Jessica Ellerm is a thought leader specializing in Small Business and the Gig Economy and is the CEO and Co-Founder of Zuper, a neowealth disruptor in Australia. Back in 1968, Dr Edward Altman was responsible for a major innovation in the field of credit risk analysis for corporate businesses – the Altman Z-score. While it transformed […]
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TLDR. The first IPO by a Blockchain venture will signal that the next cryptocurrency bull market is in good shape. One question is which Blockchain venture will be the the first to IPO. Candidates include Binance, Coinbase, Silvergate & TZero. Looking at the macro conditions and the IPO process offers some clues about when this will happen. Another question is what the first IPO by a Blockchain venture will tell us about the wider transition to The Blockchain Economy. For investors, our aim with this post is to give some context before the frenzy of IPO pricing and roadshow. Bitmain had a failed IPO process. Investment Bankers will be trying hard to overcome the Bitmain bad news story and write the story of the first successful Blockchain IPO .
This post includes:
Why this will signal a sustainable cryptocurrency bull market
The first IPO by a Blockchain venture will tell us a lot more about the price direction of cryptocurrencies than all the Technical Analysis (TA) put together. The investment bankers will look at TA among many other signals before making their big timing & pricing bet.
When Part 1: understanding the 7 step IPO Process
To get a handle on when will the first Blockchain IPO will happen, we need to understand the 7 step IPO Process:
Any of these 4 things can change this planned process:
– Acquisition. Before or after all of these 7 stages, an acquirer can come in. For example, Facebook could acquire Coinbase before or after they IPO.
– Mega private round. This is like an Acquisition, because early investors and founders can at least partially exit.
– Market tanks. The investment bankers can “pull an IPO” if a crashing market means they cannot get the target price.
– Execution snafu. The company can do something that significantly reduces the value of the business or simply not meet targets or suffer some kind of attack. For example, a major loss from a scam will derail any of these Blockchain IPOs.
The Bitmain bad news story
Investment Bankers will be trying hard to overcome the Bitmain bad news story in 3 ways:
Investment Bankers don’t want investors looking at Bitmain as a comparable.
Who are the candidates for the first Blockchain IPO
All of these have the scale to do an IPO and have made some noises in that direction. To avoid any implied ranking, these are in alphabetical order:
Here is the IPO noise about Binance
Here is the IPO noise about Coinbase
Daily Fintech earlier coverage about Coinbase IPO
Here is the IPO noise about Silvergate
Daily Fintech earlier coverage about Silvergate IPO
Could be by a) Medici Ventures which owns TZero and some other Blockchain assets b) via Overstock (which owns TZero) selling their legacy e-commerce business leaving just Medici and TZero or c) via a spinoff of Medici or TZero from Overstock
Here is the IPO noise about Tzero.
Daily Fintech earlier coverage on TZero.
When Part 2: Macro market analysis
A Blockchain IPO needs a bull market in both Legacy Finance and in Cryptocurrencies. During 2018 we had a bull market in Legacy Finance and a bear market in Cryptocurrencies. During 2019 we might have a bull market in both but the window may be tight and a lot of ventures crowding to get through that window (pity those poor Investment Bankers).
If we don’t get this window when both markets are healthy, the big Blockchain ventures lining up to IPO are likely to accept either an acquisition offer or a big private round (aka “private IPO”).
Legacy IPO vs Blockchain STO
When one big use case for Blockchain is Security Tokens that will disrupt Wall Street, it seems odd to use classic Wall Street firms to manage a classic Legacy Finance process.
TZERO will be the most conflicted about this as they are most vocal about disrupting Wall Street, but all the ventures have this issue. We may see one of two variants:
Being No 2 maybe better but risky
The race to be first is driven by a) a short window when both markets are in bull market b) the consumer marketing impact of an IPO. An IPO is less about raising capital than getting mindshare of millions of potential customers. In some markets it pays to be second to IPO not first. The short window may mean such caution is thrown to the wind.
Bernard Lunn is a Fintech deal-maker, investor, entrepreneur and advisor. He is CEO of Daily Fintech and author of The Blockchain Economy.
I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.
Subscribe by email to join the 25,000 other Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research).
Last week, I was interviewing a VC based out of Pakistan. I took away several insights from the conversation, however, there was one major highlight that would stay with me for a long time. There was a point where the distinction between Fintech businesses and business models was made.
That distinction was further enriched when we discussed how many emerging economies created Fintech business models embedded within lifestyle businesses. At that point the realisation hit me – the realisation that emerging markets has seen more lifestyle businesses provide Fintech as a byproduct business service. However, in the UK, Europe and the US, we see several businesses explicitly tagged as Fintechs providing core Fintech services.
Therefore, I thought it would be good to write about lifestyle/non-Fintech businesses across the world, that are offering or looking to offer Fintech services. Let me start with Pakistan.
Pakistan rides on Bykea: Bykea started as a ride hailing app, moved to food delivery, and in due course has now started offering financial services to many of its clients.
As they are able to track a customer’s financial transactions they are able to assess if they can offer micro credit to them. Bykea upgrade partner drivers from a cash economy to creating their first ever bank accounts. First time customers can use cash for a booking, however, their model encourages cash top ups to an in-app wallet.
