Weekly Briefing No. 35 | US Fintechs Received an Early July 4th Gift

Thanks to Brexit, US fintech CEOs now have a lot more leverage. This week, we discuss why. We also ponder the financial implications of an app designed to fight parking tickets, Betterment as Big Brother, the rise of drones in P&C insurance and bitcoin’s progress (or lack thereof). Finally, we check out Quandl, a financial data provider, and look to Miguel de Cervantes for wisdom in these uncertain times.


US fintechs received an early July 4th gift.

A butterfly flapped its wings in Britain and suddenly, US fintech companies were handed an unexpected present. To be sure, strong British fintechs will adapt to the new realities more easily than big British incumbents (as we said last week), but they will find it more difficult than US fintech start-ups to attract venture capital. After all, the US has a massive domestic market while Britain’s now will be reduced by about 87% (based on the EU’s total population).  US fintechs are also in an improved position to compete against or collaborate with domestic incumbent giants than they were previously. Even before the Brexit vote, several of America’s top ten banks were trading below book value. Now, with the prospect of more volatility coupled with long-term interest rates at levels not seen since ancient Mesopotamia, the outlook for banks is even more uncertain (notwithstanding this past week’s relief rally).  All of this feeds into the idea that, despite banks’ efforts to refashion themselves in light of new economic realities, they aren’t doing enough to improve their long-term earnings power.  More stock buybacks courtesy of the CCAR results are not a “core” solution and while development of in-house innovation is on the rise, it takes a while to infuse a full-blown fintech culture within a big firm.  More aggressive investing in or partnering with fintech start-ups, on the other hand, does give financial institutions a chance to redefine their narratives in short order. Given the window that Brexit provides, US fintech CEOs should take a few precious moments away from their algos and busdev and at least think about how they can utilize their enhanced positioning. Leverage unused is leverage lost.

AI won’t be friendly to state and municipal budgets.

Joshua Browder is the 19-year-old behind DoNotPay, a robo-lawyer start-up that has garnered a lot of attention for successfully helping New Yorkers and Londoners successfully overturn 160,000 parking fines via a robo-appeal bot. It’s easy to cheer Browder on, especially given the highly regressive nature of parking tickets and the degree to which cities use them as an indirect tax on those they otherwise encourage to come downtown and spend money. But there’s another story here that we think deserves noting, particularly alongside the coming age of autonomous vehicles. US state and local budgets are going to take a blow if they can’t count on the revenue from auto-related fines. New York City, for example, earned $565 million in parking fines last year. That pays the salaries for a lot of teachers and cops. If AI reduces revenue to states and municipalities, their already stretched finances could worsen — unless of course, they impose new taxes, tolls and fines elsewhere (fun fact: eastbound cash tolls for cars crossing the George Washington Bridge have risen by 150% in the last ten years to $15).

Betterment’s ‘Big Brother’ moment.

The roboadvisor is taking heat for its decision to prevent its retail and institutional clients from trading until nearly noon on the Friday after the Brexit vote: "I was disappointed," said J.R. Robinson, a Betterment institutional client and owner of Financial Planning Hawaii. "I thought it was a sign of immaturity on the part of Betterment.” As justification for its decision, Betterment cited its role as a fiduciary and the atypically wide bid-ask spreads that had developed in the ETFs it uses. Others suggested the move stemmed from Betterment’s “behavioral finance angle.” However, to treat institutions like retail customers — apart from the notice they received during the halt — marks an interesting choice for the company vis-à-vis other robos including Wealthfront and Personal Capital. Betterment’s decision may have been consistent with its policies, but it begs the question of whether sophisticated clients want a platform that imposes its judgement on when it’s appropriate to buy the dips — especially in light of the post-Brexit rally.


Drones set to storm P&C Insurance.

Inspecting property damage traditionally has been a hands-on, time-consuming process in which adjusters often put themselves in harm’s way to obtain the images that they need to record a loss. But drones entrepreneur David Pitman in this CB Insights blog says all that could change in the wake of a decision by the Federal Aviation Administration to allow the broad use of drones by the insurance industry.

Bitcoin’s halving event decoded.

Kudos to Quartz for its overview of the upcoming halving event (expected to take place on July 9th) that will reduce the reward for mining a block from 25 bitcoins to 12.5 bitcoins. Once the halving occurs, look for even more mining activity to be consolidated by the scale players.

Citi remains skeptical on bitcoin’s potential.

And speaking of bitcoin, a team of Citi analysts have just published a new report in which they have basically said that despite some logical use cases (particularly in emerging markets), bitcoin won’t threaten existing credit card and remittance networks in already developed markets. Even for those who disagree with the team’s conclusions, there’s value in hearing diverse perspectives advanced in a coherent analysis.

High Court slams marketplace lenders.

Although it wasn’t a surprise, the Supreme Court issued a blow to the marketplace lending industry this week when it refused to take up the case of Madden v. Midland. In doing so, the Supreme Court has reinforced a Second Circuit Court ruling that state usury caps cannot be preempted by any provision of the Federal Banking Act. As a result, for unlicensed P2P investors buying loans in New York, a 16% cap on interest rates would apply, although many loans have historically been made at significantly higher rates.

Boston firms take aim at New York fintech.

"We want to make sure we’re getting the fintech entrepreneurs considering locating here, New York or elsewhere to pick Boston and stay here.” That’s the view from Mass Insight CEO Bill Guenther who, along with State Street, Putnam, Fidelity and other Boston heavyweights, is launching a new Fintech hub in Boston under the banner Financial Technology Boston. Given the number of buyside heavyweights that call Boston home, not to mention the city's academic power, this initiative makes sense.

Not everyone loves Final, the new “burner” card provider.

“If the US banking institutions could pull their heads out of their collective rectums for a full 20 seconds, there wouldn’t be a need for companies like Final existing in the first place.” That’s the view of TechCrunch contributor Haje Jan Kamps on the news that Final has begun shipping new products that offer disposable credit card numbers.

Company of note


Toronto-based Quandl’s bold mission is to make all of the world’s numerical data available on its website. That, in turn, leads to the company’s business model, which is based on enabling sophisticated money managers to download financial data in the precise format (i.e. Python, R, Matlab, Excel) they need. Check out the company’s site as well as its efforts to add more alternative datasets to its suite of offerings.

Comings and goings.

San Francisco-based Fundbox — a provider of invoice loans to small and medium-sized businesses that is backed by several Wall Street executives, prominent VCs and Ashton Kutcher — has announced four new hires, including Prashant Fuloria as Chief Product Officer. Fuloria had been an adtech executive with Google, Facebook, Flurry and Yahoo.

Quote of the week.

“When life itself seems lunatic, who knows where madness lies? Perhaps to be too practical may be madness. To surrender dreams, this may be madness. Maddest of all is to see life as it is and not as it should be.”

~ Miguel de Cervantes