The holiday season is coming after the very exciting and hectic year in FinTech. This has been an excellent year for Grow VC Group and its companies, we have built new businesses and grown the existing ones.

Especially we like to thank all our customers, partners and supporters. We hope you have now time to take a break, spend time with love ones and also get fresh ideas for the new year.

Season Greetings from Grow VC Group and its companies!

Cryptocurrencies and related distributed technologies need a proper ecosystem to become a significant and meaningful part of the finance ecosystem

Blockchain, ICOs and digital securities (e.g. cryptocurrencies) have become the new kids on the finance block – and of course opinion is divided. Some believe they will take over the entire finance industry in a few years and make all traditional finance instruments and institutions obsolete. Others see ICOs and cryptocurrencies as the biggest bubble and/or scam of our time – in the US, there are now plaintiff lawyers that only focus on ICO lawsuits.

Maybe the reality is something between: these solutions have a lot of potential, but they need a proper ecosystem to become a significant and meaningful part of the finance ecosystem. It is easy to print money, but the real test is if you can use that money to buy something.

Let’s look at some fundamental problems of these instruments and systems that point to a missing or weak ecosystem:

1. Most cryptocurrencies, ICOs and technical solutions are independent of each other. Companies and projects issue their own tokens that are often based on their own underlining assets (security tokens) and services (utility tokens) which correspond to plans and promises. Even if it is technically possible to exchange them with other digital securities or traditional currencies (fiat money), exchange rates and values are hard to evaluate. Bitcoin, which is based on mining, is more like a commodity (e.g. gold), but most of the other cryptocurrencies are based on other assets or asset promises.
2. The services and instruments are not linked to fundamental regulatory requirements, e.g. Know-Your-Customer (KYC) and Anti-Money-Laundering (AML) requirements. It is hard to believe regulators would allow anonymous users and transactions on any significant finance market. KYC and AML are not only linked to finance regulation, but also to things like national security and anti-terrorism activities.
3. The services have no link to the bigger financial ecosystem to underwrite, syndicate or trade securities. Each service’s target is to have its own assets and investors, when different cooperation models in the traditional finance sector are the key to success.
4. There are no common models to acquire and use data to value, monitor and rate assets. A slide show or white paper is not enough to analyze any asset and – perhaps more importantly – track how the value develops.
5. There are no independent third-party models and services to analyze, rate and value assets. Common models, practices and independent evaluations are an important part of the system to evaluate assets and keep the market stable. ICOs often include opportunities to manipulate the market.

To be clear, I fundamentally believe these new solutions and models can change the entire finance ecosystem. And obviously, we cannot expect to create the whole new ecosystem overnight. At the same time, it is crucial to understand the need to have a properly working ecosystem, some ideas on how to develop it and find the fundamental missing links. Otherwise, some failing services and instruments, and even illegal activities, can cause too much harm to hinder development of that ecosystem.

Historical precedentWe can compare this development to the history of crowd and p2p finance, starting with equity crowdfunding for early phase startups. I remember a venture capitalist said years ago, “I think this online crowdfunding is a great model, but why has it started with the most difficult asset class, startup equity?” This comment comes to my mind when I look at ICOs.

P2p lending, online real estate finance, and later, stable-phase company equity have become more important markets than startup equity in the crowd and p2p finance market. Institutional capital and investors have also taken an important role in these markets, and often they represent greater than 50 % of the capital committed. These markets still also have their issues, where too many platforms try to be totally independent and just get their own deal flow and investor bases to work. But securitization, syndication and cooperation of different services have become important in this market.

There has also been a lot of work done with regulation and regulators in the crowd and p2p market. There are platforms that don’t follow all regulations, but all significant platforms want to do it, and they must. In many countries there has also been quite constructive cooperation in developing key regulations. This is needed for the distributed finance solutions market as well.

Missing ecosystem components

​The missing components in the ecosystem are essential new business opportunities. Let’s take a few examples:

1. There are many new ways to identify users and fulfill KYC requirements. We no longer need the old model of walking into a bank branch with an ID card and utility bills. There are many e-KYC solutions, but there are also totally new models to manage digital identity and personal finance data that can work with distributed models too.
2. Real-time data, data analytics and AI can be used to evaluate and value digital securities and underlining assets. Of course, there is never a solution to value mere slideware and fancy plans.
3. When ICOs and smart contract models for digital securities are developed for assets classes that are better known and easier to value, like loans, real estate and later phase companies, it will be easier to get more investors, including institutional ones, involved in the market.
4. Industry players need clearer roles and compatible tools to interact in a true ecosystem. This probably also means a marketplace and issuer cannot be the same actor – independent marketplaces are needed.
5. Many needed components, like identification, data collection, third-party markets and evaluation can be done based on new distributed technology models and solutions.
6. Blockchain still has its technical issues like capacity and latency, and its implementations vary. There are some new candidates to create similar concepts, like Hashgraph, but there is still a lot of room for developing distributed ledgers, smart contracts and database solutions.

FinTech, along with distributed technology, is changing the finance industry. But in order to have a real impact, it requires systematic development, getting different services to work together and offering reliable finance instruments. We must not leave this development only for those trying to make some quick money with their ICO – we need many parties to systematically develop their own parts for the ecosystem. In that way, we can really change the finance industry for the better.