Indonesia Go-Jek and South East Asia’s Grab: Indonesia’s road traffic challenges seem to be alleviated, thanks to motorbike Uber models Go-Jek and Grab. Go-Jek has been around since 2011, and it is now as much a payment app as it is a ride hailing app. They have 1 million drivers, 125,000 merchants, and 30,000 other services, spread across 50 cities in Indonesia. Tencent and KKR are investors in Go-Jek.
Grab has presence widely across South East Asia, operating using the same model. Softbank Group and Microsoft are investors in Grab.
Africa – Energy, Farming and Fintech: In Africa, the lifestyle use cases in focus are in energy and agriculture. As solutions for both these value chains emerge, they often come with a financial inclusion business model integrated. Although, I can’t name them – recently I came across a firm, who provided Solar based last mile charging and other energy services to African villages. The payment for these services could be through M-Pesa or a mobile Wallet.
The other model followed by firms such as Banqu, Binkabi and Agriledger is to use Blockchain technology to track farmers’ transactions. As more and more transactions are registered, the farmer creates a economic identity, which can be used to check their credit worthiness by suppliers and financial service providers. These solutions can also provide wallets for these farmers to enable friction free international transactions.
China’s Leapfrogs: I have got addicted to talking/writing about Alipay and Wechat. While Alipay took over Fintech from an ecommerce base, WeChat began their conquest from a chat messenger business. The impact they have had within China, complemented by China’s drive towards AI and Blockchain has helped the nation’s credibility. The world can no longer perceive China as just a manufacturer of cheap goods. Thanks to their success, the data created from their ecosystem, can be used to create innovative business models.
India Telecoms and Fintech: Fintech in India cannot start or end without the talk of PayTM – the firm that won investments from Softbank, Alibaba group and Warren Buffett’s Berkshire Hathaway. However, several Telecoms providers in India have taken inspiration and started providing Fintech services. Airtel, one of the top telecoms provider in India offers a wallet and even a bank account.
Google launched their Tez app a couple of years ago, and has recently rebranded it to Google pay. They have seen good success. The other name that we can’t miss is Whatsapp – who have been trialling payments in India. At the moment, they are unable to go live with the feature due to regulatory pressures to store the data locally in India. However, the gist is that different players are providing financial services as an add-on business model.
Nordics and their Wrong-un: A wrong-un in cricketing terms, also known as a googly, is when a leg spinner (bowler) suddenly makes the ball spin the wrong way. The Nordics have led the world in creating cashless societies. However, more recently its the banks that are leading financial inclusion business models through federated economic Id creation.
Norway integrated the government Id to taxes and student loans, and that helped the e-Id concept take off. Today, Bank Id in Norway has 74% penetration, in Sweden it has 78% penetration, in Denmark NemID has 85% penetration and in Finland TUPAS has 87% penetration.
Once these bank Ids became mainstream, thanks to collaborative consortium based approach from banks, new non financial services business models were created on top of that. There were life style use cases that could be possible, thanks to the economic Id boom.
It’s interesting to see how in more developed ecosystems, banks are driving lifestyle business models, and it is actually vice versa in emerging markets. Thanks to technology, one thing that’s common between the two is the customer focus. As long as that remains, even the wrong-uns can yield the right results.
Arunkumar Krishnakumar is a Venture Capital investor at Green Shores Capital focusing on Inclusion and a podcast host.
I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.
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Last week our theme was “SEC reducing signal to noise ratio for ICOs.“
Our theme for this week is “Can Crypto Debit Cards turn Bitcoin into Real Money?”
At the end of February, Shift announced it was shutting down its Coinbase debit card. In message to customers it explained that it hopes to relaunch in the future, but for now U.S. residents are left with few crypto debit card options.
A few days ago, Coinbase announced they were partnering with PaySaf, to launch a new Coinbase Card, and fill the gap left by Shift shutdown. Initially, the new card will available only in the UK and let users instantly convert their crypto balance to fiat.
A hundred years ago, no one could even imagine that it would be possible to buy things using a plastic card, instead of paper banknotes or coins. Now, we can’t even imagine our lives without debit or credit cards. To go one step further, now we are even funding our debit cards with cryptocurrencies.
Most Americans don’t carry cash. In an average week, roughly 3 in 10 adults make zero purchases using cash. Those who do carry paper money, have less than $50 in their wallets.
Cash isn’t king anymore, but neither is Bitcoin… at least not yet.
Using cryptocurrencies in the real world is difficult. The biggest challenge that cryptocurrencies face is how to integrate into the real world. There are not many merchants that will accept cryptocurrencies, and even though technologies like Lightning Network will change this, today using your Bitcoin to pay for products and services is hard. We’ve seen some progress, but we’re still a long way to go before cryptocurrencies on par with fiat currencies. For now, the biggest obstacle for the mass adoption of cryptocurrencies, is that people don’t consider them as real money, because they can’t spend them anywhere, anytime.
Could crypto debit cards change this perception?
