Hi Fintech futurists --

Today, a longer take on how to understand JP Morgan shutting down its neobank app, Amazon overcoming objections to eCommerce, and EOS attacking Facebook incorrectly with Voice. The latest short takes on the Fintech bundles, Crypto and Blockchain, Artificial Intelligence, and Augmented and Virtual Reality are below.

Thanks for reading and let me know your thoughts by email or in the comments!

Long Take

One of the winged machines below is the Wright Brothers progenitor of the modern airplane, bringing the gift of flight to the human animal. The other is Samuel Langley's aerodrome, a competitor with 25 times more funding that promptly crashed into the river and obscurity.

We continue to have these moments in Fintech and legacy financial services. For example, JP Morgan just shut down its neobank competitor Finn, targeted at Millennials in a smartphone app wrapper. Several other traditional banking incumbents have similar efforts, from Wells Fargo's Greenhouse, Citizens Bank's Citizens Access, MUFG's PurePoint and Midwest BankCentre's Rising Bank, as well as most of the Europeans (e.g., RBS competition to Starling called Mettle). These banks have every advantage -- from product infrastructure, to balance sheet, to regulatory licenses, to physical footprint, to relationships with the older generation. So how is it that players like Chime, MoneyLion, Revolut, and N26 are all able to get millions of happy users and the incumbents are failing?

The answer is actually pretty straightforward. Let me sketch out the mental model, and then give you more examples of its implementation. Supply and demand must meet for there to be product/market fit and some sort of commercial equilibrium. With the legacy financial system, we have such an equilibrium and it creates a meaningful amount of economic-rents type revenue for the product manufacturer. ATM frees, money movement fees, foreign exchange fees, credit fees, check writing fees -- all of these are far above the cost of their value. So then how do we move from one equilibrium to the next? First, let's look at things from the perspective of the customer. They face (1) a set of reasons to stay a customer with their existing provider, i.e., some level of stickiness, and (2) a set of reasons to leave their provider, i.e., some pain points.

Now you have a new entrant, and an incumbent. The new entrant is, on the one hand, in severe economic disadvantage. They do not have customers, products, or economics. On the other hand, they have no opportunity cost that prevents them from carrying out an industry-destroying strategy. Profitability collapse, through either better operating efficiency or higher payouts to customers, is a winning vector today because it is funded by "Other People's Money". Better infrastructure, aggressive marketing, bundling and unbundling -- they all fit into this bucket, and cost a ton to the incumbent, which needs to consider the impact of responding to those vectors on its core business.

The more interesting of these tactics, separate from raw economics, are things like new markets, non-financial features and platforms, and regulatory attack. Thus we see companies going after people with low credit scores and helping them get out of pay-day lending through cash advances, or underwriting loans and providing bank accounts to customers with little financial history (e.g., see Alibaba and Tencent). We see adoption of cryptocurrencies in jurisdictions where state-supported banking is broken. We see Square and SoFi exploring industrial loan company status, rather than a full banking license, in Utah. We see the individual States, lobbied by regional banks, suing the federal OCC when it tries to create a fintech charter. Equipped with this mental model, take a look now at the value propositions of neobank apps that have traction:

Each one delivers something that a regular bank does not, through cost, value proposition, or reward. Whereas the most competitive neobanks today -- including Goldman's Marcus and Wealthfront's cash account -- offer 2.5% on deposit, JP Morgan's Finn was providing rates of 0.04%. In essence, this app was a digital channel to try and capture younger customers through a user experience into a traditional financial product. User experience is not enough for a vector of defense, when you are being assaulted on economics. Similarly, economics is not enough for a vector of defense when you are being assaulted on user experience -- see how Venmo's social features keep users sticky, while Zelle is a mere money-movement feature in a plain bank app.

Digital is not a channel. Digital is a transformation strategy for everything about your business, from back to middle to front office. Digital is a new equilibrium where your revenues are down 50% per customer, but you have tripled the number of customers and are livestreaming to them on Youtube.

Let's look at two more examples with this logic. First, Amazon and eCommerce in general. Our starting point would be terrestrial shopping, with consumers happily shopping in physical malls and stores as the default behavior. Most people in the late 1990s were highly sticky to physical retail, with good reason. Changing away from the social norm to shopping online could not be driven simply by the economics of cheaper prices, because several qualitative vectors were not addressed: (1) payment methods over the web did not feel secure (i.e., giving out your credit card number to strangers), (2) you were unable to try on clothes in person and validate that they would fit, (3) delivery of mail by the Post took a long time and delayed shopping gratification. Staying focused on these three reasons, here's what happened for eCommerce to become a default behavior: (1) PayPal and other payment processors secured online payments, (2) packages could be returned at no cost to the buyer, and (3) free shipping and next day delivery became core to the Prime business model.

Once such qualitative vectors were addressed and no longer deserved a price premium, other economic motivations made eCommerce even more sticky: (a) goods were sourced globally and compete on an open marketplace, driving down prices further, (b) store rents and wages were not incorporated into pricing, (c) taxes could be lower than what you see at a physical location, and (d) you did not have to pay for transportation to the store, or forego time and wages to shop for the basics. This means that eCommerce could compete not just in the early adopter market, i.e., the equivalent of the underbanked in the finance example above, but also the main stream. Amazon's purchase of Whole Foods, Apple's physical retail stores, and Alibaba's "new commerce" initiatives are all examples of how an online shopping chassis can translate to the physical world leveraging a digital value proposition -- and why that is different from Walmart acquiring a digital channel.

