Embedded Insurance 2.0: Best Case Studies

4×4 Virtual Salon with Graeme Dean, Sriram Jayanthi, Jim Dwane and Roberto Gonzalez.

Following the launch of the Embedded Insurance 2.0 Market Map report, we run this virtual salon to showcase some of the best case studies of brands exploiting Embedded Insurance from around the world.  Organised by aperture and Embedded Finance & Super App Strategies, Simon Torrance hosted four excellent guests:


Main topics discussed:

1. What (exactly) is ‘Embedded Insurance 2.0’ and why is it important to business and society?
2. What specific problems does Embedded Insurance solve for brands and their customers, and how does it do so?
3. How to make an investment case for Embedded Insurance, at a brand and an insurer?
4. What does the future hold for brands and insurers with embedded insurance?

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The Market Map
Embedded Insurance 2.0

The most comprehensive analysis of the multi-trillion dollar Embedded Insurance market opportunity for brands, insurers, entrepreneurs and investors.

90+ pages; 46 Embedded Insurance providers profiled; 19+ Charts, diagrams and tables; 20 case studies; The Market Map quadrant.

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Embedded Insurance 2.0: Best case studies


Full transcript:

[00:00:00] Simon: Hello everybody. My name is Simon Torrance, and I’m going to be moderating this webinar on Embedded insurance 2.0. We’ve gathered some people who are experts on this topic. They are going to share some of their experiences of delivering this concept in different parts of the world. Let me introduce them to you.

Firstly, we’ve got Graeme Dean, who is VP of Global Insurance Solutions at Cover Genius. Cover Genius is one of the leading embedded insurance companies. It raised, I think recently about $80 million in a new round of investment, and works across 60 countries around the world helping brands create embedded insurance programs. One of his clients is Sriram Jayanthi, who is a Senior Product Manager at Omio. Omio is a unicorn business; it’s a multimodal journey booking platform that helps you get from A to B through any type of transport. Omio operates now across many countries in the world, and indeed facilitates about 10 million journeys per annum in Europe alone. Sriram has been leading the insurance program, working with Cover Genius for the last year; he’s going to share his experiences.

I’m delighted also to welcome here Jim Dwane, who runs Bolttech in North America. Jim’s a veteran from the insurance industry. For the last few years he’s been in the tech industry, driving Bolttech forward. Bolttech also is a unicorn business; it describes itself as an insurance exchange. It connects brands with insurance solutions and insurance companies. Last year they facilitated insurance quotations to the value of $44 billion, Jim, wasn’t it? Doing really well, growing very fast, and operates across the world. One of his great customers and clients is Roberto Gonzales, who runs Keller Covered, part of Keller Williams. Keller Williams is one of the biggest real estate companies in the world. It operates in 80 countries, has 170,000 estate agents that work with it. Keller Covered is their insurance proposition which has been set up, or been updated in the last year or so, works closely with Jim and Bolttech to enable that.

I’m really delighted to have this group of experts together with you today. I should give you one word of apology: we are all men. We normally like to have a mix of sexes in our webinars. Next time we’ll ensure that we do, but for now bear with us, please. The agenda for today’s as follows: I’m going to share a few slides to set the scene and create the framework for our discussion today, then I’m going to ask the panelists to give their views on these questions here.

Firstly, what is embedded insurance and why is it important to society and businesses? Then we’re going to spend a bit more time delving into the details of what problems it addresses for brands and their customers. We’re going to ask Sriram and Roberto about their experiences, then Jim and Graeme are going to share some of their knowledge and expertise working with other companies as well. What problems is it addressing for brands and consumers? Then we’ll look at how do these types of companies, brands of different types and different sectors create business cases for embedded insurance? What are the methods and processes and lessons for that? We’ll end by looking at the future. How might the future look? How is this market going to evolve?

To engage you, the audience and the people who are taking their time to come and listen to us today, we’ve got some polls, some surveys that will run throughout the discussion today. You can also input your questions and comments in the chat or the Q&A function that you can see. I know you’ve all used Zoom before. Please do that. We almost certainly won’t have time to answer all of them during this session, but we will commit to responding to them afterwards. We’ll review them and we’ll write up a Q&A, FAQ document to cover the questions you might have.

Thank you all of you who’ve taken time to be with us today. Big thank you to the panelists as well. Let’s get started on this interesting topic.

The background to it is a report that myself with my friends at Aperture have just finished writing, called Embedded insurance 2.0. It’s been a labor of love for the last six months, looking at this market and how brands and insurers and others can take advantage of developments. It’s about 90 pages long. We surveyed and spoke to nearly 50 leading pioneering companies in this space, including Bolttech and Cover Genius, and we benchmarked them against various criteria. You can see a redacted version on the right hand side. The reasons we invited Bolttech and Cover Genius along today was they were very much in the top right hand quadrant there compared to others. I should say that there are many players in this space. Many of them do different things in different ways, and there’s a great deal of innovation happening in this market. It’s still early stage, but very vibrant and growing much faster than the rest of the InsureTech market today. If you want to get details of this report, you can see the URL there. It’s also in the chat space here as well. The URL, if you want to get more details on the report, is there.

Let me set the scene. What is emerging that is enabling embedded insurance. 2.0 is the following: essentially some brands have sold insurance for some time, but technology is dramatically changing the way that’s happening, and also the nature of the insurance solutions and the nature of the way that consumers consume them. Let me just try and bring that to life briefly for you. We always need to start with the end consumer. As many of you know, the world is getting riskier. There are more and more severe risks facing us as individuals, businesses, and humans on the planet. That is creating protection gaps, gaps between what we need to be resilient and have peace of mind, and what we have; the types of solutions that are available to us and that we have, that are going to protect us. Those gaps are getting bigger and bigger as the world gets bigger in terms of more people, and the risks increase. There is increasing demand for protection solutions.

What’s interesting in the past is that traditional insurers would provide those to consumers, if the consumer knows about them, understands them, can access them and can afford them. There are many people in the world who are completely uninsured. There are even more people who are underinsured. Even in advanced economies like North America or Europe, there are many people who don’t have the right type of protection to suit their lifestyle or their situations. The UN is very worried about this.

What we’re starting to see is the potential for a new type of organization to help consumers get what they need. Let’s call these brands, brands and digital platforms that interact with consumers on a more regular basis than insurers do, that understand their needs in the context of what they support their customers with, and have a lot more data – often real-time data – about customers that can be used to create more appropriate, relevant and affordable protection solutions for end consumers. Of course, brands and digital platforms have their own pressures. They need to find, keep and retain customers. They’re looking for new ways to do that. Insurance, we’re going to hear about it later on, is a way of helping them to keep closer with their customers.

At the same time, on the supply side, in the past individual insurers would sell their products to customers and those products, those capabilities tend to be tracked within individual organizations. But now digital technology is allowing those capabilities to be released, abstracted into software, turned into almost Lego bricks that can be reconfigured by organizations in new and creative ways. We are seeing the capability, not just in insurance, but also in financial services and other adjacent areas that are relevant to protection, prevention services, or other types of value added services.

What we’ve now seen, and this is what our report was focused on and why we’ve invited the panelists to join us, is a new breed of organization that is sitting in the middle, that is enabling those Lego bricks to be drawn in, configured to help brands support their customers with their needs. Cover Genius and Bolttech are two prime examples of companies that are doing this, that are focused on this as their business. I call them operating systems, because they essentially help to orchestrate innovation between the supply base, all the capabilities that are needed; and the demand, which are brands, digital platforms and end users.

Today, where our panelists fit in, we have Roberto from Keller Williams, who is a brand in the real estate sector, which is digitizing rapidly; and Sriram, who runs product management for Omio, which is a digital platform. Bolttech and Cover Genius are companies that enable them to offer protection solutions to their end users. Down the bottom, those companies also create some of their own solutions, customized solutions when required, and collaborate with other parts of the value chain as well, often the traditional insurers.

That’s the framework we’re going to use to discuss around. In terms of why this is such an interesting market, we’ve done some sizing and it looks quite attractive in terms of the growth of embedded insurance over the next 10 years, which is essentially a new method of distributing protection and insurance solutions that will eat into other distribution channels. If you are on the insurance side, wondering how this affects you, the value at stake for traditional distributors. We also see that if we can enable brands that have large customer bases to be involved in the creation and distribution of new protection solutions, we could also grow the total insurance market as well, create net new value above where we are or the current forecasts. If you are a brand or if you’re an investor, if you add up all that written premium, the premiums of insurance that could be distributed in this way, you get to an exciting business opportunity in the trillions for brands to not only add value to their customers, but create value for themselves as well. That’s why there’s a lot of investment and focus on this topic today, because the opportunity is so significant.

Finally, what’s our noble purpose with Embedded insurance 2.0? I think it’s something like this. If we have these protection gaps, how can we close them by working with brands that have closer interactions with those end users on a more regular daily basis, enabled by new operating systems? Maybe this is our noble purpose. It’s not just about making money. It’s about ultimately enabling more and better protection to be baked into the everyday lives of everyone. I think that’s something that we can all get excited about in terms of helping to achieve.

I hope that has been a useful opening stimulus for our debate. I wanted to ask each of the panelists just to give their opening thoughts of what Embedded insurance 2.0 means to them, and what protection gaps ultimately do you think it could address? Then we’ll get into the meat of how it works for brands and their end users. Roberto, would you like to start?

[00:13:54] Roberto: Of course, Simon. Thank you for that, that was a great introduction. I think it explains to everyone very nicely how this ecosystem is being built. From my perspective working for KWX, which is the holding company for Keller Williams, which as you mentioned is the one of the leading real estate franchises in the US, what we do at the end of the day is have a team of realtors, over 170,000 realtors, help people purchase what ends up being the most valuable asset for most people in their lifetime, which is their home. The whole idea of how insurance fits into that is in every single home transaction, you need to buy insurance.

But his is what’s interesting, the person is buying the home. The person isn’t buying insurance; no one gets excited about, I’m going to go buy insurance. Insurance is like an add-on that you have to have. From our perspective, and the reason why Keller Covered was created was not only to help the end user, but also to help the realtor, who is the enabler in that transaction, have access to a tool that can provide the most value to the end user. The realtor helps the customer find the right home in the right district with the right schools, for their right lifestyle. The realtor doesn’t really need to be an insurance expert in reality; they can’t even give insurance advice unless they’re licensed. That’s why providing them with a tool such as Keller Covered, powered by Bolt Insurance, is so valuable.

Answering your question, what is embedded insurance, it really means automating or facilitating the right coverage to make sure that when that person led by that realtor is buying their home, that they don’t have any gaps in coverage. I love the way you said it, because a lot of people are underinsured or they’re overpaying for insurance. But having the right protection, that is really something that most of us sometimes take for granted, unless a disaster comes along. Being able to provide that guarantee to a consumer that, hey, you’re going to have the right protection, the right levels of protection, you’re going to have enough money to rebuild your home in case something happens, you don’t have to know all the details because we’re going to use third party data to facilitate and to automate the underwriting and make sure that the real risk is assessed, automating all that process, which otherwise it’s very tedious because insurance is a complicated issue, that is something that people don’t understand and they don’t want to get into, making that easy for them is just the end game for us. That’s my view on it and how it relates to the real estate business.

[00:16:29] Simon: Yeah, because after just your health your house is really quite critical. I’ll ask Sriram, your views on this?

[00:16:40] Sriram: Hello everybody. On this, I think it’s a very interesting question. Because if you look at embedded insurance, I would think it’s like some sort of disruption to the insurance industry. I think it’s very analogous to what happened in payments and banking. Across the globe, there are a lot of underbanked and underserved individuals, which basically the new payment services help disrupt and provide access to them. I think with insurance it’s very similar. It provides access and relevant access to a wide variety of consumers who currently don’t have insurance.

If you brought it down to the noble purpose, this can actually provide access to a relevant insurance for a wide variety of uninsured customers, because essentially most of them are also one catastrophic event away from poverty. Embedded insurance can essentially save them if they get access to it.

[00:17:36] Simon: Great. Thank you. Jim, your perspective.

[00:17:40] Jim: I love the fact that you use the term gap before, because one of the ways we characterize this emergence of embedded insurance is insurance distribution is essentially democratizing. Why is it democratizing? The reason it’s democratizing is the traditional means of insurance distribution, which is certainly not going away, was as you said, creating a large population of un and underserved consumers. There was a lot of protection not being served.

I think embedded insurance fills almost three different dimensions of gaps. The first gap it fills is one of, of different places. You can now buy insurance in a multitude of different places. Those places may be physical. You want into a store, you buy a cell phone and you can buy insurance on the spot. That in essence is an embedded experience. It’s a physical embedded experience. Then you’ve got the digital embedded experience, where you’ve got a digital journey. There’s something broader happening, like someone’s buying a house, and there are a series of things that people need when they buy a house, including a mortgage and title insurance, you need some access to legal services, and if you’re going to get a mortgage, you can need homeowner’s insurance. There’s a digital gap created, or a digital location. Finally, one of the most fascinating parts of this, and I thought it was great that you had Cover Genius and Bolttech on the product side portion of your slide as well, that is the emergence of these previously unknown exposures. The whole sharing economy has created a multitude of previously unaddressed coverages.

Embedded insurance affords the opportunity, not just to distribute insurance in unique ways, but it also allows you to concurrently invent coverages that satisfy or protect whatever the particular circumstance is, whether it’s the emergence of pool sharing or boat sharing and things like that. There’s all sorts of interesting things you could do in terms of product invention. I view it as a three dimensional filling of the gaps.

[00:20:12] Simon: Thank you. Graeme, what do you think?

[00:20:15] Graeme: To use your 2.0 language, I think embedded insurance 1.0 was really finding a way to offer an insurance at a point of sale. Typically, it was probably an airline selling insurance, a travel insurance with their flight. But as we’ve evolved, and people are using more digital and technology companies where there’s different touch points, there’s different channels that they’re interacting with those brands, I think 2.0 is the evolution of that in just being broadening the product suite that we’re able to offer and make available to customers through all of those different touch points, through all the different experiences. I think it’s just double downing on a lot of those experiences that people are used to, and they want to interact with those brands. They want to continue that experience that they’re used to. I think it’s about making products available at a relevant time at the right price.

People don’t really want to go and do a lot of shopping now. The likes of Amazon have made us impatient and lazy. We want it all to be ready for us and ready to go in one simple click. I think it’s just utilizing that same ethos, and then broadening the products suite. Because it’s not just for consumers. It’s also for businesses. That’s the evolution where it’s going to go.

[00:21:36] Simon: Brilliant, thank you. Let’s do a little poll just to engage the audience. If we put up the poll, Diana, let’s see what they think. Here it is. Which of these questions do you agree with most? Protection gaps being the gap between what you need and what you have. Let’s think about it on a global basis, but which of those statements do you agree with most? Does it have a very significant role, a significant role, a limited role, or a very limited role in helping to address protection gaps compared to other things that are going on? If I can ask you just in the next 20 seconds to submit your vote, and we’ll see what you are thinking about this, then we’re going to move on to talking about some of the practicalities of creating an embedded insurance program for brands and the value to their end customers.

Let’s just give you another 10 seconds now to cast your vote. Unfortunately, the host and the panelists are not allowed to vote for some reason. It means that we can’t be biased, I guess. I think time is up. Let’s see what you said. A significant or very significant, that’s good to know. That’s great. There’s a reason for getting out of bed in the morning to enable this topic. Thank you for that.

Let’s move on to the next part of the discussion. I wanted to get into the nitty gritty and ask particularly Roberto and Sriram first about their company. Let’s bring it to life with a case study. I wanted to ask you how you are using embedded insurance specifically. I know Roberto you gave a little bit of a hint of that, but maybe go into a bit more detail. What specific problems does it solve for you and your customers? If you could just bring it to life in terms of how exactly it works, where it’s placed, how it’s offered, how much it costs, things like that, that would be great. I’m going to ask Sriram, would you be happy to go first? I’ll ask Roberto, and then I’ll ask the other guys to give some other case studies and news cases that they’re seeing in the market.

[00:23:50] Sriram: Sure, I can first. I think when we looked at embedded insurance as a brand as Omio, the first thing that we wanted to do was look at user research and understand what users particularly think about insurance. It came to be one of the top concerns. I think it was also driven by the fact that we had a pandemic, and a lot of cancellations and people lost a lot of money on different travel tickets. Insurance and flexibility was top of minds for our customers.

Once we decided that we were going to be investing in this area, what we looked at was the fact that accessibility was very important. We wanted all the customers to have access to one insurance product, at least. The second thing was, we are also a digital first platform. We placed very strong emphasis on tech fidelity. We wanted the APIs to be up all the time, even if they’re down, so we can reach out to teams and then get them back up and running. We had issues in the past when working with traditional insurers, when APIs were down, sometimes for months. That was the second important thing that we looked at. Thirdly, we also innovate in the travel sector. We tried to provide unique travel products to our customers. For example, we tried to stitch together a journey. We wanted somebody to work along with us in offering unique insurance solutions for this, like a guaranteeing, a connection between a trade and a bus. This is not something that you can take off the shelf, but you need to work along with somebody to build these products. These were the things that we looked at when we considered investing in embedded insurance and why it made sense for us.

[00:25:26] Simon: You were telling me that something like 10% of the journeys that you enable people take is insurance, is that correct?

[00:25:37] Sriram: Yes. A little more than 10% of our journeys that we enable currently have an insurance attached to them. This metric, we worked on it for the last six to eight months along in a partnership with Cover Genius. We brought different value additions, we changed the customer experience, we gave them data products. Currently more than 1 in 10 Omio customers traveled with an insurance.

[00:26:02] Simon: Is it convenient that makes it attractive to the customer? Would you say it’s just there when you need it and it’s easy to access, and if you’ve done it once because the claims process is nice, you’ll do it again? Is that it?

[00:26:18] Sriram: I think it’s convenience, and also the fact that it is also relevant, because we are offering relevant insurance products that tailor to their particular journey. We also believe that our customers trust our brand. When we are offering an insurance at the right point, we believe it also extends to them that we are saying that this is a relevant product for you to be using right now, given that there’s a little bit of flux in the travel industry. I think both put together.

[00:26:48] Simon: It’s very commercially attractive to you, isn’t it? Because if you’re doing 10 million journeys, 10% of a million journeys that are covered, you charge about 10 or 15 euros, isn’t it? That’s a lot of money. Then you take your revenue share, which is quite significant as well. That’s quite a lot of high margin new business for you, isn’t it?

[00:27:13] Sriram: Yes, exactly. Not just for the customers, like I said for the customers it’s very relevant and it’s top of mind, top of needs, but even for us as a company it’s a significant source of revenue. That warrants the investment that we had. We have teams working behind this that make sure the product is serviced in the most relevant way, and customers have the most relevant experience. To do that, we need case study and we need some numbers to back this up. Like you said, with the current numbers there is quite a significant addition to the bottom line, because margins on journeys with insurance attached is quite high.

[00:27:53] Simon: I think you said also when you moved to a more modern, what I call operating system, in this case working with Cover Genius, you quite dramatically increased your attach rates of insurance as well?

[00:28:07] Sriram: Yes. I think that is because we worked on the product in close partnership, and then we decided that this is the right product strategy and the right product to be offering to this particular set of customers. We do multiple transport; we have like trains, buses and flights, and we need to be offering relevant products. Also the way we service it up, at what point we do, we needed somebody who work along with us in data mining and making sure that we have the right tools for this. This is very important for us. This was quite an equal partnership right from the beginning.

I think that helped us improve this metric, which was quite stagnant when we worked with more traditional insurers before. Post this, we managed to more than double our rates with this.

[00:28:49] Simon: Brilliant. Well, thank you for that. Let me just ask Roberto, can you tell us a bit more about how in practice your proposition works, and then the benefits because you’ve got the agents and you’ve got the end customer and then you’ve got you as well. Just tell us a bit about how that works in practice.

[00:29:09] Roberto: Like you’re mentioning, from our perspective for Keller Williams, I think it’s a very unique position because every initiative that we undertake at KWX the first question that we have to answer is: how does this benefit the agent? Because at the end of the day, that is our core business. Keller Williams is a brokerage, it’s a training company. We help agents succeed, build large businesses, successful businesses, and provide the tools so that they can do that.

We also have to keep in mind that whatever service that has the Keller brand attached to it has to have the highest quality of service, the highest quality of products. These are all the things that we have to look at. KWX has different companies that have been created with the goal of forming a home ownership experience that helps the realtor remain at the center of the transaction, and be able to like compete with other realtors from other brokerages because they have access to additional tools. Additional to Keller Covered, there’s Keller Mortgage Keller Offers, Keller Manage, Keller Title. There’s other companies that are out there or in the making to help this this whole ecosystem succeed.

Going back to insurance, how does insurance help the realtor? When you buy a home and you’re using a mortgage, like Jim mentioned, you need to have insurance. That is just one additional hurdle that everybody needs to go over in order to complete the purchase transaction. Having a tool like Keller Covered, the idea originally was helping the end user have a very streamlined, very efficient, very effective, very unintrusive experience where they could go into a website, they could answer a few questions that everybody knows, not ask anything random or that. You wouldn’t know about a hazard you don’t even know, like how far away are you from a fire station or how far away are you from a fire hydrant, which are questions you need to answer in order to get a quote from an insurance carrier. We built this website that is very streamlined. We ask only seven questions. We use third party data to prepopulate the rest of the questionnaire. We send all that over to Bolt. We leverage their insurance exchange to get back the quotes and populate the quotes.

Basically a realtor doing a transaction with a customer is able to get that customer in less than three minutes, most of the time real accurate quotes on what insurance would cost and what protection they would have for that new property. It makes the realtor seem more knowledgeable, makes them seem more efficient. It provides additional value to the end user. It’s just part of the ecosystem where you bring this additional value. Where we insert Keller Covered, and that’s really my job, we integrate in our own CRM so that realtors have an easy way to invite customers to shop for insurance. We we’re embedded with our Keller Mortgage affiliated business so that every loan that comes through also gets invited to shop for insurance, and make sure that when the loan goes through that insurance is already there and it’s not something that’s going to hold off on the actual approval of the loan.

We’re trying to find these spots where people are going to need insurance, and make sure that we service the solution at that point in time while we work with Bolt to provide the quotes for the customer.

[00:32:32] Simon: That’s very good for the agent, because it’s also an excuse after the sale of a house to get in touch in a year’s time. You might want to change your insurance, let me get in touch with you about that. You keep in touch every year until the time when they want to move house again. It’s a nice way of keeping in touch, isn’t it? I guess also for you it’s a great product, because typically the average lifetime of a house insurance is about eight years. It’s a nice recurring revenue, if you can retain them for that time.

[00:33:09] Roberto: Absolutely, what you’re mentioning is very valuable because for us providing the agents with an additional touchpoint, like you’re saying, outside of the transaction, that’s something that none of the other affiliated businesses in Keller Williams universe do right now. That’s a really nice piece of insurance right there. You’re absolutely correct.

[00:33:26] Simon: Great. Well, I want to ask Jim and Graeme about maybe another case study in other sectors that you are seeing, that you think demonstrates the art of the possible. Graeme, would you like to go first? Give us an example.

[00:33:39] Graeme: Sure, I could give you a couple of examples that that might be interesting. What we’ve found is that when we’ve embedded insurance to be sold alongside another product or service at a point of sale type scenario, that the actual underlying product or service conversion rate has increased by the mere fact of having the insurance offered. We’ve tested this in various products and various markets. It’s a really interesting case for the brands to be able to not only potentially making money for yourself from a commission point of view of the insurance, but your underlying product and service by offering the insurance is increased as well. I thought that’s an interesting case to share.

Also what we found is by giving a little bit more choice to customers, rather than ramming down their throat a really big comprehensive type policy, actually breaking it up and what we call unbundling that a little bit and allowing a little more choice to customers, builds a higher attach rate in the long term and yield as well, because they want that little bit more flexibility and the ability to say, “I want a little bit more control. I don’t want you to tell me that I need everything and I don’t feel that I do.” Or having that negativity around, I bought this policy but I don’t even need these sections so now I feel like I’m getting ripped off. It’s having that little bit more control back to the customer. We’ve found it increases the conversion rate as well.

[00:35:18] Simon: Good, thank you. Jim, any good examples that you are seeing at the moment?

[00:35:23] Jim: Listen, but one of the exciting things about embedded insurance in the future of embedded insurance, Simon, as you touched on in your opening is there feels like there’s a limitless opportunity for, the way I say it is the intersection of commerce and risk. It’s constantly changing where commerce, some type of a commercial or personal transaction intersects with some moment of risk or some identification of risk. We joke around at Bolt, about how every week we wake up and we find a place that might be appropriate to sell insurance. We think about it in the context of commerce and risk. That creates lots and lots of different scenarios. That’s the first thing.

I like what Sriram said before, and I think Graeme touched on it as well, this whole continuum of simplicity to choice. There will always be a robust market for the simpler type products. I almost analogize them to the point of purchase display when you’re checking out of the grocery store. You get to the end and they say, would you like this? They’re not giving you choice, but it’s a simple, seamless pleasant experience that just catches you on your way out. However, on the other end of the perspective, you’ve got choice. Graeme is exactly right. For the insurance geeks among us, this is some of the exciting stuff around optimizing conversion. At the end of the day, it’s about economics as well as protection. Figuring out what that optimal combination of choice generally for the more complex products; the more complex the product the more beneficial choice is as it relates to conversions. That’s something that we consider important, and something that at this juncture of the embedded journey 2.0 is something I think we’re all learning more and more every day.

One of the things that I think is the next frontier is services. Right now many of the insurance offerings are oriented around indemnification with not as much services. Again, it depends, obviously something like travel is service. But I think we’re going to see a proliferation of services as well here in the future. It’s almost like a three act play. Act one was the simple line, act two is the choice, and act three is the service oriented offerings on a much broader scale.

[00:38:04] Simon: Do you mean services in terms of risk services, to help prevent risk or mitigate them?

[00:38:09] Jim: Exactly. Risk services, response services et cetera.

The last thing I’ll say Simon is, I think what the industry’s beginning to learn, and when I say industry it’s everybody, it’s Sriram, it’s Roberto, it’s Graeme, it’s myself, we all do slightly different things, but at the end of the day we’re all part of this journey, roper intent wins the day. What does that mean? You can plug insurance into a bunch of different situations. But if you haven’t plugged it in at a place in a moment where the intent is high or where the intent is appropriate, you’re really not going to accomplish a whole lot. It’s one thing to actually run around embedding the insurance purchase opportunities, whether it be choice based or more simple based. The true winners are the ones who are going to figure out how to optimize, not just the where, but the when of that journey.

Finally, along those lines there’s something else I say called the myth of the digital journey. I think we all know that insurance purchasing is going more and more human-less. The current hypothesis is the companies that are going to win are not the companies that are going to force their consumers into a completely digital journey. The companies that are going to win are the ones that perfect when exactly someone might need to be plucked out of that journey and carried across the finish line. Technology can’t front run human behavior and human comfort. As human beings become more and more comfortable with the digital journey, the companies that are succeeding are the ones that know, this person’s about to abandon, pluck them out, carry them across. I think that’s also something we have to keep an eye on.

[00:40:06] Simon: Yeah. There’s a great example during COVID, where some Uber operations just couldn’t get anybody to drive because people were worried they were in a catch COVID, they’d be ill, they could die, they couldn’t work, and so on, particularly in emerging markets. In the middle east, they gave insurance for free to their drivers to enable their business to operate at all. That encouraged people to. We talk about products, selling products, but there’s also the component of risk mitigation or risk transfer capabilities that you can insert into a proposition, like the example I just gave there.

Let’s ask the audience again, a poll. Could we put the next poll up please, Diana? Here it is. If we think about brands and maybe think about a brand that you know well, what’s the most attractive proposition to non-insurance brands for adopting embedded insurance? Is it to create new revenue streams from insurance sales? Is it about making our core business offerings more attractive by adding insurance components to them, a bit like the example I gave? Or is it retaining existing customers by integrating insurance solutions into loyalty programs, things like extended warranties, for example? Or is it a mix of the above? Let’s get your thoughts on this. Again, I’m going to give you 15 seconds this time to give your vote on that. We’ll see what you think about the value to brands. Just use one of those and we’ll see what you think. I’m going to ask you separately about value to consumers in a minute, but let’s just see what you think.

You’ve got another five seconds to make your vote, and that is just about up now. Let’s see, Diana, what do people think? Well, yeah, a mix of all of the above. I think that’s exactly right. Because the examples we’ve just talked about are not just about reselling insurance or about making the core business offerings attractive or about retaining. It’s mix of all of that. That’s a great result there. Good.

A quick other poll, thinking about consumers now. If we can put the next poll up. This is from the consumer point of view. What is the most compelling aspect of embedded insurance proposition to end consumers? So they could be business customers, or individual consumers, but which of these three? Is it convenience? Like Sriram was saying, I’ve booked my trip and now I’m going to buy some travel insurance. It’s so convenient to access that solution at the right place and time. Is it price? Because maybe the brand will make it cheaper because they’re trying to package it up with other propositions. Or is it simplicity? It’s just so easy to understand, to access, to manage; and particularly what these guys do is to make the claims experience really easy as well. Is it just, I don’t want any hassle, it’s so simple to do because brands have worked with companies like the ones that are with us today to make it a much better experience.

What are your thoughts on that? Again, I’m going to give you another five seconds now to get your final thoughts on that, or is it a blend of all of those three? Let’s just see what you’ve said to that. Convenience. This is really interesting Graeme, isn’t it? Because I know you always say convenience is really important. Price is less of the driver. In fact, people are happy to pay for something that’s good. Graeme, any comments from you on that one.

[00:43:54] Graeme: That’s right, you probably heard me say it before. Convenience is the number one driver. It isn’t about price, and it isn’t about the insurance brand per se either because it really is about the brand that’s actually offering it, which is the distribution brand. It’s at the right time, the pricing is likely right because you’ve probably had some smarts in there, but it’s not the main driver. It really is convenience.

[00:44:22] Simon: Any other comments from anybody else on this one to tally with your experiences?

Good. Let’s move to the next section about creating a business case. Part of the reason for us writing that big report recently is to try and educate and engage brands about the art of the possible. It feels to me that this is a very Greenfield market still. You’ve had big companies in the past that, like retailers or banks that have sold or resold insurance. Telcos have done that to some degree with handset insurance. Then there’s big manufacturers or retailers that have sold extended warranties.

But what it seems to me is that that’s just part of the market. There’s a huge sway of the rest of the market that doesn’t even realize what they can do, the sorts of things we’re talking about, particularly non-digital companies. There’s a lot of small companies that never thought they could embed insurance. Small retailers of e-bikes, as a classic example, which it’s great to offer at point of sale theft, injury, warranties, and so on. But in the past, it was just way too expensive to do that. Now through technologies any company can do this.

I wanted to ask you a bit about how even for very sophisticated digital companies like Omio and increasingly Keller Williams, how does your organization go out thinking about creating a business case? What are the key things that the CFO and the CEO and ultimately the board resonates with? I’m going to ask Sriram and then Roberto, and I’ll ask the other guys to come in with their experiences. Sriram, what made this compelling to your leaders?

[00:46:17] Sriram: I think the first thing, like I mentioned previously, is the fact that there has to be an inherent customer need. We saw in various user research that we did that there was this need to have flexibility and peace of mind. That was top of mind. Once we took that problem statement then we started understanding the economics behind it, we created the case in terms of, what is the potential reach that we can offer this product to? We wanted to offer, for example, on let’s say a hundred percent of our transactions, all our transactions have one insurance product attached to it. We took industry leading, we attached rates to these products, we had consultations with different partners. We understood what is the potential, attached it for these products. We also had historical data from working with traditional insurance partners, so know potentially what percentage of our transactions or bookings or journeys have or can potentially have an insurance with them.

Then we also know the market size of the insurance product. We have an estimate of what the value proposition for insurance. Then we took that into how it will affect the company’s bottom line and economics. We built a very simple business case using this, and when we looked at those numbers, they were very compelling. First, there was an inherent customer need to offset risk, especially in the industry. We looked at the numbers and the adapt rates and the market dynamics. Everything put together, I think it was a very compelling case both from the customer standpoint and from the company standpoint. While we are offering something that offsets risk, we are also adding significantly to our revenues.

[00:48:08] Simon:  Great. The numbers stacked up quite easily once you put them down and work them through. Roberto, just tell us from your point of view. I’m just wondering, if I could ask, because once you’ve started to sell, you’re selling a certain type of insurance, maybe you could go on and sell other types of insurance to your customers given that you have this relationship with them. I was almost thinking, could you not sell insurance to the agents, liability insurance and so on? Tell us your thoughts on at least the business case, and how that might evolve.

[00:48:42] Roberto: In order to understand that, I’ll quickly go over how this whole thing started. Keller Covered has been around for four years. Originally, we had direct relationships with carriers, and we just had a legion website where we would collect the information, send that information to an array of different carriers, and just show the quotes. That was the end of it. We started to realize that there were some pain points, and this is where we started to create the business case for switching the business model. Some of the pain points that we had were complaints from our agents saying, I sent the customer through and I don’t know what happened. Can you tell me if they purchased a policy or not? Can you tell me what happened with this customer? We had no idea because all we were doing was collecting information, showing quotes and sending them off to 20 different call centers.

That’s when we started to analyze the possibility of not just being a legion website, but becoming an insurance agency. When we decided to become an agency, we had two options. We could become like a real agency or we could become a virtual agency. That’s when we started to look at the availability of how quickly are we able to scale to support 170,000 agents in all 50 states overnight. That’s really where we started to do the whole process of, let’s find a partner that can provide us with the technology to replace what we already have, which is a connection with carriers that shows quotes, but also allows us to have the servicing part of it and have the agency and have that human touch, which is still necessary.

That’s the history up to this point. We started with homeowners’ insurance because we are Keller Williams. We work with realtors, we work for realtors, and that’s initially the solution that they need. Today, through our partnership with Bolt, we’re able to sell auto insurance and an array of different policies, but we don’t have the online solution yet. When will we get there? Eventually. We’ll eventually have an auto flow, we’ll eventually have a bundle flow. But we’ll always add on top of the home ownership, because that is the sector that we’re in and that’s the starting point from where we will go forward.

[00:50:53] Simon: Great. Thank you for that. You touched on one thing, I know someone asked a question in the chat here about regulation. You explained it quite well there; you didn’t want to take on the burden of being a full agent and being regulated that way so you have this proxy approach, which essentially you’re outsourcing that licensing to Bolttech.

[00:51:16] Roberto: No. We are a licensed agency, but the operation is being handled by Bolt. The manpower is outsourced.

[00:51:23] Simon: Exactly. One of the questions we had was, do brands then need to take on all the balance sheet overheads and license, and so on? What we’re saying is that these new operating systems that are in available now take that worry away. They can manage that for a brand if it doesn’t want to take on some of those regulatory overhead.

[00:51:49] Roberto: That’s correct. A lot of the overhead is absorbed by their operations. But because of the existing regulations, if you have an entity and you want to sell or promote or solicit insurance, in the US you need to be licensed. That’s why we got the license in place.

[00:52:03] Simon: Perfect. I want to ask Jim and Graeme, in terms of creating business cases, are there any other things that you’ve seen that have been really compelling beyond what we’ve just heard now?