The article was first published on Disruptive.Asia.

Equifax’s data leak was truly monumental; it involved compromised information of 145 million people. An interesting part of the story was the hearing with former and current executives of Equifax, Yahoo, and Verizon at the US Senate Commerce Committee. In this hearing the interim CEO of Equifax Paulino do Rego Barros indicated that it is Equifax and other companies that own this consumer data, not consumers, and consumers have no control over it. This even when it emerged that several customers have had their data collected without their directly knowledge. How long can it continue like this?

Finance services and health care are two areas where companies have a lot of data from people. It is often also very sensitive information in nature. There are many companies in those industries, and people often use services from several companies. It is often valuable too for the consumer that companies can share information between them. For example, when you go to a doctor or hospital, it can help in your treatment that they know your medical history, and when you apply for a loan or use wealth management services, your finance history helps to find the right products and make decisions. But it must be consumer’s decision to share this data.

We have had two parallel, but slightly opposite, developments with the internet. While each individual can generate more activity - for example publish his or her photos, articles and have their own e-commerce site - the data is concentrating more to some central places, such as to big companies, data aggregators, and data processors (for example Equifax or online marketing platforms). Now we can see developments that we could move to more distributed models with data too and individuals could get better control over their data.

This technically is also linked to blockchain development that particularly has an impact on the finance industry. Blockchain basically distributes finance data, transactions and authority around the Internet, to individuals and their nodes. A person can have her or his own bitcoin and cryptocurrency wallet, which is not the account of a bank or finance institution. Now we will see solutions where people can have their own safebox for their finance, health care, and other data.

Lawmakers will probably try to give further rights to consumers to control their own data; in some countries sooner, some later. But new distributed ledger and data models can empower consumers sooner to take control and impact the balance. In finance and data services we can see development that the control and databases will be distributed. It is not anymore a hierarchical centralized model to manage data, but it will be a distributed model with the consumers in control.

Read the whole article at Prifina Blog.

FinTech is disrupting the finance industry to the point where we’re likely to see quite a bit of M&A activity as a result. That activity could take several different forms, but one likely possibility is that FinTech or tech companies could acquire traditional finance names.

It appears the transition for banks to really utilize FinTech has been difficult. I wrote earlier how banks are stuck with their legacy organizations, processes and IT. Traditionally, mergers and acquisitions are a way to help that transition. However, many M&A activities fail to bring any real transition or realize results.

The finance business is also a brand business. Retail banking, wealth management, private and investment banks have many well know traditional brands. Sooner or later, some new FinTech players will want to link themselves to old brands. They will also target licenses and regulated businesses, and one way to get them through acquisitions.

We will see different kinds of M&A activities when FinTech really starts to have an impact on the finance business:

1. Finance institutions acquire FinTech companies to get technology, new services and competence
2. FinTech companies acquire traditional finance institutions to get licenses, regulated business and brands
3. Traditional finance companies are forced to merge to cut costs and get better economy of scale
4. Larger FinTech companies acquire smaller FinTech companies to get more services and technology to offer a full scale of services
5. Many mid-size finance firms (including regional banks, mid-size asset management and broker firms) are forced to sell whoever is ready to acquire them because they cannot compete anymore
6. Non-financial (e.g. software) companies acquire small to large FinTech companies to position themselves in financial services.

The hot question in the market is: will big finance institutions or technology companies survive the M&A frenzy and be the winners in the end? There are still too many variables to know the final score, but it looks like on average banks are not well suited to adapt to the new situation. The most likely scenario at the moment is that banks lose a significant part of their business, and they’ll be left with some basic heavily regulated business. Most of the value added businesses, e.g. lending, wealth management and investment services, will go to the new FinTech actors.

Who will be the tech and FinTech companies that will be big in the finance market? The easy answer is Google, Apple, Amazon and Facebook, all of which have a lot of users and many of them already offer some finance functions like payments, money transfer or lending. But the global picture is more complex. China is the leading FinTech country right now, and companies like Alipay and Tencent are already significant FinTech companies. Alipay processes up to 120,000 transactions per second, more than 10 times the numbers of Visa.

Most probably we’ll also see new companies becoming significant players in the finance industry. Data, AI, and finance back-office services will become an important part of the market. This could mean that the consumer interface is quite fragmented, but there are important technology companies that empower many of those services.

These services are also going to the cloud, which means that AWS, Microsoft, Google, IBM and Oracle will play a role in the finance ecosystem. FinTech can be one of the biggest new opportunities for cloud providers. They also might become interested in offering more back office functions for different consumer and end-user services.

The finance market will probably see a lot of niche services. At the same time, there could be a few FinTech backbones that enable most those services. In principle, banks could emerge as those backbones with PSD2 and open APIs. But in practice, considering their capacity to adapt and current use of obsolete technology, it is hard to see how banks could win that game.

The most probable scenario at the moment is that some bigger FinTech and technology companies will make acquisitions to offer more technology services to different finance end-user services. They want to expand their technology offerings to all finance services. End-user FinTech services will acquire brands and licenses of traditional finance that are valuable in their business.
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What that ultimately means is that banks are on the path of the telco – they can keep some heavily regulated finance services, but their margins will go down and soon you’ll be seeing some bank mergers.

The article was first published on Disruptive.Asia.