Crypto debit cards were hot in the first half of 2017. Their value proposition was simple: users wanted to spend their cryptocurrencies to buy things in the real world, but merchants didn’t want to accept them. Crypto debit card companies built platforms, that let users automatically use their cryptocurrencies, when they swiped their debit cards. The only difference was that the necessary funds for the transaction, were withdrawn from a cryptocurrency wallet and converted into fiat.
When Visa cut WaveCrest, the main issuer for most crypto cards, nearly all them stopped working. Many, like TenX and WireX, suspended their services. Others worked, but only in a limited number of countries and currencies.
Bitcoin’s Lightning Network is already comparable with Apple Pay. Bitcoin’s payment system is superior to the conventional international payments and wire transfers. Technical improvements to Bitcoin’s network are almost certain to make it the world’s main payment system.
Datalight conducted a fairly large-scale study, which was entirely devoted to the prospects of Bitcoin to become a global payment system. They believe that the Bitcoin payment network will surpass the current giants Visa and MasterCard in the next 10 years.
Potentially, crypto debit card companies are an endangered species. Due to the complexities of operating a crypto-fiat business, regulatory requirements, the changing stance of Visa and Mastercard, and Bitcoin’s Lightning Network, crypto card companies could have a hard time in the future.
Even though crypto debit cards have been the best solution for crypto-to-fiat spending so far, it’s not an ideal one. Anonymity has always been one of the most important Bitcoin features and absolute privacy is simply impossible here.
For now, they are an important stepping stone. There is no doubt that merging crypto with debit cards is a powerful driver for mainstream adoption. Crypto cards help legitimize cryptocurrency, since they work just like a Visa or Mastercard, that most of us have and use everyday.
For cryptocurrencies to make the leap from an traded asset to valid real-world currency and payment method, we need to think of it as real money, money we can use to pay for things. Crypto debit cards can help bridge this gap.
Ilias Louis Hatzis is the Founder & CEO at Mercato Blockchain Corporation AG. He writes the Blockchain Weekly Front Page each Monday.
I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.
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TLDR. The big coming wave is Security Tokens, but the backlash against Utility Tokens is overdone. On Monday, Daily Fintech analysed the recent moves by the SEC to provide regulatory certainty to Utility Tokens. This is a big deal. Until now, entrepreneurs faced a regulatory environment where everything was a security, because in that world there was nothing else. Now entrepreneurs can use a Security Token to raise capital and a Utility Token to reduce their Customer Acquisition Cost (CAC).This is a a big deal for entrepreneurs. It is only exciting for investors who have equity in the ventures created by those entrepreneurs. That is how it should be. A Utility Token is a great business building tool; it is not primarily an asset. If you buy a Utility Token, it may appreciate in value, but you buy it in order to use it and any price appreciation is a side benefit.
This post is an update to the chapter on Investing in Utility Tokens in The Blockchain Economy digital book.
This post describes:
The SEC rules governing Utility Tokens
The SEC rules were analysed in Ilias Louis Hatzis’s Daily Fintech post on Monday. For convenience the key rules (defined in a No Action letter for the Utility Token of a company called TJK) are copied below:
Laws change over time and vary by jurisdiction
The Legacy Finance world has Debt and Equity. The Blockchain Economy has Utility and Security Tokens. You can tokenise Debt (just like you can tokenise Equity or any other asset) but that does not change the fundamental characteristic of that asset.
Debt is illegal in Islamic Finance (for more please read this). There are workarounds that dress up debt to look like equity, just like there are workarounds that ICOs used to dress up a security to make it look like a utility token. This perspective is useful when you look at the legality of Security vs Utility tokens ie laws change over time and vary by jurisdiction.
Four reasons why other jurisdictions will probably follow the SEC rules
Yes, the SEC only has jurisdiction over one market – America, but here are the four reasons why other jurisdictions will probably follow the SEC rules:
There will be minor markets that differentiate by being easier on Utility Tokens, but unless they also offer a large investor pool, that will be “noise on the line”. Europe’s legislation/regulation will be interesting to watch. Unless Europe takes a differentiated position soon, the market will follow the SEC rules.
Utility Tokens can be used to improve CAC/LTV, which is a critical metric driving valuation
CAC/LTV = Customer Acquisition Cost/Life Time Value.
You can use this to evaluate the value of both Banks and Fintechs, as we described in this post from 2015. In fact just about any company can be evaluated using CAC/LTV.
Both CAC and LTV are complex in their own right, but it is the interaction between the two that is so often confusing or difficult.
Customer Acquisition Cost (CAC) is the metric to evaluate Marketing efficiency.
Churn is the kryptonite of Superman Marketing. The problem with Churn it is not directly under the control of Marketing. This is where Product is key. Another way of saying Churn is “if customers think the product sucks, all that expensive Marketing is wasted”. Churn means customers cancel the service and then Marketing have to win new customers, which is far more expensive than retaining them.
Life Time Value is not static. LTV is all about getting the balance right between cross selling, upselling and low churn – too much selling to customers may increase churn. If LTV goes down, you have to reduce CAC. Product strategy, pricing, marketing, customer service all have to be in alignment.