[00:52:16] Jim: I might just add something to what Roberto just said. It goes to how we got where we were as partners. Our view of it is in terms of building a successful embedded insurance strategy over a long term, a durable strategy over a long term, there’s a continuum. On one end of the continuum, our companies that want to be digital, but are not. On the other end of the continuum, you’ve got companies that are completely digital already. But the reality of it is the vast majority of companies either by preference or just where they are in their journey, are somewhere along that continuum.

Our philosophy is we can deliver the best in class technology, however you’ve got to have that human element. Regardless of where a company drops in along that continuum, you essentially catch them and help them along their digital journey, wherever that may be. Not everyone wants to be completely digital, not every business orients itself toward digital. That’s an important part of the broader embedded insurance story, is having as minimal amount of human intervention as possible, but not abandoning it. At the end of the day, and it gets into the business case question you asked Simon, which was why do people do this, there’s more than this but I think about it in three very simple buckets. The first one is, and Graeme touched on this earlier, it’s the economics. There’s direct economic benefit to doing something like this, and there’s indirect economic benefit to doing something like this. Graeme used a great example of when you sell a product alongside another product, the other product gets a lift from a conversion perspective. We all have data that proves that. The second one is just brand and product value. By having a more comprehensive offering, you create extra value and tangible value in the product you’re offering. Finally, and this really is where the technology works as magic, is creating a great experience. You could argue that that’s not terribly dissimilar from point number two, but I think it’s important that creating that beautiful experience and that easy convenient experience is really important. I think when people are putting business cases together, they think about it among other things across those three dimension.

[00:54:48] Simon: Yeah, that’s great. Graeme, your perspective.

[00:54:52] Graeme: I think it’s actually about understanding the motivations of that brand, because each vertical has quite different motivations. It might be a case of just wanting to make money, and that’s fine pretty early on. Or it might be a case of maybe they need to offer some coverage because there’s some regulations around those customers having, or their members needing some cover, or maybe they want to increase the total basket price of what they’re selling. There’s many different motivations. You’ve got to understand that to then build the business case for that partner that you’re talking to for their internal purposes.

But on top of that, and going further from what Jim was saying, you’ve got to be able to service these brands. They want to know, can you service them now, but also for their growth plans. They obviously have growth plans. It might be expanding internationally. It might be expanding to different verticals and things. From a Cover Genius’s point of view, we identified that pretty early on. We’re very big on making sure that we have that global framework to then service those big global brands. then the technology, can you service, can you do multi lines, multi products? because part of the business case, they don’t want to have to do multiple integrations with multiple contracts and things like that. You’re actually solving a real issue there. It’s just simple and they can actually go, I’ve got the provider of choice now and in the future. That’s where we come from.

[00:56:24] Simon: It’s very important because often some of the digital companies that you’re working with, they might be quite small today, but they’re growing fast, you want to latch onto that. If you are there at the beginning and you are helping them to do that, it’s a collaboration because it’s a revenue share, then you can really take off with their success as well, which is good. Of course traditional insurers say, we must make this profit margin or we’re not going to do the deal if we can’t do that. But often that can be a bit shortsighted.

We’ve got just three minutes left. I’m going to ask the audience about the barriers to this. Then I’m going to ask you for a very quick comment to all of you if I could. In the interest of time, let’s put up the final poll, which says: what are the barriers to embedded insurance? The biggest barrier, you have to just choose one if you had to, to more widespread adoption of Embedded insurance 2.0.

I’ll read it out for you and please make your vote. Is the biggest barrier awareness and understanding by brands about what is possible? Is it that business cases are quite difficult to create? Is it regulation? Is it about the incumbent insurance industry being slow to develop this market? Is it there aren’t enough insurance techs like the guys with us today, to help develop the market? Is it technology? Or is it end customer willingness to adopt?

I want you to choose one. You can do it in order, but just choose one now. In the next five seconds, we’ll show the results. Then I’ll ask the panelists to give a very brief summary of what they think the future might look like, if I can ask you to think about that. Then we’ll finish right on time. Let’s see the result now. Here we go. Quite interesting. The one that’s got the most, interestingly, is the ability of the incumbent insurance industry to develop this market. I guess the point being that the incumbents have all the power today, and we need to co-op them and enable them to, to drive this market. We probably can’t do it round them or without them. The second highest was just the awareness and understanding of this topic by leaders of brands. There doesn’t seem to any be any problem with VC investment in startups to develop the market.

I’m just going to ask it, we’ve got one minute left. If I could just ask you to have a brief statement; you could either respond to this in some way, or how you think the market is likely to develop, which will be useful for our participants and listeners today. Let’s start with you, Roberto.

[00:59:20] Roberto: I agree with the poll; I think it’s the incumbent. I think it’s the legacy carriers, because even if we have companies like Cover Genius and Bolt facilitating and enabling technology, we still rely on those carriers to update, to be sure that they’re on track to provide these services. That that’s my perspective as well.

[00:59:36] Simon: Brilliant. Sriram.

[00:59:40] Sriram: I tend to agree with the poll too, but I think I’m more in the awareness category. It is more awareness that prevented us from doing it, but once we were aware we did this case study and then it was an open and shut case for us.

[00:59:58] Simon: Brilliant, thank you. Graeme?

[01:00:00] Graeme: Well, I’ll give you final thoughts. I think what needs to evolve with the future is just making sure that that customer experience is optimized the whole way through, right from the buying and through to claims. If the claims fall down and is poor, it’ll reflect on the embedded insurance generally, because they’ll go, I bought it from this brand, I had a bad claims experience. They won’t want to buy again from that brand or perhaps even others. I think we just need to optimize the whole thing.

[01:00:28] Simon: Brilliant. Jim, final thoughts from you?

[01:00:30] Jim: I think what will be interesting to watch over the coming years, and it’s not today, it’s not next year, but it’s into the future, is this blending together and the seamlessness that’s going to occur between either a purchasing experience or an experience of a coverable type situation and the actual insurance offering itself. You see it in some of the OEMs now in the auto industry, when you buy the car the insurance can come along with it. I think we’re going to see that proliferate over the next 10 years. I don’t know exactly where it’s going to go first, what’s going to happen, but just watching the blending of the insurance into the actual daily lives of people in terms of providing that protection. Essentially they will become one and cease to become two things.

[01:01:16] Simon: Yeah, baked into the everyday lives of everyone. That’s great. Thank you, lovely sum up. There’s a few questions people have asked, I should say the report does answer many of those questions and it’s in the chat. The link to the report is in the chat if you want to have that details of that. I know that a lot of you who are here today can be startups, smaller companies. Although it’s a payable report, get in touch with me if you’d like a special often.

Finally, thank you very much to the panelists. I’ve really enjoyed it today. Thanks for your expertise and sharing that with the world. Thank you who’ve joined and listening in, and we will be in touch. Please do connect with me on LinkedIn for more access to useful information, insights, and knowledge. Thanks to everybody for their time today. It’s been a great pleasure to be with you. Thank you.

[01:02:10] Jim: Thanks Simon.

Banking-as-a-Service (BaaS): Navigating the Maze

The worlds of Open Banking, SaaS and BaaS may actually be converging – with several highly lucrative winner-take-most platforms likely to emerge.

I came across this impressive twitter thread a few weeks ago from Nicolas Benady, who runs a new Banking-as-a-Service (BaaS) platform called Swan. It explains why BaaS, Core Banking and Open Banking solutions are totally different.

But, to our mind, some of the confusion is justified. While today there is a big difference between Open Banking, BaaS and B2B SaaS systems, like core banking solutions, a lot of the differences are dissolving. Further, not all BaaS platforms are created equal and, as the example of Sequoia walking away from its investment in Finix demonstrates, the BaaS space is also quite complex.

What follows is our schematic for understanding the differences between BaaS models, as well as a discussion about the battle to dominate the BaaS space over time, which we think is likely to involve both open banking and B2B SaaS platforms.

PaaS vs BaaS

Platform-as-a-service (PaaS) is about providing a platform on which others can simply and cheaply build a new proposition. Banking-as-a-Service (BaaS) is about providing a platform that allows (normally non-financial) businesses to embed banking into their existing proposition, like point-of-sale credit.

However, this is a somewhat false dichotomy in that many of the platforms actually do both. They can enable companies to build a new proposition on top of the platform and offer an already-assembled service to be embedded directly into an existing proposition; the distinctions can be quite nuanced.

The differences in BaaS

Instead, we perceive the main points of differentiation in BaaS to be the extent to which services are vertically integrated vs modular and the extent to which they are out-of-the-box vs customizable.


Out-of-the-box BaaS

Let’s start in the top left quadrant.

Out-of-the-box BaaS models are fully-formed, end-to-end services that a brand can embed into their propositions, typically with little customization. They tend to work on the basis of a variable, revenue-sharing model. And they are generally best suited to smaller businesses that have few internal developers (or don’t want the hassle of development) and do not want to be regulated in any way: that is, those business willing to forgo customization (and higher margins) for ease of use.

An example in the payments space would be Stripe, which allows any digital business to accept payments through a simple API integration. Stripe integrations are largely the same – the same layouts, with the same fields. And Stripe charges a variable fee for this service, 2.9% and $0.30 “per successful card charge”.

An example from the wealth management space would be DriveWealth, which we profile in our recent report, which provides an end-to-end brokerage service that brands can embed into their proposition on a revenue-sharing basis.

Vertically-integrated, customizable BaaS platforms

In contrast to out-of-the-box BaaS services are those that are still vertically integrated (in that a single platform provides the end-to-end service) but they allow for much higher levels of customization. This is where the line gets slightly blurred between PaaS and BaaS in that with many of these platforms it would be possible to build both a standalone fintech proposition as well as highly customized user journey with distinctive look and feel within an existing proposition.

There are broadly two models for vertically-integrated, customizable BaaS.

Vertically-integrated, customizable BaaS offerings from incumbent banks

The first are from incumbent universal banks, such as Goldman Sachs (Marcus), BBVA (Open Platform) and Standard Chartered (Nexus). This is a logical play for these banks, since it allows them to spread costs and grow volume. Much of a bank’s cost base – software, infrastructure costs, compliance – is relatively fixed and, therefore, generating a higher volume of business through indirect channels helps to spread these costs and improve cost/income ratios. Furthermore, new customer coming via indirect channels should be acquired at much lower cost since they are existing customers of the acquiring platform. However, what is less clear is the extent to which the better unit economics will be shared between the brands distributing banking services and banks manufacturing them (especially over the medium to long term).

Newer entrants offering a narrower range of services

The other players–more numerous for now–operating in this area are relative new entrants, regulated digital platforms or banks which offer generally a much smaller range of services than could be offered by a universal bank. These players, by dint of being platforms and having little or no consumer-facing activities, are not particularly well known, such as Solarisbank in Germany or Cross River bank in the US. There are also examples solely focused on specific segments. One example, profiled in our wealth management report, is WealthKernel, which provides a full-end-to-end stack for businesses to start wealth management businesses, a kind of Shopify for wealth managers.

Finix is a kind of hybrid model

In the matrix above, we have positioned Finix between the regulated and the unregulated spaces. This is deliberate since, although Finix is regulated under the Payment Card Industry Data Security Standard, it is not regulated as a payments company. The quirk here is that Finix basically provides all of the capabilities for its customers to become payments facilitators, for which they need to be regulated, and in doing so it changes the economics for those customers. Instead of paying a per-transaction fee, customers pay a subscription to Finix meaning that a much greater proportion of the income from payments accrues to customers over time. In a strict sense, then, Finix is not a direct competitor to Stripe. But, it is an alternative to Stripe, which is why Sequoia felt the need to walk away from its investment.


Modular and customizable BaaS platform

 The other main type of BaaS systems are those that are both customizable and modular. By that, we mean that they afford their users a lot of flexibility in the implementation of the services, which can be easily extended, but also that it is not a single provider providing the service.

These types of BaaS platforms are a partnership between a service provider, which typically provides the service configuration and orchestration as well as customer and risk management, and a regulated institution, normally a bank, which provides compliance, balance sheet, settlement, custody and other regulated services.  

An example in the wealth management industry is Bambu (profiled and evaluated in our wealth management report) with its Bambu GO platform for the US market, which allows new entrants to launch a robo advisory service or to embed one into an existing offering, using Apex Clearing to provide the custody and brokerage.

The business rationale for these partnerships is around specialization and flexibility. The partner banks can focus on banking manufacturing while the partner can focus on the distribution of these services, which requires these services to be served up in context-aware user journeys. Moreover, the BaaS provider can work with different partner banks in different countries to overcome the geographical constraints of these partner banks, which tend to be limited to operating in single countries or jurisdictions.

This kind of partnership with BaaS providers can be very lucrative for the banks involved, but it is harder to see how this can be a viable model for incumbents. Owing to the scale economies and lower CAC, small credit unions and community banks in the US that have developed these partnerships are earning elevated returns on equity. Celtic Bank, for instance, a small commercial bank based in Salt Lake City, earned an RoE of 37% in the quarter to end of September 2020 (source: US Bank Locations).

The problem with the incumbent banks is that they have very different cost bases compared to these small credit unions or digital banks. The idea of distributing services wholesale through these intermediaries is difficult to imagine given the sunk distribution costs, such as a branch network, that most banks have as well as the high costs from legacy technology. Distributing a subset of services through these intermediaries might be more viable to grow subscale or non-strategic business lines through an indirect channel, such as Goldman partnering with Stripe Treasury. But, in the main, we expect incumbents to move slowly on BaaS and when they do to elect, at least initially, a vertically integrated model – because they are not yet ready to decide which services are core and non-core.


BaaS operating platforms: the value of linking many to many

A change that we foresee is for the BaaS systems to become less static and more networked over time. In short, we expect the modular BaaS providers to evolve into providing a many-to-many gateway. By that we mean that rather than partnering with a single or a very small number of banks on the supply side, which is generally the case at the moment, we anticipate that these players will work with both many suppliers and many brands on the demand side, in a model more analogous to a software operating system. We already see the early signs of this. Synapse for example offers a service to connect brands with their existing bank provider, while Bond is even closer still seeking to use AI to make the bridge between brands and bank services. Stripe Treasury is also interesting, both because for this service Stripe moves from top left to bottom right on the matrix above, but also because its go-to-market is to partner with other platforms like Shopify, making it the platform of platforms.

This model of the BaaS operating system is, in our view, the most exciting area in the whole of the fintech landscape – the pinch point where the most value is likely to accumulate.

The emerging competitive landscape for BaaS operating systems

However, it is a not a foregone conclusion that the most successful BaaS operating systems will stem from the BaaS field. B2B and B2B2C are becoming increasingly blurred and this opens up the possibility for B2B systems of intelligence to also emerge as BaaS operating systems contenders.

Consider the graphic below, which relates to the wealth management market. On the left-hand side, we illustrate a B2B SaaS system of intelligence, in this case additiv for wealth management. additiv provides wealth managers with software that enables them to manage the customer relationship independently of the core banking system and independently of distribution channels, but the software is mostly used by single institutions in a vertically integrated business. Elinvar has the same proposition as additiv, except it also offers some business processing outsourcing. Next is WealthKernel, mentioned earlier, an end-to-end vertically integrated BaaS platform. Then, we have an example of a modular, BaaS platform: Bambu GO. The interesting point to note here is that Bambu’s main business is being a SaaS provider to regulated firms, such as Standard Chartered, providing its solution in the service of an integrated business model, just as additiv does. The offering provided by Bambu doesn’t change, just the end customer (now not a regulated entity, but fintech or consumer brand) and the provider of regulated services (a partner, rather than the end customer).

Therefore, it follows that any B2B system of intelligence can easily pivot through partnerships to become a modular BaaS provider and, from there, to become a BaaS operating system. In fact, the move to a BaaS operating system is, in many ways, easier since these systems of intelligence are being used by many banks in a SaaS setup, meaning there are already several supply-side options for the brands on the demand side. Bambu has already started down this route with Bambu GO, but others in the wealth management field, such as Elinvar and additiv, are moving in this direction, too.


The other players that are potentially in the running for the BaaS operating system are the Open Banking platforms, like Plaid, Bud, Yolt, and Tink. These platforms provide the capabilities for connecting customer data with other services, where the customer provides the permission for this to happen. For example, if you want to connect your accounting system to your bank account, an open banking platform will provide the connectivity to make that happen. However, most platforms have realized the potential to go further, moving beyond just connecting banks and services and towards fulfilling user journeys, such as switching a utility provider. By connecting banks and brands, they are also in a position to pivot and become BaaS operating systems.

So, rather than being completely different, the worlds of open banking, SaaS and BaaS may actually be converging – with several highly lucrative winner-take-most platforms likely to emerge.

This blog was based on an excerpt from our recent “Digital Age Wealth Management” report, which you can access and purchase through this link.

The Market Map |
Some surprising results

We get very different outcomes compared to conventional evaluation studies. A lot of smaller vendors rise up the rankings thanks to advanced technology and flexible architectures. And for incumbent software vendors, it clearly distinguishes those that have kept up with technology change and those that haven’t.

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New Business Models in Wealth Management

4×4 Virtual Salon featuring Chris Bartz, Christine Schmid, Dmitry Panchenko and Bertrand Gacon.

Lively panel discussion on New Business Models in Wealth Management, featuring two of the leading wealth management software vendors identified in our new 150-page report “Digital Age Wealth Management“. 🏆

💭 Chris Bartz (CEO of Elinvar)
💭 Christine Schmid (Head Strategy at additiv)
💭 Dmitry Panchenko (Head of Investments, Tinkoff Bank)
💭 Bertrand Gacon (CEO of Impaakt)

We discussed:

  • Changing consumer trends
  • Changing technology
  • New business models
  • New fitness landscape for wealth managers

This webinar was the second of two discussing some of the key trends from our recently launched report on “Digital Age Wealth Management“. The report introduces The Market Map, our own methodology which upgrades vendor assessment criteria to help those charged with selecting, scaling or investing in wealth management software solutions to make better informed decisions about what characteristics matter in the digital age.

Read transcript –>

The Market Map |
Some surprising results

We get very different outcomes compared to conventional evaluation studies. A lot of smaller vendors rise up the rankings thanks to advanced technology and flexible architectures. And for incumbent software vendors, it clearly distinguishes those that have kept up with technology change and those that haven’t.

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Full transcript:


Ben: Hi, everybody. Welcome to the 4×4 virtual salon today where we’re going to be talking about new business models in wealth management. So if you’re new to the format, let me just quickly explain why we call it a four-by-four virtual Cylon. So we have four speakers who might go into introduce in a second, we cover four topics, which today are going to be customer trends in wealth management, technology trends, new business [00:00:30] models, which is where we plan to spend most of our time.

[00:00:32] And then the outlook for wealth management. And in addition, we have four polls. So you’ll see on the portal that the polls are uploaded and you can answer those polls at any time and we will make reference to the results during the discussion. And then the last thing is we’ll take one question, one audience question per topic.

[00:00:51] So you’ll also see that there’s on the portal. There’s a button where you can leave your questions and I’ll incorporate at [00:01:00] least four, hopefully more than four questions during the discussion. Okay. Right. So let me introduce our speaker. So I’m going to start with what is my top left, which is Dimitri Panchenko, who is head of investments at Tinkoff bank.

[00:01:14] And Tinkoff bank is Russia’s largest digital bank with over 13 million customers, but it’s best known for its super app, which covers a whole range of digital services. In addition to banking, such as insurance travel and ticketing restaurant bookings. And [00:01:30] e-commerce. Tinkoff investments, which is the part that Dimitri leads was only launched two years ago and already has three and a half million customers using it for automated portfolio management, digital brokerage, and wealth management.

[00:01:44] Okay next. We have Chris Bartz who is CEO of Elinvar. Elinvar is a Berlin based wealth management technology company. It’s platform used by over a hundred wealth and asset managers in Germany covers the end to end customer needs by supplementing it services. [00:02:00] But those are third party application providers, but also third party services providers having recently raised another 25 million dollars in VC funding.

[00:02:08] And embark is now looking at scaling up the platform and increasing self customization. Okay next. We have Christine. Christine Schmid is head of strategy at additive. additiv is a wealth management software company operating across Europe, middle East Africa and Asia it’s DFS orchestration platform enables private banks and wealth [00:02:30] managers to deliver rich omni-channel experiences while giving them the intelligence to maximize customer.

[00:02:36] engagement and then last, but definitely not least. We have Bertrand Garcon who is CEO of Impaakt and Impaakt is a platform that is crowdsourcing the intelligence to be able to get beyond rudimentary ESG scores, to understand the real societal and economic impacts of companies, activities in doing so impact is helping asset managers to build better portfolios that better represent their [00:03:00] client’s preferences.

[00:03:01] And values. Okay. So we’re going to kick off now. And the first topic we’re going to cover is customer trends. And so I just remind you that there’s a poll that you can complete, and there’s also the ability for you to post a question, which I’ll put to the, to our panelists. Okay, Chris, I’m going to start off with you if that’s okay.

[00:03:20] So, Chris. We’re seeing a massive intergenerational transfer of wealth from, from baby boomers to that, to their kids and [00:03:30] grandkids rural. So seeing just through the change in, you know, in any economic activity that youngsters are controlling more investible assets, what is the impact in your view of younger people having more wealth than they have done historically?

[00:03:47] Chris: [00:03:47] First of all, thanks for the invitation and great to be here. Really looking forward to the discussion with all of you when we first thing from my perspective, which is important to understand, because sometimes it makes up when we are talking about gang people in Wells [00:04:00] tech, we are not usually not talking about super young teenagers, but we are often talking about people who are in their thirties or forties.

[00:04:07]So when this is important, when we think about like the puzzle, not in mind, The biggest difference from my perspective is that this generation is much more used to technology supporting basically everything in their daily diet. And one example I like is when you think about booking a restaurant and you’re out there on a regular basis, very good hosts are very used to know everything about [00:04:30] you.

[00:04:30] They know your favorite table. They know your favorite dish. They know your favorite wine. So you basically have a very consistent high end experience because this is driven by CRM systems. This is driven by good showing of knowledge, same as true for basically every service we use today.  other OnStore experiences.

[00:04:49] One of the very few example, exceptions is as well as management because wealth management is done very manually. Very paper-based. And basically, if you advise us on [00:05:00] holiday, there’s a fair chance that you’re treated like a completely new customer, even though you are with the bank for quite awhile. And that’s, from my perspective, the biggest challenge.

[00:05:08] So traditionally the super manual process was part of the. Increased service because it was so personal. Now the lack of organizational knowledge is one of the biggest challenges and that’s from my perspective the challenge, but also the opportunity because whilst managers in their core are a very, very trusted partner and especially worst management time.

[00:05:30] [00:05:29] Also the clients who are younger. Half a hype based trust in these institutions, but they do expect them to really make use of all the knowledge. They have to share this knowledge and to create armies in the organization knowledge so that they are less dependent on a single advisor and what they discuss with a single advisor, but really benefit from the strengths of the complete organization.

[00:05:50] And this is a challenge from my perspective, wealth managers have to solve that they are better able to make use of all the knowledge they have about their clients to really. Develop the best and [00:06:00] most individualized solution for these times. And not only the solution that one advisor has in mind, but really the solution where the whole power of new formulation comes to the benefit of the client.

[00:06:10] And this is absolutely expected from the younger generation, as I said, not the 18 year old ones, but more the ones in our age group. If I look

[00:06:18] Ben: [00:06:18] around. Okay. Dimitri, I’m going to ask you the next question. There’s a follow on, I guess, to what Chris just said, which is what, you know, what Chris is saying, is that, do we trying to deliver personalized [00:06:30] services manually or through just a human interface?

[00:06:33] Means that you get quite a lot of spread of, of outcomes, right? Sometimes it’s good. Sometimes it’s less good. And, but it’s not that consistent. Do you think that that delivering that digitalization is the now the means to deliver really hyper-personalized serviced at scale? And is that where Tinkoff has, do you think a competitive advantage?

[00:06:55] Because it has just so much customer data because the super app covers so much of our [00:07:00] digital lives.

[00:07:02]Dmitry: [00:07:02] Yeah, so that’s a really interesting and a really important question because the Mo well only we don’t have any branches, so we don’t have an ability just to meet the clients and to do this paperwork.

[00:07:15] So our challenge and we have already done it. So we get three off. We got rid of every paperwork in onboarding by brokers services and I was saying that was one challenge now is to organize the asset [00:07:30] management services in the same way. So of course the reason is small problem here.

[00:07:34] There is an issue here because our customers would like to take everything under control and the brokerage services. And this means to this demand and. On the other side, we see the problems that people in this pit of so many fronts would like to. To see as an asset manager in there has, there is a bias that there should be [00:08:00] a very, all the professional guy who got the rules assets and will say some re difficult to end not so really clear speeches.

[00:08:08] And now we We are offering and work on the decisions, which allows us which will allow us to get 3000 is. And we, we succeeded to a little and maybe I will tell you about it later, or right now it depends.

[00:08:23]Ben: [00:08:23] Yeah, maybe if you wouldn’t mind, give me one, one example of where you’ve succeeded.

[00:08:30] [00:08:30] Dmitry: [00:08:30] So I think that’s all our robo-advisor is the best rural robo-advising decision in Russia. So we. We call it owl. As the belt I’ll Russia in Russia is a symbol of rezone capability. I don’t know. Is it the symbol somewhere else, but here in Russia, it’s very smart. So it asks the customer several questions about risk attitudes about investment horizon about currency and some.

[00:08:57] And some others. And after that, it’s [00:09:00] offers diversified and rather big portfolio. And so we launched it two years ago and it has already formed more than 9 million portfolios. Well, but, but the problem is another one. So we have some problems with conversion on the last step.

[00:09:17] So in comparison with our other decisions. So it’s as a conversion on the last step, when a customer should just put a final bottom and we tried to research and [00:09:30] we found out a very interesting conclusion. So. We researched what the user really do after the all offer teams, his portfolio he refused to buy it by

[00:09:44] But after that, he goes to our mobile application. So in as a part of mobile application and purchase the same stocks and bonds, we all recommended it to hitchhike himself. That means that our customers would like to take or to take the control. They would [00:10:00] like to take his final decision by themselves.

[00:10:03] And those it’s really interesting issue. And now where we’re working on the 2.0. To solve this problem.

[00:10:13] Ben: [00:10:13] A little problem, even. Why is that out? Yep. Okay, good. Kristen, we’re going to come to you next because I think Chris and Dmitri have raised a couple of really interesting questions here. Right? Which is the.

[00:10:23] There’s, there’s no doubt that technology can allow us and all the data that gets thrown off by digitalization can allow us to give you [00:10:30] to give much more contextual advice, much more, you know, to be, to deliver much, much more personalized service at scale. But as Demetrius saying, there’s always, there are always things that play with wealth management.

[00:10:40] They’re a bit distinct, right? There’s this sort of reassurance factor. There’s the, you know, there’s the there’s the ability for there’s the desire for people to take control? W, what does that mean? Do you think, in terms of optimal delivery delivery models for, for wealth management, do you think it, it sort of leads us towards some sort of hybrid [00:11:00] optimum delivery model?

[00:11:04] Christine: [00:11:04] So certainly an assisted one, certainly an assisted one. In particular in times where you have high volatility uncertainty. Is is very high. You not only need advice can be automated, personalized content but also. You want to know if, if there is someone behind it. So systems is something we, we clearly see to grow in terms of the business model on the, [00:11:30] on the robot side that you have the ability for a call center or even on the, on the wealthier side that you have a full fledged hybrid hybrid model where you can.

[00:11:42] In the digital interaction can deal exactly the same as in-person meeting the same efficiency, the same documentation handling the same. Advice handling optimization in a [00:12:00] very, very efficient way and seamless, no matter if we’re unfortunately rooking all from home again in a lockdown or meeting going forward again.

[00:12:11] So yes, we clearly see that trend.

[00:12:13] Ben: [00:12:13] And you think the key is to make sure that that whatever channel you use, the the experience is seamless and consistent. Right? And I guess the other, my follow-up question would be, do you think that, because I think, you know, the other surveys we see where it says that younger people, since we’re talking about [00:12:30] younger people always prefer digital channels.

[00:12:32] Do you think that will change as their wealth increases? And they may want more reassurance, more personal interaction or human interactions, right. Okay.

[00:12:42] Christine: [00:12:42] It has a function to, to the, to the amount of files. Does it need to be a human interaction? Not sure, but doesn’t need to be an assisted interaction.

[00:12:51] Yes, definitely. In particularly if it comes towards topics that we all will need which is financial planning [00:13:00] because it’s likely will have pension gaps. We had acid inflation that helped nevertheless interest rates, a record low and the pension gaps that need to be addressed need to be advised.

[00:13:11] So it needs very early financial planning guidance, and maybe even beyond. Pure pure vowels only we would call it valves and Hells pure Wells own. They’re really advising, advising the client, providing trust, providing stability. And in, in [00:13:30] simple terms, huh? Not with, not with the financial jargons, but in very simple terms.

[00:13:36] Ben: [00:13:36] Veteran I’m gonna continue next because I don’t know if you’re looking at the poll, but what people are saying is that they think that the biggest trends affecting wealth management will be the transfer of wealth. But then the next one that they’re highlighting is ESG. And so I think this is a nice segue into, into impact and your work, because I want to ask you a two-part question here, which is Is, we obviously see a massive increase in the [00:14:00] demand for ESG investments.

[00:14:01] Can we, can we attribute that also to demographics and maybe also to the sort of, you know, the increase in investible assets that young people hold. And then what effect do you think the pandemic is having on ESG investing? If any.

[00:14:15] Bertrand: [00:14:15] Well, yeah. Hi everyone. All of these trends are to the interconnected and we definitely see a very strong generation shift when it goes to increasing demand for ESG assets or impact investing or sustainable investment, you know, whatever you call it. [00:14:30]

[00:14:30] I’m sure many of us are around this panel today, have a, of teenagers as, as skeets or or close contact with teenagers. And you, you can see by yourself, how important does the environmental and social topics to that generation. And they’re just not, not important to them. You know, philosophically, they want to take action.

[00:14:48] I think that’s the, one of the main differences with the privileged in average. And it’s not that they, they might be more concerned with the environment that they’re more willing to actually take action. They might also be less cynical than we are, or that all parents are. [00:15:00] And one of the ways for them to easily take action is to actually transform their investment portfolio.

[00:15:05] They’re very aware of the power of capital in terms of transforming the broader economy. And we’ve been talking a lot about the digital revolution in a way that is taking place in the wealth management industry, like in any other sectors or maybe in a bit different way than in the other sectors, but it’s still happening in the wealth management industry.

[00:15:23] But there’s, to me there’s another as important triple addition that is taking place as we speak. And that is the sustainable revolution. [00:15:30] So you know, it’s I I’ve been myself working in the sustainable finance was the last 15 years. I can tell you that 15 years ago it was like A very niche market was only a handful of banks, you know, claiming that they were doing anything about environmental and social.

[00:15:44] Now, today you will struggle to find any, once you go to bank that says that they do not integrate any environmental or social consideration. And so it has become very mainstream of course, with a very diverse, I would say, level of, of Robustness. And [00:16:00] how serious is that really being integrated across the board in the investment process, but for sure, this is the, this is a huge shift in the, in the demand.

[00:16:08] And it is, it is largely fueled by the by the dinner generation shifts and youngest clients. They would probably put that on top of their demand to their web managers. And very often even before financial performance, this is something that we also realized it’s sometime for, for the youngest generation.

[00:16:25]The positive impact of the investment is the number one demand [00:16:30] before the financial performance of their portfolios. So-so so, yeah, that’s a, that’s a major change and this is a change that he’s now in itself leading to another wave. Of a differentiation and sophistication in the market because as ESG data becomes integrated by most every single bank, there’s no longer a differentiation available there.

[00:16:51] So now wealth managers are looking for what’s the next way. And the next wave is really about impact data. And the difference between ESG data and impact [00:17:00] data is that ESG is very much looking at the. I would say the responsibility of business, whether they, you know, they treat their employees well, whether they are to the right practices and the right policies.

[00:17:11] But the real question is really what is their, their, their, their value to society in a way. What is their core business model is bringing as as positive or negative effects. Yeah, and that is a very different question and much more complex. And this is where now the market is moving is to try to to to figure [00:17:30] out how to answer those questions and not stop just by saying, if you treat your employee well, and if you limit your CO2 emissions, that’s okay.

[00:17:37] You can still, you know, manufacture shoes or sell cigarettes, or we don’t care. Now, this is not, I think he’s over now. The market is ready to really answer that much broader question about what is your. Your net consolidated impact to towards the environment and society. And this is the, this is the, the, the new change that is taking place now.

[00:17:57] Ben: [00:17:57] Okay. So we’re going to come back to that because [00:18:00] that’s, you know, th there’s a lot to unpack in what you just said. So I think we’ll come back to that and we’ll address it through the subsequent sections. Right? So in terms of some of the sort of technology and business model challenges around getting that impact data so I just remind our audience, they can ask questions at any point and I’ll put them to the, to the panel, but what I’m going to do now is I’m gonna move on in the interest of time.

[00:18:22] We’re going to move on to the next section around technology. And Christina wants to come to you first. And I want to ask you in your [00:18:30] experience, do you think that wealth managers are starting to look at technology decisions and evaluations a bit more through the prism of business model evolution? Or do you think that’s, do you think they’re still looking at it through some sort of more traditional or more traditional lens?

[00:18:47] Christine: [00:18:47] Hmm, it’s a very good question, Ben. If, if you can split the business model approach down into three layers. So the operating model, the sourcing model and the servicing model, then I [00:19:00] think they’re looking into it increasingly from a holistic point of view. Let’s, let’s, let’s start with the business model per se, and then the operating model.

[00:19:09] So. In the past, the operating model was mostly focused on pricing. I bringing the costs down and efficiency up. This has changed. And I think the clear, clear trend there is as well, that banks are increasingly aware of that. They’re part of that becoming part of the technology and [00:19:30] the solution. The term they’re to use is the banking as a service.

[00:19:33]Not only can they position themselves, that’s, that’s, that’s a business model decision they have to take. But also can they use and build up on existing technology with their teams? On on the sourcing model side, I think we’ve, we’ve we’ve payment. We all have learned that we need, we need, we didn’t know, Pence’s dumb open banking.

[00:19:54] We need to integrate the best solutions that are out there and, and fast and in an efficient [00:20:00] way. So. There clearly some, some trends, trends are visible on the sourcing model side, which is cybersecurity, which is anything that has to do with data analytics, personal advised advice is a big trend.

[00:20:15] And there you need the best partners to do the data analytics as well into wealth management and the servicing model, which is as well part of the business model decision. Clearly. It’s it’s w you’ve asked me before it’s about [00:20:30] hybrid or assisted robot. It’s about serving the client seamless bead remote, as we trust now, discuss, or be it in, on client meeting.

[00:20:40]The second trend there, and the banks have, have to make up their mind in terms of how they’re positioning in terms of omni-channel. So it’s not only e-banking, it is increasingly mobile or parallel and the clients want to see the same one to do the same actions. I think [00:21:00] yes, banks are targeting the business model approach really focused these days and are very supportive of doing the changes, honestly.

