ValueWeb — Chris Skinner
How Fintech Firms are Using Bitcoin Blockchain and Mobile Technologies to Create the Internet of Value
“Ten years ago, taxi drivers felt secure, Nokia and Blackberry ruled the world, Washington Mutual and Royal Bank of Scotland were the most respected banks in the world and China was irrelevant. It’s a little bit different today.”
On the 6th of December 2014, a $81m Bitcoin transaction was made that only cost 4c to process.
ValueWeb by Chris Skinner is about the inevitable paradigm shift of the Internet to a system which will allow customers and machines to exchange value in real-time. Value, Skinner elaborates, is not only limited to money and currency, but also includes more intangible things such as Facebook likes and Twitter favorites. (For example PewDiePie, a YouTube star made $7m in 2014 simply from YouTube ad revenue which came from his YouTube views…)
Skinner posits that two things are necessary to bring about this transformation: the proliferation of mobile, and the emergence of a new exchange system.
Mobile is part and parcel of the shift because of network effects: arithmetic additions of mobile users leads to geometric numbers of new connections, and because value isn’t limited to money and currency: the “Oscars Selfie”, a promotional stunt from Samsung, was valued at $1b because of the views and therefore brand awareness it generated.
A new exchange system is necessary because today’s systems – the banking system – is slow and expensive: it takes days to processpayments and charges a lot. A cheaper and faster system is required before those who are currently excluded from the financial system can use it.
Most FinTech companies fit into 5 main categories:
Alternative finance: Lending Club, Funding Circle, IndieGoGo
Analytics: Contix, Finalta, Kesho, Quovo, SumZero
Payments: PayPal, Venmo, Square, Dwolla, Klarna, Ripple
Social trading: ZuluTrade, StockTwits, BelforFx
Strategy: WealthFront, Yuebao
And they are either:
wrappers: still use the old financial system at the core, ApplePay
replacers: replace an existing financial service with software, Ripple (replaces SWIFT), Zopa (first P2P, algorithm replaces credit analyst)
in 9 months, Yuebao, Alibaba’s mobile money fund, had more subscribers than there were equity investors in China (88m), and had 185m in 2 years
Wealthfront took 2.5 years to achieve $1b AUM (took Charles Schwab 6, but CS has $2t now)
BATS Exchange (2005) accounts for 20% for all US equity trades
M-Pesa as of 2014 had 30% of the population using it… during the period 2007-2015, this lead to 12.5m new bank accounts (from 2.5)
FALSE PERCEPTION: banks, the incumbents, aren’t moving.
Banks all around the world are spending lots on trying to stay ahead of the curve, but think Innovator’s Dilemma… it is difficult for the incumbents to create radical change, instead they usually bring about incremental change. They are held down by regulation, legacy, and the bottom line.
But Skinner boils this down to CEOs and management level people being unable to imagine a world without the modern banking system, one where they control it end-to-end. So they just tinker with the current system, and at great cost. (European banks in 2014 spent 82% of their IT budget on accommodating and updating legacy systems and only 18% on R&D)
Skinner agues that banks need to:
move the back office to the cloud
open source the middle office, and
deliver amazing UX in the front office
FALSE PERCEPTION: banks need to move
(Source: Economist) “In 2014 individuals and funds provided €1.5b in equity and debt to European SMEs, compared with €926b of funding made available by banks”… Banks have plenty of breathing room. Most FinTech is retail-centered anyway, and banks make most of their profit from corporate and investment banking. And because customers are rather loyal and sticky (the older generation have relationships with their local bankers), they could offer no retail banking improvements, and wouldn’t lose many customers.
But Goldman in 2015 predicted that P2P lenders would have a 14% share of the credit market by 2025.
FALSE PRECEPTION: you can’t make money when everything is free (in regards to payments)
Yes you can, by creating additional value through design. Case study: Shinhan Bank in Korea has a restaurant app that provides reviews, booking and review functionality, and most importantly payment via a QR code on the bill and an e-wallet in the app. The app is becoming the country’s primary restaurant app and thus competitors are willing to pay Shinhan to be included in it.
The future, as Skinner depicts it, relies on mass personalization based on big data. The hypothetical example being that if you show interest in a product, via Google searches or Facebook likes, a bank might gauge your interest and offer you a discounted offer, and favorable financing, when it finds enough other interested parties. Banks need to stay relevant.
And in the digital age where the bank has no privileged position because you can store your money anywhere: in a fund, in Zopa, in Funding Circle, and a bit in the bank, what the bank has to store and protect is your identity.
FALSE PERCEPTION: digital banks don’t need branches
Branches provide: trust, branding, and services that customers might be hesitant to purchase over their computer (first mortgage, etc.) Chebanca! is a successful digital bank in Italy that understands this, and accordingly has a small strategic network of branches focused on providing the aforementioned qualities. And it’s had an effect: the bank’s asset holdings in areas with branches are 2.5x that of those without.
CORRECT PERCEPTION: bitcoin bad, blockchain good
The currency is bad for two main reasons: (1) it’s too volatile, manipulated by people with vested interests and (2) it’s a digital currency and even though it is the most popular one around, it has terrible adoption (there are only 250,000 ls with more than 1BTC in them), merchants don’t see the point in accepting it because they themselves can’t use it, so they need to convert it, which adds extra steps and exchange expenses… The first successful blockchain-based payment system that accepts fiat currency will spell the death of bitcoin.
Blockchain is good though, and banks are actively looking into being able to use a distributed ledger system to record the ownership of all assets, not only (digital) currencies. Ripple, aiming to replace SWIFT, is at the forefront of this. Its success lies in its accommodation for the current system: it works with fiat currencies, thereby not disrupting a country’s monetary policies.