The story of Banking in the 20th century can be summed up as Low Churn. We are statistically more likely to get divorced than change banks. There was no point in changing Banks, because the difference between banks was marginal. The Fintech disruption changes that. Now customers have more real choice and regulation is seeking to protect consumers from lock-in strategies that make it hard for them to switch.
Crowdsales are a great way for companies to sell a service aka reduce CAC. It is Internet Marketing 101. Crowdsales have been around for a while, but Utility Tokens enable Crowdsales on steroids.
Two ways that a Utility Token is different from a traditional crowdsale.
Invest in Security Tokens of ventures that offer great Utility Tokens.
If a venture offers a Utility Token that is successful in the market, that venture is likely to have good CAC/LTV metrics which eventually translates into equity value held in Security Tokens. I say “eventually” because market mismatching can last a long time ie price does not always equal value or vice versa.
The future cryptocurrency landscape will have 4 different types of assets
An Altcoin Pump & Dump is about cornering a very small market. Cornering a big market – like say Gold or Bitcoin – requires a lot of capital. You can corner an Altcoin quite cheaply and then pump & dump your way to fortune. If you are trading Altcoins and not pumping & dumping, then you are the sucker at the table. This is Penny Stocks 2.0 – watch Wolf of Wall Street for an entertaining guide to this sort of market.
So there is good reason why the SEC clamped down hard. Most Altcoins should be regulated into the dust.
The fact that Bitcoin & Ethereum got a get out of jail free card from the SEC, puts them in much stronger position versus their challengers. The future cryptocurrency landscape will have 4 different types of assets:
Bernard Lunn is a Fintech deal-maker, investor, entrepreneur and advisor. He is CEO of Daily Fintech and author of The Blockchain Economy.
I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.
Subscribe by email to join the 25,000 other Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research).
TLDR. The conventional wisdom is that Legacy Finance Institutions will lead the way to mainstream adoption of Bitcoin. This post outlines an alternative thesis that the route to mainstream adoption of Bitcoin is by building a second leg as a currency for everyday spending among those excluded from financial services today, starting in countries with a Fiat currency crisis such as Venezuela
This is an update to this chapter of The Blockchain Economy digital book.
This post describes:
The conventional wisdom trajectory
The conventional wisdom trajectory has 3 phases – from past, through present, to future.
This chapter argues a contrarian thesis that bitcoin’s path to mainstream is not a pivot but rather a continuation of Phases 1 & 2. The conventional wisdom scenario plays well at Davos (World Economic Forum), the gathering place of those with wealth and power (Big Tech & Big Bank). This post shows why that conventional wisdom is wrong.
Bitcoin needs a second leg to be stable. Bitcoin’s first leg – store of value – will eventually become unstable if it has to stand on its own. Bitcoin needs a second leg – a currency for everyday spending. That second leg will not be built by Institutions or Speculators, it will be built by entrepreneurs (maybe with Institutional partners) who know how to serve the needs of those who have been excluded by Legacy Finance (who need Bitcoin as a currency for everyday use).
Bitcoin’s second leg will be built from the wreckage of Exotic Fiat currencies
We can witness this happening today in countries such as Venezuela that are suffering from hyperinflation (as described in this post). This has reached Act 4 in the Creative Destruction 7 Act Play This is “when the going gets weird, the weird turn pro” (quote from Hunter S Thompson, who was certainly weird but also professional enough to write best-selling books).
It is likely that the Bitcoin habit, which we can witness in Venezuela, will spread to countries that are close, physically and/or culturally, to countries with hyperinflation. These neighbours will witness the horror of hyperinflation and see how practical Bitcoin is as an alternative. For example, Argentina and Peru, while not yet suffering hyperinflation, may follow the example of Venezuela. This has reached Act 3 in the Creative Destruction 7 Act Play. Act 3 is Denial. A famous example of the Denial Act 3 was subprime mortgages that blew up in the Global Financial Crisis in 2008. For a long time the surface numbers looked good until a few nonconformists looked below the surface (watch The Big Short movie for an entertaining take on that story). A more recent example in Finance was the Wells Fargo fake accounts scandal (which was going on for a long time before it was uncovered).
If Bitcoin is limited to countries with hyperinflation, those of us working in developed markets with strong Fiat currencies can dismiss it as a phenomenon (like wheelbarrows full of cash) that have nothing to do with “normal” countries. The next bull market needs a use case story that more people can relate to.
If Bitcoin spreads from Venezuela to other countries such as Argentina and Peru, the markets will have a story to relate to. There are 180 currencies listed as legal tender, of which only 8 are considered as “major” by the FX market. Contagion spreads rapidly.
When we see that contagion spread to developed markets with Fiat currencies that are perceived to be strong today, then we will have reached mainstream adoption. Again we need to look at edge cases aka those who feel excluded by Legacy Finance.
When Bitcoin gets traction in developed markets, it will be via those who feel excluded by Legacy Finance
This is Act 2 in the Creative Destruction 7 Act play. Act 2 is when we see Straws in the Wind. It takes guts to see a few straws blowing about and bet that this is caused by an invisible wind. The signs of change are far from obvious but “the answer my friend is blowing in the wind”.