[00:21:11] Ben: [00:21:11] Dimitrio I want to ask you a follow up question on that, which is so first of all, I want to ask you, so what are the, some of the technology challenges that you face in your business? You know, is it around data analytics or is it just more around scaling the platform to meet the demands of, you know, millions of customers?

[00:21:30] [00:21:29] And then the second question I want to ask you in relation to what Christine just said is how do you at Tinkoff bank decide what you will provide? No sales versus what you will partner for. Where do you draw the line in terms of your, you know, your core competencies?

[00:21:45] Dmitry: [00:21:45] So let’s start from the first question.

[00:21:47] It’s, it’s a challenge and difficult question because yes, we are growing a really fast to be attracted to more than 2 million new customers surgery. Here and the editor [00:22:00] only 5 million clients at all. So our part is more than 40% during the last year. And we have about a 1 million active for customers and of course that’s a challenging problem for them.

[00:22:12] That’s a challenge. Question four. Taking the decision what should be first to, so the provider reliability or the silvers, or to run very quickly to the new products, new decisions. And of course we try to keep the balance and we try [00:22:30] to provide the providers at the same time, the scalability for.

[00:22:34] New customers for new activities. Brokerage businesses are really difficult by the fact that you should be ready for incredible for, from credible client customers activity. And you cannot predict it. So if you can predict that you’ll be Warren Buffett or something like, or, or even higher. So in this aspect, we should provide incredible reliabilities.

[00:22:56] So which can be more reliable than, [00:23:00] for example, it’s a common time, maybe 10 or 20 or 50 times. And that’s a problem because for example, as the start of as a moment of. When the American stock market starts, let’s just say it could be yeah. 1 million customer at the same moment. And they’d like to start trading and we should succeeded and they should provide a service.

[00:23:23]We shouldn’t, they shouldn’t give any delays something like that. So we don’t have the ability to, [00:23:30] to be mistaken. And then the other one points that at the same time I should think about the products, the product development, and of course for our small team, it’s a serious issue. But I think that we succeed, succeeded visits.

[00:23:43] So we try to find balance and we the I think we provide the speed is number one in Russia by the product development. So we release new features may be at least one time per month. And we. [00:24:00] Seriously keeps this speeds of the space in order to satisfy our customers. And I forgot the second one question.

[00:24:09] What should be in the center of a

[00:24:13] Ben: [00:24:13] bank, a broad offering in your super app? And the question is where do you partner, where do you think you need to do it yourself? Or is it, do you think it’s about data? Is it about owning critical datasets? Where do you, where do you sort of think about your core competence and what strategic.

[00:24:28] And if I’m provisional [00:24:30] is Bazzi provision

[00:24:31]Dmitry: [00:24:31] Maybe it seems to be strange, but the customer is the customer’s needs. The customer seizures is in the central. So it’s the first, so everything we do which should be should be the war to there’s increasing all the level of customer satisfied.

[00:24:46] And so he’s happiness and so we don’t think about, Oh, we should add some data smart data decision or sounds like that. So the reason is to improve the the customer’s life to give him some new [00:25:00] features to increase the speed of decision of his problem and And of course from this follows our data and smart decisions and which we widely implement in our everyday VOC.

[00:25:13] So if, if, if you need can share some samples, but. So, so, so the customer is the first time that he’s in the center and we take all the resources to solve his issue, data, smart, search, official intelligence machine learning [00:25:30] or, or sometimes it’s not really good to admit it, but I, we, we can hire more.

[00:25:37] Then more, more hundred to 200 supports the guys to solve the problem in this exact

[00:25:43] Ben: [00:25:43] moment. Great. Thank you. And then Chris,

[00:25:48] Dmitry: [00:25:48] of course we don’t like Sosa such decisions, but we have to do it sometimes.

[00:25:54] Ben: [00:25:54] And thanks, Chris question for you, which is so, so I’m not the only time. I’m sure I plug it, but we just did.

[00:26:00] [00:25:59] We just published a big report and wealth management. And as you know, Alan VAR is one of the, one of the systems that we looked at. And one of the things that we thought was pretty, something unique about your business model is the extent to which you allow data sharing amongst the tenants of the system.

[00:26:14] And the question I wanted to ask you is. You know, while that’s obviously incredibly value in terms of so turbocharging data network effects, how do you get rounds, data privacy concerns, and with that kind of setup,

[00:26:29] Chris: [00:26:29] I [00:26:30] mean, first of all, I think we all should acknowledge that it’s completely normal and absolutely part of every industry and also increasing the finance industry that not one single player is providing our services, but rather speaking about the value chain and then the extra quality and the delivery for the final user.

[00:26:47] Comes together by the company combination of competencies. And this is typically in the like most high end service. So for example, if you’ll think about the family office, you have DPMs managing a certain part of [00:27:00] the walls, and then you have a family office, or it has a, which has a complete overview, but still the DPM has certain part, the parts he or she is managing.

[00:27:08]And they are, they have the full transparency about everything they need to make their job. And it would be, and that’s basically also the way we look at it. So it’s important for us on the one end that we have all the security limits in place. And we are that’s untypical for a tech company, but from our perspective, very valuable, we are fully regulated financial institution, even though we’ll be focused on the technical [00:27:30] side of things.

[00:27:30] So we are 40 bathroom license, which. Requires that we Inforce and make sure that we have all the same security limits than a traditional bank. Starting with GDPR and ending with a bat. Second thing, this we use the most modern technology for that. So for example, we have something which is called roll level security.

[00:27:49] So for every data set, we have. We can define on the data sets, which use off the platform has access to this data set. And this is something dynamics, or if we can add basically [00:28:00] user rights and did it use the rights to a certain data point. And we ensure transparency. So for example, if it’s if a DPM, as well as someone else should have access to the same set of data, so easy, easy age the most simple example would be you have an independent discretion of portfolio manager and you have a custodian bank and both have an overlap of a client data access, or for example, the asset information is visible post, but certain information around the investment strategy is only visible.

[00:28:30] [00:28:29] Discretion of portfolio manager and then, but there’s at the same time, there is information which is only visible to the custodian bank. So for example, if the same, see client has multiple mandates with motor B DPMs, all the English, the same custodian bank, then the custodian bank has a full access. Of all this kind of information and each thing a DPM only sees the information from his perspective, individually perspective, and that is something we manage based on basically what the seek science defines as what is the [00:29:00] goal through target and what is his desire to access?

[00:29:03]So we have the combination of the technology. We have a combination of transparency and the last thing is then process. And there are there are also situations where we are actually the neutral third party. So one example for that, and that’s something we are now very much looking into in the context of extending our platform to even more partners on the provide side is traditionally, for example, you are a benchmark provider, or let’s assume you a pothole and you are now contributing a certain [00:29:30] information to the portfolio.

[00:29:31] Your price models were very much limited to the set of information available for you. So you could in the end, go for a license fee, one of the, but that’s pretty much it, but your service might actually be very valuable to increase assets. So with us as a neutral party, we could also support system logics where we say, okay we price based on assets, but that does not necessarily need to know all the information, but you can trust us as a third party who is able to facilitate this because we, as a [00:30:00] neutral instance, have the information from both sides.

[00:30:02]And then both sides can trust us. And we think that’s very valuable in a world where it’s more about. More and more about the ecosystem and not one single player providing everything, but in the end, it’s always about the value chain and the ecosystem where everybody focused on core competencies. And we try to bring these together solving topics

[00:30:19] Ben: [00:30:19] like this.

[00:30:20] And just one more question, one more. Follow-up do you, do you also use the sub collective data to train. Collective models, you know, which might be on, you know, understanding, [00:30:30] pricing across all your different customers or I don’t know, fraud threats, or, you know, I don’t know what those models might be, but do you also sort of try and common models?

[00:30:39] Chris: [00:30:39] Only in very, very limited ways. So to be very explicit to our model is not. So I always try to, I always compare there’s like the Google  and then therefore the service is cheaper and there’s the, where the user have to pay. But on the other hand and everything is optimized for protection. We ended up at the side of things.

[00:30:59] So we [00:31:00] really focus on, yes, we charge our users, but on the other end, we really protect whatever they share with us. So therefore for example, when it comes to pricing investments for the juice out of loss, we don’t do any analysis there because we think that’s in the interest of our partners, that their data is really protected when they shared with us.

[00:31:18] And we want to be a neutral, trusted instance. Yeah. Where we use information as, for example, when it comes to it security. So we do maintain the security for the whole platform, and we do make sure that a threat [00:31:30] analysis is used in a way that we really protect everyone using our platform.  But there is something where we don’t need to use any confidential data, but more general flaws, excess behavior and stuff like this to really make sure that the security is maximized for every user, but our trusted, confidential, confidential information is.

[00:31:48]Protected and only used in a way that it’s transparent to the respective user, which includes all patrons.

[00:31:55] Ben: [00:31:55] Fantastic. Good. So I remind the audience that they can ask questions and I will put [00:32:00] those to the panelists, but in the absence of those questions, I’m going to move on to you better. And I’m going to move us into the section where we want to spend most of our, what is know a good proportion of our time, which is new business models and betterment.

[00:32:12] I think if you don’t mind, if you wouldn’t mind just explaining a bit your business model, because it is very, very unique, right? So if you’ve known, explaining the business model and then. You know, it relies on user generated content, which is not a model we often see in banking. Right. And particularly one on which people are placing heavy reliance on that data to build portfolios and that kind of [00:32:30] stuff.

[00:32:30] So so if you would mind just explaining a bit the business model and then kind of talking about some of the challenges with user generated content and how you get it to the right level of accuracy and timeliness and all the kinds of things that a, a regulated financial institution would expect.

[00:32:48] Well, you were muted federal.

[00:32:52] Bertrand: [00:32:52] Sorry about that. Yeah, so I was seeing just so the, the easiest way around to, to guide you through that is just to let you know why we created the impact of the first place [00:33:00] and this, it was because we were. I’ll serve clients of of traditional ESG data providers and not very satisfied with the type of data we have, partly when the, you know, this, this move that I mentioned going from moving away from easy data into impact data, which is a very complex question.

[00:33:17] And and I think one of the reasons why we’re frustrated is that the the, the normal model that is Dominant in the financial industry is the single expert model. So you know, you want to have an information and you ask the, the expert of [00:33:30] the, I don’t know of the car industry, what they think about the impact of Renault and they will produce a report and you buy the Freeport, but impact.

[00:33:39] Is, is a far more complex question than financial performance. And we know that punishing performance is not so easy already, but impact is, you know, is way beyond that and you need to aggregate at the type of information. And and that, that, that is very hard to find in, in the mind of one single experts, you know regardless of how knowledgeable is that expert.

[00:33:58] And so. We thought it [00:34:00] was only two ways of being able to really measure the impact of companies and to, to, to get to manage that that level of complexity. One was a pure AI models that can really, you know gather a huge amount of information and try to make sense out of that. Or the other way is collective intelligence.

[00:34:16] So picking the brains of a, not just one single expert, but silence and silence of contributors, who you know, each of them having a, a small part of the information and having a way where you can gather all that information in a structured, [00:34:30] vetted, organized, documented way so that you can build the collective knowledge about the impact of the company.

[00:34:35] And that, that is really the the bases on which we created impact. So it’s a collaborative platform. It’s not a Wiki, but it’s very similar in a way to the processes that you could see in Wikipedia. There are many levels of, of quality control and, and vetting information because of course the power of collective engine intelligence is huge, but the, the risks are also very important, right?

[00:34:57] In terms of fake news and distortion of [00:35:00] information and, and you name it, right? So you need to have a very strict and very robbers control. Quality control mechanisms. If you want to make sure that the end results, the research and the scores that you produce are actually of a very high quality. So I’m not going to detail all of those mechanisms that are in place, but the, the, the answer is that it took us some time, but we now have a very robust and gene to produce that research in a very high quality and with a with a power, with a bandwidth [00:35:30] studies, you know, as no equivalent in terms of scale to any other single expert model, because, you know, we just added more contributors.

[00:35:35] And so the sky’s the limit in terms of all of the capacity to produce that content that’s skate. Now, once this is done, the other benefit of collective intelligence is that. There’s not one single person that decides that a plastic pollution for Nestle is more important than feeding the planet or vice versa or how much one should be weighted against the other one.

[00:35:55] Right? It’s a collective rating in a way it’s collective assessment. So you basically reflect [00:36:00] what is the common consensus from, from global civil society, which, which in itself has a lot more value than just asking Beckham what he thinks about Nestle or asking Ben, what it thinks about Toyota.

[00:36:10] Right. Yeah. And so that, that, that the model, we also use artificial intelligence, but not as a way to directly calculate those scores really more the way to assist with the research process. Making sure that analysts you know, get access to the writing permission in a quick way and in a structured way, and then can process that information [00:36:30] using the human brain for what it does best and using the artificial indigenous for what it does best.

[00:36:34] And I’m not trying to. Use one to do you know what the other ones should be doing and that’s, that’s the model we have. We we’ve been developing.

[00:36:40] Ben: [00:36:40] And then just, just one more question for you, which is what’s the hardest thing about scaling. Impact because, you know, I’m one level, you know, insurance you’ve talked about, right.

[00:36:50] That’s critical. Another level is getting sufficient coverage of topics. And that seems to be where you’re using AI. What about actually attracting the two sides, right? Because you’ve got the classic chicken and [00:37:00] egg problem, right? You need to have a lot of researchers in order to attract a lot of asset managers.

[00:37:05] And with the asset managers, you won’t get the researchers. How have you overcome the chicken and egg challenge? Well, I’m

[00:37:10] Bertrand: [00:37:10] not sure we have we’ve we’ve all I mean, it’s just a part of the solution is just to have a, you know, a do to get your investment capacity, right. And to have the right backers in terms of investors so that you can have the time to build that knowledge before you can actually sell it.

[00:37:26] And you have access to accept that, you know, it takes some investment and some time [00:37:30] before you can gather all of that research and produce it at scale, then only you’re able to sell it to two clients, which is what we do. Now. We have, we have reached that, that point where we can, when we start studying that research to decline, it took us some time before we could actually gather, you know, research on Southern’s of companies.

[00:37:47]Yeah, and I think the the other challenge is probably the fact that for that to work, you need to attract a very large community of contributors who might not have a complete alignment of [00:38:00] interest with your clients. And just give you a very concrete example, like in terms of coverage. Of course, and investors would like to have this kind of information for the largest companies in the world.

[00:38:10] Some of them being completely unknown from, you know, from the average Joe because the B to B companies or, you know, so, so get gathering information and gathering data and gathering greeting on Amazon or or alphabet or Toyota. That’s easy. But when you do move to some of the companies that are interesting for investors, because they [00:38:30] big companies in terms of market cap, but they do not.

[00:38:33] They’re not consumer goods company then of course, it’s a bit more of a challenge. So you have to, to find ways of actually making sure that your contributors on the platform can get interested into those. And the main way of doing that is, is just to make sure that they come to the platform for the right reason, which is an alignment around impact measurement.

[00:38:51] Most of the players, we have, they come here because they want to understand, they want to contribute to measure that impact. And if you can explain why this big company is important in terms of [00:39:00] impact and why they should contribute to the rating, then the job

[00:39:04] is

[00:39:04] Ben: [00:39:04] on. Perfect. Thank you very much. So to meet you, I’m coming to you next and I’m sorry to do this, but this has, this is a three part question.

[00:39:12] Okay. I can remind you about the parts later, but the first question I wanted to ask you is yours is a business model that also has also had to overcome the chicken and egg problem, right? Because you needed to have millions of customers in order to be aggregate services for those customers. So how did you overcome the chicken and egg problem?

[00:39:28] Question number one. [00:39:30] Question number two, I can remind you later. Question number two, why don’t we see more super apps in Europe? You know, there are, there are, you know, there are many, many super apps in Asia, but you’re the only one sort of really successful super app in Europe. And then the third question has been put by the audience, which is how do you manage kind of all the data aggregation.

[00:39:49]We’re in this world where we’ve got GDPR. PSD two. I mean, how do you, how do you solve, you know, piece together and amalgamate data sets in a world where you know, that you’ve got sort of fragmented regulation [00:40:00] and more, more, you know, more regulation around data privacy. So, yeah. So first of all, how did you overcome the chicken and egg challenge with, with Tinkoff bank?

[00:40:13] You’re you’re you’re muted. I think Dimitri,

[00:40:18] Dimitri

[00:40:20] Bertrand: [00:40:20] you’re you’re on mute.

[00:40:23] Ben: [00:40:23] Sorry,

[00:40:27] Dmitry: [00:40:27] let me elaborate a little how [00:40:30] I struggled with this problem.

[00:40:31]You know momentum today we realize it and that means that we don’t have any time for her relax, so we don’t have any time to gather resources. So we encourage shout team. We. Try to get more sources for, from the, our ecosystem.

[00:40:49] So there are big, we call it the whole Holy war. So it’s a big, huge discussion of we discuss there was the main targets for us and the Alec system [00:41:00] and now there is a decision that it’s Incofin investments is accelerating a lot. It’s succeeded in a lot and in our culture, in our DNA to, to help us all, all the bank now, sports it’s income from investments because it’s good moment.

[00:41:13]It’s a good time. And We really need we don’t, we don’t have any time to just think about it. We should deliver, deliver, deliver, or so we should keep the same space and we should scale our reliability. So we scale our infrastructure and I think [00:41:30] that’s is, is the issue not about solving the problem of chicken neck.

[00:41:35] We just widen, widen it and widen it. And Try to in reach our capacity to, to, to be able to do a lot at the same moment. And so we scale our business maybe twice this year so on as the staff our it team. And we are trying to do it very fast. We try to attract as a staff from not only [00:42:00] from, from different regions from our countries and maybe even more so the decision on his own disease.

[00:42:06] And so I think that is the challenge, which we are managed to solve it. And I think that we. We changed a lot, so three months ago, and now it’s the security difference. Believe me. So the sleep, not really much, but it’s a good time for

[00:42:25] Ben: [00:42:25] us now. And then, and then why don’t you think there are more super apps? [00:42:30]


[00:42:30] Dmitry: [00:42:30] Hmm. I was thinking about this question and my first idea was that it’s the point for huge scientific researches because it’s not so simple question. I think yeah. There are several important points which played a huge role in this the level of, of, of competition. Maybe the concentration of big players and small players.

[00:42:53] So We saw that in Europe and United States this process took much [00:43:00] more time and maybe was a behavior and habits of the customers have already formed and that’s important. And but after all we all don’t know what will be the next, because I think that Amazon, which is now seems to be only.

[00:43:14] E-commerce for a common customer. So Google, which seems to be only a search for common customers, all or, or Facebook all these super apps have more ambitions and our X system will have a lot of ambitions [00:43:30] and we would like to be more fuchsia would like to provide more services. And so.

[00:43:36] Ben: [00:43:36] And then Demetrius one more question. That’s come in from the audience here, right? This is good. We’re getting lots of questions from the audience now, which is it’s about your, your international presence. So I understand that Tinkoff only operates in, in Russia. What’s the plans to take tink off internationally, particularly in light of the fact that it’s kind of the only European super app.

[00:43:56] So why not go to the UK or Germany or one of the other [00:44:00] countries with thought populations in Europe?

[00:44:04]Dmitry: [00:44:04] I I’m not sure that I can count I can disclose in our our plants and our ambitions. I, I just can say that we recession actually everything, every abilities and possibilities. So we are interested in.

[00:44:20] In, in, in increasing the old business, but I’m not sure that I have what Sarah right now at the moment. And there is a well known Startup which is called [00:44:30] vivid money. So it’s well known story. It’s already presented in our in a, several regions of Europe. And so there is a connection between our companies, but it’s a well known story.

[00:44:43] Okay. Okay. So it’s a FinTech, it’s a FinTech

[00:44:46] Ben: [00:44:46] story. Okay. So, so in other words, is your answers kind of a bit, watch this space and a bit, we’re not doing it necessarily through the Tinkoff vehicle. We’re making investments and using capital to expand. Okay, good. [00:45:00] Chris coming to you next, which is, you know, how like banking as a service has become like this really big trend or at least a much hype trend, right?

[00:45:08] This idea that, that you can embed. Banking into any distribution channel and maybe, maybe a bit like with, with Tinkoff right. You, you embed into channels that already have lots and lots of customer engagement. And we see this a lot in payments. We see this a lot in, in lending. W why haven’t we seen it more, do you think, in wealth management, and do you [00:45:30] think that’s about to change.

[00:45:34] Chris: [00:45:34] So, I mean, starting with the last question, obviously, I think it’s going to be it’s about to change because otherwise it would not make much sense. But when we look at the overall or the underlying trends, I think. The reason why it started in payment and in other areas is because they are, we are very much speaking about economies of scale and we already speak about very, very high price pressure, whereas in wealth management for example, [00:46:00] in Switzerland, but also in other areas for quite some time, we had very high unit economics.

[00:46:05] And so it was actually possible to pay a lot of people, a lot of money for very menu work. And you still see team structures like one assistant supporting for advisors to serve clients. So basically you always had the option to go for some menu, a big opt ins that are going for a technical solution.

[00:46:24] That’s one reason. And the second reason from my perspective is that okay. And when we think about wealth management, [00:46:30] we are actually talking about a very, very fragmented industry. So you have private banks, you have DPMs, you have family offices, you have a lot of players in this industry. And therefore you had less parties who were able to really support huge investments in tech infrastructure.

[00:46:47]And so from my perspective we have now the interesting situation that exactly the last part is the fragmentation of the market. We’d be the driver for Ross tech as a service. And so the [00:47:00] technical side. Because all these players are interested in upgrading the idea, but they cannot do the investment themselves.

[00:47:06] They know a few of the pressure due to expectations or organization knowledge. One of the points we talked about earlier due to pressure on the margins due to increases in rigorous so that there are no manufacturers that actually force everyone to invest in technology. The split of the value chain.

[00:47:24] We discussed new trends like Bhutan is working on when it comes to impact. [00:47:30] So all of this in the end needs to be translated into Intel technology. Most of the players lack the resources to do the investments themselves. And therefore we see, do expect that there will be an increased demand for whilst tech provided as a service.

[00:47:45] And this then comes together and that’s, from my perspective, a very interesting dynamic with much more evolved regulation about the usage of services as a service. So for example, when we think about the various, the most fundamental thing of the infrastructure as a [00:48:00] service of meaning cloud service, cloud infrastructure Actually only in the last years, at least in Europe, we really see regulation taking off there a much better view by the regulator, much more consistent view.

[00:48:12] And they’ll basically everyone has a clear framework how to use cloud services that can still be improved, but which already allows us to use it in a secure way. And from my perspective, this like increased demand increased pressure in combination with a better regulatory framework. As a very good [00:48:30] moment.

[00:48:30]And I do expect that over the next year, as we were seeing significant increase in usage of Wells take as a

[00:48:36] Ben: [00:48:36] service. And where do you think, well, we’ll be into which channels do you think it will be embedded? Do you think it will be, do you have a sense of that? Would it be like lawyers, probate lawyers, for example, will it be accountants?

[00:48:48] You know, what channels do you think w w will be used to offer up wealth services that aren’t directly proprietary wealth channels?

[00:48:57] Chris: [00:48:57] I would I would expect that we see [00:49:00] this basically as the things we already see today done manually, we will see them executed in a better Dignitas supported way.

[00:49:09] So for example, I was responsible for the product management and the complete offering of a private bank based in Bowden. The maturity of the client acquisition was done through networks. And we were working together with lawyers, working together with techs, advisors, working together with all different kinds of [00:49:30] parties who also have the same client group, because in the end, from the perspective of the client, especially your client, it’s always about the holistic view.

[00:49:39] And I would expect that this is now being more and more supported so that you have in the end, again, an ecosystem of parties serving a client, but they are all supported in a better way so that the client has a better overall experience. And then the client can decide for himself. What does he want to discuss with whom but the level [00:50:00] of available information and the the possibilities to share data in order to improve service was significantly increased.

[00:50:07] Ben: [00:50:07] So you think it’s kind of a shared cost of customer acquisition and then across many plants. In other words,

[00:50:14] Chris: [00:50:14] I would say it’s like it’s a network of people working together and doing strategic partnerships. And one thing I usually discuss with partners of ours, when they think about that target operating model in the past, the core assumption was I’m a wealth manager.

[00:50:29] I [00:50:30] view what I’m doing. Tomorrow it’s much more about, okay, what is really my unique core competency and what are the things that better do with partnerships? And that can include things like I’m not actually managing the complete portfolio of a client, but I’m focusing on your certain part. And I it’s, for example, it’s G strategies or impacts for the juice buyer by another provider then extends to one of the things about real estate.

[00:50:52] For example, burden in Berlin. Most whilst management clients have a significant share of their portfolio in real estate. Then who are the parties supporting [00:51:00] this part? Then it goes further to the tech side of things. And so far for that perspective I think everybody in this industry needs to have a much clearer view about what is the, what are the individual core competencies?

[00:51:12] What are complimentary services to this, and how do I execute on these combined business models? And therefore we will see many more business models executed. From an ecosystem for supported with strategic partnerships. And then the question is how do you [00:51:30] support this technically, but also how do you support this from the legal point of view and how to really strengthen the strategic partnerships?

[00:51:38] But I think we are definitely far, far away from the times where one single institution was able to support everything. And we will definitely now going into directions where it’s much, much more about ecosystems by the way that also offers opportunities the other way round. So we just mentioned PST to PhD is much is a lot about sharing Ben, bangs, sharing [00:52:00] certain account information with other parties.

[00:52:02] I can also imagine going forward that whilst managers can establish themselves as a trusted party. To advise clients on other things. So Christina pointed out the the as one example and I think that’s completely right from my perspective. The question really is, okay, which information does the client wants to share with whom?

[00:52:22] And in the past we already saw in the individual levels that clients shared, for example, information about their business and their family died with their [00:52:30] advisor. I would expect that going forward there’s opportunity for more data to be shared with the wealth manager who then advising on this holistically.

[00:52:37] Together with parties and we’re supportive.

[00:52:40] Ben: [00:52:40] Fantastic. So Christine to you next. So a common theme of this section has been, you know, the growth in ecosystem based business models. So my first question to you is what other examples do you see of ECOS ecosystem based business models in wealth management, but they also want to put to you a couple of questions that we’ve had from the audience there.

[00:52:58] One is to what [00:53:00] extent do you think the pandemic has accelerated. Digital transformation in wealth and wealth for wealth managers. And then we also had one about data sharing, right? Which is how do you create a sort of quid pro quo, you know, for the suppliers that share data with you to make it worth their while to do so.

[00:53:18] So, sorry to put, so a bit like the Patriot three-part question to you though. So let me know if you need to be reminded of any of the parts. Okay. Let’s, let’s

[00:53:28] Christine: [00:53:28] start with the the [00:53:30] one that the pandemic accelerated desire for wealth managers. It clearly has accelerated the demand for tech, but in, in different ways But banks often used to build, to build their own and particularly the large ones.

[00:53:46] Now these days they can build an existing models. And I think there, there is a shift. Happening there in terms, in terms of speed in terms of no longer coding, but more on the configuration side, but still [00:54:00] having the, the end mile. So the, the client journey on full control The second one I would say is, is really the end-to-end.

[00:54:09] Okay. We want, we want an end to end solution UX. Just want to change my color and my logo and get it out fast. This is, this is a need for the ones that were not digital before before COVID hit us. And so. There is a full fledged solution in between the ones that really want customized built itself [00:54:30] and from an end to end.

[00:54:31] And I think as, as well as tech providers, all the T if you have, you have to play the full level between an end to end solution, but also providing just a means that the partners can build themselves, but it has definitely, definitely accelerated. And it has affected the business models. That’s with this cost before I think your second one Was on utterly consistent based business models.

[00:54:54] Am I right Ben? Yep. Okay. In terms of [00:55:00] ecosystem based business models, I think we can firstly, as well look across the financial industry. And w we spoke about financial planning before. The need to bring in impact sustainability data. So if we look into financial planning, it’s, it’s about, it’s about stability security, and there is a, it’s a combination of, of banking and insurance.

[00:55:24] So. I remember one of the studies looking into affluent opera, affluent clients and how [00:55:30] satisfied they were with we’ve kind of life protection offering provided with, with their wealth management side was around 9% that you don’t 9%. So there is a clear need for simple ecosystems and that provide services.

[00:55:48] From pension to free savings and even on top, for example, a life insurance and in a simple way. In a very simple way. So their ecosystems there, and that’s where oddity for example [00:56:00] is with its health and wellness offering established. The second ecosystem, one is really breaking up in the past. The banks have sourced the investment products.

[00:56:11]Proper due diligence came on the recommendation list. These days there is an ecosystem of investment providers and other platforms. Growing examples are daily or other examples are chant too, and it’s, it’s a link into DS investment providers that is, that is [00:56:30] needed going forward increasingly, and you need to have the flexibility to bring them into your offering for the clients as well, that this is something that’s happening within the industry.

[00:56:40] And then maybe adding up to what Chris has elaborated on, on banking as a service. Yes, clearly we see, we see this trend and in terms of the channels, it can as well be that the bank themselves become the channel. I E that the banks provide their service in terms of a supplier [00:57:00] aggregation and provide.

[00:57:01] WealthTech wealth, wealth management services to other smaller banks, even to insurance companies. So it’s not only within the technology within the banking sector itself, but it could as well be a wealth tech provided verdict. Client has its traffic, his or her traffic. So typically what we use daily is on the consumption side where we use daily is on the mobility side.

[00:57:25] Once we’re free to be more mobile again, and. [00:57:30] To provide the financial service there where the client goes on on daily needs is certainly something which we would expect to grow going forward. And the last journal, the last channel is with with corporates.

[00:57:44] Ben: [00:57:44] Yeah. So employee wellness,

[00:57:49] Christine: [00:57:49] neglect that. So where we have your payslip, literally you have your savings.

[00:57:55] Okay,

[00:57:55] Ben: [00:57:55] great. That’s breaking up as well. Okay. Right. So we’re moving, we’re running out of time. So we’re going to [00:58:00] move quickly into the last section, which is kind of the outlook for wealth managers. You know, the fitness landscape, if you like. And Dimitri, I’m going to come to you first, which is how, yeah, they can, you can answer this in general or you can answer this from a Tinkoff effective, but how do you sort of change culture within an organization in order to adapt to the digital age?

[00:58:21] Because things are so different, right? I mean, we’ve been talking about how the business model is based on opening up to fair buck is not kind of, you know, building a wall around your [00:58:30] business. So. You know, how, how do we get organizations and the people within organizations to adapt culturally in order to be able to launch and run digital age, business models.

[00:58:40]Dmitry: [00:58:40] It’s a little bit of a strange question for, for us. And it’s understandable why because we, as the digital absolutely digital platform from the day one. And so I think that is the problem for us is a little bit opposite that we should attract some customers. We are not so digital digital radio, and there is a [00:59:00] sheriffs that such customers, but.

[00:59:01]So about, in the aspect of our personal digitalization channel culture I think that’s special culture, special people to describe how, how it was created. So, so it took a, it has taken several more than 10 years and as a special atmosphere, I admit it. And I stress it’s it’s it’s it’s incredible atmosphere. We try to. Hire a young guys for verse Monte guys from [00:59:30] the best two universities. We try to pull them into the Metro culture.

[00:59:35] We try to encourage them to share with them our main values. And so Well, we are really concerned about the happiness and so everyone is really interested in, interested in delivery in the results in developing new products. And for me as a, as a leader of All this thing which is called

[00:59:56]My target is to ma not to encourage [01:00:00] and not to rule them to to deliver products, but to maybe sometimes, sometimes stop someone in order to solve the problem of chicken neck. So It’s a special atmosphere is by a special team. And it’s absolutely creative. And the productivity is really, really high.

[01:00:15] The butter, the roots of this atmosphere lies maybe more than 10 years ago, how it was the creator, how it was created. And that’s why for us, it’s a serious [01:00:30] problem too. In doctor, the people specialists from some other financial institutions. So because when I have a trade-off as a leader to promote some young guy who is 24 to solve some really difficult issue or to hire specialist with 25 years over experiencing our from our arrival.

[01:00:56]I will choose the first option because so it’s our [01:01:00] DNA and it’s our method.

[01:01:02] Ben: [01:01:02] Great. Fantastic. Coming to you. Next spectral is I’m going to give you the opportunity to kind of get on your soapbox. Yeah. Right. Because W we all know, right. So I read a statistic that I think by next year I was on like 50% of all investments will be based on ESG criteria.

[01:01:16] Right. But as you yourself say, you know, like you get this, you get this, these weird situations where oil companies can, can have a better ESG score than in a wind turbine manufacturers or whatever, because, because of the [01:01:30] way these, these, these scores are calculated. So, so my question to you is, are we gonna move beyond just.

[01:01:35] Investments based on ESG investments based on much, much more accurate kind of reflections of what companies actually the impact actually have. And is that going to become a source of differentiation for asset managers?

[01:01:49] Bertrand: [01:01:49] Well, the, yeah, of course my answer would not be no. I mean, if, if I, if I believe the answer would be, no, I would not be in this business, but yes, definitely.

[01:01:55] We actually starting to see that. I mean, we have started to see that for already a number of months [01:02:00] You know, one of the limits of the ESG data that you just described is that it is fairly agnostic of the basically of the, of the sector of the industry, of the whole business model. So regardless of the fact you producing again, cigarettes or, or shoes, or or hamburgers, doesn’t really make a difference into your ESG score, which is quite, you know, Quite a shock for people that are starting to discovering what ESG is all about.

[01:02:23] But this has been my reality for the last 15 years. And now this is a reality that is now coming to an end because the market becomes a lot [01:02:30] more sophisticated. And when you talk to an clients, particularly wealth management and clients. So the younger generation that that we’ve been discussing at the beginning of that session, you know, you cannot tell to those guys that you’re creating a, a sustainable investment portfolio to them.

[01:02:44] And the first line is in the portfolio is a, is X on. And and that if more is right, so. So it, it doesn’t, it doesn’t work anymore. I mean, we’ve reached the limit of that model. I think empty now we were trying to figure out where, where the companies, where do we think is right. And [01:03:00] now the question is our company doing the right thing and that’s a fairly different.

[01:03:04] Question. Right. And and we are, you know, one of the reason that makes me think that we are going to move to that new dimension very quickly is actually financial performance. If you look at the incredible movement, you could see on some sectors on the last two years, like energy, right? If you look at the market caps, the global market caps off traditional.

[01:03:27]You know, oil and gas companies [01:03:30] compared to the new players in the renewable energy, you know, like five years ago, it was, it was still like the old world where the the old giant where like, you know, 20, 40, 50 times bigger than the than, than the renewable energy players. Now, if you look in terms of market cap, which again is, is not a direct reflection of their economic weight, but still sell you a lot about how investors think about that.

[01:03:54] There is just huge. Sectoral relocation. And this is what impact investing is all about. As [01:04:00] opposed to ESG investing, ESG investing, doesn’t make you change your sector allocation. It’s just that in you that if you want an all company, then maybe you, you, you, you should choose a, I dunno, total instead of Exxon, right?