Let's take one more example -- the company behind EOS (Block.one), is spending $150 million of its $4 billion Initial Coin Offering to launch a social media platform called Voice. The app falls squarely within the industry of social media, and is an amalgamation of Twitter, Facebook, Steemit, and Brave. To join Voice, users must verify their identity with official documentation (e.g., a state ID) and then are allocated a bespoke token for generating and engaging with content. Voice attacks social media incumbents on the following basis: (1) their services are not "free" but cost privacy and personal data, (2) social networks are littered with bots and fake accounts, and (3) influencers and creators do not make enough money from engagement and can also be de-platformed anytime.

These issues have never been more obvious than today, but I remain deeply skeptical that they are a real weakness that can lead to a platform shift. Consider everything from Path ($500 million for verified social network down the drain) to Diaspora (privacy oriented social network used by ISIS) as attempts to dethrone Facebook on this basis. But these aren't problems that users are willing to pay others to solve. Facebook is free and frictionless, and making something that is more difficult to adopt because it runs a Tokenomics system is not a fruitful economic tactic. As a result, Voice is more "expensive" than Facebook in both user-experience and onboarding. Since there are no economic propositions, the only remaining direction of attack is modern content and engagement, and that is a real vulnerability for the social networks. This is the flank Facebook keeps defending -- from buying Instagram and WhatsApp, to copying SnapChat. This is where Bytedance's TikTok beats the incumbent.

Looking at the declining usage of Steemit (the less polished version of Voice) above, do you really think privacy and anti-bot control is going to drive 4 million monthly downloads?

Short Takes

• Grasshopper Raises $116M, is a newly chartered national bank, announced receipt of all final regulatory approvals for the Bank to open for business. Not sure why someone doesn't just buy an existing bank with $10 million in deposits and use its existing licenses. Am excited to see what Grasshopper does with its Temenos infrastructure, but a license is not yet an asset.

• Advisor robo tech has no legs, say TD Ameritrade execs, and Merrill adds human advisors to robo platform. Can you believe two contradictory ideas at the same time? You don't need to -- check out the long take on neobanks, which can explain why TD's advisor robo adoption (channel for RIAs) isn't growing, while Merrill is all in (digital transformation). Bloomberg’s attempts in this industry with Bloomberg Black are another example.

• Tink announces PayPal as a strategic investor. Payments and data aggregation through open banking are one and the same. We are about to see personal finance management, neobanking, and money movement apps fight over narrower ground.
  

• Apple’s CryptoKit Launch Paves the Way for Secure Mobile Wallets. This is a great headline, but a disappointing news item. It doesn't power the phone to be a crypto asset wallet, rather focusing on encryption libraries for regular software.

• Security Tokens Were Supposed To Transform Crypto. So Far, They’ve Flopped. Older article, but interesting points for me, as well as a good list of who is involved in STOs. Short answer is that securitizing something doesn't create demand for it. Here is a good nuts and bolts piece from Clearmatics as well.

• Celsius deposits cross $250m mark. The company lends out crypto ($1.2B in originations so far) and pays interest rates between 5-10% to users providing collateral. My takeaway is that there is a large demand among crypto holders to find ways to generate financial gains.

• 20 Blockchain Projects With the Most Dev Activity on Github. Status, Cosmos, Storj, Aragon, Augur, 0x, Maker and a few other usual suspects have the most activity. Also interesting are Trust Wallet (acquired by Binance) and Neufund (STO platform out of Germany).
  

• This AI-powered subreddit has been simulating the real thing for years. So neural networks were trained on different types of users to simulate their discussions across topics, creating a totally machine Reddit. I can imagine companies like Simudyne using these neural actors to create massive, rich, economy-sized financial simulations.

• Net Element Launches Blade, Fully-automated, Artificial Intelligence-Powered Underwriting Solution with Predictive Scoring. I am a sucker for financial products made by machines. This machine learning powered feature does a full AML/KYC check and a fraud assessment on SME merchants in 15 minutes.

• AWS launches Textract, machine learning for text and data extraction. There are so many NLP and text extraction tools for specific finance verticals -- wondering if they survive a threat from a larger player with more data.
  

• Apple ARKit To Get People Occlusion, Body Tracking, High Level ‘RealityKit’ Framework. While Facebook may be leading with Oculus hardware, Apple is leading with software. Having a device that understands human figures, and then renders objects in front or behind them is a key Lego piece to making AR believable.

• Inside AIG’s wearables pilot. Laborers get back injuries, which are impossible and expensive to heal. A device from Kinetic can be worn by a human and recognize when that person is doing high-risk activity, monitoring or warning them. Not sure how I feel about my financial products (i.e., insurance) telling me to have good posture!

• Beam raises $55 million for a connected toothbrush that lowers dental premiums. An insurance underwriter lowers your premiums if you brush over Bluetooth. I mean, it's cool -- but it's also a punchline from the Onion. Hard to imagine a large enough savings in premium payments justifying the nosy machine.

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