The reason change comes from the excluded is obvious. Their needs are not being met by Legacy Finance. We see that happening today in Venezuela. When the issue is feeding your family, the clunky UI and risks of Bitcoin do not seem a big deal. Using Bitcoin gets onto your Must Do Today action list.
Are there markets like this in the developed world? Are there enough people excluded by Legacy Finance in the developed world to make sure that the Bitcoin contagion spreads to the developed world? I believe the answer is yes and that we can see this answer blowing in the wind of three niche markets in developed world that have excluded by Legacy Finance:
Traders are from Venus, Investors are from Mars and Martians need to study Venezuela
The difference between traders and investors looks small on the surface – it is simply the length of the holding period. In reality, the approach is fundamentally and completely different.
Bitcoin traders look at price charts. Bitcoin investors look at how people are using Bitcoin.
Given that real Bitcoin usage today is quite limited, Bitcoin investors have historically looked at what products are being built today that will enable new forms of usage in the future. To give an example from an earlier era, an investor would look at an early version of Hotmail and extrapolate that mass use of email via browsers was possible.
The hope story on Bitcoin is getting a bit long in the tooth. The market needs to see real usage traction, not just products with potential use. For that we need to look outside the developed world.
So Bitcoin investors need to understand how Bitcoin could serve the Excluded
Traders need a story. Bitcoin as a one-legged stool (digital gold store of value) is not enough to power the next bull market. To reach the mainstream investor, Legacy Finance Institutions will need more than the how (things like Custody), they will also need a usage story. They will need to show why Bitcoin will change the world and how that is already happening.
Traders will still trade and their liquidity is essential. Some of the traders who got into Bitcoin during the last bull/bear cycle will get back into active trading during the next bull/bear cycle. Many will do this via Institutions, others will use startups.
Profit comes from serving the excluded said Captain Obvious
Question: which market looks more attractive?
You probably answered B, yet most solutions target A. A big reason is that most developers today work in developed markets (where Customer A is located) and we find it easy to build solutions for people who are like us.
Investors who understand Bitcoin users will do best
That is another Captain Obvious statement and yet most investors work in developed markets and feel comfortable investing in solutions for those markets.
We can see this in some early Bitcoin entrepreneurs such as Wences Casares of Xapo who comes from Argentina.
Serving the Bottom of the Pyramid is a lot easier when the marginal cost is zero and payment cost is close to zero
The Bottom of the Pyramid (BOP) is a socio-economic concept that allows us to group that vast segment – in excess of about four billion – of the world’s poorest citizens constituting an invisible and unserved market blocked by challenging barriers that prevent them from realising their human potential for their own benefit, those of their families, and that of society’s at large.
Technically, a member of the BOP is part of the largest but poorest groups of the world’s population, who live with less than $2.50 a day and are excluded from the modernity of our globalised civilised societies, including consumption and choice as well as access to organised financial services. Some estimates based on the broadest segment of the BOP put its demand as consumers at about $5 trillion in Purchasing Power Parity terms, making it a desirable objective for creative and leading visionary businesses throughout the world. One of the undeniable successes in this process is the explosion of the Microfinance industry witnessed in many parts of the world.
The first person to really focus on BOP was C.K. Prahalad (1941-2010), who in the process has inspired influential leaders and countless ordinary citizens sharing his vision, to joint efforts for the unleashing of their creative and productive potential as part of an inclusive capitalist system, free of paternalism toward the poor. Source
The iconic use case was Unilever with their single serving soap packages in India. That took real innovation.
Serving the Bottom of the Pyramid is a lot easier when the marginal cost is zero, for obvious reasons. You can deliver at the price point needed in the market without having a margin problem with cost of goods sold .
The advent of fast, low cost micropayments via offchain technology such Lightning Network also make it much easier to profitably serve the Bottom of the Pyramid. Credit Cards obviously don’t work in that market and physical cash has hidden costs (theft, time, handling etc).
Blue and Red Ocean strategies of Legacy Finance Institutions in the Blockchain Economy
The Cypherpunks, Anarchists & Libertarians who kick-started the Bitcoin Blockchain engine tend to relegate Legacy Finance Institutions to the dustbin of history. Clearly Bitcoin is a big bang disruption for Legacy Finance and many will suffer a Blockbuster/Borders/HMV/Kodak type fate.
We see two fundamental strategies for dealing with this kind of big bang disruption:
Institutions need help from a range of service providers such as strategy to code to legal. Serving the Institutions will always be a profitable business.
Watch what is happening in the Exotic Fiat Currency Countries
The bridge from hyperinflation “broken Fiat” Currency Countries to developed markets will be via “exotic Fiat” Currency Countries.
The 8 most traded currencies are
U.S. Dollar (USD)
European Euro (EUR)
Japanese Yen (JPY)
British Pound (GBP)
Swiss Franc (CHF)
Canadian Dollar (CAD)
Australian Dollar (AUD)
South African Rand (ZAR)
There are 180 current currencies across the world, as recognized by the United Nations. That is a lot of what FX traders call the “exotic” currencies.