[01:04:10] But impact investing is about thinking what is the core business and what are the value of each of those businesses to the word. And then, you know, rethinking that may be, we want to have less of a. Of energy providers coming from fossil fue, as opposed to energy providers coming from renewable energy.

[01:04:26] And that that’s a much more fundamental [01:04:30] reallocation of portfolios, which, which did not really happen until now. This is also why sustainable finance and Tina as really. Largely fail in to that mission of changing the world for the better, because it didn’t change the asset allocation, but now this is what is happening.

[01:04:45] And to do that in a, in an organized olderly and robust way. You will need data. I mean, just like always in finance and investment data is King. And if you don’t have the right set of data to make those kinds of investment decision, [01:05:00] then you would just keep on, you know, making blind decisions that are not based on facts and you would keep replicating the same mistakes.

[01:05:08] So we need to put in the hands of the financial industry, a very rubber set of data. On the impact of companies so that when you decide that this company as overall a positive impact on society, this is you know, this is backed by facts and evidence and spouses. And again, it’s not easy, it’s complex because companies engage in a number of [01:05:30] operation.

[01:05:30] Then their, their impacts might be very positive for one community and very negative for another one. So it’s a very complex question, but it’s a very crucial question to answer if we really want to You know, to, to transform the economy and make sure it is actually benefiting the the common good and given the size of the challenges we all face with.

[01:05:48]Us or kids and everyone on that planet climate change is just as a small, a smaller, those challenges. I mean, there’s many more coming after that, the biodiversity, and we see, you know, we saw with the [01:06:00] pandemic, I think there’s, you had one question. I, I had an answer actually, whether the pandemic has accelerated that move.

[01:06:05] Yeah. Definitively because the pandemic is, has been in a way, you know, a way of rebuilding those, those fragilities in many business models, say it also a way of. Of immediately putting to the front, those businesses that bring a, a very high positive value to society. You know, when the societies is being under lockdown, then you get to see who are the guys around you, you know, [01:06:30] that’s T working because if it.

[01:06:31] Don’t work any more than the, the, the, the word stops. Right? So, so that’s a very good way of revealing, you know, what are the the positive value companies and business, and those ones are the ones that are going also to over perform. Economically and financially in the, in the years to come because they will they will, they will benefit from from that interest from investors, from consumers, from governments that we get more support.

[01:06:53] And the one that are not going to that direction are going to face, you know, increasingly you know, negative wins by being to [01:07:00] to to prevent them from growing, from being a good financial performance. So, so the correlation between impact. And risks and returns you’re going to increase. And my view is that You know, people of my generation, we were born and grown in the world of investment with a two dimension word, which was risk and return people of my parents’ generation, actually, when they went into the investment community, they were used to, to deal with only one, one dimension, but was returns, right?

[01:07:27] The risk dimension actually. [01:07:30] Was developed in the 1970s after the oil crisis, when the markets started to be a lot more volatiles and we developed, you know, many tools and, and data to measure the volatility and those risks and integrate that. Now it’s really about risk and return. That seems to be like the norm for people of my generation, but in five to 10 years, You know, if they will look at us and say, you know, how could you not just look at the impact as, as, as, as a major driver for performance.

[01:07:55] And and I think we have now already enter that, that new word where investment is [01:08:00] about risk return and impact and adjust returns around those three dimensions.

[01:08:05] Ben: [01:08:05] Nice. That was full of stuff. Sound bites as well. I love that. Yeah. Not just about doing things right, but about doing the right things, you know, that was great.

[01:08:12] Great stuff. Okay, Chris last question for you. So we’re gonna have two more questions. One is for you Chris, very quickly, which is so Dimitri talked about culture and he’s he’s also, you know, he’s also talked about the technology advantage that, that Tinkoff bank has, is it technology and culture that stops incumbents from being able to [01:08:30] adapt as quickly as new entrance?

[01:08:31] Or do you think there are other factors at play as well?


[01:08:37] Chris: [01:08:37] I think that I would not say that it was primarily technology and culture. I think indeed there are some other factors. So for me, one of the main differentiating factor when I look at who is acting and who is waiting. It’s basically the incentive model on the decision-making level, you can argue that this part of culture, but I would also argue that’s part of the incentive model.

[01:08:59] So [01:09:00] if you are there, for example, if you are. In a company where you are there for them as a decision maker for the next 10 to 15 years, then you are much more likely to act. Then you are. Then if you’re in a company where you actually start planning your retirement and we all know the technology shift comes with risk and I think.

[01:09:18] If someone tries to ignore that, that would actually not be a fear. So every change of a business model and every change of technology, which is part of the change of the business model comes with a certain risk. [01:09:30] And I, I do understand every decision maker who tries to evaluate this risk also from a personal perspective.

[01:09:36]And for that reason, I think that’s one key driver. The second key driver from my perspective is from, for the last 20 years or even longer, technology was not seen as a strategic component when it comes to financial business models. So for quite a while, for example, one, one very simple example.

[01:09:56] I’m also the chairman of the advisory board of the ministry of finance in Germany. [01:10:00] And one of the first things we actually did is we made it help, make it easier for us. People was a tech background to become a board member at a regulator company, because usually all the regulation is optimized in order to make sure that the decision-makers have the financial knowledge.

[01:10:17] And for example, I able to do the credit reassessment or do in the case of an asset manager, do the portfolio management. But there was basically no benefit of having a technical background, rather the opposite of what rather hard for you. [01:10:30] And so for that reason to pick up the technical techno point of yours were on in the second or third level of the organization, and usually only done after the bot already made the key business decisions.

[01:10:43] But if you look at something like the PCIs mandate I don’t know if all of you and or everyone in the audience is familiar with the end. The business mandate for is roughly 20 years old. Now it falls every developer at Amazon to make sure that every service is programmed in a way that it [01:11:00] can work with every other service.

[01:11:02] So today we call that microservice architecture in its core and also accessible for, for third parties. And I would argue that’s one of the reasons why AWS is as successful as they are. In the bank, typically the relations were of no interest and product complexity. Increasing technology complexity was not considered at all as a challenge or being able to update later on was not considered at all a [01:11:30] strategic question.

[01:11:31] And so from my perspective, I would more focus on what is the incentive model for the decision-maker. What is the core competencies on the decision level, body? Decision-making body and how it is regulator impact. Also things like this where I think we need to change that. Then a third level is driven by actually the first tool, understanding technology as an opportunity.

[01:11:56] So not only a, and this is something we discussed earlier already. Not only [01:12:00] think about it as something which helps me re reduce cost in my current model or help me increase efficiency in my current model, but rather opening up new opportunities. So how can I basically enable new things by, for example, being a trusted party across different business fields, or by working together easier in an ecosystem and having this view And then from my perspective, you end up with with actually a much more agile organization and taking [01:12:30] the right steps was more, much more high, much higher likeness.

[01:12:32] And we all know strategy, strategic decisions are always decisions on that uncertainty, but you improve the likeliness of being white.

[01:12:40] Ben: [01:12:40] Fantastic. Christine, last question comes to you and to some extent is to slightly redress the balance, right? Which is, we’ve talked about some of the challenges or obstacles that the incumbent organizations have when it comes to innovation.

[01:12:51] So having the right skills on the board, you know, challenges around incentives, challenges around culture, technology, debt, all these things that we’ve been talking about, but [01:13:00] where are the big advantages where we’re doing? Cumbents have. Where can they bring sort of, you know some of the existing advantages into the new world to help them to be more successful.

[01:13:11] Great.

[01:13:12] Christine: [01:13:12] Thanks a lot, Ben. Fully agree with what Chris has said. First, we need a mindset. Change. Technology is strategic. It’s a strategic component and it’s an opportunity as well and opportunity for growth for an economy. Now on top the incumbents have the [01:13:30] clients at the moment. They have an existing client base often have a large existing client base and can serve them better.

[01:13:37]If they do the next generation, that’s an F if they do the next generation link successfully, they would have some Ella have, then the next client base, if they’re not already a banking somewhere else. So that that’s the first one. We all know that customer acquisition costs are very, very high for new entrance into, into the wealth management market.

[01:13:58]The second is [01:14:00] they have the existing customer acquisition channels. So they have established channels bead through advisor B through other channels and they can target either in person or hybrid on the existing clients side. Now with an omni-channel model, you as well can address prospects on top of your existing clients, but also simply interested in your company.

[01:14:25]People. And the third one is, and I never thought that we’ll [01:14:30] mention that, that way. Honestly, it’s, it’s the trust and the brand and the regulated for the next decade or century, you’re here to stay. So whenever it’s, it’s getting, it’s getting shaky in the markets and we had a fantastic, fantastic run retail investors are in the market and are trading.

[01:14:48]We will, at some point, see after that asset inflation, we have seen setbacks. So the banks, they have dull and boring brick and mortar. They have a balance sheet, they have a huge report. [01:15:00] They have equity, they have liquidity on the balance sheet. As I said, they’re regulated for the next century. Which, which is trust and brand.

[01:15:08] If they get the order two things, right. Which is the mindset change. No, it’s not the place to wait for your pension. It is the place where you need to change the company you’re running and make it fit for the next decades. And secondly, technology strategic. And I think then they’re nicely positioned, but

[01:15:30] [01:15:30] Ben: [01:15:30] I say, yes, No, sorry, sorry.

[01:15:35] I didn’t let you finish. Sorry, Christie.

[01:15:38] Christine: [01:15:38] I think if, if that, if they get that combination or that, then they can avoid the, the risk that they have, which is that the change is a gradual until it was sudden. So then need to act now.

[01:15:53] Ben: [01:15:53] Fantastic. Okay, bye. So fortunately we’ve we’ve run out of time. So I just would like to say thank you to our four [01:16:00] panelists.

[01:16:00] I think we’re very lucky to have four such interesting speakers from four such interesting companies. And thank you for the lively discussion. And thank you also for answering all the questions that we didn’t have time to, to, to put you life. So Dimitria in particular, thank you for answering all those questions you’ve been getting, and we’ve been getting loads of good feedback.

[01:16:17] So I don’t know if you’ve seen bear Tron, but you just had a kudos. For impacts Andrea. And and then lastly then just to thank you all, everybody who, who listened life, thank you for, for interacting with us, for your questions, for your [01:16:30] comments, for completing the polls. And for those of you listening after the fact, thank you to you too, for watching the recording and then look out for the next four by four.

[01:16:39] So we’re the next one we’re already pulling it together. It’s going to be on talking about crypto. Whatever it is now really a true investible asset. So look out for that and thank you again for attending and participate.

[01:16:52] Chris: [01:16:52] Thanks for the invite. Thank you.


A new approach to enterprise software analysis (and why we launched The Market Map)

Introducing The Market Map for Wealth Management Software Solutions, a new approach to evaluate technology solutions in the digital age.

When was the last time you went into a branch (even pre-COVID)? Or the last time you paid for something in cash?

Financial services have been gradually digitizing for years. It started with digital distribution of existing services. And then the services and service providers started to change. Who still uses their high street bank for FX payments or for buying stocks?

We’re now moving into a new phase where, now digitized, financial products are going to be more and more embedded into other services – either tightly, like payments within the Uber app, or just bundled together for convenience like in super apps.

But while the industry is undergoing this paradigm shift, the way we evaluate the enterprise software on which it runs remains unchanged.

At best, the conventional analysis is becoming increasingly irrelevant but, at worse, it is steering decision makers towards systems that are not fit to address their changing needs.

So we’ve decided to shake things up. We’ve written a report explaining in detail how wealth management is changing as a result of digitization and, as part of the report, we launch The Market Map, a new criteria for evaluating software solutions in the digital age.

Here’s why we think enterprise software analysis is broken and a look at how a new approach would produce radically better results.

From supply to demand

When we talk about digitization, we invariably focus on technology itself, specifically how far it has advanced. But its more significant — and often overlooked — consequence is that business models are also changing.

If the industrial revolution solved the problem of supply and made economies of scale possible, the digital revolution is turning the supply-demand equation on its head.

Supply is no longer an issue because, most of the time, sourcing, distribution, or both can be digitized. Even where creating economies of scale isn’t feasible, the proliferation of as-a-service tools means you can borrow them at a reasonable cost.

Instead, it’s now demand — or, more specifically, customers’ attention span — that’s in short supply.

This shift from supply-side to demand-side economies of scale has far-reaching implications. Mass consumerism is falling out of favour because, with supply abundant, customers don’t have to settle for a limited selection of highly standardized products or services in exchange for affordability.

On the contrary, they now expect to be treated as individuals, and will vote with their feet if their needs aren’t met.

A vicious cycle

If individual consumers are embracing their newfound power and demanding more tailored experiences, enterprise clients — particularly in the financial services space — are yet to smell the (small batch roast) coffee.

Digital transformation has been one of the financial services industry’s top priorities for several years. And Covid-19 has only made the need for it more pressing. But the business models underpinning most firms have remained largely unchanged, in that they’re still predicated on mass production.

The result is that firms tend to approach vendor selection in an anachronistic way. And the system is self-perpetuating.

Procurement teams’ requirements are rooted in supply-side economies of scale.  At the same time, the businesses who evaluate enterprise software need to appeal to the enterprise buyer. So, their reports give importance to the criteria procurement teams look for, even though these aren’t necessarily the criteria that matter.

And the cycle continues.

Size doesn’t always matter

The way enterprise software analysis is currently done has two major flaws.

For starters, many reports are directly or indirectly pay to play. Right off the bat, this creates an economic barrier for smaller vendors.

More significantly, even where the economic hurdle can be overcome, vendors may still be let down by the methodology. This is because reports tend to rank on criteria that make sense from a supply side perspective rather than the demand side.

Consider size.

On paper, staff numbers, office locations, and annual revenue are important, because they’re the mark of a financially viable, trustworthy company. In a tightly regulated industry where the stakes are sky high, it’s understandable that firms would prefer an established firm over an untested upstart.

But when it comes to the actual job of launching a new business model, do these numbers matter?

Probably not.

Take revenue. In an on-premises or single instance scenario, whether a vendor makes $5 million or $500 million a year has little significance aside from, possibly, indicating they have more resources to put into R&D.

But bigger R&D budgets and capabilities aren’t as beneficial as you might think. On-premises and single instance upgrades are time-consuming, expensive, and, as a result, infrequent. And in an era where APIs make integrating highly specialized tools quick and easy, it may actually be a disadvantage for software to have a wide breadth of functionality.

If anything, with 80% of digital transformation projects doomed to fail, the bigger risk is investing time and money and undergoing a disruptive implementation phase only to find out your chosen software isn’t fit for purpose.

Of course, this is not to say size never matters. Having a large number of clients is extremely important where a vendor is able to leverage this customer base to externalize network effects by, say, training a common AI model or aggregating services that are useful to the network.

But to deliver these kind of demand-side economies of scale requires a modern technology architecture, which can orchestrate interactions across a network. A lot of older vendors, with higher revenues and more employees, don’t have this.

From one-stop-shop to best of breed

When packaged software became commercially available, it was a vast improvement on what banks were working with.

Before there was an IT industry, banks wrote their own apps in-house at considerable expense. In comparison, packaged software met most of their functional needs and ran on cheaper hardware.

Better still, changes could be applied easily, so the ongoing run-the-bank costs were lower, while it was possible to launch new products much more quickly than in the past.

But, the move to SaaS has changed the landscape entirely.

SaaS is more than just a new delivery model. It has changed the plane of competition. When integration was hard, having monolithic systems with broad functionality was a competitive advantage. Now that integration is less of a concern, the focus has changed to software architecture and the quality of both (narrower) functionality and the user experience.

There are many second-order effects. One is the possibility to circumvent the enterprise buyer to sell simpler and better solutions bottom-up directly to the end user. But another is the move to best-of-breed.

If integration is easier, why would an enterprise buyer not want to source the best functionality, rather than take it all from a single application? This again can make breadth of functionality actually a disadvantage, rather than advantage.

The logical play for incumbent software solutions is to become the bridge to these best-in-class applications, but many applications don’t have the capability or the vendors fear the risk of cannibalization. Either way, this is not something that most software evaluations even consider.

New business models

In the same way as vendors need to start thinking about changing their business models, so do financial services providers.

They similarly need to think about demand aggregation, supply aggregation (becoming a platform) or focusing on the plethora of underserved or overserved customer demographics that can now be reached directly through digital channels.

However, to be able to do, requires them to have different technology solutions. For example, they might need to aggregate multiple (non-financial) data sets or deliver services over third-party distribution channels. But, again, these are not criteria in most evaluation reports.

Introducing the Market Map

So, we have launched a new methodology for evaluating software solutions. It starts from the assumption that, now or in the future, financial firms will need to do more than routine innovation. That is to say, to survive and thrive, they will need to move beyond just distributing existing solutions to existing customers over new channels.

Financial firms will need to undertake non-routine innovation.

Since non-routine innovation is a function of capacity for technology innovation and capacity for business model innovation (and normally both), these are the key criteria we use in our evaluation methodology.

Better outcomes

The way enterprise software is analyzed and evaluated is bad for everyone.

Vendors with exciting products are missing out on growth opportunities. Enterprise customers are missing out on potentially transformative technologies. And analysts are spending time putting together reports that are out of sync with their clients’ needs and, so, ever more valueless.

Clearly, enterprise software analysis is broken. Our bet is that changing the methodology will encourage the industry to embrace tools that, though not fitting the traditional mold, unlock more value at lower cost and allow them to get better at what really matters in the digital age: delivering better services at greater scale.


The Market Map |
Some surprising results

We get very different outcomes compared to conventional evaluation studies. A lot of smaller vendors rise up the rankings thanks to advanced technology and flexible architectures. And for incumbent software vendors, it clearly distinguishes those that have kept up with technology change and those that haven’t.

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Democratization of Wealth Management

4×4 Virtual Salon featuring: Sid Sahgal, Nikolai Hack, Qiaojia Li and Michael O’Sullivan.

Lively panel discussion featuring:

💭 Sid Sahgal (Product Manager, Hydrogen)
💭 Nikolai Hack (Head of Strategy & Partnerships, Nucoro)
💭 Michael O’Sullivan (author “The Levelling”, ex-CIO Credit Suisse)
💭 Qiaojia Li (CEO of Rosecut)

We discuss:

  • Changing consumer trends
  • Changing technology
  • New business models
  • New fitness landscape for wealth managers

This webinar was the first of two discussing some of the key trends from our upcoming report on “Digital Age Wealth Management“. For the next 4 x 4 Virtual Salon, we’ll be double-clicking on the topic of “New business models in wealth management“.

That will be on 18 Feb at 12 CET/11 UK/19 SGT and we’ll be joined by Chris Bartz, CEO of Elinvar, Christine Schmidt, Head of Strategy at additiv, Dmitri Panchenko, Head of Investments at Tinkoff Bank, and Bertrand Gacon, CEO of Impaakt. Sign up here. You won’t be disappointed.

Want to learn more about our enterprise software analysis methodology for the digital era?

Look out for the first report in our series, which will tell you everything you need to know about analyzing software for the wealth management industry. Coming out on February 16th, 2021. 

Register your interest by leaving your email address below.

A Long View of Banking Industry Disruption (#36)

Structural Shifts with Marc RUBINSTEIN, former hedge fund partner and author of the Net Interest newsletter.

We sit down with Marc Rubinstein, a former analyst and hedge fund manager who currently authors Net Interest — a weekly insight and analysis newsletter on the world of finance. Each note of his newsletter explores a theme currently trending in the sector, whether it’s FinTech or economics, or investment cycles — and today, you are going to hear about a little bit of everything. Marc and Ben Robinson discuss the history of equity research and where it’s at now, whether current regulation is tilted too far against banks, the twofold challenge facing challenger banks, the past and future of embedded banking, the four key differences between investing in private companies versus public, the potential financial services game-changers that could happen this year that people are not talking enough about, and more. 

Full transcript
Structural Shifts with Marc Rubinstein

There’s a lot of overlap between what a very, very good equity analyst does and what an investigative reporter does.

[00:01:26.21] Ben Robinson: So, Marc, thank you so much for agreeing to come on the Structural Shifts podcast. We’re a really, really big fan of Net Interest and so, we feel very, very privileged to have you on the show. If you don’t mind, can we start by you just briefly introducing yourself and giving us a short summary of your career so far, just because I think that will be relevant. I think we can use parts of your career to frame some of this discussion.

Marc Rubinstein: Sure. Well, no, thanks, Ben. It’s great to be on. I’ve been in the realm of financial services for 25 years. I started as an equity research analyst, analyzing banks — I spent 12 years doing that — I spent 10 years investing in banks as a partner of a hedge fund exclusively focused on financial services, stocks globally, publicly-traded, long and short. And then since 2016, I’ve looked at financial services out of sheer interest. It’s something that it’s difficult to shake off. And so that’s basically it in a nutshell.

[00:02:22.07] Ben: Good. Okay, so we’re gonna pick up on different aspects of that. But I wanted to start with the equity research part because one of the newsletters I’ve most enjoyed — I mean, they’re all brilliant, but one of the ones I’ve most enjoyed just because it had personal resonance for me because I was once an equity researcher — was the one where you talked about the history of equity research. If you don’t mind, maybe you can just talk a bit about how sell-side equity research works, because it’s kind of a strange model where, you know, fund managers have access a lot of times to internal research, but yet they source it from a third party; that third party doesn’t charge directly for that research. So it’s kind of a strange model. So if you don’t mind just talking about sell-side equity research, and also how it’s changed, right? Because I think, you know, if I were to put it crudely, it’s gone from a really well-paid, really highly-solicited job to something which is not that anymore, right?

Marc: So, I started out as an equity research analyst in the mid-’90s. And I was not particularly familiar with it as a professional opportunity. It wasn’t something that I, at college, realized that it’s something that I wanted to do. I wanted to go into finance and I participated in a graduate training scheme at a bank — Barclays Bank — it was an investment banking subsidiary of Barclays at the time; and went through various placements across the bank, not dissimilar to the way graduate training programs work today. I do need to say though, any listeners that have watched the series industry, it was nothing like that. But I ended up in equity research and spent, as I said earlier, 12 years there. Now, the way equity research was conducted then was very, very different from the way it was conducted prior to that, and the way it’s conducted today. Equity research emerged in the 1960s, 1970s as an add-on to the core brokerage business that brokers offered their clients. At the time, commissions were very, very heavily regulated and the only way to compete was through ancillary services. And so, brokers offered equity research as one of those ancillary services. They gave it away for free. It was a marketing device in order to attract brokerage business. And that was the case when I entered as well. At around the time — so, we’re going into the ’90s, into the late ’90s and early 2000s — another side of the investment banking business was booming, and that was M&A — an equity underwriting. It’s very topical now to go back 20 years and look at the tech boom of ’99–2000s, given the conditions we’re currently seeing today. But the way it worked back then is that companies would want to IPO and they would choose their investment banks, not dissimilar today. And one of the features that they would look for in selecting their investment bank was the quality of the research that that investment bank produced. And so, rather than exclusively being an ancillary business to the trading business — which was the case, historically — increasingly research became an ancillary business to banking, as well. And as a result of that, equity research attracted a new revenue stream and was, therefore, able to grow. And in the late 1990s, this business of equity research grew, costs increased, a superstar culture emerged.

The markets are not efficient, and Signal and Zoom are great recent examples of that. And to the extent that they’re not efficient, research does have value and those inefficiencies typically emerge the lower down the market cap curve one goes.

Marc: The piece that you referenced, I talked in there about a telco analyst who worked at Smith Barney in New York, called Grubman, and he wrote on telco stocks like AT&T, and he was coerced by his boss, Sandy Weill, who was the Chief Executive at Citigroup, to rethink his view — it’s kind of a euphemism for upgraded to a buy — on one of the stocks under his coverage. The 2000s came along, Eliot Spitzer, who was the Attorney General in New York, took a view that actually there was a massive conflict of interest at play here and he tried to dismantle that construct within equity research. The problem is that the cost base was still there and the cost base didn’t have now a revenue stream to attach to. And so, you had like an orphan kind of wandering around looking for kind of a foster family; this cost base was looking for a new revenue stream. For a short period, it stumbled upon proprietary trading. So, the period between 2001 probably, 2006, 2007, investment banks built very large prop trading businesses, internally, and equity research was a feeder mechanism for some of the ideas that they would put on. And then, the financial crisis happened and that business disappeared as well. Ultimately, that was also dismantled by regulators through Volcker amendment to the Dodd-Frank Act of 2010.

Marc: So, throughout this entire history, you’ve had this kind of valuable resource — inherently, experts looking at companies and issuing investment recommendations through the process of research on those companies. Yet, in and of itself, it was a business that found it very difficult to reflect a model that was able to pay it sufficiently. Which brings us to today and you’ve had another bout of regulation — this was in Europe about three years ago — in 2017, you had MiFID II, which required an unbundling going all the way back to the ’60s, where this process started, where research was ancillary to trading, regulators in Europe came along and said, “Actually, there’s a conflict inherent in this as well.” Certainly in the degree to which it paid for by institutions, and yet again, the business has gone through a kind of an identity crisis. And that’s really where we are today.

[00:08:35.08] Ben: If you like, it’s been sort of hammered by three waves of regulation, right? So, first, Eliot Spitzer, then Volcker, now MiFID II. One of the things that’s changed is you said, I think in your newsletter, you talked about how much Grubman made, right? I think he made like $50 million or something in the space of a few years, which would be unheard of now. So, you know, payback has gone down. But the other thing that’s notable is the amount or the volume of equity research, which has dramatically changed. I mean, you talked about go-to Credit Suisse, an investor meeting, they were like, you know, hundreds of analysts there. I remember, you know, going to SAP investor meetings, there would be 100 plus analysts in the room. And so, clearly, we went from a situation where there was oversupply — do you think we’ve tipped to the opposite situation where there’s a lot of undersupply, particularly of smaller cap stocks?

Marc: For sure there is an idea that there’s an undersupply research out there, that a lot of it is being certainly a shakeout within the industry. Now, it was arguably overpaid, to begin with — and certainly Grubman, did he merit the millions of dollars that he accrued? Probably not, almost certainly not. Possibly not from a compensation perspective, but from a resource allocation perspective to the industry, we may have under shored on the other side. And it’s not dissimilar. Maybe the analogy here is the media, is the press and actually there’s a lot of overlap — and I draw this out in that piece — between what a very, very good equity analyst does and what an investigative reporter does. And there’s a public service here, there’s a public good here. You know, certainly what the research analysts were doing — so Wirecard, very well-known fraud. Interestingly, the credit, rightly so, for uncovering that fraud has gone to a journalist, Dan McCrum from the Financial Times. But there are other cases, and certainly, there were a couple of analysts. Some of them didn’t cover themselves in glory, but there were a couple of analysts who also got that right. And there’s kind of a public service to looking independently, without being influenced by the companies themselves and the management of those companies, nor by other constituencies, for putting out independent research on companies, for doing their job.

[00:10:49.16] Ben: It’s interesting that you call that public good, because it suffers from the same shortcomings of a public good, in the sense that it’s difficult to exclude access to that research once it’s in the public domain. And it doesn’t stop you from consuming. In many ways, it does have the properties of a public good, which means it suffers from the free-rider problem and in general, sort of under-provision.

Marc: Absolutely right. And in addition, it’s difficult before the fact to know if it’s any good or not. Clearly, the analyst report that said that Wirecard was a fraud, after the fact we know was very, very valuable research. The report, which would have arrived on the same day, on the client’s desk which said, you know, Wildcard is a great company and it’s got huge upside — again, after the fact we realized it’s got negative value. But at the time, the decision rests on the recipient to discern between those two. And that’s not easy. And it’s not easy as well, to know ultimately, where the value is, in this. There’s a lot of noise out there.

[00:11:53.12] Ben: I want to come back to Wirecard in the context of, you know, bank regulation, and whether it’s a level playing field. But just on this idea of, you know, perhaps under-provision of research. Do you think that creates arbitrage opportunities? So, for example, do you think it’s now easier to create alpha investing in small-cap stocks? Because there’s a high return on doing that research yourself, whereas before, that was not the case.

Marc: I think, yes. So actually, just recently, there’s two companies called Signal — Elon Musk tweeted quite recently that one should be buying Signal, he was a big proponent of Signal; readers picked up the wrong Signal. Actually, early on in the pandemic, the same thing happened with Zoom, there were two Zoom companies. The point here is, you know, the markets are not efficient, and Signal and Zoom are great recent examples of that. And to the extent that they’re not efficient, research does have value and those inefficiencies typically emerge the lower down the market cap curve one goes.

It’s incredibly difficult for any investor to change their mind.

[00:12:57.18] Ben: There’s a quite high proportion, certainly relative to, in the past, small caps that no longer have any sell-side equity coverage, right?

Marc: Yeah, that is right. And it’s not great, either. Now, the flip side is that some of it has shifted over to the buy-side themselves. That was a trend that was already in place from the institutional perspective. But what we’re now seeing because of the ability to share ideas more freely, through the internet and platforms like Twitter, and also dedicated platforms, like Sub-Zero, and the ability for individual investors or smaller, emerging institutional investors to get access to infrastructure — maybe they can’t afford Bloomberg at $24,000 a year, but they can afford other apps and other facilities — more research has been generated. And you know, actually, this brings us back to the model, it is quite interesting. So, the old research model was ‘we’ll give it away to everyone for free and we’ll attract some revenue dollars through trading commissions’. More recently, post-MiFID II, that translated into, ‘we will just service, say, the top 100 customers who are prepared to pay for it’. There’s a trade-off now between generating thousands of dollars from 100 customers or via the internet, particularly where the market might be individual investors who… And whether this is cyclical or secular or not, at this stage, I don’t know. But certainly, retail engagement in the market is increasing. They’re not going to pay thousands of dollars for institutional research but the quality of what’s available on the internet is very, very high, and maybe they’ll pay $20, $30 a month, and tens or hundreds of thousands of those… You know, there’s a good newsletter writer called — there’s a number of good newsletter writers out there, but a number of them, they offer, in my view, institutional-grade research, particularly in the technology space, and they charge $10, $20 a month for it. But they have hundreds of thousands. And I actually would be interested to see their p&l against a traditional equity sell-side research business, given lower costs and broader reach.

[00:15:21.13] Ben: I was actually gonna highlight this as a second arbitrage opportunity, which is one might be there’s more potential to make money from small caps than there was in the past, but the other one is, I think — you know, I don’t want to suggest that this is the model for Net Interest, but a bit where you can almost crowdsource almost as good or maybe even better, in some cases, research from the internet, which is, you know, the sort of the bottom up, you know, kind of organic production of research to fill the gap. Because, I agree, and you see the same thing also in investigative journalism and other content areas, which is, you know, your choices are either to pay a subscription for the FT or to subscribe to newsletters, right? Because these things are sort of mushrooming. And, you know, I mean, that’s another phenomenon in the way that you’re embodying, which is you publish your newsletter on Substack, and in some ways, you’re kind of contributing to this gap that’s been left as equity research has become or is provided to a lesser extent than it was in the past.

Marc: Yeah, I think that’s right. And, you know, it comes from just this, I don’t like the word ‘democratization’ that people use, but it certainly plays into our theme. You know, clearly, the advantage that… And I remember when I was an equity research analyst, it was at BZW, which you mentioned, which was a subsidiary of Barclays. And I was looking at Swedish banks in 1996. They kind of emerged from a crisis, they’ve been re-privatized, they’ve been re-IPOed, and there was kind of a recovery theme in a way. And I stumbled upon — it was kind of the early days of the internet, we had access to the internet, but what was on there was difficult to find. There was no search, it’s kind of the days before Google. And I kind of stumbled across a document written from the Central Bank of Sweden, the Rik Bank, which provided very interesting data on kind of banking volumes. It was faxed to me by somebody in Sweden. I literally, I was working at home, it was a Saturday, I was working at home. I couldn’t read it because it was Swedish. Google translate didn’t exist. I ran around to my local bookstore, bought a Swedish-English dictionary, translated this thing, put out a piece of research on this finding that actually loan growth in Sweden, based on this data was greater than anybody anticipated. And it was it. I stumbled across something purely informational. And clearly, the friction to getting that information now is just non-existent. Everybody has all of the information all of the time hence, there’s no arms race in place to get new sources of information. Kind of alternative, dangerous nets. But you know, that’s all done. What’s happening now is the same thing is happening to analysis. Now, people, again, through the ability to meet in the market square via whether it’s Twitter or any other kind of platform, there might be a great analyst who’s based in… I mean, I know there’s a great equity research analyst, who I read called Scuttleblurb, he is based in Portland, Oregon, far from Wall Street, and there are people just all over the world in India, in small towns in England, all over the world, all analyze it. So, they’ve got the base level of information and the degree of analysis they’re doing now is institutional grade, and it’s accessible.

[00:18:50.08] Ben: It was just before the financial crisis that you switched from being a sell-side analyst to working for a hedge fund, if I’m right. Presumably, that was a great time to have the ability to go short on banks. And I just wondered, you know, when you were living through it, how evident was it in advance of the crisis that it was coming. Could you presage that, you know, we were gonna have this big crash, or was it really as sort of sudden and unexpected to you as it was for the people that weren’t as closely following that?

Marc: It’s a really interesting question. It would be easy for me to say yes. I would say the way I would finesse it is yes, we saw elements of it. But it’s important to remember, somebody once said, ‘causes run in packs’. There’s never a single cause. I think it’s lazy analysis. And I see it and often politically motivated for people to say the financial crisis was caused by x — and x typically correlates with one’s political inclination. X could be, you know, greedy bankers, or x could be people borrowing too much or x could be sloppy regulation or x could be too much leverage at the banks or whatever it might be. There’s a whole range of reasons. And ultimately, it was the confluence of lots of those things that happened to create the crisis. Although we — me and my colleagues — identified some strands of it to have predicted the degree to which it all coalesced, you know, in kind of, you know, let’s say, October 2008, I think that was difficult to predict. But that’s never… There’s complex reflexivity to it. It happened, I remember watching, I vividly remember watching the debate in Washington around passing the torpid. It was controversial. And I remember specifically it went down. But because it went down, the market went down, and so, reflexivity because the market went down, then when it came back for another reading because the market had gone down, incentives have shifted. Predicting kind of reflexivity in advance is difficult. Having said that, the worst things we saw. So back in, you know, we were short. I mean, back in 2006, we were short some subprime companies. I went back through my — I’m not a Facebook user anymore but when I canceled Facebook, I downloaded all of my posts, and there was one post in July of 2007, where I cautioned about an impending financial crisis. We were short, Fannie and Freddie, and all the rest of it. Just an observation about investing broadly, and, going into more detail on the crisis, but investing broadly, it’s incredibly difficult for any investor to change their mind. And I think there were a number who were negative; a lot stayed negative beyond March 2009. But the fascinating thing to me is those that there were kind of negative, and then they switch positive. And just taking a step back away from financial services, but generally, investors’ ability — the very, very best investors, their ability to adapt to changing conditions like that, continually, it’s very, very difficult. And I think, you know, history is littered with investors who have got two or three calls right, but to be able to retain an element of persistence, through those changing dynamics, it’s very, very difficult.

[00:22:38.06] Ben: Yeah, I think it could be a rabbit hole but I would argue almost that potentially the greatest of all investors, Warren Buffett, has not been able to adapt this strategy to some extent to the digital age, because he’s still buying sort of, you know, asset-heavy companies with a lot of supply-side, economies of scale, and so on. So I think it even happens to the best when there’s a paradigm shift.

