitely not for everyone. However, we think that if sophisticated platforms like OpenDoor make meaningful inroads in housing markets, it could force traditional real estate intermediaries to up their game.
This week’s little known facts about…Zhongguancun (China’s Silicon Valley).
First established in the 1950s, the area within Beijing's Haidian District
was re-imagined as a tech hub after Chinese official Chen Chunxian toured Route 128 near Boston and Silicon Valley on a 1979 goodwill trip to the US.
Notable companies birthed in the area including Lenovo Group, Founder Group and Stone Group, all of which were established in 1984-1985. The hub’s technology park serves as the Chinese headquarters for global companies including Microsoft, Google, Intel, AMD, Oracle, Sony and Ericsson.
Recently, Zhongguancun enrolled a new class in its elite angel training camp. Executives hail from companies including Alibaba, Tencent, Baidu and JD.com.
One last thought: if the area is headed for the global big leagues, perhaps the backers could shorten its name to Zhong?