Watch the currencies/countries that are physically and or culturally close to “broken Fiat” currency countries. For example, If Bitcoin spreads from Venezuela to Argentina and Peru, the markets will have a story to relate to and other countries may copy this way to avoid the horrors of hyperinflation.
Bernard Lunn is a Fintech deal-maker, investor, entrepreneur and advisor. He is the author of The Blockchain Economy and CEO of Daily Fintech.
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Climate change is no longer just the concern of flood-exposed coastal residents, or those who inhabit potential wildfire areas; there is growing indication from insurance companies that the cost of events related to climate change will spill over in significant ways to property insurance in total. Global insurer Munich Re’s Chief Climatologist, Ernst Rauch, recently discussed the issue with The Guardian, “Climate change could make insurance too expensive for ordinary people”, indicating that the rising financial effect of catastrophes could spill over into rates being taken across the spectrum of property insurance policies.
“If the risk from wildfires, flooding, storms or hail is increasing then the only sustainable option we have is to adjust our risk prices accordingly. In the long run it might become a social issue,” he said after Munich Re published a report into climate change’s impact on wildfires. “Affordability is so critical because some people on low and average incomes in some regions will no longer be able to buy insurance.”
Low and average incomes? If one agrees that Munich Re’s outlook is correct it might be said that affordability will be an issue for ALL incomes in some regions if no carrier makes insurance available due to excessive risk; if there is no property insurance available (or it’s not purchased by customers- interesting perspective on earthquake insurance here) this problem spills over to financial markets in terms of loss of mortgagee casualty protection for real property loans. Take the spillway further, and riskier areas become less viable for economic activity in the big picture. Consider even further- reduction in occupied properties, reduction in property tax revenues, public revenue… now there’s trouble.
What’s to do? Wring hands, rend garments, wail and gnash teeth? How about some real change of thought for property insurance? Let’s look at coverage, coverage amounts, indemnity, parametric options, and connected properties (IoT).
If property insurance policies covered just fires or probable maximum loss (PML) perils, insurance would be significantly less costly. Correspondingly, if those PML perils had a ‘floor’ severity amount beneath which the customer held responsibility (not unlike windstorm or earthquake perils in the US), insurance would be less costly. If policy coverage for frequent claims, e.g., water losses, was capped at a known amount, insurance would be less costly. Continuing, if frequent insurance claims were payable essentially on demand (no claim inspection needed), insurance would be less costly. Even further- if insurance products were more available with less cost of acquisition (customer or company cost), premium volume would rise, making insurance less costly. Customers have become accustomed to the granular indemnity response that today’s policies provide, and that may need to change.
So what’s the point? Again, the industry is at a potential tipping point- natural and manmade losses are growing faster than expected ($500 billion in 2017-18 alone, per insurer Swiss Re , estimated $200 Bn insured), and the purpose of this article is not to focus on what is a given- increasing cost of insurance due to the expectation that the pattern continues. Of course absent the presence of insurance to indemnify at a time of loss, what matters the cost?
What if:
Just some thoughts, but holding key ideas- broadening responsibility for risk management beyond just the individual property owner and changing the expectation of property insurance from a full indemnity model to one that recognizes a loss but doesn’t hold one party to the contract (the insurer) solely responsible for determining the amount of loss and working to identify every detail of the financial loss.
If property insurance is to remain viable from an industry basis it seems the product needs to be considered from a loss/disaster perspective backwards, from a who is at risk from a ‘no recovery’ aspect, and then from a who benefits from helping fund risk management efforts. There are plenty of data available to the industry to calculate the probable cost of individual high-frequency claims, and by extension the premiums needed for a parametric basis for settling that nature of claims. Individual investigation of smaller claims is simply not a highest and best use of expensive human capital, and if AI is to be applied to those claims, why not carry the knowledge to preemptive claim resolution (loss is detected, payment is made?) Sure, the policy forms that exist today would need rework (as would customer expectations), but in the face of pricing risk sharing beyond many property owners isn’t radical thinking needed?
Wildfire losses like those experienced in California or Greece exposed the nature of who and what is insured, the haves and have nots, and also the difficulty in rebuilding (or not) areas that have had regional destruction ( see Paradise California’s wildfire recovery challenges.) Significant wind and flooding damage in Hong Kong, Japan, southeast US, and southern Africa produce ripples that extend materially well beyond those regions. Confidence that risk is being apportioned and shared will serve to stabilize capital that is being made available as a backstop for significant risk (catastrophe bonds, insurance linked securities, and traditional reinsurance- with an interesting ECIS regional perspective Seeking Alpha view here ).
Climate change effects highlight the big responses to big events, but whether there’s a clear bread crumb trail between change in climate and change in property insurance the anticipated path is clear- the cost of insurance is rising along with global tides. And the effect that all benefit from a viable, affordable insurance industry is also clear- risk management is a keystone factor that if absent ripples through economies on a macro scale, and as such needs a unique macro approach to ensure we are all not insurance poor.
Patrick Kelahan is a CX, engineering & insurance professional, working with Insurers, Attorneys & Owners. He also serves the insurance and Fintech world as the ‘Insurance Elephant’.