Some of the consternation of bankers right now is that tech companies are getting away with stuff that they just wouldn’t be able to get away with.

Marc: True. And to our conversation earlier about small cap, large cap, I mean, certainly, his performance hasn’t been as good in the recent past, compared to prior periods in his history. And he’s got longevity, very difficult to compare him to any other investor, because I’m not sure there’s any track record out there that’s as long as his. But he made the point recently — he actually made it ’99 — he made the point, there’s a great quote in ’99, where he was talking about if he had a million dollars to invest, you know, he’d crush the market because of his ability to access small cap, but it could be a reflection on your point as well.

[00:23:36.10] Ben: It might be both because you actually wrote another great newsletter about the curse of managing too much money — it becomes harder and harder to achieve a return on much bigger sums.

Marc: Yeah, exactly. That’s another curse — I call it the Zuckerman’s curse. Gregory Zuckerman, who’s a great writer, has written a number of books about — he’s written two, in particular — hedge fund managers. And they’ve been published. Clearly, he’s been attracted to them because of their profile, and their profile is a function of their performance. And therefore, there’s a direct line between them showing good performance and him writing a book. Actually, there’s more nuance to that. It’s not them having good performance, is them having good performance and being big enough for him to notice. One of my favorite investors out there is Hayden Capital. A guy called Fred Liu, based in New York, was up 222% last year, but he’s small, nobody knows of him. And the curse is that over a certain size it’s difficult to sustain that performance on an ongoing basis. Actually, it’s worse than that because typically, after a good year, the money then comes in. And investing isn’t mean reverting but certainly, there’s an element of… It’s only as difficult to sustain very, very good performance across multiple time periods.

[00:25:05.17] Ben: Do you know what Zuckerman’s next book is about? Just so we know in advance.

Marc: That’s a good one. I feel bad because I’ve read them all. I mean, they’re great books. It’s the writing on the wall.

[00:25:20.11] Ben: I’m gonna ask you, a bit like the financial crisis question I’m gonna ask another question, which is gonna be, I think, impossible for you to answer in retrospect, without any sort of cognitive biases, and so on. But you wrote another newsletter, which I really, really liked, which was called “The End of Banking”. How obvious was it now, in retrospect, that post-financial crisis, financial services was just not going to be the same again, right? Because their profitability is not the same. It doesn’t represent anywhere near the same size of, you know, as the composition of the index in which it sits. And so, it just seems like the financial crisis in a way was like, you know, the peak. And you know, maybe as you said, this may be cyclical, it may be that in the future, it becomes as big as it was and as profitable as it was. But certainly, it seems much more structural, for the reasons I think we can talk about now. But when did it become evident to you that the sector becomes structurally less sexy in a way?

Marc: I’ll be honest with you, it took me a long time. My mental model — I mentioned Swedish banks earlier — my mental model was that banks — and this has been true historically, and in my working memory through the Swedish banks, they went through a period of crisis, they’d be recapitalized, they’d come back to the market. Typically, they’d be a lot more conservative and so, underwriting would be tighter. They would then generate huge amounts of capital and then recover. There was a singularity inherent in the industry. They would crash, they’d be recapitalized and then recover. And that was my mental model. I remember at the time being told — we talked about the tech boom from 20 years ago, ’99–2000. We’ve talked about that already. I remember in 2010, 2011, a strategist who’d experienced the tech boom — I mean, I experienced a tech boom as well but I wasn’t directly involved in it — I remember a strategist at a bank saying to me, “The market has to cycle through a generation of investors to forget what happened, to forget the scars of the previous crisis for any kind of return to normality.” And I didn’t believe it. I said, No. You know, so I was sanguine about the extent to which the market recovered. I underestimated a number of things. I underestimated one, how low-interest rates would stay for how long. Two just the… You know, and I often think, actually, for the investment banks, worse than 2000 for them, and their long-term from a strategic perspective, worse than the experience they suffered in 2007–2008m how well they performed in 2009, hurt them longer term from a strategic perspective more, because the backlash was then huge. It was kind of the political disgust, they made so much money in 2009, and that increased the scope of regulation, which muted them for many, many years after that. So, I underestimated regulation, and then we can talk about disruption. It’s difficult. I’m not sure I underestimated that but that was clearly another factor.

[00:28:45.28] Ben: Maybe let’s unpack those things because I think interest rates, I think, you know, we won’t know for a long time if this is a structural or a cyclical factor. But it seems like the re-regulation of the banking is a much more structural thing. As is this one other thing which I don’t know if it’s permanent or not, but you talk about it as governments inserting themselves into the cap table of banks. This idea that they become almost like an arm of government in some ways, right? Because, you know, particularly during the COVID crisis, you know, that we used the direct funding and also, you know, they just don’t have the same control they used to have over capital allocation. So, again, I don’t know if that’s a structural or a temporary phenomenon, but certainly, one of the things that’s been so weighing on bank valuations. But the re-regulation part, I think is probably much more structural. And the question I wanted to ask you about that is, you know, I think we could probably talk about regulation in different buckets. So part was about making banks safer, part was about some introducing more transparency, but the part that I think is now looking a bit kind of controversial in a way is all the regulation is aimed at introducing more competition to banks. You know, so, a PSET, for example, almost seems like that was mistimed because I think what the regulators perhaps hadn’t appreciated because the lag, was that there’s just been so much new competition from non-banking players, right? So I wonder almost in hindsight whether regulators would still introduce some of the regulation they’ve done to introduce more competition into banking because it seems like almost now, not necessary. And potentially unfair. You know in your last newsletter, you talked about that letter from Ana Botín to the FT. And, you know, some of that I thought was quite justified, some of that criticism of recent regulation and the absence of a level playing field. So, it’s a long question, but do you think almost like some of the regulation are tilted or was too far against the banks?

Marc: Yeah, I think it is. I think it’s a truism that regulators typically fight the last battle. And not just regulators. I think it’s a response to, you know, I mentioned earlier, you know, my mental model for the period after the financial crisis was dictated by the last battle, which was the Swedish banking crisis of mid-1990s. So for regulators is the same. They are very, very focused on fighting that battle. And equally, I think it was a truism that whatever the cause of the next financial crisis, it was never going to be the same ingredients to the one in 2007, 2008 to 2009. By the same token, we’re not talking about a financial crisis, here. We’re talking about as you put it out, a playing field. But certainly, the combination of low-interest rates, and a playing field that’s not level was very, very negative for the banks. And there was a degree to which maybe regulators understood that, maybe they didn’t. If they understood it, certainly there was no political motivation to circumvent it, because there was this culture about wanting to punish the banks. But you’re right, you know, this point about they insert themselves, the role of any chief executive of any company, pretty much exclusively is capital allocation. And from an investor’s perspective looking at banks, if they don’t have the capability to manage their own capital allocation because regulators can come in… I listened to a debate recently, between some sell-side analysts, and market participants, and representatives from the Bank of England. And the view of the Bank of England — and I don’t think they’re unique here. I think it’s a view of many regulators that prevented their banks from paying out capital, in March of 2020 was only temporary. But you’ve spoken about scars and the degree to which scars can be left, and from now on, any investor that is investing in a bank understands that at any point, particularly given the capital framework that was put in place to protect banks from unknown. I mean, clearly, a pandemic was an unknown, but that’s what capital is there for. It is there to protect against the unknown. It is not there to protect unknowns, except for a pandemic, or unknowns except… All unknowns, whatever they might be. And so, even with that in place, for them to come in and say, “Actually, we’re going to take charge here of capital allocation” that sends out a very negative signal.

One could have made an argument 10 years ago that banks have got more data, more valuable data. I guess Amazon has got shopping data, Google has got search data, Facebook has got social data, and some overlap between them. Banks have got financial data, and what data is more valuable than financial data? And yet, they’ve been restricted, rightly, from their ability to monetize that.

[00:33:26.20] Ben: Plus, they’d already introduced regulations to ensure that there were more buffers, that you had to protect against losses earlier in the cycle. And so, to some extent, it was almost like a double hit on their ability to allocate capital, right?

Marc: Exactly. Exactly. So we’ll see the extent to which… There’s a view out there that we haven’t seen the worst, that maybe over 2021, when things begin to recover, small businesses will see unemployment. And there’s a view out there. The other thing is, again, a competitive point of reflexivity. Back in March, the regulators didn’t anticipate — to be somewhat fair to them — the degree to which monetary policy would come in, and fiscal policy would come in, but once they had come in, there was a degree of caution that was maybe unwarranted. And again, they might argue, who cares. We’re hurting some bank investors here, but who cares? But ultimately, from the perspective of a bank investor, there’s some long-term issues here. And actually the ultimate bank stop, and it worked in 2009 is that investors, the private sector bails out the banks, the private sector puts more money in because it knows that actually, at this point in time, we can draw a line and that future returns for that bank look positive. It would have been difficult actually, for that to have taken place in 2020, given what had gone on before it and given the things we’ve discussed about regulatory intervention. I think it would be very difficult. The banks have raised capital in the private markets, and that would have been very negative.

[00:35:19.18] Ben: Do you think maybe things might change from here? This is where I wanted to bring in Wirecard because the banks are so heavily regulated now and so closely scrutinized that a lot of the scandals and fraud and impropriety is happening outside of the banking sector in tech companies or shadow banking or areas of shadow banking. Do you think at some point that the regulator is now going to change the direction of, or at least move its focus to all of those companies that are doing banking, but aren’t banks?

Marc: Whether it’s going to happen or not, I don’t know. And actually shadow banking, I mean, I said earlier, I’m going to contradict myself now talking about fighting the last battle. But some of the ingredients of that last battle were in the non-banking sector, were in the shadow bank. Subprime companies weren’t regulated and in the US, different regulatory requirements for thrifts, such as Washington Mutual, who played a game of regulatory arbitrage, choosing to be regulated by one regulator rather than a broad financial services regulator. The investment banks weren’t regulated as banks. Lehman Brothers was regulated separately from… And as a result of the crisis, Goldman and Morgan Stanley became bank holding companies and became regulated as a bank. So shadow banks, this kind of regulatory arbitrage was going on anyway. But you’re right, is going on now. And these payments companies, to all intents and purposes, what a payments company does is not dissimilar to what a bank does. And we saw that with Wildcard, actually. And hence, you know, you mentioned Ana Botín’s FT piece. Some of the consternation of bankers right now is that tech companies are getting away with stuff that they just wouldn’t be able to get away with.

Nobody wants a mortgage, they want a home.

[00:37:23.05] Ben: in every sense, right? In the sense of the same scrutiny, but also, you know, they don’t even have the same level of capital, for example, to do the same business. It’s not just more scrutiny, it’s not just the supervisory level blame for this; it’s actually an operating level blame for this as well.

Marc: Yeah, that’s right. That’s right. That’s right. And the issue here is not about financial stability, per se. It’s about the specific issue that Santander has, and Unicredit has mentioned it, and Jamie Dimon at JP Morgan has hinted at it as well, which is about data. And one could have made an argument 10 years ago that banks have got more data, more valuable data. I guess Amazon has got shopping data, Google has got search data, Facebook has got social data, and some overlap between them. Banks have got financial data, and what data is more valuable than financial data? And yet, they’ve been restricted, rightly, from their ability to monetize that. And I think the issue now is we’re seeing this convergence of data and this degree of consternation about the degree to which the playing field is not leveled.

[00:38:43.00] Ben: And the PSDs bit as well. It’s not just that they have to share data if the customer says that’s okay, is that they’re sharing data with companies that already have, in some ways, an advantage because they’re already more embedded in our lives, right? So, you’ve made the point many times in your newsletters, if you control distribution in the digital age, you know, you’re in a much better position to create network effects and to reduce the cost of customer acquisition and so on, than if you’re a balance sheet provider. And so it’s almost like, it’s a double whammy of sort of thinking you need to introduce more competition and forcing banks to share a really valuable asset with those people that are already better positioned to capitalize on data and distribution anyway.

that combination of Goldman Sachs’ back office, banking as a service infrastructure, with Apple’s consumer-facing distribution and brand value, could be a bigger competitor to JP Morgan than Chime or any kind of startup, FinTech, challenger bank.

Marc: Yeah, that’s right. And banks, certainly some of the starter bank, some of the challenger banks are trying to exploit that idea about distribution. But they don’t have the distribution right now, and that’s obviously an issue for them.

[00:39:41.03] Ben: I’m really pleased you mentioned challenger banks because one of the things I wanted to ask you is, you know how people are talking about this COVID economy is k shaped, right? And the idea that everything digital is booming and everything analog is suffering or faring really badly. And to some extent, you’ve seen that in the world of financial services and FinTech. You know, you talked about Square — which we’ll come back to in a second — as a company that’s really shot up and really found more customers and been able to benefit from the crisis. But challenger banks notably haven’t. What do you put that down to?

Marc: Well, some of them have, actually. So you’re right. I did write. Some of them have. Chime in the US has done very well through this period. But others haven’t. I think the biggest challenge, singularly, that these challenger banks face is their ability to acquire customers cheaply — and the right customers. There’s some question mark as to the quality of those customers, let’s say. And actually, to be fair to the company, the company has provided disclosure in the past as to what the unit economics are, on a customer that pays its salary account into its Monzo account, as distinct from a regular customer that maybe saw their friend has got Monzo, downloaded the app, and maybe actually isn’t even an active user. I guess a problem — maybe is why it’s different from other digital industries — is that there’s a life cycle perspective, whereby the customer becomes more profitable when he’s a little bit older. And yet, digital adoption tends to take place when they’re younger. So the challenge for the challenger banks is twofold. One is, as I’ve mentioned, it’s the ability to acquire customers cheaply. But the second, linked to the ability to capture revenue from them, is can they turn a millennial into — can they extract profitability, which is equivalent to what a typical bank customer profitability might be? Or do they have to wait until that customer gets a bit older, and kind of hits that profitability level, which would be typical in a lifecycle process.

[00:42:11.04] Ben: Let’s talk about customer acquisition cost, because I agree with you, the unit economics are really hard to manage, if you’ve paid loads and loads of money to acquire the customer. It costs a lot to acquire the customer. And then, the lifetime value is somewhat held up — in my view, at least — which is, you know, the ability to sort of upsell and cross-sell customers is hard in banking because we don’t actually spend very much time on the banking apps. And so, we still have this thesis that it’s gonna become much easier to embed banking and other channels than it is to build a really, really profitable banking business going forward. Because, you know, if you consider social channels, for example, or e-commerce channels, we spend a lot of time on those channels. And if you can introduce banking at the point of sale, or if you can introduce banking in a social way, then, you know, first of all, we have a low or even negative cost of customer acquisition, but then you also have the ability to generate very high lifetime value, because you have the customer spending a lot of time on the app, and therefore, you have a lot of surface area in which you drop-sell and cross-sell. Where do you stand on that whole embedded banking discussion?

Marc: Yeah, I think that’s right. I think that is right. I think one of the reasons why payment has been the most successfully penetrated area within financial services by startups and digital propositions is exactly this point that the frequency of payments is infinitely higher than the frequency of mortgage application. So that is right. And I’ve thought about this in the context of insurance, as well as banking, but in both cases, nobody wants a mortgage — there’s no tangible benefit, there’s no tangible value in the mortgage itself. Nobody wants a mortgage, they want a home. And secondary to that is the financing of it. And equally, nobody wants a checking account. Ultimately it is a payments mechanism and they want some facility to serve multiple jobs. One is to preserve their payments. One is as a store of liquidity. One is maybe as a conduit into savings — longer-term savings. But the tangible value of the thing itself is low. And, as you say, therefore, the appeal of embedded finance is very, very high. Now there are issues around regulation, and from a business perspective, the ability to scale, but from a consumer perspective, it makes perfect sense.

[00:44:51.15] Ben: And do you think this is, therefore, the biggest threat to banks over the long term which is, you know, it becomes easier to embed finance in channels that have engagement, than trying to create engagement in banking channels, and therefore, as you’ve talked about this sort of split between what we might call distribution financial services and the, I guess we could call it the manufacturing financial services becomes even more pronounced, and therefore, you know, profits go one way and the other becomes more and more of a utility over time.

Marc: It depends. So, one of the features of banking is that each market is distinct. There’s a path dependence because we’re going back hundreds of hundreds of years, banking has evolved very, very differently across different markets. You know, a mortgage in Switzerland is very, very different from a mortgage in the UK, for example. So Russia is an interesting case study. Sberbank, the biggest bank in Russia, has brand value that banks across countries in Europe and in the US would envy. They have phenomenal brand value. Sberbank itself has launched a marketplace where… Everything we were discussing earlier, it knows it’s got the data and it’s got the brand value. So it’s got the data and the brand value. So, it’s offering a marketplace to its customers via its app. So that’s one approach. Everything we’re nervous about big tech companies in the US and countries in Western Europe, everything we’re nervous about them achieving, Sberbank itself might be achieving that and is in competition to the tech companies in Russia because it’s forging its own path there. So that’s one market. It’s a bit different. But you’d be right elsewhere. You know, I often think about that. I’ve written this in one of the newsletters that Goldman Sachs plus Apple is probably the biggest competitor — that combination of Goldman Sachs’ back office, banking as a service infrastructure, with Apple’s consumer-facing distribution and brand value, that combination of both of those could be a bigger competitor to JPMorgan than Chime or any kind of startup, FinTech, challenger bank.

[00:47:18.01] Ben: Listening to you, it seems there’s a tendency to conflate retail banking with banking in general, because, you know, trust is so important. And as you say, once we move into wealth management, then you just don’t see the same level of tech or FinTech disruption. Once you move into wholesale banking, you know, you don’t see the same level of tech and FinTech disruption. So I wonder, you know, are we guilty sometimes for talking about retail banking, as if it’s whole banking? And then the second point would be because you’re such a student of financial services, I wonder, do we also fall into the trap of thinking that these things which look so disruptive, have actually played out many times before in different guises? Because I was reading your newsletter about Visa before and it’s almost in a way that, was Visa not embedded banking in a way? So I wonder, are we also guilty of thinking these are bigger trends than they really are and they happen quite regularly over the course of history, in cycles?

Marc: Yeah, it’s such a good point. I think 100% I agree with that. And there’s nothing new under the sun. A lot of what we’re seeing now we’ve seen before in various guises. So you’re right, I did a deep dive on Visa, recently. It’s a fascinating story. The founder of Visa, Dee Hock was so far ahead of his time in thinking about payments and the way in which payments simply reflect — just to give some context, we’re talking about the 1960s, where, you know, computers were the size of buildings, and he was thinking about payments. And most of the payments at the time were done on paper that was shuttled between banks. And he foresaw this system whereby payments were — he didn’t use the phrase ones and zeros, but he talked about alphanumeric data — simply alphanumeric data. He has written about all of this. So, Dee Hock, the founder of Visa, is 92 years old today. He founded Visa in the late ’60s, let’s call it 1970. He was CEO until 1984. And he wrote a book in ’99 that was re-issued in 2005. And he questions the need for banks. He says, “If it’s just alphanumeric data, why do we need banks, and the payments?” And he, at the time, knew nothing about crypto, knew nothing about digital currencies. But presently, he talks about a global currency, he talks about payments just taking place directly between consumer and merchant, much of the functionality that Bitcoin potentially offers — or crypto more broadly potentially offers today. And he was talking about this in the ’60s and ‘70s.

Marc: Just to come back to your question, similarly, equally, he allowed JCPenney, which went bankrupt last year, it kind of came out, it went through a bankruptcy process in 2020, has come through with that now. But back in 1979, it was one of the three biggest retail merchants in the United States. It was so big, he said, “Well, let’s introduce embedded finance, let’s bring it straight into the Visa ecosystem”. But even before that, interestingly, it was companies like JCPenney, that actually invented the credit card in the way now that… So now we think about kind of Shopify, and everything that Shopify is doing with Stripe to embed finance at the point of sale in merchants. This was a big merchant’s… I guess, what’s changed is that you don’t have to be big anymore, that because of these providers, because the cost of everything has gone down — the cost of storage, the cost of underwriting, the cost of everything has gone down — it’s become more accessible for smaller companies to offer these things that the big companies have been offering since the 1950s and 1960s. So yes, there’s nothing new under the sun. The same with challenger banks. AG was a challenger bank that merged in the UK with a not dissimilar model to the model of many challenger banks today, 20 plus years ago, 25 years ago. A lot of these models have appeared before and one of the things that I try and do in that interest is look back through history — as you said — as a student of financial services, to learn from them and apply them to the situations we find ourselves in today.

[00:51:54.04] Ben: Having said that, there is nothing new under the sun, I just want to get you on digital currencies, because actually, it does seem like something which is more transformational. If you don’t mind, can you briefly just describe what digital currency is because, you know, one of the things that, you know, when we talk about digital currencies, people get, I suppose, a bit confused about is, you know, if I were to pay you some money now, and I would just transfer it to you, that’s in a way digital money. So what’s the difference between just an electronic transfer of Sterling versus digital Sterling?

Marc: There’s three types of digital money broadly. One is crypto. So, basically, it’s got its own infrastructure and its own coin. So, like Bitcoin. Two is we can talk about stable coins, which have their own infrastructure. So Facebook looks like it will launch any week now, actually, its own stable coin. It’s got its own infrastructure, but it’s stable in the sense that it’s not its own coin, it’s a US dollar or some other currency. And then the third type is a Central Bank Digital Currency, which is, the central bank maintains the infrastructure. It is also an existing currency — call it the US dollar. So these are the three types. And the difference is… So, if we’re talking about your question referred to Central Bank Digital Currency, the difference is, you know, if I give you a 20£ note, it will have a serial number on it. So, when I’m talking about a digital currency when I’m paying you online, it won’t have that serial number on it. So basically, I’m digitizing that 20£ note. I’m digitizing that 20£ note such that if I was to pay you 20£, it would have a serial number attached to it, such that the regulators, the central banks could then audit the trail of that currency the way they do with cash right now through a digital system.

[00:53:56.06] Ben: But isn’t that the most important point for Central Bank Digital Currencies, which is about that ledger? And therefore, it really goes into the question the extent to which you need banks to intermediate. Because if you can have your wallet directly with the central bank, if the central bank can disperse money to you directly, does it to some extent take away that role of banks as creating money supply? Because I suppose, to the earlier question about, you know, if we are going to see an increased split between the distribution of manufacturing financial services, and the central banks kind of rising up to take a bigger share of the manufacturing — or I don’t want to call it manufacturing, but if the balance sheet aspect of financial service because more will just sit directly on their ledger. Does that again squeeze the traditional banking sector?

Dee Hock, the founder of Visa wrote a book in ’99 where he questions the need for banks. He says, “If it’s just alphanumeric data, why do we need banks, and the payments?” And he, at the time, knew nothing about crypto, knew nothing about digital currencies. But presently, he talks about a global currency, he talks about payments just taking place directly between consumer and merchant, much of the functionality that Bitcoin potentially offers — or crypto more broadly potentially offers today. And he was talking about this in the ’60s and ‘70s.

Marc: Yeah, absolutely. And one of the reasons why the central banks are being so cautious in rolling out Central Bank Digital Currencies — everybody’s looking at China — China is trialing Central Bank Digital Currencies right now. They’ve suggested that those trials will continue up until Beijing Winter Olympics in 2022. So, we’re not going to see anything launched until at least then. And that’s in China. And similarly, Europe and various other central banks have said that they’re still studying it. And one of the things they’re studying is exactly that, is that what would differentiate between retail central bank digital currency, and wholesale. And one extreme would be retail, which is the picture you paint, which is that you and I have an account with a central bank, the same way that UBS has an account with the central bank, or Barclays has an account with a central bank. We have an account with a central bank and are therefore able to conduct ourselves without the need for banks.

[00:55:48.18] Ben: Because I can just send you money through my wallet to your wallet, right?

Marc: Exactly. And it’s insured. The way bank deposits are currently insured. All they do at wholesale, and actually, they maintain the role of banks. And again, it goes back to this idea of path dependence. It is quite interesting. Dee Hock, when he thinks about Visa, he’s got this framework for looking at the world. He says, you know, “To understand anything, you have to think about the way it was, you have to think about the way it is, you have to think about the way it might be. And you have to think about the way it ought to be.” And when he was thinking about Visa back in the early ’70s, and say today, actually, he’s made this very clear in his book, that Visa had been created through his kind of organizational principles. It’s not a panacea, and he lists in his book, and I quote him in my recent piece, some of the issues, some of the drawbacks some of the flaws in the Visa model. And to come back to what we were talking about, the point applies here as well, is that there’s a path dependency that, you know, maybe on a blank sheet of paper, we can devise this phenomenal new financial system. And they did that in China. You know, China didn’t have credit cards, they went straight from cash. So they didn’t need credit cards. They went straight from cash to a digital wallet, and you cut out the middleman. That’s very, very difficult when you’ve got vested interests that are cultural, political, data, that when people are used to a certain way of doing things as they are in Europe, in the US, you might be right, from a blank sheet of paper, if we could devise a financial system, we do it like this. But that’s not, to use Dee Hock’s framing, that may be the way it ought to be but we can’t neglect the way it has been and the way it is. And therefore, it probably won’t pan out like that.

[00:57:49.16] Ben: I was going to ask you this question at the end, but I feel I need to sort of preempt it now. Which is, you talked about Libra. And I just wonder, you know, if you look ahead at 2021, what’s the most potentially game-changing thing that’s going to happen in financial services that people aren’t talking enough about? It feels like that might be Libra, because, in a way, they’re going to roughshod over all those vested interests and introduce something that’s going to potentially have the adoption of every Facebook user, which is I don’t know how many billion people and it’s kind of outside a single country jurisdiction and it just seems massive. I’m wondering, you know, are you going to write a newsletter on Libra? Because it just seems such a big phenomenon?

Marc: Yes, I agree. I think it will be a big story for 2021. Riding roughshod. Interestingly, they already watered it down. So initially, they put together a consortium, which included financial service companies, there was a backlash from regulators. And so, they watered it down and the result today is something a little bit different. But I agree with you 100%. I think it’s gonna be a big story of 2021.

[00:58:54.13] Ben: But it’s still a currency that might be used to intermediate peer to peer and other transactions. You know, and even all the vendors that sell through Facebook, right? Within the Facebook network, you might have a currency that sits independently of any fair company, or is that not?

Marc: So again, I mean, anything I would say, the regulators do still have the capability to insert themselves. And we saw that too in Brazil, WhatsApp, which is part of Facebook launched a payments mechanism. And they spent a lot of time preparing it, launched it, presumably at launch they’d had the approval of the central bank because they’d spent a lot of time preparing it, but nevertheless, the central bank once it saw it, changed their minds and shut it down. So, regulators still do have this power, which is, I guess, classic disruption. Bitcoin has been operating at the margin and interestingly it never really became a payment coin. So, Coinbase, which is going to IPO this year, started out as a payments system for Bitcoin. And there’s a book that was released in December, called Kings of Crypto, about the story of Coinbase. And in it, they talk about hiring somebody in order to acquire merchants that will accept Bitcoin. And they did a great job, he got all these merchants, he got multiple billion-dollar revenue companies, lots of merchants, all lined up to accept Bitcoin. But consumers didn’t want to spend their Bitcoin. And so, they pivoted to a broker and Bitcoin became less of a payment mechanism, and more of an asset class, more of a commodity. But clearly, that can change. But as I said, it’s tangential, classic disruption. So they operate margin, and it can become mainstream.

[01:00:58.23] Ben: Yeah, if I understand what you’re saying, Libra, first of all, you know, whatever way in which it’s envisaged that it will be used might change because the use case is different from the one that was a bit like Bitcoin. I want to move on to a different topic now, which is private versus public investing. Because, you know, to get to the latter part of your career, I think one of the things that you’re doing now is you’re doing some angel and private investing. I just wonder if you have any interesting observations about the difference between investing in public markets versus investing in private companies? And I suppose we’ll come back to it as well. But you know, I think it’s relevant because companies seem to be staying private for so much longer than in the past. And it’s almost like being an expert in private investing is a more important skill set than it was historically, we could potentially argue. So I wonder if you’ve got observations around that.

Marc: Yeah. So, interestingly, three months ago, I might have agreed with your point about companies staying private for longer. I think what we’ve seen recently through the rise and the emergence of SPACs…

Ben: You’ve preempted that because I was gonna ask if the SPAC is the vehicle to get companies from private into public markets faster?

Marc: Yeah. I think yes, they are.

Ben: Let’s break this down into three sections, if you don’t mind. So, first of all, maybe everything we’ve got on the data shows it’s changed yet, but why weren’t companies staying private for longer? Because it must have been because it was difficult to realize the value in public markets. And how do SPACs do that? Why would a SPAC or a company taken to market through a SPAC, have a higher valuation than a company that would have gone through an IPO process?

Marc: Yeah. In the short term, maybe that’s an inefficiency in the market. Long term, it’s not clear that the mechanism through which one comes to market has a bearing on one’s long-term valuation. But having said that, there are some structural differences in the process. The key one here being that when, through the IPO process, management is not allowed through SEC guidelines to provide any projections on the future. And coming back to what we were talking about earlier, in terms of equity research, one of the roles, one of the jobs that equity research analysts used to fulfill was to provide equity research at the time of the IPO. Now, it wasn’t always independent, which is one of the issues why it was shut down. But there was a service provided nevertheless. Now, that’s not allowed. So now, what will happen is the company will provide its own filing and the institutional investor will have to peruse that filing, do their own due diligence, do their own work in order to take a view, but they’re given no steer as to what the projections are.

[01:04:08.23] Ben: Do you mind, just because I’m not sure everybody knows what a SPAC is. I mean, I love the phrase that you put in your newsletter, you said, “The SPAC is a bit like the wardrobe, is the portal to Narnia, complete with unicorns on the other side.” So what did you mean by that? If you don’t mind just spending a minute on what it is because it’s such a new phenomenon. Maybe many people don’t know what it is.

Marc: Sure, that’s fine. So a SPAC is a Special Purpose Acquisition Company. And what it is, it’s a pool of money that is raised by a sponsor. Typically, a well-known sponsor will raise several hundred million dollars in cash. And the purpose of the cash and the role of the company that the cash sits in is to do an acquisition with a private company, to find a private company — hence the analogy of Narnia. So public investors clearly are restricted to investing only in public companies. But if they were to buy a share in a SPAC, it’s just a pool of cash. If they were to kind of hand some cash to the sponsor, the sponsor will then go through the wardrobe, into the land of the private companies and find a private company to merge with, bring it back out. And then, all of a sudden, you now, through the merger process, have got a share in a private company.

[01:05:31.21] Ben: That is a great analogy, by the way. That’s superb to describe what a SPAC is.

Marc: And just to finish off what I was talking about earlier, the difference is — and it’s slightly arcane, it’s kind of regulatory — but the merger process enables the company to provide projections. So the guy on our side of the wardrobe, when the sponsor comes back out with his private company, can say, “Well actually, in 2022, ’23, ’24, these are our projections. What do you think?” And at that stage, he can either kind of roll with it, or he can sell because maybe it wasn’t what he wanted as a public market investor, so he can sell but he’s kind of got that right.

[01:06:14.17] Ben: So you think this sort of recent last 20-year phenomenon, with more companies staying private, is maybe addressing this fact? Because it does two things, essentially, if I understand rightly. Firstly, it reduces a lot of the friction and the cost of going public because I can’t remember how much an IPO costs, but it’s a lot, right? You pay your fees, I think it’s like four or 5% that you pay to the investment bank?

Marc: It could be even higher, actually. Yeah.

[01:06:35.04] Ben: So yeah. So there isn’t that big cost, there isn’t the sort of, you know, I don’t know how many months it takes to IPO. But it reduces the friction, the cost, the time to go public plus also through being able to share projections with the market. Arguably, and I think this is the bit you’re talking about, there isn’t the data, but arguably, it enables you to achieve a higher valuation. Because I guess there are two reasons why people stay public for longer, right? One, they didn’t feel they could achieve the valuation that they deemed appropriate in the public market, or they were just put off by the time and the cost and the friction.

Marc: Yeah, that’s right. And also the third reason is the private market was rich with capital. So, why would they…

Ben: But that bit hasn’t changed, has it?

Marc: That hasn’t changed. But you’re seeing even in the public… You know, interestingly, recently… So Lemonade is a FinTech, it’s an insurance company that was founded on a kind of a digital platform. And it was SoftBank. So the SoftBank vision fund is one of the biggest venture capital backers out there, it was an investor in Lemonade. It went public in July of 2020. Actually, recently, already in 2021, it’s raised fresh capital in the public markets, at a valuation much, much higher than when it went public in the summer. Typically, normally — and that’s an unusual occurrence — in the public markets, normally, that would take place in the private markets to be a funding round, even six months after the last one. It’s more unusual in the public market. There was kind of a convergence between… I mean, maybe it’s cyclical just because of where valuations are. But it feels as it was kind of convergence between some of the behaviors that were typically the case in private markets and in public markets.

[01:08:23.10] Ben: I suppose you could argue companies like Tesla wouldn’t achieve a richer evaluation on the private market than they could in the public market. But do you think also, there’s some of the stuff that couldn’t IPO because it didn’t come under the same level of scrutiny would do so through a SPAC?

Marc: Yeah, I think that’s right. I mean, some pushback about SPAC is people have talked about as being a SPAC bubble. And, you know, inevitably, there’ll be a lot of poor companies that are coming through that wardrobe, sneaking through that when the, you know, as Buffett says, when the tide goes out. Yeah, we’ll say who’s swimming naked.

[01:08:59.29] Ben: I think probably we’ve run out of time to talk about Robinhood, and that whole phenomenon of the gamification of the stock market investing. But I just wonder if you had any other observations just from your practice as a public and a private investor. You know, the kinds of things you look for in companies that you didn’t historically, or whether it’s very similar.

Marc: It’s really very different. It’s very, very different investing in private companies, from investing in public companies. For one, probably four key differences. One is the level of transparency, which is much higher on the private side than on the public side. Two is — and this is an interesting point — two is volatility. So, a lot of people inherently don’t like volatility. And I think one of the attractions of private market investing is that they only get revalued when there’s a funding round. And so, kind of right now it’s not an issue, because, in the markets, we’re only seeing upward volatility with everything getting up. But I think there was a kind of a degree of, think back to March, April of 2020, when there was a lot of not such good volatility in the markets. I think there was a degree of comfort around private holdings, which, you know, whether it is Robinhood app, or whatever broker one is using, one’s not seeing kind of the daily volatility of valuations in private holdings than they are in public. That’s a big behavioral difference. The third difference is the structure. It’s very, very important as a private investor to be comfortable with the structure of the holding. You know, when you buy a share in Apple, it’s a share in Apple. It’s pari-passu with all the other shares in Apple. That’s not necessarily the case with private companies. Well, they are different classes of shares so it’s something that as an ex-public investor gone private, I suddenly have to learn about. And the final point is just that you’re in the room. I mean, I can write a newsletter about Jamie Dimon at JP Morgan, he may or may not read it, he may or may not do anything about it…

Ben: I think he subscribes to that, doesn’t he?

Marc: Probably he won’t do either. But it’s just a great experience being involved in a private company.

[01:11:31.05] Ben: Yeah, I think is that last point, which is, you know, you have the ability to make your own weather in a way, right? Because I always thought, for me, that’s the key advantage of angel investing, which is, you don’t just sort of invest the money and hope for the best. You can actually get involved and materially affect the return on that investment that you make.

Marc: Yeah, exactly. Exactly. Exactly.

[01:11:51.10] Ben: One question I wanted to ask you, which is the big downside, obviously, of private investing, is liquidity. And it just amazes me that we haven’t seen more people enter the space for the secondary market for private investing. Why do you think that is?

Marc: There are some crowdfunding platforms in the UK — it was one crowdfunding platform in particular in the UK — was Seedrs, which offers secondary trading of its companies that is crowd equity, crowdfunded for. But probably is difficult, actually, because of the fact that, coming back to the point about structure, different classes of shares. You know, I did another newsletter on fixed income markets — electronic trading and fixed income markets — which is much less developed than electronic trading in equity markets. The reason being is there are multiple fixed income instruments out there. Whereas there’s only one equity for most companies, there’s only one equity. And it’s the same here with private, there’s two different classes of shares with too many different terms. But there’s no standardization.

[01:12:53.08] Ben: So, I have two quick follow-on questions for you. One is, what’s getting you really excited beyond Libra looking into 2021?

Marc: I think what’s happening in embedded finance is fascinating. I think what’s happening broadly, just the acceleration we saw in 2020 around digital, I think what’s happening broadly, through payments mechanisms, and beyond payments, not payment as the hub. It used to be that the checking account was the anchor product for most banks, or potentially, the mortgage actually, increasingly is becoming payments. And that I think has all sorts of implications, whether it’s around crypto or Libra, or embedded finance. It’s basically the common theme across all of those things.

[01:13:40.06] Ben: And then the last question I wanted to ask you, which I think is gonna be difficult, you may have to come back to us, which is, what’s the best book that’s ever been written about the financial services sector?

Marc: Liar’s Poker.

Ben: Yeah, that would have been my pick. Yeah. Okay, good. So if anybody hasn’t read Liar’s Poker, you really, really should. Great. Marc, thank you so much for coming on the podcast. It was a great discussion, and I really appreciate you taking the time and keep up the good work with Net Interest which is awesome. And if you didn’t subscribe to Net Interest, you really should. One fantastic deep dive into an aspect of financial services every Friday. So subscribe. Marc, if people want to subscribe, where do they find it?

Marc: Yeah. So netinterest.email is the page.

Ben: Thanks so much again.

Marc: Thanks, Ben. Great to be on. Thank you.

Digital Assets are Coming of Age (#34)

Structural Shifts with Adrien TRECCANI, CEO of METACO, the foundation of digital assets

Bitcoin is the best performing asset in 2020. There is growing institutional interest in crypto and broader digital assets. Tokenization is poised to be a huge market opportunity. In light of all this, we’re inviting you to a masterclass on all things crypto. We’re sitting down with Adrien Treccani, CEO and co-founder of METACO — a provider of security critical infrastructure for financial institutions that enables them to safely enter the digital asset ecosystem. Adrien is a leading software engineer specialized in high-performance computing and financial engineering and an advisor to banks, hedge funds and associations on distributed ledger technology. So today, you are going to learn about the difference between cryptocurrency, digital currencies, stable coins, you’ll hear about the evolution of blockchains, what will happen to commercial banks if we start seeing Central Bank-issued Digital Currencies, and more.

Full transcript


The next step is for the trusted companies on the market — which are the banks — to actually get in and start offering professional services around the management of digital assets. And for that, infrastructure is needed.

[00:01:24.17] Ben: Adrien, normally, on Structural Shifts we don’t do a whole lot of bio. We don’t cover a lot of biographical information, but I think it might be useful in this case. So, should we start there? How did you first enter the crypto space?

Adrien: You know, Bitcoin started in 2008 when the first paper was published by this anonymous creator called Satoshi Nakamoto. And then, for a few years, it was only the playground of, let’s say, libertarians, anarchists, passionated software engineers, and cryptographers. But, let’s say around 2011, a lot of people started getting in either for speculation purposes or because of passion for the new technology and innovation. At this time, I was doing my Ph.D. You know, when you do a Ph.D., you have a bit of free time. I don’t like to say it, but you still have some free time to look for things which are not strictly speaking related to your Ph.D. research. One of these things was cryptocurrencies. I was completing my Ph.D. in mathematical finance with a specialization in high-performance computing and Bitcoin was not so far away from what I was doing. So, reading articles about it, I saw an opportunity to speculate or invest. I did not believe in Bitcoin initially. Like, I think, everybody, initially I saw a scam or something which I could not really understand. But after a month of looking around for information, and also missing out on incredible growth opportunities — I think Bitcoin tripled while I was just looking at it — I started investing a little bit and therefore, also getting into the details of blockchain. And this is only years later, in 2015, I realized that something had to be done to support the growth of the ecosystem. The industry was not ready at all to offer massive services around cryptocurrencies, tokenization, and all of these new use cases that are appearing today. In particular, we were still facing a lot of platforms getting hacked, losing most of their coins; investors like myself losing a lot of money in these horror scenarios. And so, I thought that the next step was for the trusted companies on the market — which are the banks — to actually get in and start offering professional services around the management of digital assets. And for that, infrastructure is needed and Metaco — my company — is specialized in offering such infrastructure.

cryptocurrencies have these incredible opportunities that you no longer see on any of the markets

[00:03:41.23] Ben: And you always saw that as being the opportunity you would pursue? Because I can’t remember when we first met, but you’ve been in this space for a very long period of time and you’re an expert. And you could have done anything, right? I mean, you could have set up an exchange, you could have been a trader — why did you start a custody platform?

Adrien: I could have been trading. That’s a good point. I have these several years in the hedge fund industry as a trader, and I think cryptocurrencies have these incredible opportunities that you no longer see on any of the markets unless you do high-performance frequency trading. And so, I think that would have been a possibility. However, at that time, the markets were not sufficiently developed, if you think in terms of market depth, about liquidity, to implement many of the strategies that today would be actually very interesting to study. I missed the opportunity at that time and that was also for me a way to get back to software engineering. And discovering Bitcoin when I was doing mathematics and finance allowed me to get back to programming. And so, when I was the victim myself of losing bitcoins, having one of the exchanges I was using that got hacked and then a second exchange that I was using got hacked, I really thought that the opportunity was in building the infrastructure of this new ecosystem. And today, well, I’m not saying that since we founded the company in 2015, we had this exact precise business plan. In fact, we slightly pivoted in 2017, but we always had this ambition to provide institutional solutions for digital assets.

[00:05:18.11] Ben: Is custody, do you think, the biggest missing piece in the institutionalization of digital assets?

Adrien: Well, I think custody means slightly a different thing with digital assets than it does in traditional banking. When we think about custody in traditional banking, it’s often about storing pieces of paper, and potentially, you know, having corporate actions and not doing much about it. When we say custody in the crypto ecosystem, what we mean is much more than that. It’s obviously key management, the management of these — what we call — secret keys, which secure the assets, but it’s all of the interaction with the blockchain or the distributed ledger. It’s not just about storing and moving assets, it’s also about interacting with smart contracts and corporate actions, managing the whole lifecycle of digital assets — things which are much more dynamic than what one is usually used to with custody in traditional banking.

We’ve seen this big trend of central banks speaking about creating not just physical cash, but getting into digital cash — what is called today, a CBDC. The principle behind it that you can store and transfer a currency peer to peer, from person to person, with no intermediary is something that we see today indeed central banks are moving to.

[00:06:13.12] Ben: Many of the listeners will have different levels of understanding of all these different terms. So, if you’re okay, to maybe just take a step back and just maybe see if we can define and come to an understanding of some of these terms, and then we’ll delve in a bit more deeply. So, can we start with what the difference is between a cryptocurrency and a digital currency — or a central bank digital currency?

Adrien: Yes, sure. So, I would say that Bitcoin created this new way or proposed a new way of dealing with assets. These new ways to think about the solution were, there are less central parties. You can completely decentralize the payment network or currency, and make sure that there is no single point of trust — you don’t have a CEO, you don’t have a chairman or a company or a government that has full control over the assets or its infrastructure. And so, Bitcoin was the first to provide a scheme that actually works and that has been verified now for almost 10 years. However, what was invented by Satoshi Nakamoto in this context can be reused for many new applications. Some parts of its invention can be reused in different contexts and sometimes, almost exclusively, everything that is invented can be reused for other assets. When we speak about digital assets, we generally think about taking the blockchain technology that he invented in this context, extracting some parts of it, and using it for different asset classes — let’s say securities like equities, fixed income, and whatever, bonds or loans, real estates, arts; you know, anything that you think could benefit in being tokenized or put in a digital form on the blockchain.

Adrien: Then once you’ve gone through this tokenization process, your asset benefits from the same properties as Bitcoin itself. It can be stored and transferred efficiently, it can be divided into small particles, it can be controlled through what is called a smart contract so, sort of automated software, which can simplify the application of contractual clauses. What we’ve seen recently is that this technology could potentially also be used by more traditional assets like currencies. We’ve seen this big trend of central banks speaking about creating not just physical cash, but getting into digital cash — what is called today, a CBDC: Central Bank-issued Digital Currency. I’m not saying here that they would use exactly the same principles as Bitcoin. I think that the Bitcoin blockchain or the Bitcoin technology will not be adapted for that, it will not scale enough, it would be too open or too transparent in different ways, but the principle behind it that you can store and transfer a currency peer to peer, from person to person, with no intermediary is something that we see today indeed central banks are moving to.

[00:09:04.10] Ben: At the moment, I can pay you in Swiss francs, I can make an online transaction, it’s digital, right? So just again, what would be the difference, then, between just a digitally-exchanged Swiss franc and a digital Swiss franc?

The idea of the Central Bank-issued Digital Currency is that you can have a direct link between you and the Central Bank, but it is now digital rather than physical

Adrien: Well, think about the difference today between cash and something that you hold on your bank accounts. When you have cash, it’s guaranteed by the Central Bank that you will have some purchasing power tomorrow. So, if you have this banknote in your wallet, then tomorrow you should still be able to buy your bread in the morning with this banknote. Because it’s backed directly by the Central Bank, this claim, this promise is made by the Central Bank itself. Any other entity in between, an intermediary, I don’t know, defaulting, going bankrupt, could not break this promise by the Central Bank. I’m not saying that this is perfect. Of course, the Central Bank, we’ve seen many examples where they hyperinflate the currency and potentially, even though it doesn’t go bankrupt, you still lose all the purchasing power that you’re supposed to have and you start having packs of banknotes that are worth nothing, that are good to light the fire, for instance. But you know, this is still a claim that is direct between the consumer and the Central Bank.

Adrien: Now, if you think about banking money, that’s very different. In fact, when you have money in your bank account, this is not a promise by the Central Bank, this is a promise by this intermediary that is your commercial bank. If this commercial bank goes bankrupt, if it wants to apply special fees on every transaction, any model, any business model or risk that this bank is facing, potentially, you’re going to be subjected to it. It’s not a direct claim or a direct connection between you and the Central Bank. So, this whole chain of intermediaries, which sometimes is much more than just one commercial bank — it can be multiple commercial banks, it can be payment processors, it can be custodians in between — this whole chain could be completely reduced to a direct link, similar to what you have with the cash, but in a digital form. And so, the idea of this CBDC, this Central Bank-issued Digital Currency, is that you can have an equivalent direct link between you and the Central Bank, but it is now digital rather than physical, and you can use it to process transfers on the internet as efficiently as you would with Bitcoin — probably much more efficiently than you would with your bank transfers where sometimes you cannot transfer during the night or off business hours, sometimes you cannot transfer outside of your country, or it takes multiple days, it can be very expensive depending on where you send the money. With the CBDC, the promise is that it would be relatively similar to Bitcoin, you could send this money anywhere, anytime, frictions would be minimal, and you would have the guarantee that even if there is a complete collapse on the financial industry, as long as the Central Bank is relatively stable, your purchasing power should remain the same.

[00:11:54.15] Ben: In the event that we do see Central Bank-issued Digital Currencies, what becomes the role, then, of commercial banks?

I wouldn’t be surprised if in the future, we start seeing fine art, Picasso paintings being tokenized, so you, as an investor can finally invest in it, even if you’re not a billionaire, through tokenization, and that you can start diversifying your portfolio in many different classes of assets, that today you don’t have access to.

Adrien: Well, I think it may change dramatically. I don’t think banks will disappear. In fact, you know, some people expected that post offices would disappear when the internet was adopted. This is not what happened. In fact, Swiss posts in Switzerland are louder than ever. They just had to restructure to find new business models, new opportunities. And we see that what they used to do may have changed slightly, but it’s still relevant. I think the same is going to be true for cryptocurrencies or Central Bank-issued Digital Currencies. I believe that banks will still be relevant. If you think about it, even today with cash, you have the ability to store cash under your mattress. Now, do you do so when the amount is relatively large — let’s say if you store more than a couple of thousands — are you going to put that under your mattress, or are you going to put that in a vault somewhere and potentially with a bank? You probably will do that with a bank. Even though you don’t have to, it’s just an option, at some point, you realize that you prefer paying a professional third party that knows what it’s doing, has all of the measures, the infrastructure, the processes than doing it by yourself saving a few hundred bucks per year, but potentially being fully compromised. And I think the same thing is going to happen with digital assets. Even if you have the option to work with the Central Bank directly, it would be a very practical option to have for small amounts, you know, fast transactions to not be fully dependent and reliant on the commercial banks and payment processors. But in general, when you want to work with a trusted third party that removes some part of your fees and your anxieties, and you will get back to working with a bank. And this is pretty much our assumption also with Metaco. You know, we could see a future where banks completely disappear. In fact, we could go one step further and think about a situation where even central banks disappear and are replaced by Bitcoin, Libra — which in a way is a central bank — Ethereum, etc., and where commercial banks simply are no longer relevant. I think that’s not gonna be the case. And our approach at Metaco is that most investors in these cryptocurrencies and digital assets, will still want to work with a trusted partner that knows what they’re doing, that advises them — and for that, infrastructure will be needed.

[00:14:17.06] Ben: Do you foresee that everything will go digital or crypto and therefore they just have to find a new role than the new decentralized financial world? Or that there’ll be a little bit of a bridge between the old and the new?

If you think about a world where some of the regulations adjust to this new digitalized ecosystem, decentralization, I wouldn’t be surprised that new competitors that would never have considered getting a banking license due to the costs and, you know, frictions could suddenly become relevant and capable of operating a regulated business in this field.

Adrien: I think the transition is going to be very long, first of all. So, even though we speak about tokenization as being a hot topic today, I think tokenization is going to take years to become a new standard, and that is going to take even more years until the legacy approach is completely replaced by tokenization. Now, whether it’s going to be fully replaced at some point, I wouldn’t be surprised because if you think about it, everything is digital today, except monetary considerations. Everything can be digitalized: information, communication. You no longer send telegrams, right? You use the Telegram application, which is a messaging app; you use WhatsApp, you use Facebook; storing pictures — you used to print them — well, you no longer print them, you keep them in a digital form. So, what’s missing today is the notion of money or value of equities, which is partially digitalized but it’s still in a very centralized ecosystem, which doesn’t give you as an investor direct control over what you own. So, I wouldn’t be surprised that in the future, we start seeing fine art, Picasso paintings being tokenized, that you, as an investor can finally invest in real estate, even if you’re not a billionaire, through tokenization even if you’re not a billionaire, and that you can start diversifying your portfolio in many different classes of assets, that today you don’t have access to.

[00:15:59.23] Ben: One more question on the role of banks. So, what about things like issuents? Do you think that they just become custodians or do you think they keep some of their historical roles in, for example, issuing new securities?

Adrien: I think they will keep this role, however, they will be facing more and more competitors coming from IT. So, security firms, IT firms, or, you know, some of the big techs today: Google, Apple, Facebook, Microsoft of this world. If you think about this, it’s already the case that Apple is getting very strong in payments. Alipay, obviously, and many of these other protocols are getting traction to a point that you can ask whether banks and payment processors are going to remain relevant in this field. So, I think yes, banks are gonna keep this role and are probably going to be natural service providers in this field. However, they’ll start facing competitors that they don’t see today on the market. A big part of the reason they are still so strong in this market is because they’re protected by regulations. If you think about a world where some of the regulations adjust to this new digitalized ecosystem, decentralization, I wouldn’t be surprised that new competitors that would never have considered getting a banking license due to the costs and, you know, frictions could suddenly become relevant and capable of operating a regulated business in this field.

[00:17:16.10] Ben: So it seems that a lot of the promise of digital currencies, cryptocurrencies, Central Bank-issued Digital Currencies, is about democratization, is about making everything to do with finance cheaper, easier to access, having less friction. So, is that where you see the benefit? Do you see that finance becomes open to everyone because you don’t need a bank account — you can diversify your assets for, you know, very small holdings? Or do you think it’s something bigger? So the reason I ask that is because, on the way here, I re-read the classic article by Chris Dixon, “Why Decentralization Matters?” And for him, it’s much more than just democratization. It’s about introducing new, better incentives for digital commerce. Do you see it as big as that?

Adrien: I see it even bigger than that. It’s much more than finance, it’s much more than payments. It actually can have dramatic consequences, in my opinion, in a good sense. But beyond this obvious industry that is finance, one example is governments today or the way we operate a company. Let’s start with this simple use case. Today, a company, if you’re in Switzerland, you create your company, you say, “Oh, I’m going to inject 100,000 Swiss francs for the capital, I’m going to be the shareholder of this company, I’m going to be subject to specific laws that have been established. I can set up a shareholder agreement.” All of these things, if you think about it, they are arbitrary. It happens that through history we’ve defined that this is the way it should be in a country, and every country will have a different way of operating with companies. But in the end, it’s nothing more than a series of contracts. And all of these contracts can be fully digitalized on the blockchain. This is exactly what these so-called ‘smart contracts’ are about. They’re not just for tokenizing things. They’re also for digitalizing companies where you can have an algorithmic Board of Directors, shareholders that can vote, you can pay dividends to anonymous shareholders that you don’t know anything about, except that they hold a part of this abstract company. You can take decisions and vote as a Board of Directors, not because you all meet in the same room, and you have the law of Switzerland backing you, but because you just vote with your token, in a smart contract on the chain. So, a company is something, if you see it this way and you do the abstraction that is nothing more than a set of contracts, I see a future where this simple concept may be completely digitalized and even the government here would become less and less relevant in regulating and controlling how companies operate.

Adrien: That’s just a tiny example, but if you push this further, you can start thinking about many laws that exist today, and are enforced by the centralized governments. You know, we have a centralized government, we speak about democracy, but in the end, there are a bunch of people that vote to elect legislators, legislators create laws that do not always reflect what do people want, these laws are then enforced by judges and courts that may even interpret the law in a different way than it was written, which was different from what the people actually wanted — and you end up in a system where you have dozens of intermediaries and a very centralized system for politics, for law, for justice. And I can see a future where blockchain and smart contracts can be used to create new incentives where many of the laws that we have today become irrelevant because they are already backed by some form of smart contracts, and the protections that the law offers us today can be enforced by algorithmics, by codes, by programming, and you no longer need to have armies of lawyers, judges, courts, and politicians creating laws because it trades into code running on the blockchain. So, that’s, I think, a very exciting future, obviously very disruptive — I’m not sure regulators will be happy about it, because it takes away some of their power — but I think it also can create a world with much more certainty, where, when you sign a contract, which in this case is digital on the blockchain, you’re not fearing that law may change in the next two years, or that the courts may interpret your contract in a different way, that the counterparts in the contracts are maybe dishonest. You agree on a contract, you don’t ask the lawyers and the judges to agree with you. You just code it in a specific way and you get the two parties of the contract to agree and to let the blockchain execute it with no ambiguity.

[00:21:32.25] Ben: You mentioned Libra, right? When we think about Central Bank-issued Digital Currencies, they are decentralized to a point, but they’re not completely decentralized, because you still have, I guess, one per country, one per nation-state. Whereas, it seems that Libra is trying to do something which is truly global, right? So, do you think that Libra is therefore the best medium of payments that could be or a better form of that?

Adrien: I think the ambition of Libra is very different from the ambition of a central bank. You know, a central bank, by definition is central. Why would a central bank aim for decentralization when even its name includes the word ‘Central’, you know? A central bank wants centralization, it wants all of the power to decide on what’s best for the economy. Then, we can debate whether it actually does what’s best for the economy and I would argue that it does not. But I think there are as many opinions as there are economists on the market. The point is, a central bank is not here to decentralize. It is here to provide a service which is systemic to the economy. I’m pretty sure, although this is obviously a market that is immature today, that any platform that a central bank deploys for Central Bank-issued Digital Currencies like a digital Swiss franc, is going to be rather centralized than decentralized. What is going to provide as a benefit is that it’s probably going to be peer to peer. So, you will have the ability to store and transfer these Swiss francs person to person with no intermediary — but through Central Bank, of course — however, I don’t expect that they will build and provide an infrastructure which is maintained by dozens or hundreds of thousands of different users or companies. I think this is not necessary for what they aim to do.

Adrien: However, Libra has a different ambition, which is to provide a neutral platform, which can host, then, a lot of different initiatives. It could potentially be used by a central bank to issue its coin on the Libra network, it could be used by a private company that wants to issue its coin — whether it’s a currency, a stable coin, or whether it’s a commodity token or something else — on the Libra platform. So, I see Libra more as infrastructure or as really an open platform than it is about providing money. Of course, one of the main use cases of the Libra platform is for this consortium of private slash public companies or entities to jointly control and potentially issue a stable coin. The Libra Foundation or Association is responsible for managing these stable coins for different currencies that they announced and this can look very much like what a central bank would do. But to me, it’s just a specific use case that they could have achieved with this Libra platform. And I wouldn’t be surprised that in the future we’ll see hundreds of new use cases like this one on the Libra platform the same way we see so many different applications of smart contracts on Ethereum.

[00:24:28.13] Ben: To pick up on that, you introduced the term ‘stable coin’. What’s the difference between cryptocurrency, digital currencies, and stable coins?

Adrien: So a cryptocurrency, at least if you think about Bitcoin and the ones that get a lot of inspiration from Bitcoin, a cryptocurrency is a fully decentralized currency. And by this, I don’t mean just that the blockchain — which is the ledger that stores every transaction and wallet and balances — is decentralized, I mean that the currency itself is not controlled by any central party. So, who is responsible for creating new bitcoins on the network, managing the monetary policy of Bitcoin? Well, it’s no single person. It’s actually the whole network itself that has to agree on the terms of the next bitcoins to be created in the network. And so, the management of Bitcoin itself is therefore fully decentralized. What it means also is that there is no central party that can decide whether it would make sense to create more bitcoins today or less bitcoins today. It’s fully algorithmic. This is very different from what the central bank does. If you think about the Central Bank, it looks at the economy, it looks at the exchange rates of the currency, and based on this, it will decide, “Well, should we print more Swiss francs? Or should we print less Swiss francs?” This will be a dynamic politically-based, in a way, or economics-based decision process that defines how many Swiss francs are in circulation. So, that’s very different. This is how the central bank is capable of keeping this stable, because depending on the status of the economy, it can decide to print more or print less, so that the purchasing power and the exchange rate with other currencies is relatively stable. With cryptocurrencies, you cannot do that, because they are fully decentralized, nobody controls them, so they cannot adjust to the exchange rates. This is why you see Bitcoin rising so much or Bitcoin crashing so much, suddenly. It is not adjusting to the demand of the market. So, that’s the main difference between cryptocurrency in the traditional sense and a stable coin. A stable coin is generally managed by a central party, or has, at the least, if it’s not managed by a central party, some form of algorithmic pegging to the value of something that is stable in the economy.

[00:26:52.03] Ben: Let’s also talk a bit about blockchains, the underlying ledger. So, do you see that the Bitcoin blockchain will always exist? Or do you think that gradually, these blockchains will evolve and become more scalable, more composable over time? So, is it just the first generation or is it a blockchain that will continue to exist, that has continued relevance? How do you see the evolution of blockchains? And how many can there be at any one time, since, you know, to be secure, it needs a lot of computing power?

Adrien: I think that the alternatives that you propose are not necessarily mutually exclusive. If you think about Bitcoin, I agree it is a first-generation blockchain, by definition. It’s the first one that was launched and that actually survived. Now, it is also true that is not going to be the only one and that it’s already outdated from a feature point of view. The feature set of Bitcoin is very limited as compared to many new distributed ledgers and blockchains that exist on the market. At the same time, this is also the main value of Bitcoin, it’s its stability. It’s not changing every week, it’s pretty much the same code and the same algorithm that is running now for more than 10 years. And this is because of the stability that people and investors have so much trust in it. You know that it’s not going to break because of a new bug that nobody knew about, that was brought during an update or in some new feature implementation. You know that you’re facing the same thing as the last 10 years. So, if it was robust until today, there are good chances that it’s going to remain robust in the next 10 years.

Adrien: If you think about alternatives like Ethereum, Tezos, and the many other ones that exist on the market, their goal is not exactly the same. It’s really to innovate. And they do innovate. In many ways, they do much more than what Bitcoin can do. But at the same time, it’s also a risk, because if you’re an investor, if you’re using that in production, and there is a massive update of the platform, what are going to be the consequences on your code? Could it be that a bug is introduced, a security risk is introduced? You never know, really. And I think this is why, as an investor, you may want to also favor these stability components — and this is also why we see Bitcoin being so dominant on the market in terms of market capitalization and traction. It’s certainly not because it has the most use cases. I think that Bitcoin is pretty much nothing more than a stable deflationary — or ultimately deflationary — cryptocurrency that is therefore a good investment opportunity. It doesn’t do much more than that today, it can be a great payment protocol, but not much more. Whereas Ethereum provides all of these so-called smart contracts, which can simplify contractual relations between investors and you have an infinite degree of flexibility: you can program any arbitrary software running on the Ethereum platform which you cannot do with Bitcoin. So I think that today, the question is more, “What do you want to do with these cryptocurrencies?” If what you want to do is revolutionize the future, replace what I call, you know, companies being digitized, you can’t do that today with Bitcoin; you have to go with a more modern platform. However, if what you want is you’re looking for a form of digital gold, something which has gained trust over the years and that has shown to be something that is attractive that people like to hold, and that tends to keep its value to some degree, then I would prefer investing in Bitcoin for that. It’s really its main value proposition.

At this stage, we are at the beginning of this industry, where you still have a lot of competition — healthy competition in a way — you have a reasonable amount of different ledgers that are all credible, but you have still a very strong dominance with Ethereum for smart contracts and Bitcoin for cryptocurrency.

[00:30:21.02] Ben: If we assume that the end state or future states where we have decentralized apps, decentralized companies, or maybe digital autonomous companies, decentralized apps, decentralized finance — so we have, you know, a tendency to have a very large number of companies, and apps, and so on, the opposite of centralization. Underneath it, we still have the force for centralization of the blockchains themselves, right? Or not? Because, I suppose the subsequent question is, you know, how many blockchains do you think we’ll end up having? The permissionless ones.

Adrien: It always depends what you call centralization. You’re saying that we have decentralization that is the blockchain. It’s a bit like saying it’s centralized because we’re all on the same planet. You know, we all live on planet Earth. Of course, at some point, you have a centralized standard, if I could say, or a relatively central standard. Now, it doesn’t mean that this standard is centralized itself. If you think about Bitcoin, sure, it’s a very centralized standard. So the specification of how Bitcoin works is now agreed over by thousands of users, thousands of companies. However, the Bitcoin network is maintained by these thousands of users. So, if you want to change anything, you can’t do it by yourself. You have to convince thousands of other users. I think that this is actually a very strong value. This is the network effect. The network is more valuable as you start growing its user base, the network that it can reach. Would you use Bitcoin if you knew that only a couple of people on planet Earth would agree that you send them to them and that they sell a piece of bread to you? No. You like having Bitcoin because you know that there are millions of people that hold some, potentially you can go to a supermarket and buy a piece of bread with it. Maybe not everywhere, but this is starting to happen. And clearly, Bitcoin has value. You can exchange it for Swiss francs or something else quite easily.

You have this triangle, that you can’t get everything at the same time. You can’t get decentralization, security, and scalability at the same time. If you want two of them, you’re gonna have to sacrifice part of the third one.

Adrien: Now, having the fragmentation with dozens of blockchains, actually, in a way hurts the system. It’s great in the sense that it creates competition between these initiatives, and therefore, through competition, they have to improve to keep their momentum, keep their dominant position. However, at the same time, when you want to do something concrete — let’s say you’re a bank and you want to create a new asset on the blockchain — you immediately start asking yourself, “Where should I do that?” On Bitcoin, on Ethereum, on Tezos, on any of these other, you know, hundreds of blockchains. And therefore, whichever decision you take, is going to make some people happy, and some people unhappy, because not everybody agrees on the same standard. So, it’s always this trade-off between competition is a good thing but if you have too much competition and no standards, then it limits the innovation also. And I think at this stage, we are at the beginning of this industry, where you still have a lot of competition — healthy competition in a way — you have a reasonable amount of different ledgers that are all credible, but you have still a very strong dominance with Ethereum for smart contracts and Bitcoin for cryptocurrency.

[00:33:22.23] Ben: In the current internet era there’s a tendency for heavy concentration at the app level. I think the opposite is true in the crypto world, which is the concentration is at the protocol level. If concentration is at the protocol level, is the hardest thing, then, getting those protocols to scale? Because I remember you’re the first person I ever heard talking about sharding. So, can you talk about some of the ways in which these protocols are starting or the mechanisms that people introduce to try to get this whole infrastructure to scale better? And use less electricity?

Adrien: So, I think that’s multiple different issues. So, the first one is, I don’t know if it’s a theory, but it’s at least a very strong observation. You have this triangle, that you can’t get everything at the same time. You can’t get decentralization, security, and scalability at the same time. If you want two of them, you’re gonna have to sacrifice part of the third one. So, you could, for instance, like, Bitcoin has pretty good security, pretty good decentralization, but then, the scalability is not so good. Or you could say, “Well, I’m gonna centralize”, which is what we have today. You know, if you think before Bitcoin, we had these very centralized payment processors like Visa, MasterCard. And you can say, “What matters for me is security and scalability, so I want to be able to process thousands of transactions.” However, then in this case, it’s not going to be so decentralized. It’s going to be very centralized, actually. And having these three properties at the same time is very difficult. So, when we speak about ways of scaling the blockchain, sure, we can do much better than what we do today, but we have to be aware that this cannot be infinite. We cannot reach hundreds of thousands of transactions per second or millions of transactions per second, keeping the same level of security and decentralization. You will have to start, you know, sacrificing some of these properties.

We should not see energy consumption as the devil. It’s part of any successful industry, and I would tend to argue that securing value, which is probably the most important thing today, in a globalized free market, being able to secure wealth, secure value and purchasing power is arguably much more important than many services we pay so much for in terms of electricity

Adrien: Now, what we see happening is the capability to indeed use sharding techniques where potentially part of the network validates some kind of transactions, and the rest of the network validates other kinds of transactions, and therefore, because you don’t have every single computer of the network validating every single transaction, then you can maybe double it or triple it, depending how you shard, how you allocate this subset of operations to each of these maintainers. Now, I don’t want to get into the details, but this is typically one sacrifice because now rather than having all of the users checking everything, you only have part of the users checking some things. One could argue that in many cases, this is sufficient — and I think it may be the case that it’s sufficient for many applications — but by definition is obviously less secure than everybody looking at everything. So this is one of these trade-offs.

Adrien: Another way of scaling is to not have every transaction written on the blockchain. Of course, when Bitcoin started, it was the assumption that, you know, everybody could write a transaction on the blockchain, or at least some people believed that. I don’t think Satoshi Nakamoto himself believed that. He wrote something in one of his, I think, messages or maybe in the white paper that suggested he was aware that this would not scale forever. But clearly, it was realized at some point that you could not scale what you write on the chain, forever. You would have to, at some point, decide to write transactions outside of the chain. And so, what we see today as a possible way to scale is to say that small transactions, fast transactions that require really high frequency, but maybe do not need to be secured to a point where you write everything on the chain, they could be processed more centrally between two parties using cryptography. So, in a way, it would still be relatively secure, no way for an intermediary to steal the funds or to break the chain. But you would only rise the settling transaction, the clearing transaction on the chain after you have reached a point where the risk that you have of chain is maybe too high for your tolerance.

[00:37:16.08] Ben: Is that how you see permission and permissionless blockchains coexisting? So, just again, for the benefit of our listeners, can you define what the difference is between permission and permissionless?

Adrien: Yeah. Permissionless ledger is like Bitcoin. It is a ledger that can be used and maintained by any user. If you have an internet connection, not only can you use Bitcoin, but you can also maintain it, you can be what is called a miner — so somebody that’s going to protect the network actively — and you don’t have to ask anybody; you don’t have to ask the government, you don’t have to ask your bank. You can just participate in maintenance and use it however you wish, like any other user on the system, without any permission. That’s what we call a permissionless ledger. Now, of course, not everybody is happy with this solution. If you think about banks, for instance, they don’t like the idea very much that they would start issuing securities and have to have processes to apply compliance logic on something which is, in some way, out of their control. So, in the last five years, or maybe more than that, several initiatives have been launched to create things that looked very much like Bitcoin or Ethereum but that are not controlled by any internet user. They are controlled by a subset of pre-approved users. That could be a consortium of banks, for instance, where you take a consortium of 10 banks, and each of the 10 banks knows which are the other banks of this consortium. We can verify, therefore, that only just 10 banks are maintaining and protecting this network and potentially accessing its information. So, this is a permission ledger, a ledger that is not accessible by anybody.

[00:39:00.14] Ben: And so, you could see a situation where a consortium of companies or banks might do supply chain finance, for example, in a permission blockchain, and then write the resulting transactions into a public or permissionless blockchain.

Adrien: It could be the case. I think we’ve seen quite a few projects going that way, where a permission ledger is used a bit like intranet — you know, like, before the internet, we had more intranet — so it’s used a bit more in a private context. And when you want to settle or when you want to get back to a more public standard, you would operate on a public chain. I’m not a big believer in permissioned ledgers, to be honest. I think that although in some use cases, they have a strong value proposition, in general, they are not so much more than a very secure database. You could, in fact, implement a permissioned ledger with some SQL database with additional layers on top of it, checking the integrity of data and making sure that multiple parties have ways to audit the contents. And so, I sometimes am a bit doubtful that this can establish itself as the new standard for digital currency management. However, in some cases, we’ve seen interesting applications. In particular, when you have natural consortiums for specific applications, if you look at a specific supply chain, it may be that indeed, you don’t need to open up to the rest of the network, you just want these specific dozens or hundreds of parties to be involved. And why would you then go on a public chain where you have to pay fees, where everything is public, and therefore you have privacy leaks, and where you’re not in control — so, it’s harder to apply your governance logic on top of it. In these cases, indeed, using a permission ledger is an interesting alternative.

Cryptocurrencies in general are becoming much more legit. And we see it concretely happening with regulators opening up everywhere in the world and reputed banks moving in this field, also.