I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.
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These are interesting times with Brexit around the corner, an Indo-Pak (China) war looming, and a disastrous trade relationship between the two largest economies of the world.
This week I delivered a speech at Cass Business School on how and if AI could help in dealing with recessions. There is so much noise about the next recession, that I wonder, if people prefer a recession to cool down the economy a bit.
And the expectations on Constantinople is pushing up crypto prices again – although I don’t believe for a second that, the crypto market is big enough yet, to trigger recessions.
Assume you are driving a Ford Fiesta, can the speed indicator on your dashboard keep you from having an accident? Upgrading your car to a more sophisticated, intelligent one would definitely help. But that doesn’t prevent you from having an accident either. Even self driving cars could be hacked, or could have a bug that causes accidents.
AI/Machine learning or any variation of data driven intelligence, as we know them today, can provide us suggestions – and clever ones.
But if a market filled with irrational exuberance from humans have to be fixed by rational machines, it is a tall ask.
The dot com bubble burst and the subprime mortgage crash happened because of too much liquidity in the market leading to bad lending and spending decisions. And it only took a trigger like a policy change or a crash of Lehman Brothers to sap liquidity off the market. So, what are the signs now?
How can we get intelligent with the data around us and spot recessions? An analysis of Consumer data should provide us with a view on consumer behaviour, and almost predict where inflation would be heading. One of the firms I recently met, used open banking to collect consumers data, enrich it, and help them manage their finances. But the intelligence they gather from millions of transaction level data are used by their institutional clients to understand customer sentiments towards a brand.
Those insights combined with macro economic data should give these institutions the intelligence to choose their investments. The applications of open banking have largely been focused around selling services to customers in a personalized fashion. However, open banking data should help us understand where the economy is heading too.
Risk management functions in banks/FIs have been beefed up since the recession. About £5 Billion is spent in the UK alone on risk and regulatory projects every year. The ability to perform scalable simulations in a Quantum computing ready world will help banks provide near real time risk management solutions.
In capital markets, we model the risk of a position by applying several risk factors to it. Often these risk factors are correlated to each other. To be able to model the effect of a dozen or more correlated risk factors on a firm’s position is hard for conventional computers. And as the number of these correlated risk factors increase, the computational power required to calculate risks increase exponentially. This is one of the key issues of simulations (not just in financial services) that Quantum computers are capable of solving.
11 years ago, when the recession happened, regulators were ill-equipped to react due to the lack of real time insights. Today they have regular reports from banks on transactions, and better ways to understand consumers’ behaviour. That clubbed with macro economic data trends, should provide enough indicators for regulators to set policies. So, when there is a tax law that would trigger a collapse is being proposed, they should come up with strategies to bring the law into effect with minimal damage to the economy.
In the machine learning world, there are two different approaches – supervised and unsupervised models. If you understand the problem well, you typically go for the supervised model and see how the dependent variable is affected by the independent variables.
However, I believe, recessions often have the habit of hitting us from a blind spot. We don’t know what we don’t know.
It’s important for regulators and central banks to run exploratory analysis – unsupervised models, and assess the patterns and anomalies that the algorithms throw.
Data from consumer behaviour, geo-political events, macro economics and the market should give these algorithms enough to identify patterns that bring about recessions. This may not necessarily help us avoid a recession, but could definitely reduce the impact of a sudden recession, or help us engineer a controlled recession when we want a cool down of the economy.
Arunkumar Krishnakumar is a Venture Capital investor at Green Shores Capital focusing on Inclusion and a podcast host.
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Our earlier research told us that what customers really care about in Insurance is Claims Processing. Getting paid, promptly, without a lot of added stress after a traumatic event, matters a lot more to customers than attributes such as quality of user interface. Seen from the other side, claims can often have fraud and so managing the Claims Process properly is one key to running a profitable Insurance business.
In short, the details matter, so we decided to interview somebody who really understands the Claims Processing details – Pat Kelahan.
Q. Please tell us a bit about Pat Kelahan
I am a father of seven, husband, multi-tasker and someone who strives to see and communicate the need to keep customer service as the focus of business, including insurance. Having been involved in insurance claims assessment and management for almost twenty years, retail and business ownership for another decade and one half, and construction/disaster work, my customer-focus has seen many iterations. In addition to the direct work of insurance I have remained a student of the industry, gaining understanding of how the ‘pieces’ fit together, and how effects on one facet affects the others.
My current role is as Building Consultant/Forensic Market Strategist for H2M architects + engineers, a large engineering firm located in Melville, NY. How does that keep me in the insurance world? Well, the firm has an active division that assists property insurance carriers with forensic cause and origin work, including assessing mold, asbestos, and environmental damage claims, and consulting with adjusters for understanding of what causes claims. In addition, I am charged with helping the firm anticipate changes in property insurance and what comes next. Toward that end I network extensively with insurance stakeholders across the globe, and have introduced the insurance persona, ‘The Insurance Elephant’, to better focus the industry’s need to keep customer service in all it does, particularly as InsurTech efforts evolve. My duties also include presenting at industry conferences, conducting industry training, and consulting on building damage with insurance adjusters and others within the industry.