[00:40:49.00] Ben: We’ve talked about how blockchains can become more scalable. Another objection that people raise is that, you know, they’re so wasteful in terms of… You know, because trust is achieved through mathematics, and mathematics is done by computation, these need an awful lot of electricity, right? So, there are ways — proof of stake and so on — that are emerging where we don’t necessarily have to burn a whole lot of electricity to create the trust, right? So, do you mind just talking about some of those emerging techniques?

Adrien: Yeah, sure. But, before I speak about these imaging techniques, maybe there is a philosophical question, which is, do we actually care? If you think about this, governments use a lot of electricity too, and we’re not arguing that we should remove all governments on planet Earth, just because they turn on the light when they get to work. Banks use a lot of electricity. Gold mines, when you’re mining gold, you use a lot of electricity.

Ben: And there’s also, we can put electricity on a renewable rail.

Adrien: Of course, I think we’re getting there in the future. We may have actually a very efficient way for, if you think about, some of these renewable energy factories, however they do it, that don’t know exactly how to store the electricity, they don’t want to sell electricity at the wrong time during the day. Well, they could actually use this electricity to mine Bitcoin when it’s not profitable to sell it on the market and rebuy electricity later. So, I think we should not see energy consumption as the devil. It’s part of any successful industry, and I would tend to argue that securing value, which is probably the most important thing today, in a globalized free market, sort of economic system, being able to secure wealth, secure value, purchasing power is arguably much more important than many services we pay so much for in terms of electricity. You know, if you ask me, I’m a bit of a libertarian so I’m quite open-minded about this. But if you ask me, if you want to save energy, I’d say maybe fire a third of the government. Maybe a third of the administration today is not so necessary. If you think about it, we have all of these laws that are no longer relevant and that need to be implemented, that need to be monitored. Let’s save energy! You know, fire some state employees. Or maybe some banks are no longer so efficient, so we can fire some personnel in the bank. So, I know it’s a bit hard to say that, but the energy consumption is not something we should necessarily avoid. We could argue that having the most secure blockchain on the market today — that is Bitcoin — has a price, an electricity price, but this price may be the right price for the service it provides.

Adrien: Now, you’re right that there are some new initiatives. It’s been quite a few years already that what is called proof of work — proof of work is the main mining algorithm on Bitcoin, which is so energy-consuming. There are new initiatives to replace this proof of work algorithm with more modern or let’s say different ways of securing the blockchain. And although I doubt very much that Bitcoin will adjust to it — because again, the main value of Bitcoin is that it doesn’t change so much — we already know that other chains like Ethereum or Tezos have moved or will move to such a new way of securing the blockchain. Now, it’s not perfect either. It may be more ecological, you may use less electricity — actually, significantly less electricity — but it has other security weaknesses that it introduces, that we don’t know much about and it’s not clear that it’s actually as secure and as neutral that the Bitcoin system is. So I think it’s good for innovation, but I would not be so convinced that this is the way everything has to go. I think Bitcoin remaining the way it is, it’s actually a very strong value proposition.

[00:44:37.25] Ben: Because in its essence, if somebody has a larger stake then somebody else has more say over the blockchain, is that right? So it’s not as equitable or not as fair.

Adrien: Yeah. But, you know, in this proof of stake modality, which is this alternative to proof of work that uses less electricity, if I want to make it simple, the richer you are, the more control you get. So if you’re rich in terms of coins and cryptocurrency, you’ll have larger control over the network. And the assumption here is that it’s very hard for somebody to centralize so much that it has a lot of control over the network by becoming very rich. Well, this assumption is correct. If you look at history, and the billionaires of yesterday that now are worth more than 100 billion or 200 billion, you may wonder if this assumption of relatively decentralized coin distribution is valid. Of course, there are ways to counteract on that, you can create counter incentives for cheaters or abuses of the system, but is it going to be perfect? I think nobody can know for sure until this is concretely implemented.

Adrien: Now, if I want to be honest, proof of work is not perfect either. So, this existing Bitcoin protocol that secures with what is called mining, it is heavily electricity consumption is not perfect either. There is also a degree of centralization, the reason being that as soon as a company emerges and makes profitable business rounds of mining, it’s going to grow, it’s going to hire more people, buy more hardware, and is going to concentrate a lot of mining around its factory. And what we see today is that China is one of the main miners. It has several of the largest mining factories, and electricity price is one of the key drivers of where you would like to establish such businesses. Some countries naturally attract mining, other countries naturally reject or repulse mining because it’s too expensive and not profitable. And even though mining is interesting in the sense that, in theory, anybody could just turn on its computer or laptop and start contributing, and therefore creating very decentralized networks, in practice, your laptop is so weak or is so bad in comparison to professional miners that it has become unrealistic to compete with professional miners, unless you heavily invest in professional hardware. And that means that most people will not do it, and therefore centralization also appears.

[00:47:05.12] Ben: And is that centralization of mining becoming a problem? Does it make the network vulnerable?

Adrien: By definition, having excessive centralization always means it makes it more vulnerable. At one point it becomes really vulnerable is hard to say. I think we’re far from that. And even though it is relatively centralized today, it still is an oligopolistic control. And the interesting property of such protocol is that even if you have a miner that represents, I don’t know, 5% of the total mining power, and therefore, one could say has 5% of the mining power, he cannot do anything by himself. He would need to align himself and have a handshake agreement, or a contractual agreement with up to 50% of the mining power — so many other parties on the network — to finally reach a point where this is potentially dangerous for the network. What we’ve seen in the past that this sort of centralization event can happen. There were multiple times in the history of Bitcoin, where mining was so centralized that the top two out of three miners, were almost able to control the network. What we’ve seen is that naturally, without trying to enforce new rules or change the protocol, the network itself got so afraid by this amount of decentralization, that it fragmented by itself. So, some of the contributors of these mining pools, you know, these mining companies, decided to switch and move to different companies, because they didn’t want to be potentially parts of excessive centralization, that would hurt the trust and the security of the network, and presumably the value of the coin because the value of Bitcoin heavily depends on how much you trust it.

[00:48:49.10] Ben: So we’ve come a long way. So, you know, initially we had this, you know, in for me, of being a place where criminals did business, right? And then we had this sort of, Bitcoin boom. I remember Jamie Dimon said that Bitcoin was worse than tulips. And then, it just seems that, you know, as time has gone on, more and more institutions have entered this space. A lot of the negative reputation has disappeared so, I think most people recognize that it’s not a place where exclusively criminals do business. And it seems like in the very recent past, there have been a number of key masters, right? So, people like Paul Tudor Jones writing that letter where he said he was going to invest in Bitcoin, he saw it as a reputable asset, and the OCC saying that banks can now act as custodians and Renaissance Capital now being able to trade futures. Do you think we’re reaching some sort of tipping point where Bitcoin moves from an edge case niche financial product to something which is truly in the mainstream?

Adrien: I think there is no doubt about it. The only thing that’s missing is the regulatory approval in some countries — actually in many countries — and the ecosystem and infrastructure to build up so that the banks or the institutions that are moving in this field, have the technical capability to do so. What we see — our company Metaco is well-placed to know about this market because we’re in discussion with dozens of banks pretty much everywhere in the world — and we see the demand is very, very strongly increasing. It’s generally a demand that needs to start building today to be productive or operating in a couple of years. So, it’s not something that is so responsive. You’re speaking about large companies, large banks, or even smaller banks, but that have a lot of other considerations — the regulatory aspects, the risk, the reputation. The market is moving now and it’s a given, at least to me, that what we knew about Bitcoin — five, six years ago, it was the preferred currency of the dark web Silk Road markets to buy drugs, weapons and pay hitmen — is very far away now. And Bitcoin criminality, of course, is always going to exist the same way that you still use dollars for terrorism financing and money laundering or whatever criminal act — or Swiss franc or any other traditional currency. Bitcoin is not going to be an exception. Of course, there will be criminal activities with Bitcoin. But Bitcoin is becoming much more of a legit currency. Cryptocurrencies in general are becoming much more legit. And we see it concretely happening with regulators opening up everywhere in the world and reputed banks moving in this field, also.

[00:51:42.10] Ben: Did you ever have any doubts that cryptocurrencies and blockchain would become a mainstream phenomenon?

Adrien: I personally never had doubts about it, otherwise, I would have probably sold my coins multiple times in the last seven years, as the market crashed — which happens regularly. I think for me it was clear, and it still is clear. What I could never have been 100% convinced is whether Bitcoin would be the winner, or Ethereum, or something else. I’ve also made a lot of wrong bets on some of these other currencies that I did not invest in, because I thought they would never succeed. And actually, those things can be worth more than a billion today. So, nobody really knows, I think Bitcoin is here to stay and I think it’s going to be a very, very strong new asset class on the market as it becomes more mainstream. I’m pretty sure that the other smart contract platforms on the market, like Ethereum, are here to stay. They have this very strong network effect today, where they’ve almost established themselves as standards. So, a big question has always been which of these cryptocurrencies are going to survive? But I think we’re very close to having a concrete answer to that question today.

We, at METACO, focus on infrastructure, and then we work with regulated partners, which are banks, in making sure that they have the most solid and professional infrastructure to protect their assets, to start tokenization use cases, do anything that is related to the blockchain.

[00:52:53.27] Ben: I just want to maybe finish off by talking a bit more about Metaco itself. So, you recently raised a 17 million Swiss francs series A round in the middle of the COVID-19 pandemic. So, that would seem to indicate that this space, again, is hot and becoming mainstream. But can you just talk a bit about why you’re different from some of the other companies that provide custodian infrastructure? Do you think it’s because you’re principally on the side of the banks and the financial services companies?

Adrien: Yes, indeed, we’ve gotten through a Series A financing round, where we raised 17 million. To be fully transparent, we started the fundraising before the COVID. But, you know, it doesn’t change much about the outcome, which is, you know, raising funds takes more than six months.

Ben: And it was a larger raise than you were initially seeking, right?

Adrien: Oh, absolutely! We aimed to raise 8 million, we ended up with more than 20 million on the table and we settled at 17 because we didn’t want to get into a lot of negotiation about new valuations, reducing dilution, etc. But it was a very successful round. To be honest, it was not the easiest period to close such a round. It is clear that a lot of venture capital funds on the markets stopped any discussions they had not just with us, but with any company on the market because they had to focus on their existing portfolio of companies that maybe may have been suffering because of the period. I think we’re getting back to normal now but we’ve been extremely successful in also the companies that we brought as shareholders. You know, Standard Chartered Bank is one of our shareholders, Zuericher Kantonalbank — it’s massive players in the banking sectors. Standard Chartered is a global custodian, Zuericher Kantonalbank is one of the most reputed banks in Switzerland. We brought a company called Giesecke+Devrient, which is one of the security giants that is supporting central banks everywhere in the world, and that is also very much focused on Central Bank-issued Digital Currencies, which is one of the reasons for the investment in Metaco. So, incredible investments and opportunities opening up with these different new partners and shareholders.

Adrien: I think as a general comment on the company, we are very special in the sense that we are specialized engineers in cryptocurrencies, in blockchain, in security, and obviously in software engineering, but we don’t focus so much on regulated services. We actually don’t want to become a regulated company. We focus on infrastructure, and then we work with regulated partners, which are banks, in making sure that they have the most solid and professional infrastructure to protect their assets, to start tokenization use cases, do anything that is related to the blockchain. And so, for that today we have the chance of still being very much of a startup. We are agile, we can take decisions very fast, very efficiently, depending on the market conditions. But, at the same time, we’re backed by extremely solid companies, we have a lot of liquidity and that gives us all of the opportunities to scale not just in Switzerland, but in Western Europe, Germany, and Singapore, Southeast Asia, and in North America.

Ben: Fantastic! Adrien, thank you very much for your time!

Adrien: Thank you, Ben!

Hard Truths about Digital Banking (#32)

Structural Shifts with Leda GLYPTIS, Chief Client Officer at 10x Technologies

We’re discussing with Leda Glyptis, a self-described recovering banker and lapsed academic, who’s worked in technology implementations for the last 20 years. Leda is one of the leading voices in banking and FinTech today, she has served as Chief Innovation Officer at QNB group, she was Director of EMEA Innovation at BNY Mellon, and most recently she was Chief of Staff at 11:FS. In this episode, Leda and Ben discuss what a Chief Innovation Officer actually does, whether innovation can come out of innovation departments, what most companies miss when they talk about culture, why emotions are holding back traditional and challenger banks from making money, why selling banking services like supermarket offers doesn’t work and what banks should be doing instead. For more information on Leda, look up the hashtag #LedaWrites on Twitter. She publishes an article every Thursday.

Leda recommends


  1. One book: “To end all wars: A Story of Loyalty and Rebellion, 1914–1918” by Adam Rothschild
  2. One influencer: if you don’t follow Bradley Leimer already, I don’t know what you’ve been doing and you don’t know what you’ve been missing
  3. Best recent article: ‘Can empathy be the cure’, by Theodora Lau
  4. Favourite brand: Converse All Star
  5. Productivity hack: I have ‘writing spaces’ — windows of time in spaces away from my desk where I write with no interruptions, no internet access and usually with a specific time box imposed by a friend arriving to join me in a café or park at a given time or by virtue of doing it on a flight or train ride.

One should only build the technology that is tied to their differentiator and partner or buy the rest

[00:01:28.12] Ben: Thank you so much for coming on the Structural Shifts podcast! I wanted to start off by asking you how one goes from studying social and political science to becoming a banker?

Leda: First of all, thank you very much for having me. The answer to that is ‘by accident’. I have always found it extremely impressive and confusing when I hear people talk about their careers and say, “You know, when I was 17, I decided I want to do this, then I had a plan, and I did it.” I don’t know who these people are. This was not me. Mine was entirely accidental. As I was finishing my Ph.D. with a series of deaths in the family which knocked me for six, I found myself sort of delayed and frustrated, ended up getting a job in, actually, private security of all things, and was my first taste of corporate life and working with technology investments — because the company was investing in non-weapons defense technologies at the time. And I found myself quite far away from academia, in a place that was interesting but didn’t make that much sense. And I chatted with a friend one day saying, “There are parts of my job I really like, parts of my job I don’t like, but I really don’t know what to do now, where to go next.” My friend said, “Well, we’ve built some software. We want to sell it into banks, but we don’t like people and things. You like people and things. Why don’t you join us?” It was an absolute audacity of your mid-20s. I thought, how hard can this be? And it turns out, it was quite hard, but it was also quite incredibly interesting. And I fell sideways into banking IT, and I haven’t looked back since, to be honest.

[00:03:02.08] Ben: I wanted to ask you: so, your last job in banking was at QNB and you were Chief Innovation Officer. What does a Chief Innovation Officer do? So, for example, is that a role that holds a budget, or is it one where you sort of seek to influence the rest of the organization and guide them towards some sort of digital future?

Leda: It absolutely varies. In some organizations, the Chief Innovation Officer is part of a marketing effort and they’re there to drive organizational learning in and organizational positioning out. In those cases, the job doesn’t have much of a budget, and it tends to be all about teaching the organization what they should know and helping the organization tell a story to the market about how they’re thinking about the future. Then, there’s another type of Chief Innovation Officer that it’s all about the third frontier of technology — so, the stuff that is really out there, that is not going to be useful or usable for the next 10 years but the bank should be thinking about them. They’re doing a lot of experiments, and they tend to have budgets for POCs, but not much beyond that. And then, there is the Chief Innovation Officer that is essentially the new technology IT person. So, I would say that my role at BNY Mellon was a combination of the first and second. So, while I was at BNY, my role was a lot about bringing learning into the organization and helping the organization position itself in a changing market, and running experiments with technologies that, at the time, were very new for us. My role at QNB was very different. It was, what are the things that we should be doing and we should be seen to be doing for the type of corporate citizenship we want to have in our chosen markets, both in Near East Africa but also in the sort of Far East subcontinent and beyond — Southeast Asia, where competition and technical literacy was extremely high. So, the Chief Innovation role for QNB was, “Come in and help us do the things we need to do fast, but also help us move the needle a little bit on the ways of working internally.” And I say ‘move the needle a little bit’ because a lot of Chief Innovation Officers are all about the internal workshops. This was, I would say, more indexed into doing things that were business focused and external-facing without changing the infrastructure of the bank. So, it was things that could either plug into that infrastructure or stay on the glass, and less about changing the ways of working. So, to answer your question, it could be anything, and my two innovation roles have actually been very different — but very useful in the sequence that they were in because a lot of the experiments we had done at BNY Mellon were the learning I needed in order to go straight into implementation at QNB.

[00:05:56.05] Ben: Do you think it’s a more important role than it was in the past?

I don’t think there has been a clear sense of where profitability will lie in the future.

Leda: Perversely, I would say no. Actually, somebody called me recently and said, “Would you take another innovation role?” I was like, “Nope.” I think it was an extremely important role early on because it both signaled internally and externally, that the organization is engaging with some hard topics. And also, it showed an acknowledgment that the way we work, the way we learn, isn’t right for the way that the market is moving, and therefore we need to change. Fast forward almost 15 years later, there are very, very few organizations that have moved the needle meaningfully in terms of either way of working or transformative technology use. Some have, but they’re few and far between. And even those that have, haven’t done it through their innovation departments. So, I would say that the function it represented as a department is more vital than ever — the new ways of working, the different deployment schedules, leveraging technology differently, all of that is more important than ever — but I would say that the structure doesn’t work anymore. What the innovation departments taught us is that we can’t do it through innovation departments. It has to be right at the heart of the business.

[00:07:10.10] Ben: And do you think that’s why those banks have found it so hard to introduce significant change? Because there hasn’t been this sort of CXO buy-in, other broader buy-in of management. And therefore, do you think it’s as much cultural as it is technological change that’s needed?

Leda: Yes and no. So, I think there is a cultural change that is bigger than the technical change — I think you’re right — but I think it’s much more systemic than saying people are resisting. I don’t think people are resisting. I think the structures we have created are not conducive to the type of decision making we need. Everything from the fact that you may be running an agile project in your part of the bank, but the testing schedules for the wider bank are waterfall and therefore you need to book in your testing before you’ve started building. It’s mad, right? It makes no sense. But it is how it is. Similarly, the risk matrices you apply, the way you measure success on a quarterly basis, the way that shareholders measure success, all of those things we bundle under culture change, but it’s actually much bigger than culture. It’s about how we build up the business, how the business reports success to the owners of the business, and how the business makes sure mistakes are not made. So, it is facile to say culture and dismiss all of those things as an attitude problem. It isn’t. I would say that the biggest challenge — when we started this journey, part of the question was, “Well, are these technologies real? Are they useful?” And we spent a lot of time in labs, testing and finding that the technologies are both real and useful. They’re robust, they’re scalable, they reduce the total cost of ownership, they do all the good stuff. But they also fundamentally transform the business model, both in terms of how they enable you to operate in a way that you’re not prepared to operate in — the speed of decision making that these technologies enable you to do, you don’t have the governance for. So there’s a big change piece that is around governance and approvals that is human, yes, but not just cultural; it’s organizational. The second piece is that cheaper infrastructure and faster infrastructure kind of requires a different business model because you can’t go charging the same for a very different service. Your customers are wise to the fact that you do different things and potentially less from a human perspective. So, I would say that the challenge hasn’t been technical for a while. It’s governance and monetization.

Maybe what we’re seeing is a transition to a world where retail banking is a public service utility. And I’m not saying it necessarily needs to be run by the government but it is approached by a utility, and therefore the profit structures become very different. And that’s something that your challenger banks don’t necessarily address

[00:09:46.03] Ben: On that topic of business models, banks, in general, know where they’re headed in that direction — you know, what the business model opportunities are — and if they know where they are, which one would suit them best?

Leda: I don’t think they do. I don’t think they do. And it’s not an easy thing. I don’t think there has been a clear sense of where profitability will lie in the future. I was recording a podcast with John Egan from BNP Paribas, recently, and he led with the statement, “Banks don’t know how to make money in the new situation. Therefore, what are the options?” And it’s very refreshing to hear someone say that from within a bank, although admittedly, he doesn’t sit on the traditional side of the bank. I think there are a couple of pieces there. One is the appetite of the market is shifting. Certain products that we were comfortable seeing being profitable, aren’t profitable anymore. Retail banking isn’t profitable. Mortgages, credit cards, institutional banking, transaction banking, investment banking, that’s all still profitable, but the regulatory pressure to change pricing and the way that money is made is definitely making it less profitable than it once was. It’ll be interesting to see how far the regulator will push certain things. I’m seeing banks change their infrastructure and invest in technology, not because they want to be seen as innovative, but because they want to lower their total cost of ownership. They’ve reached a point where growing their top line is much harder than it used to be, then, actually reducing your operating costs is the only way to increase profitability. So, we’re definitely seeing that shift. But I would say that monetization is a challenge for the challengers — funnily enough — not just the traditional banks, because the challengers, they are extremely well-capitalized, burning through cash, building up something that is very, very beautiful from a UX perspective, that is, challenging banks, the assumptions we had on how hard or easy it should be to do certain things, they have definitely reduced what has now come to be considered predatory pricing and all of that. But at its bare bones, their business model is not too different. I was at a panel a few months ago, and Nick Ogden turned to Anne Boden and said, “What challenger? Your business model is exactly the same as everyone else’s!” And Anne made some very interesting points around pricing and focus on the consumer. And she’s right in all of those points, but actually, at the level that Nick was raising the challenge, he is right. If you look at the challenger banking model, their proposition was, “We can make money the same way, but by being cheaper to run, we can also be cheaper to use. So we will pass that benefit to our customers.” The reality is, retail banking is not profitable, not in the same way it used to be. And the traditional banks are making money because they have universal banking. And the challengers are looking at their business model going, “Oops, that doesn’t make money.” You know, there are the Revolut’s of the world that do make money through crypto trading. There are other ways, but the traditional retail banking, as we knew it, is only profitable for the big banks, after the third or fourth product per customer, which is not a scale that your challengers have. And I went on for an hour here to answer a very straightforward question. I don’t think they know how to make money. And I don’t think it’s an incumbent problem. I think it’s a systemic problem. It’s banking, as we know it.

[00:13:26.04] Ben: If retail banking becomes some sort of a lost leader almost, to around which you have to bolt on more profitable businesses, what does a more radical business model look like? One that accepts the premise that, you know, retail banking is not inherently very profitable.

Leda: I would start with the proposition that maybe it doesn’t need to be. Maybe what we’re seeing is a transition to a world where retail banking is a public service utility. And I’m not saying it necessarily needs to be run by the government but it is approached by a utility, and therefore the profit structures become very different. And that’s something that your challenger banks don’t necessarily address because, in order to have a credit card and an affordable mortgage and an affordable consumer loan, you tend to have a balanced book, underwriting, repacks, and investment vehicles that move that debt around and leverage it in instruments that are highly complicated and have nothing to do with retail banking. And that is how you make mortgages more affordable. That’s how, allegedly and theoretically, you make credit cards more affordable. Now, I think there are two questions inherent in the question you just asked. One is, can you create retail banking that is systemically independent from institutional transaction investment corporate banking? And I would say not with the current pricing models that we’re used to because things slosh about and move around. And the second is, can you create a business model that says, “It won’t be particularly profitable, we will do it at cost and we will perceive it as a utility.” It is possible. The technology we have to do it would allow for the running cost and maintenance cost to be lower. But I would say that the cost of lending will probably go up, or you will have to pay for a current account, which in some societies already happens, and people wouldn’t even blink. But in places like Britain, people were like, “Whoa, what’s that all about?”

even if it makes perfect sense to focus on the thing you’re best at or the thing customer comes to you for and leave other things to others who are better at them, there is an emotional blocker there

[00:15:30.03] Ben: Do you think we’re seeing the first indications that that’s actually happening? In the sense that the manufacturing balance sheet part of the banking is becoming more and more heavily regulated and I guess less and less profitable? And then secondly, because we’re already starting to see big bank mergers, which would suggest that we’re moving into a phase now where institutions are trying to just maximize economies of scale, which is what’s at play here. Would you say we’re already heading in that direction or we’ll take a more direct intervention from governments or regulators to make it happen?

The challenger banks measure their success in terms of accounts or in terms of being primary accounts, but the number of people who close their high-street bank account is minimal. The whole notion of being multi-banked is a given now.

Leda: It’s too early to tell, actually, is what I would think. We’ve definitely seen, as you rightly point out, some mergers and consolidations. But in the world of banking, those mergers and consolidations — or de-mergers — are part of how business is done. We have not seen big banks exit retail banking, which I bet is tempting. But actually, bankers, not to bash them as cynical, but I have never met a bank CEO who didn’t feel a sense of duty towards the community they serve. And even though no bank CEO’s retail arm is where the money is made, they all feel extremely strongly about retaining that. And I can’t stress that enough, there is no bank out there that I can think of — actually no, I lie; there are a couple in very particular circumstances — but for the vast majority of banks, their retail division either breaks even or loses some money. But no one ever considers killing it, because they do feel a sense of duty and responsibility to their communities. And they don’t need the regulator to tell them that. They actually do that themselves. So, to answer your question in the negative, the obvious thing would be to kill your retail banking and focus on the profitable stuff, but people don’t. And I don’t think the regulator would permit it, even if people were inclined to go that way. I think there will be a couple of things: there will be consolidation, as you say, because there’s definitely profitability in scale. I think we will see an acceptance that certain products will become less profitable, and that will become the new normal. And I hope — but I have seen very little indication of that — I hope that people will start making the hard decisions to invest in the infrastructure of the core entity, not the greenfield captives, not the small experiments, but really create an overhaul of the infrastructure of the bank, that will mean that the cost of ownership and the cost of doing business will go down. And therefore, yes, you know, the return on equity will be terrible for a few years. But once they’ve paid off the cost of build, then actually, they will have a much lighter infrastructure. So the fact that certain things are not as profitable won’t matter as much, because they’ll be much cheaper to run.

[00:18:26.28] Ben: I want to come back to that point about how banks should transform technology. And so, I’m going to come back to that, but just in the meantime, I wanted to ask you: so, if retail banking doesn’t necessarily get split off from other types of banking, do you think you’ll have different players doing the manufacturing from those that do the distribution? Because, as you say, the manufacturing part is capital intensive, it’s not very profitable, but the distribution part seems to be where you could achieve network effects and where you could achieve much higher margins and potentially very low cost of customer acquisition and so on.

No one will ever enjoy buying banking services. One of the things that the banks have to accept is that you can make it as snazzy and fun and cute as you like, it’s not going to change the way people feel about it.

Leda: Well, you speak sense, and that should be the direction of travel, right? Whether it will happen or not, will depend on a lot of things. Regulation is one — we don’t have a clear direction of travel from the regulators, but there is an increasing push for separation clarity and demarcation lines between different pieces of the life cycle that the regulator is pushing towards. So, that may be a factor. But what is holding banks back from doing this is emotional, it’s not practical. I mean, over the years — I worked in a transaction bank and custody bank and I kept saying to them, “Plumbing is amazing! Why do you care about the sexy stuff?” Like, plumbing is where you can make money, you’re needed, but it is unsexy and people emotionally want to do the more exciting stuff, the client-facing stuff. So, even if it makes perfect sense to focus on the thing you’re best at or the thing customer comes to you for and leave other things to others who are better at them, there is an emotional blocker there. So, you see, for instance, quite a lot of the traditional high-street banks who don’t actually drive profitability through their retail businesses, should say, “I’ll tell you what: open banking has landed, I’m not very good at this digital journey stuff. But people still want to have their money in a place that feels secure, so why don’t you, Mister Startup, create all your propositions on top of my platform and account, your customers’ money will be in an HSBC account, but they won’t even see HSBC, they will see PensionBee and Revolut. Neither of them is doing that, and there are many reasons for it. For the challengers, it’s both the independence that you get from having your own license, but also the feeling of being a grown-up and sitting at the grown-ups table, and not just being a little app that sits on top of another system. The traditional banks are convinced from the old way of running relationships, that owning the customer is important, right? If you sit inside a traditional bank, there are usually fights between departments about who owns the customer. The notion that you need the customer touchpoints, you need to own the customer, that’s where profitability comes from, is actually complicated, convoluted, and in some cases, entirely misled.

Leda: The point is that you have the challengers spending a lot of time and money creating infrastructure that, to your point, should be created by someone else and it should be sold as a utility to all banks. The traditional banks are spending a lot of time trying to create propositions and user journeys that they’re not very good at. Meanwhile, they don’t make any money from them and they could just sit back, take the deposits, let other people be creative. They were symbiotic relationships that could have been explored and haven’t. And I think we’ve reached the point now, where none of what exists makes sense at scale. All of the various banking players will need to think about scalable and robust infrastructure. And, as part of that same discussion, they will need to think, “What am I for? And do I need to build all the bits that I will use to be that?” And my personal view is one should only build the technology that is tied to their differentiator and partner or buy the rest because it means that you carry less legacy, you carry less need for dependence on know-how, and if technology moves on and your provider doesn’t, then great, you change providers.

[00:22:37.11] Ben: So if we think about, I don’t know, eCommerce, right? You’ve got Amazon as an aggregator, and Shopify as a platform, right? How do you think it plays on banking? Do you think banks can be aggregators? Or do you think they’re destined to be platforms?

the data that you need for timely, intelligent, embedded financial services is there, but nobody is doing it yet

Leda: That’s a very good question, and I think it depends on two things. One is the economics of it. So, the way that financial relationships are monetized right now makes it very hard to go down, actually, either of those paths, because the way you make money is hard to unbundle. It’s not a case of, “Okay, now you will be doing 30% of that process, so you get 30% of the revenue.” It’s sadly not how it works. The second challenge is, which bank has the technology to actually even start thinking about that? The people who are quietly, but interestingly, doing quite a lot of that work is Standard Chartered. They are looking at the types of work they have historically done and creating partnerships to allow them to retain their usefulness. So, it’s less about, are you an aggregator or are you a platform? And more about, in what you currently do, where do you retain brand relevance? And where are you still actually a meaningful part of the puzzle? And who can you partner with upstream and downstream to make that piece where you’re still good, bigger? And the only bank I’ve seen do that to any meaningful scale, actually, so far is Standard Chartered.

[00:24:08.19] Ben: The big advantage that the incumbents have, as you say, is every challenger is spending hundreds of millions of dollars on trying to acquire customers that the incumbents already have.

Leda: That the incumbents already have and don’t lose, right? Because it’s actually a false statistic we see. Because you are absolutely right. The challengers measure their success in terms of accounts or in terms of being primary accounts, but the number of people who close their high-street bank account is minimal. The whole notion of being multi-banked is a given now. I don’t know a single person who has one bank account.

[00:24:43.27] Ben: Yeah. So, you’re almost saying that that’s not a meaningful statistic anymore, right?

Leda: No. So, I’ve done a very informal survey of a few friends of mine who took the leap, so to speak, and started paying their salary into a challenger. And so, rather than having your traditional bank for your salary to be paid into when you’re spending money, playing money in your challengers, they actually started paying their salary into their Starling, their Monzo, their N26. But you ask the next question, if the vast majority of them sweep what they don’t expect to use immediately. So, actually, the deposits, which is where the money is made from a banking perspective, still go to the traditional institutions, either because they offer better interest rates, or because they offer higher protection, better security. The motivations are multifaceted, but if you say that the main thing that a banking player will monetize is deposits, then even the people who pay their salary into the challengers — and I would say that that number is nowhere near as high as the total number of customers, obviously — even these guys don’t leave their deposits in the challenger in any meaningful sense.

we will see much more embedded finance, much more embedded payments, actually much more complicated financial transactions being embedded in the commercial activity, but it won’t be driven by finance. It will be driven by the consumer need and the consumer opportunity.

[00:25:57.29] Ben: And do you think that’s like some sort of proxy for trust? And do you think trust is the key attribute to be able to do aggregation? I.e. I’m going to introduce you to other products and services you might find useful and value-added, because you’ve given me your trust?

Leda: Trust is absolutely vital. However, I think the main thing is that people don’t want to think about any of these things unless they absolutely have to. So, the proactive up-and-cross sell the banks are trying to do is noise. Nobody says, “Do you know what I’m gonna do today? I’m gonna pick a car loan. This is my plan for the afternoon.” People will say, “I have to renew my mortgage and I hate it, and I’ve been putting it off.” No one will ever enjoy buying banking services. One of the things that the banks have to accept is that you can make it as snazzy and fun and cute as you like, it’s not going to change the way people feel about it. The second thing is, people want these things to be available when you need them. So, I keep getting mortgage offers from my bank — my high-street bank — even though my mortgage is paid for out of that bank; but I get first-time buyer offers on a weekly basis. So, the data that you need for timely, intelligent, embedded financial services is there, but nobody is doing it yet. And I mean, from the standard banks. And I would say that the challenges are not doing as much of it as they could.

Leda: There was a proposal I saw recently that N26, was going to be doing this. I don’t know whether it actually went live or it got delayed because of COVID. But essentially, it was, if all your movements take place within your N26 account, N26 says to you, “Hey, leader, you pay this much for rent, you qualify for this kind of mortgage, and you can afford an apartment in the neighborhoods you do most of your spending in. So, in the neighborhoods where you spend your life, you can afford to buy.” Those data points are actually available, either publicly or through your own protected account. Now, that is a useful service, right? That is intelligent, embedded finance. But I don’t think that my mortgage provider saying “Do you want a credit card? You can afford one.” Or, my high-street bank saying, “Would you like to buy a house? We can help you.” is in any way helpful. Trust or no trust — because, of course, I would trust them to execute — but it’s not like the supermarket where you will buy your favorite shampoo because it’s an offer even though you don’t need it. And yet, the way financial products are promoted is exactly like your supermarket offers. People will see it and buy it. No, it doesn’t work that way. So, intelligent embedded finance is technically possible. It’s absolutely possible from a data perspective. When it becomes the way we offer services, then the people who do it best will be the people who read the situations best, not the people who have the best pricing.

digitization is not about allowing the banks to dominate this conversation. It’s about allowing them to stay compliant and relevant with the way people live

[00:29:01.18] Ben: So you’ve mentioned the term ‘embedded finance’, which is something that’s become, I think, really quite fashionable, over the course of 2020. Do you not think that it will be embedded into products and services that aren’t financial at all in nature, i.e. those that have the highest engagement? Because that always seemed, to me, the problem, as you said, which is, I only go into my banking app when I need to do banking, whereas, you know, I’m in WhatsApp all day. So, isn’t it easier to try to engage me with financial products and services through apps and services that I’m regularly using, and in which I have the pool of engagement?

Leda: I would expect so, but I think that the starting point would be interesting. So, for instance, the Uber example is a very interesting one, right? By taking away the process of payment, they’ve given you back, what? Two minutes of your life? And yet, it felt like a revelation the first time it happened. Uber didn’t create embedded payments to help MasterCard make money. They did it to create a proposition that would make them more attractive to the user. So, I think we will start seeing embedded finance for that purpose. And it will put everything on its head. I was speaking to someone who works for Experian, and they were saying, “Creating a good credit footprint has become second nature. We all know you need to brush your teeth and have a good credit score.” But the reality is that assumes you need to enter the credit system. That’s an assumption that we have made without even thinking about it. But is that the right thing? Is that something we should be encouraging new generations to do? So, for me, the interesting thing is, we will see much more embedded finance, much more embedded payment, actually much more complicated financial transactions being embedded in the commercial activity, but it won’t be driven by finance. It will be driven by the consumer need and the consumer opportunity.

[00:30:56.12] Ben: If I were to summarize, you’re saying that it will be more intelligent, more useful, and it will be pull not push, right?

Leda: Yeah.

[00:31:03.25] Ben: Changing the topic slightly, do you think that open banking is the catalyst to move us to this world of pull not push, and intelligent and useful embedded banking services?

the consumer will not choose the bank that has the best user journey; they will choose the bank that gets out of their way the most

Leda: I was asked a similar question not too long ago, and we had been talking about dance earlier and something entirely unrelated. And I used the analogy in a way that was relevant in the moment, but I think it still works. And what I said is, gravity is essential for dancing. But nobody thought, “Gravity is great. How could I use it? Let me invent dancing.” And the thing that has been frustrating for most big organizations that open banking came, and the banks kept looking at it until the eyes bled, and couldn’t figure out how to make it work for them, how to make money through it. And I heard equally a lot of startups looking at it and going, “There’s an opportunity in there but I don’t know how to monetize it.” And I think that if you stop staring at it, and you start going down the path of solving real problems, then open banking will be an enabler, a facilitator, and an accelerant to things that you can do to solve real problems. A little bit like you couldn’t dance without gravity, but the two are not… You know, nobody came up with dancing or slides by thinking I need to use gravity for something.

the boat that said ‘digitization is your key to future profitability’ has sailed. The boat now says ‘digitization is a key to survival and compliance’

[00:32:20.16] Ben: It seems to me that the whole digitization of the industry banking, is the new driving force to embedded finance, all these other downstream applications that will be super useful and value-added. But it doesn’t seem like open banking itself is actually that relative to everything else that important. Or do you disagree? Do you see it as being really quite significant in pushing us towards this?

Leda: I think open banking is going to be significant in enabling solutions that wouldn’t have been possible before. But it’s for the consumer, and for the creativity that the industry will see. It’s not for the incumbents. I think that, as I said earlier, embedded finance, and those truly empowering capabilities won’t come from the banks. They might be powered by the banks, but they won’t come from the banks. So, the revolution and the truly transformative pieces won’t be because the banks finally found a way of doing this. It will be because somebody thought of something that is now possible because of open banking. So, digitization is not about allowing the banks to dominate this conversation. It’s about allowing them to stay compliant and relevant with the way people live. So, for instance, at my high-street bank, you can’t set up an international payment on the app. You can only do it online. Now, if you’re not a banker, you either don’t question that, or you assume it’s for security purposes. If you are a banker, you know that’s because their systems don’t talk to each other and the online bank is on an entirely different infrastructure than the mobile bank. The reality is that a time will come — and that time is not far away from us — that the challengers and some of the incumbents will solve some of these problems. So, the consumer will not choose the bank that has the best user journey; they will choose the bank that gets out of their way the most. And by getting out of their way equally means not bombarding them with products they don’t want, but also enabling them to do things on-the-go. I remember a few years ago, I was here, in Athens, visiting my parents, and I needed — it was a routine KYC check for my mortgage. I couldn’t do it remotely. I had to go in-person into the branch that has changed in the intervening time. So, there are things that are hygiene factors these days, both because the customers expect them and because the regulator expects them, but I think that the boat that said ‘digitization is your key to future profitability’ has sailed. The boat now says ‘digitization is a key to survival and compliance’.

[00:35:06.26] Ben: I suppose asking the question a different way, do you think that… So, open banking kind of creates an obligation to share customer data. Customers, as we observe in other realms, they’re happy to share their data where they perceive there’s a utility for doing so. So, do you not think that this will happen anyway, as the right use cases emerge?

Leda: I don’t think that use cases will come from the banks. Now, I think open banking is not an obligation to share data, it’s an obligation to share infrastructure that enables the sharing of data, should the customer consents to it. And the onus was on that consent mechanism, because banks would allow you to screen scrape in the past, which is extremely insecure, but cheaper to do. I think creating that infrastructure for consent and control has been what? Has been a sort of a point of contention, because it was expensive, and the banks couldn’t figure out how to make money with it. But I firmly believe that the creative solutions that leverage open banking are not going to come by people who look at open banking and think how can I make this — make money? They will come from people who are solving problems and go, “Oh, look! With open banking, it’s much safer and easier to do that.”

[00:36:18.12] Ben: What effect you see COVID-19 having on banks, on B2B FinTech companies, and then on the B2C challengers?

Leda: I think it very much remains to be seen. I’m extremely skeptical of all the triumph of, ‘this has sealed our digital efforts and accelerated and…’ I don’t see that. What I see is, banks that knew they had challenges and problems in their infrastructure faced those problems by throwing more people at the problem, the people working extremely hard to create bridging solutions, and delivering for the clients and the bank being extremely proud of their people — as they should be. And then, the conversation of whether they should actually challenge change, restructure being not even started. So, I would say that the banks have done well in the midst of COVID because of sheer hard work, creativity, and determination on their human sides. But not because their systems were up to scratch. And I’m not seeing anyone saying “Okay, our systems were not exactly up to scratch, and I should do something about that.”

you can’t change systems without changing the supporting economics and surrounding governance. Which means that if you’re doing the slow refurb process, you’re going to have a schizophrenic organization for quite a long time

[00:37:30.03] Ben: What about, do you think, they’re investing more in B2B FinTech solutions to help them to digitize faster or to, at least, service customers digitally faster than they were?

Leda: There is some loan disbursement work that has gone ahead. But honestly, what happened when COVID hit is that people went into panic mode because they needed to deploy quick solutions for particularly loan holidays for both businesses and individuals. The systems were not set up to do that. And the reality was that if you have a COBOL-based system to change an interest rate is two months’ worth of development work. The reality is they threw the people at it, they made the change, but the system is still COBOL-based.

[00:38:13.24] Ben: And then, what about the B2C FinTech companies? Because there was a piece that was written by McKinsey, I think it was called, “Rerouting Profitability” or something, and they made the point that all of these challenges in the unit economics of some of these businesses have been laid there, and now they’re struggling to raise new funding, and the FinTech sector is an existential crisis. How do you react to that kind of comment?

Leda: I’ve heard about the existential crisis before. I saw that report. And they were saying the FinTech sector is an existential crisis, then the FinTechs responded all over Twitter and LinkedIn, “You’re the one, an existential crisis”. And the reality is, no one is an existential crisis. This is a long game. It’s a long game. And in the last 15 years, everything is moving in the direction we said it would, but because it’s not moving as fast or as radically and because the startups that were around at the beginning are mostly not still around, therefore, the winners and the losers are not as black and white, people are feeling a little bit more relaxed than they should. But we said 10–15 years ago, the economics of banking are changing, the significance of technology is changing, the world will be more connected, service orchestration will be the name of the game, unit economics will change. All of that is happening. It’s just happening slowly, as you should expect, and therefore, I don’t understand people who are trying to find comfort in these radical revelatory moments of, “We fixed it” or “This was wrong” or “This is right, and that is wrong”. It doesn’t go that way. There is a direction of travel and we’ve been very much moving in that direction for 15 years. Certain events accelerate certain parts of the journey — regulatory moves, certain mergers, the rise of the Chinese giants, COVID. But it’s not a pivotal moment after which everything is different.

[00:40:10.02] Ben: What about payments? Do you think the impacts on payments from open banking has been more transformational?

Leda: I mean, my answer when it comes to open banking is, it is what it is, right? There’s no change. Payments are in an area that has had a lot of focus and has had a lot of innovation over the last 10 years. It hasn’t been transformative, because the monetization relationships are similar. But we’ve seen incredible speed in payments, particularly cross-border. So, payments, I would say, is a place where we’ve had so much innovation and creativity, that unless the rest of the banking infrastructure starts catching up in terms of the build of the systems that can support, there’s only so much more that we can see in payments, because there’s a little bit of saturation.

[00:41:00.10] Ben: I want to go back to something you said earlier on. If we think about this, there’s typically been a few approaches to technology transformation. One is the Big Bang approach, which I think is becoming increasingly less viable or palatable. And then you’ve got this progressive…

Leda: People lose their jobs when they do that, right?

Ben: Yeah. I mean, I just think it’s just, the time to value is too long, the risk to value is too high. And so, we’ve seen people moving to more progressive renovation type renewal strategies, and then also, as you said — I think you used the term ‘greenfield captives’ — but this idea of building a new digital bank, and then trying to migrate customers and books of business to that new bank. So, first of all, I’m sort of inferring you’re a bit of a skeptic when it comes to this build and migrate strategy. So is progressive renovation the right approach to technology transformation, or do you see another option?

Leda: There are many options, right? One is Big Bang, the other is refurbish as you go, and the third is build and migrate. We have not seen the migrate part happen yet. Some of the greenfield builds have failed to provide the skills. So, First Direct is a good example, right? Everyone who uses First Direct loves it. Why am I still on the old HSBC systems? I don’t know. But they haven’t migrated. Now, I would suggest that it’s too late now because even though First Direct customers are very happy, the technology is almost 20 years old now. But even with a successful challenger, no migration took place. Then, you have situations like RBS’s Bo where, for whatever reason, they pulled the plug on the effort. Now, a lot has been said, and a lot of criticism has been piled on top of RBS for killing Bo. I actually think that I don’t know enough about the ins and outs of it, but I think if you think something isn’t working, having the courage to say, “Pivot, move” is actually brilliant, is what we should be doing as well. That’s what we said our innovation departments were for. And the fact that quite a lot of the technology is being redeployed elsewhere shows that the experiment was not a failure. But the whole idea of build something at arm’s length and migrate didn’t work there.

Leda: There’s currently Mox in Southeast Asia, which looks to be an immense success — they’re onboarding a new customer every minute. Will Standard Chartered migrate customers on to there? No idea — remains to be seen. So, the build and migrate thing is brilliant as an idea and lower risk. It’s just that the migrate thing never seems to happen. The Big Bang approach doesn’t work, and we’ve seen a lot of very good CTOs stop being very good CTOs — in fact stopping CTOs at all. It’s the fastest way to end your career, right? So what are you left with? You’re left with slow refurbishment. And the thing about slow refurbishment is that it has two massive challenges. One is, it’s a long game, and people lose momentum and focus. It’s a long game. Like, if you start doing that, it’s going to take 10–15 years. And in year three people start going, “Are we still doing this?” And the answer is “Yep. And we’ll be doing it for quite a lot longer.” So people start losing focus, it stops feeling like a top priority, it feels like an endless log in a bottomless pit. The second challenge is that you can’t change — and we touched on it earlier — you can’t change systems without changing the supporting economics and surrounding governance. Which means that if you’re doing the slow refurb process, you’re going to have a schizophrenic organization for quite a long time, where part of your organization will have a different governance model and a different pricing model and that creates immense tensions, both in terms of the operating model viability, but also in terms of humans. Imagine a team that sits in the same office opposite to each other, half of them have transitioned to a new system with new governance with real-time approvals from risk and compliance and a different pricing model. And the guy sitting opposite you has to go to the risk committee. And if they miss their slot, they have to wait for three months. But that’s the reality: if you’re doing a slow migration, you have to change the system, the pricing, and the governance for each part of the bank, and then move on to the next one. And it’s not just the cost of running two parallel infrastructures until you can migrate and switch off. It’s the fact that you’re gonna have to be running two different organizations, from a governance and pricing, etc. perspective.

[00:45:26.24] Ben: One idea that I hear more often is, you know, as you said, I don’t believe there is a silver bullet — but this idea that maybe you can put some sort of orchestration platform in between channels and record-keeping, which enables you to deliver better customer experiences, and sort of buys you time to replace those record-keeping systems, which is where the real complexity and the real legacy lies. So, how do you react to that idea of introducing a new orchestration layer?

Leda: Bring it! Great! But you still need to fix the human governance, which seems to fall off everyone to lift.

[00:46:10.21] Ben: And do you think it’s issues of governance that are ultimately the reason why these greenfield captives don’t become the bank at large?

Leda: That’s a very, very good question, and ‘I am not sure’ is the answer. I would suspect the answer will be different in every captive. And it would depend a lot on whether the captive is expected to run on the existing bank infrastructure — in which case, it’s not just the governance, it’s also the infrastructure — or whether you have your own board and you’re essentially not just a separate entity name, but you’re genuinely a separate entity, in which case your decisions can be different. I think it varies. It could be lack of conviction, it could be the fact that nobody has successfully done it yet. It could be a case of, when is it big enough? Or when do you know? So, Mox is very young, so it’s easy to pick them as an example — Mox is succeeding by every metric right now, but it’s extremely early. Assuming that the plan is if Mox succeeds — and I hope they will, and I think they will — if the plan is, well, we expect that some of the traditional bank customers will choose to go to Mox, great! But if the plan is, we will migrate the customers when Mox has achieved size and scale, I bet you that nobody has specified exact numbers for that. It is so far into the future. But then it becomes a question of, okay, what is big enough? How long do you wait?

[00:47:37.16] Ben: And it’s not obvious that all customers will want that kind of service. And it’s not also obvious, to me, at least, that the regulator will allow it, because what happens to rural areas? What happens to non-digital customers?

Leda: The answer to that will be many-fold. I haven’t seen a regulator yet force banks to have branches. So, that could be a very interesting legal case that says, “If you allow Revolut, and Monzo, and Starling to have a banking charter without the responsibility to maintain branches, why are you putting the onus on me?” It’d be extremely difficult to have rules for one and not for the other, right? So, there is currently no obligation to serve the rural areas, there’s currently no obligation to have branches, there’s currently no obligation to serve the elderly. So you could see challengers that emerge that cater to those communities or you could find that actually, the way things go, they become even further underserved and marginalized. But with no obligation to retain a physical presence and the mounting cost of retaining a physical presence, I am not sure that the considerations you raised would carry the day — valid as they are.

[00:48:52.22] Ben: I guess there’s another reason to move fast, otherwise, you’re left with this sort of rump of hearts of expensive-to-serve customers. And I think it also maybe depends on something you said at the start, which is, whether this ultimately becomes some sort of public service utility, in which case, maybe there does become requirements about serving rural customers and things like that. A slightly different topic. So, I think we’ve been through the hype cycle with everything to do with cryptocurrencies, and digital assets, but it feels like we might be back into some sort of slope of enlightenment. What do you see is the role of digital assets in banking?

Leda: There are three different pieces there, right? And when this whole thing started, we couldn’t imagine them separate to each other. One is digital assets, the second is crypto assets, and the third is distributed architectures. I would say that distributed architectures and what we understood as smart contracts were a revelation, it blew our mind. But there are now ways of doing them that are much kinder to the environment than a traditional blockchain. There are ways of having a distributed architecture that isn’t DLT. There are reasons why you might still choose DLT, but you can have a distributed architecture in immutable records without DLT. So you would need some good reasons to have DLT that would go beyond those basic functionalities that, for a time, we couldn’t fathom outside DLT, but now we can.

Leda: The second thing is digital assets. And I think we were going in that direction anyway but the advent of blockchain and other digital assets forced us to create security of holding and transacting in assets that don’t even have any magic, physical representation. Because we have been dealing in digital assets and digital ledgers for a long time, but the assumption was that there was capital adequacy, that if I make a transfer to you, if the bank has that physical cash or that physical gold somewhere in its coffers, that doesn’t exist anymore. So the transition to regulating and understanding digital assets and creating a certain degree of complexity is there and is now also decoupled from crypto cash and crypto-assets. Which means that crypto has become its own segment, where part of what you’re doing is creating the distributed architecture and crypto and digital assets with the added layer of not having that provenance and ownership — essentially becoming a bearer asset, like money would be in the physical world, but in the digital space. And I think it’s not a space I personally have a massive interest in anymore. That’s not that I don’t find it interesting, is that there are only so many hours in the day. But I do find that for the industry, decoupling those three things has been helpful because then you can have the benefits of the architecture and the benefits with digital asset without getting into the moral and regulatory conversations around the crypto side, unless it’s absolutely what you were trying to achieve.

[00:51:59.13] Ben: Yep. Okay, last question. So, we’ve got this far and we haven’t talked about the technology giants — Google or Apple — moving into banking and finance. What’s the role of those mainly American and Chinese technology giants in banking in Europe?

Leda: I would say that the Chinese giants and the American giants represent a very different type of challenge because the Chinese giants have a very well-developed financial proposition. It’s not just payments, it’s investments — if you look at the two big Chinese entities, they started with payment, sure, but that’s not where they stopped. So, I would say that them coming into Europe presents a very interesting challenge because they’ve worked out how to become financial services provision players and they don’t need to build scale in Europe to become profitable, because they can leverage their scale in Asia. They already have scale. What will be interesting is how the regulator will treat their entry point, whether they will expect a lot of infrastructure separation — in which case they would need to rebuild their support, and their infrastructure in Europe in order to have that scale — or whether they would allow them to cross leverage. But I think it’s a very interesting thing with the Chinese giants in particular, that their regulatory framework has very much allowed those entities to grow because of how the regulatory framework is in China. You don’t have anything of that size in Europe, and that’s not an accident. That’s partly because the regulator is pointing growth in a different direction. From a US perspective, the giants that are being looked at as potentially entering our space are only dabbling in payments. So, they’re looking at extending whatever it is they’re currently doing into the next step, as we were talking about — the embedded infrastructure makes it natural for these entities to offer payment services, and facilitate some of those. There is no indication that the deeper credit lending and investment pieces are being addressed. The only pieces we’ve seen have been through partnership — you know, that short-lived partnership between Amazon and Wells Fargo and then more successful, but equally limited for now partnership between Goldman Sachs and Apple. We’re not seeing an appetite for those guys to become regulated financial services providers the way that Alibaba and Tencent have.

[00:54:33.01] Ben: Where do you think the bigger challenge comes from?

Leda: If you’re talking about the biggest challenge to profitability for banks in Europe, actually, I think it comes from the regulator, who’s increasingly demanding unbundling and transparency and simplicity and pushing for technology transformation without allowing the banks to pass that cost on to their customers. The business models that both of those two geographic units of giants represent would have to be tweaked a little as they enter Europe, but from a bank, multiple payment providers that sit on top of their infrastructure doesn’t provide an existential threat. Neither does a Chinese tourist making all payments through WeChat. It’s what happens about pushing them up and down the value chain, and how they monetize the place where they land, which is why I find the model that Standard Chartered is doing very interesting, because they’ve had to deal with those Chinese giants and have taken, to me, the logical path of, there are certain battles that are not worth fighting, because we weren’t winning them before these guys appeared. Therefore, let’s focus on the things that we’re still needed for, that we do well, that we have scale for, and then we can even still partner with those guys and give them depth where they don’t need to build infrastructure. Because one of the things that both the Chinese and American giants have in common is the fact that they are clear as to what it is they’re for. And what it is they’re for may be multifaceted, because they have many different business lines under their umbrella, but they’re clear as to their purpose, and they don’t carry unnecessary infrastructure if it’s not aligned to their purpose. So I think it’s important for European entities to learn that lesson.

[00:56:18.08] Ben: If an incumbent is clear about what they stand for, and they align around that, and potentially also pursue some sort of ecosystem-based model, then there’s no reason why banks can’t surf this wave of digitization and emerge on the other side with happy customers and profits.

Leda: I mean, I am not going to foretell such a happy ending for anyone because they’re potentially too many banks, and what passes as profitability for the average bank is possibly not to be seen again in the market. But I would say that anyone who refuses to do that will definitely not have a seat at the table. Consumers — and I don’t just mean retail consumers, I mean, customers across all value chains — and regulators are much more demanding, and rightly so, in terms of service provision, focus, transparency, and pricing. And therefore, unless you really know what it is you provide, what it is you’re for, you can become overwhelmed by options. Think about it, you can revamp your lending infrastructure in 10 different ways. If you can’t decide whether lending is important to you, how will you know what the best way of revamping is?

Ben: Thank you very much, indeed, for your time. That was great.

Leda: Absolute pleasure. Thank you so much!

The new moat in financial services (and why P. Thiel, not W. Buffett,…

In the networked age, scale of production is no longer a moat. Instead, network effects are the new moat. Peter Thiel gets this; Buffet doesn’t.



I look for economic castles protected by unbreachable ‘moats’ –Warren Buffett

The quote above from Warren Buffet, a statement he first made in a 1996 investor letter, is one of his most famous. It neatly encapsulates his investment approach: invest in giant companies that can achieve a “moat” by operating at a scale that others can’t reach.

By spreading the fixed costs of expensive, non-transferable assets like machinery or a banking licence, as well as highly-geared operating expenses like brand marketing and regulatory compliance, over a larger revenue base than competitors, these companies could be better known and cheaper. And, if you look at Buffet’s portfolio, it’s full of companies operating in industries with high fixed costs and high operational gearing: capital goods companies like BYD, consumer goods like Coca Cola and, above all, financial services companies like Wells Fargo, Amex and Bank of America.

The investment approach was massively successful — until it wasn’t. In the period 1979 to 2008, Warren Buffet outperformed the S&P 500 by 12.6% a year on average, cementing his reputation as the Wizard of Omaha, the most successful investor of all time. But — a less known fact — since the financial crisis, Warren Buffett has underperformed the S&P. One might be tempted to attribute this relative under-performance to the heavy financial services weighting in the Berkshire Hathaway portfolio. However, while a factor, deeper structural changes are at play.


Problem number one with the Buffett investment philosophy is that, in the digital age, critical mass is within most companies’ reach. Critical mass — or minimum efficient level of scale — is the scale of production a company needs to reach where it won’t have a major unit cost disadvantage compared to its competitors. After this point, diminishing returns to scale kick in, which means that even if a competitor has greater volume it won’t translate into the same order of magnitude differential in unit costs.

However, as we’ve written before, companies can now plug into the scale economies of third-parties like AWS, which spread fixed costs over the volumes of all customers, to get to scale faster. In banking, you see the emergence of banking-as-a-servce providers, like Railsbank or SolarisBank, levelling the field for new entrants. All in all, this means that scale does not represent the barrier to entry it used to.

Scale can become a hindrance

The second problem with Buffet’s investment philosophy is that diseconomies of scale, or negative returns to scale, manifest themselves more frequently and earlier.

In the industrial age, the trick to achieving an unbreachable moat was to produce standardized goods at mass scale and then invest in marketing to create sufficient demand to sell all of these goods. The challenge now is two-fold. Firstly, the broadcast channels that companies used to advertise are being eroded at the same time as there are many more demands on the consumer’s attention, making it harder to engage in the same type of mass-marketing.

The second issue is that, since consumers are now online, we can know much more about them, as well as have a direct relationship with them. This means that at the same time as it’s become possible to operate profitably at smaller scales of production, it’s become possible to produce goods which cater to smaller customer demographics, and to reach these customers directly — which explains the rise of artisanal goods and direct-to-consumer brands.

But, for digital goods, it goes further, artificial intelligence increasingly allows platforms to match services to customers as well as personalize services to each customer.

To put it another way, in the digital age, the mass consumer is dead.

The new moat

This begs the question, is it still possible to create a moat in the digital age? One answer could be that the idea of a moat is obsolete, a relic of the industrial age, sort of what Elon Musk said when he challenged Warren Buffett recently. But, the reality is a new moat is possible and it’s the diametric opposite of what came before.

Scale isn’t the barrier to keep out new entrants, scale is what attracts new entrants to work with you. Scale doesn’t allow you to push a mass produced product to the mass consumer, scale is what enables you to tailor an individualized product to every consumer.

“I think moats are lame. If your only defense against invading armies is a moat, you will not last long” – Elon Musk

This definition of scale is one that accepts and capitalizes on the new realities of the digital age. Maximizing production scale by itself is less of a competitive advantage and, increasingly, a competitive disadvantage. But the fact that consumers and business are connected means that a new competitive advantage can be achieved by maximizing network size.

Where a network has strong social engagement, like Facebook, adding more users increases the value of the network for everyone. Where a network matches buyers and sellers, like Amazon, increasing the network size increases choice and, by extension, value. Where a platform analyzes data to serve up the best results, like Google, the more data that comes from adding users, the better the results become. And most platforms are a combination of these social, two-sided and data network effects.

What is more, the new moat is a superior moat. Supply-side economies of scale, while a formidable barrier to entry in the industrial age, always suffered from diminishing returns.

Demand-side economies of scale, however, are subject to increasing returns to scale since more users create more value for other users in a self-reinforcing positive cycle. This is why in markets where network effects are strongest, there are winner-takes-all dynamics.

Does this mean that supply-side economies of scale are irrelevant? Not at all, as we wrote a few years ago, these platforms based on demand-side economies of scale (network effects) often become asset heavy as a way to reinforce the strength of these network effects and maximize profitability. But the difference is that maximizing scale economies was not the goal in itself. Instead, these companies found a route to mass adoption and, from there, put in place the assets to sustain the network. In other words, a business grows its assets top down like the roots of a tree.

If the new moat is to achieve network effects, how can these be achieved in banking? In our mind, this is probably asking the wrong question. Banking is inherently a transaction-based activity. This makes it unsuitable to most types of network effects.

For example, most companies that have tried to build social network effects into banking, either as part or whole of their USP, have failed. We don’t want to chat with our friends specifically about money, we don’t want to share all of the information on our assets and liabilities. Which means that, although the new banks sprouting up might be cheaper and more convenient than what came before, they aren’t able to arrive at meaningfully and sustainably lower costs of customer acquisition numbers once they’ve gone beyond the early adopter audience.

It is possible to create marketplaces for financial services, but because banking is transaction-based (and fundamentally not a social activity), the surface area around which to create a marketplace is limited. Basically, we don’t spend much time on banking apps, which makes it difficult to introduce us to other products and services, which we then don’t purchase frequently anyway.

This podcast was recorded at FinTECHTalents’19 Festival: we’re exploring the potential of unleashing network effects in financial services. Ben Robinson is joined into the conversation by: Evgenia Plotnikova (Partner @ Dawn Capital); Martin McCann (CEO at Trade Ledger); Oliver Prill (CEO at Tide Business Banking).

Some banks and fintech providers get round this by targeting specific demographics and then giving them the tools they need to run their business/life, such as Tide, which understands that freelancers and small businesses will send invoices and submit expenses more frequently than they’ll apply for a loan. But, these business are niche.

When this is attempted on a bigger scale, it comes back to the same problem of unit economies: high CAC in the absence of social network effects and low lifetime value in the absence of the engagement.


The mistake we think many people make when they think about banking and network effects is to apply the following logic: banking is a massive market, therefore we must target it and find a way to generate network effects. We believe it is smarter to turn the logic on its head and think about how to put banking into channels and services that have high engagement and strong network effects, what Anthemis calls “Embedded Finance”.



As Amazon is showing, the goal isn’t picking off a few high value revenue lines, but making value flow ever more easily within the Amazon ecosystem, removing friction and making it easier for buyers and sellers to trade. Similarly, the Alibaba and WeChat models both serve a higher purpose: to embed financial services into people’s lifestyles.

The direction of travel can go in the other direction too: that is, starting with banking and seeking to embed it in other services with higher engagement. This is what Moneo is trying to do and what TinkOff Bank in Russia has done so successfully. Through partnerships as well as launching its own products, Tinkoff has created a super app akin to WeChat in China where consumer can do everything from booking theatre tickets to giving their kids chores.

But, in general, it seems more probable that banking will get embedded into other services than vice versa for the reasons already stated: it’s a high CAC and low engagement starting point from which to build out an ecosystem or Super App.

That doesn’t mean that there won’t be plenty of opportunities to build big businesses in banking, that enjoy strong network effects. But, to our mind, these are unlikely to be directly client-facing.


Earlier this year, we wrote a piece about systems of intelligence in finance. The piece looked at these systems mostly from a supply-side and architectural standpoint, arguing that solution architecture needed to change in response to the split of distribution and manufacturing and to capitalize on open banking. It concluded that systems of intelligence would emerge as the most valuable parts of the Enterprise IT value chain.

Here we make the same argument, but from more of a market standpoint. If we accept that banking will become increasingly embedded in third-party services and channels, it doesn’t necessarily follow that, as many people argue, banking will become completely commoditized.

As markets digitize, two types of intermediaries tend to emerge: those that seek to internalize network effects by commoditizing supply, aggregators like Amazon or Facebook, and platforms that externalize network effects by empowering suppliers, like the Apple AppStore or Shopify (Ben Thompson sets out this distinction very well in this much recommended post).

In financial services, then, the same pattern will play out: aggregators like Amazon will commoditize financial services suppliers, while platforms will emerge to intermediate between suppliers and distributors in a non-zero-sum, value accretive way. These platforms will be systems of intelligence.

Systems of intelligence are evolving. Today, most systems of intelligence are deployed for individual clients and with the end of digitizing services. But this is just the first step. Digitizing services makes them consumable through non-proprietary bank channels, but it also generates a new stream of data that can be used to make the services better fit consumer needs. So the next step will be that systems of intelligence will then use that data to help providers more intelligently price and package financial services.

But once that has been achieved, the opportunity will exist to then serve up the right service to the consumer at the moment of need, which mean systems of intelligence become systems of network intelligence, matching the needs of consumers with the inventory of suppliers in the smartest way.

This is the evolution we observe happening at companies like additiv, Assure Hedge and Trade Ledger. Trade Ledger is digitizing the origination of credit services so that lenders can supply credit at the right price and with the speed needed by fast-growing SMEs. But beyond that, it is able to use data to give lenders a real-time picture of asset quality, even for intangibles assets, allowing lenders to offer new types of services better matched to changing customer needs. But, ultimately, the opportunity exists to then link lenders with the different players in the ecosystem, helping embed banking into whatever is the right channel to serve the customer at the point of need. Martin McCann, Trade Ledger CEO, puts it well in this excellent blog:

“Within business finance, the opportunity exists not just to connect banks with their customers, but banks with banks, corporates with corporates, corporates with complementary third-party services providers and so on.”

If Warren Buffett has missed the shift from supply- to demand-side economies of scale, there is one investor who most certainly hasn’t. That is Peter Thiel. His investment in Facebook, a business underpinned by massive network effects, made him a billionaire. Conversely, Buffett passed on Facebook, like Google and Amazon, because he couldn’t get comfortable with the valuation, saying “I didn’t understand the power of the model as I went along.”

And the performance of the two investors also couldn’t be more divergent. Whereas Buffett has underperformed the S&P since 2009, Thiel’s Founders Fund has more than two-fold outperformed the VC fund industry since 2011 (the only figures we could find in the public domain). Since 2011, the Founders Fund is up by $4.6 for every $1 invested.

And where is Peter Thiel investing now? If you look at his holdings, there are many B2C companies there for sure. But, more than anything, there are systems of intelligence — across many industries, but especially in financial services. This leaves Peter Thiel well-placed to capitalize on what Matthew Harris, another venture capitalist, sees as the fourth major wave of digitization after internet, cloud and mobile; one that, in his view, will create more value— $3.6 trillion — that its three predecessors combined.

So, you don’t need to believe us that systems of intelligence are the next big thing. Just look to Peter Thiel, the new investment wizard.

Network Effects in Financial Services (#8)

Structural Shifts with Evgenia Plotnikova (Principal VC @ Dawn Capital); Martin McCann (CEO at Trade Ledger) and Oliver Prill (CEO at Tide Business Banking).

This podcast was recorded at FinTECHTalents’19 Festival and in it we’re exploring the potential of unleashing network effects in financial services. Ben Robinson is joined into the conversation by: Evgenia Plotnikova (Principal VC @ Dawn Capital); Martin McCann (CEO at Trade Ledger) and Oliver Prill (CEO at Tide Business Banking).


This podcast was recorded at FinTECHTalents’19 Festival, at Printworks, London (www.fintechtalents.com)

What we’re essentially trying to do is create a network of quality data that provides the potential for innovation in terms of services which can be built on top of that data. But the problem we’re solving initially is that convenience and trust problem of both sides of the network. — MM

What we’d like to distinguish within our business is three things — network effects themselves, then the virality factor and economies of scale. […] in my view, you can actually create significant businesses without having network effects -EP

The platform generates a lot of data […] so we invest a lot in data science and machine learning to basically do all non-simplistic decision making. […] Every time you can’t make a simplistic decision, we deploy machine learning and machine learning gets better the more data points you get from different users because the models become whack. — OP

We’re internalizing, but I think other people who sit on our platform can externalize. So it’s too big a problem for anybody to solve, so we’re trying to do the bit that we know how to do really well, which is to organize the data services and provide them so that other people can create other business models on top of that. — MM

But the key for us at this stage, we don’t think too much about, I guess the detail of what the network effect will be. Because if we don’t get the momentum and the traction and the scale, we don’t get the opportunity to create the network effect. — MM

I mean we currently open more business current accounts than Lloyds or RBS group per month on a flow measure, and the reason for that is very simple that the network effects just don’t exist. There used to be a degree of virality, which really was just brand awareness. You would default to the Big 5, because you just didn’t know that was another. — OP

It’s the regulator. It could probably be more market share with network effects — because the winner takes most of the market — which is actually one of the debates we’re having with all the social networks, should the regulator not start to intervene because they have all of us, right? But we fundamentally believe in financial services. There may be niches where this doesn’t apply, but in general, 15 to 20% in any country exposes you to regulatory intervention risk. — OP

Platforms take a while to build. This is very different to a product vertical that you were talking, in Europe with 20+ countries or, you know Revolut that goes into 30–45 markets. Effectively, they are single product or similar product-centric propositions that very rapidly can go across borders because all they do is marginal change. — OP

There is nothing to stop us from creating a monopoly. So we’re not like a financial service provider. Whether we get to do that depends on the decisions we make about building up the business. A lot of that has to go back to what I said earlier about momentum and scale and the ability to keep creating additional value add and value adding services for the participants of the platform, in different regions. — MM

I love the fact that we’re a technology company. I mean, I would never want to be a bank because I think that model has so many constraints with it that you have to work within the system, whereas being a technology company, you’re completely unbounded and you can re-imagine completely what the value proposition in the marketplace looks like. — MM

I’d say in the beginning, it can be poor product that can accelerate network effects. You mentioned LinkedIn, you might remember monster.com. So that kind of became a large business driven by network effects before LinkedIn came. And so I think that’s actually a case in point of eventually poor product falling on its own sword despite the network effects that existed there. And so for me, ultimately, it’s not about sort of internalizing and externalizing. Ultimately it’s about category dominance. And so the way that we think about opportunities to invest is we don’t just look at a market that’s large. We’ll look at a specific value chain and where the business positions itself within that value chain. — EP

Ultimately I wouldn’t say that you necessarily get a huge premium for the network effects. It’s more your ability to have your cost base being linear, whether it’s your revenue is exponential. And so whether it’s network effects that that got you there or whether it’s your virality factors or your go-to-market, ultimately the great businesses will get the right price tag, regardless of what made them get there. — EP

We’ve been raising money, we find that the investors we spoke to honestly couldn’t give a c*** about network effects. All they care about is financial fundamentals and team. That’s it. All they care about is how much money are we currently making? What’s our attraction and how fast are we going to grow our revenue? And when are we going to make profit and how are we going to make profit, and do we have a good team and do we believe we can execute? That’s all they care about. — MM