I have a graduate degree in business from a top 50 university, have served as mayor of a village in upstate, NY, and been seated as a member of boards for not-for-profit organizations.
Q. In which segments do you think we will first see big breakthroughs in Claims Processing?
Significant changes are being seen in claims processing now, but since insurance is comprised of many lines in many markets and in the many facets of the business, the changes need to be looked for. Also, the InsurTech (the integration of digital innovation and the insurance business) impetus currently active within insurance is well-known within the industry, but not so well known by its customers. The point? Processing innovations have been in general transparent to customers. Sure, there’s online access and application-based transactions, but considering most customers only interact with their insurer at the point of purchase, claims processing changes have not been the primary focus of carriers. Much has occurred on the expense side of the business- underwriting, distribution, and sales, but not as much on a cost-equivalent basis for claims. If claim costs are 75% of the business, that portion of the business has been sorely under-represented in innovation efforts. Industry watchers celebrate the $40 billion or so that has been invested in InsurTech efforts over the past few years; that sum while large, is insignificant compared with the $10 trillion or so in premium volume accounted for by carriers during the same period.
What will we see, therefore, as the big breakthrough in claims processing? The recognition that the administrative handling of claims remains generally unchanged even in the light of InsurTech efforts. Efforts to date with ‘tech-ing up’ claim assessments, drones, virtual damage capture, vendor access to systems through APIs have been a good start but remain mired in the rote of manual process and repetitive admin liability. Pair the inertia of admin with the still huge volume of unstructured data and like an addictive person, the industry needs to recognize the problem before it can move to a resolution. All along the insurance customers’ needs must remain paramount and need to be the starting point of all innovation.
Q. What do you consider to be the most important InsurTech innovation that you have seen in the last few years?
There have been many significant innovative ideas brought to the insurance industry since the InsurTech impetus followed FinTech’s success three to four years ago:
However, what I suggest is the most important InsurTech innovation has been the advent of the ecosystem-based, application leveraged sales of micro policies that have added hundreds of millions of previously uninsured persons to the ranks of insureds, primarily within the China market. Absent the advent of AI and tech infrastructure to support underwriting, processing and sales of these policies through a central, accepted platform these hundreds of millions could not be served. And, the technology is promising in terms of carrying the methods into other markets where additional hundreds of millions are under-served.
In what country do you see the most important InsurTech innovation?
The prior response suggests this answer is China, and I would not dispute that. I would say that China represents the greatest importance in terms of scope, but I would also remind the reader that similarly important, less wide -spread successes have occurred elsewhere. For example, app-based bicycle insurance is taking hold within India where bicycles are a key form of transport, and a firm in Germany has introduced a very effective health insurance platform where customers can through online actions submit and be paid for health and accident claims. Natural hazard risks have been assessed and made available to carriers and insureds in manner that allows detailed assessment of insurance needs. Carriers can take proactive steps, even creating claims, when an insured’s dwelling is in immediate risk of damage, solely based on data analysis. Farmers in remote regions of the world can obtain parametric cover to protect against financial loss of crops. The list is long, but I retain the right to support that based on the volume of previously uninsured persons now having cover due to InsurTech innovation, my answer remains China.
Bernard Lunn is a Fintech deal-maker, investor, entrepreneur and advisor. He is the author of The Blockchain Economy and CEO of Daily Fintech.
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What does every human want when it comes to money, let alone every small business owner? Financial freedom, of course.
Freedom to have the ability to make decisions about your life, or your business, and not be beholden or limited by financial or information constraints.
Businesses like Nav, a SME focused financial management app that provides free access to credit reports, taps into this desire, handing back control on what is typically an opaque data point for a business, and which is often a limiting factor when it comes to accessing financing.
This week Nav secured $44.8 million in fresh funding from Goldman Sachs, Experian Ventures, Point72 Ventures, Aries, and CreditEase Fintech Investment Fund.
Since 2012, when the business was launched, the driving force of Nav has been a simple one – materially decrease the small business death rate. Mismanagement of cash flow is often the driver for this – studies point to over 80% of businesses citing poor cash flow management skills and a lack of understanding of cash flow as a failure reason. When the cash flow crunch hits – which it often does for many a small business – the only way out can be quick and timely financing. However quick and timely financing often comes down to how healthy that credit score is. It’s like ensuring your health insurance is up to date, just in case that ski accident leaves you in a plaster cast. Like insurance, your credit score is sort of like the one thing you have to have, that you hope you never need.
To date Nav claims it has helped over 400,000 businesses make better financial decisions and access capital. The company acts as a referral network for lending partners, and leverages affiliate and referral partners itself, to grow its base of SMEs.
Enabling financial freedom by making information available to the end user that changes the power dynamic, is a driving theme throughout all good fintech. If this was the only thesis you used as an investor, I’m of the firm belief you’ll be on the right side of returns, and history.
Nav is one example of this in action, and it’s clear these venture funds believe that thesis.
Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Jessica Ellerm is a thought leader specializing in Small Business and the Gig Economy and is the CEO and Co-Founder of Zuper, a new superannuation startup in Australia.