Apple finally confirmed their long-anticipated entry into mobile payments with the launch of Apple Pay, which will support both physical payments (using the NFC capability in the new iPhone 6 and 6+, and the Apple Watch), and in-app payments. Thanks to tokenization (which has been in the pipeline since last October), no card details will be stored on the phone or on Apple’s servers.
Apple Pay will launch in the US in October (the European launch is expected to follow in 2015), with support from American Express, MasterCard and Visa. Discover and China UnionPay are expected to join later this year (Apple is rumoured to have considered buying or partnering with Discover as a back-up plan if the main card networks didn’t want to play ball). Apple’s signed up a raft of retailers, including Macy’s, McDonalds, Starbucks, Subway, Walgreen’s and Whole Foods (but not Wal-mart, which is backing the QR code-based CurrentC payments platform).
Stripe enjoyed a boost as Apple included the startup in its list of recommended payment solution providers for app-makers who want to use Apple Pay to accept in-app payments. Competitor Braintree (which had previously announced that it will partner with Coinbase to support Bitcoin) was quick to announce that it, too, will support Apple Pay.
Jack Dorsey revealed that Square (which recently turned down a $3bn acquisition offer from Apple) are building a register that will accept both Bitcoin and Apple Pay.
Meanwhile, Simple customers have been complaining about technical glitches, possibly caused by the migration from accounts from Bancorp to BBVA.
Alipay, which was (somewhat controversially) spun out of Alibaba in 2011, is expected to begin offering banking services after receiving approval from the China Banking Regulatory Commission to set up a private bank. Meanwhile, Alipay competitor Tencent announced that it is partnering with nine retail chains to allow users of its WeChat to make in-store payments by scanning a barcode generated by the app.
Back in the US, Clinkle (which has raised more than $30m to date) finally revealed what it’s been working on – a pre-paid credit card with a quirky rewards programme, targeted at college students. Reaction was less-than-positive.
CME Group has invested in Dwolla, as part of $9.7m round, saying “We believe Dwolla’s real-time infrastructure solutions can benefit the financial ecosystem within which we exist,” suggesting that CME may see a role for Dwolla in enabling real-time settlement.
Green Dot Corporation and Wal-mart announced a partnership to roll out GoBank (a mobile checking account that Sam Altman worked on before departing to run Y Combinator) across the US. Some people misinterpreted this news as Wal-mart launching a bank (which they previously thought about doing) but it’s really an expansion of the existing partnership, which has seen Wal-mart selling Green Dot’s pre-paid debit card products in its stores for several years. Wal-mart also owns 5% of Green Dot.
Sweden-based Trustly released BankAPI, an open source, decentralised, Internet-based financial messaging solution that it designed as an alternative to SWIFT.
TIBCO Software is to sell itself to Vista Equity Partners (a private equity firm that specialises in buying and turning around enterprise software companies), for $4.3bn. TIBCO was an early fintech startup, founded in Silicon Valley in 1985.
VC firm General Catalyst announced that it has allocated $10m for seed-stage investments in startups that build on top of Stripe’s APIs. The GC Stripe Platform Initiative’s first investment is in Baremetrics, which provides analytics tools for companies that use Stripe.
Bradley Leimer has left California’s Mechanics Bank to become Head of Innovation at Santander North America.
Microsoft hired Amazon payments lead Iain Kennedy, hinting at a possible attempt to reinvigorate Microsoft Wallet.
Visa Europe’s director of mobile, Mary Carol Harris, has left to join Apple, presumably to work on the rollout of Apple Pay in Europe.
Isis announced that it will rebrand as Softcard, in an attempt to avoid being targeted by US airstrikes.
Satoshi Nakamoto’s email address was hacked by someone who threatened to reveal the Bitcoin creator’s identity. However, the threat appears to have been a bluff. The email account was subsequently deleted, and Nakamoto’s true identity remains a secret.
The Bank of England released a report on Innovations in payment technologies and the emergence of digital currencies (i.e. Bitcoin), describing the distributed ledger as a “significant innovation” which could “transform the financial system”.
Bitcoin mining hardware manufacturer Butterfly Labs was shut down by the Federal Trade Commission, which alleged that the company delayed delivery of mining devices to customers in order to use them to mine bitcoins for itself.
Bitcoin Savings & Trust founder Trendon Shavers was ordered to repay $40.7m after being prosecuted by the SEC for running a ponzi scheme.
Following weeks of warnings about the risk of “card clash”, commuters in London can now use contactless (i.e. NFC-enabled) payment cards to pay for travel on the London Underground and buses.
The .bank domain has been given the green light by ICANN and is expected to be available from June 2015. Strict standards, including verification of registrant’s charter with its regulator, will be enforced to ensure that “only verified members of the banking community will be able to register .bank domains.”
Finally, as September drew to a close, eBay announced that it will spin out PayPal as a publicly-traded company, in a move that is reminiscent of Morgan Stanley’s 2007 spin-out of Discover.
Last week, New York Attorney General Eric Schneiderman announced a lawsuit against Barclays, alleging that the company had led clients to believe that the Barclays LX dark pool was a safe place to go swimming when, in fact, it was teeming with bloodthirsty, man-eating sharks (or “predatory high-frequency traders”, as A.G. Schneiderman put it).
The bombastic language (the word “toxic” appears in the complaint 24 times, one more than “predatory” but well behind the 41 mentions of “aggressive”) masks the fact that the underlying allegation at the heart of the lawsuit is that Barclays “misrepresented” the extent to which participants in Barclays LX were protected from “aggressive” HFT firms.
“Misrepresented” might not sound particularly bad. A.G. Schneiderman presents no proof that Barclays intended to defraud its clients or that clients suffered any losses as a result of Barclays’ misrepresentation. In fact, he doesn’t even accuse Barclays of lying. However, he doesn’t need to because he’s using the Martin Act, a 93 year old state law that redefines securities fraud using a far wider definition than federal securities laws, removing any need to prove intent to defraud or even that fraud took place. The Act gives the New York attorney general broad powers to investigate potential violations. According to Nicholas Thompson, writing in Legal Affairs:
The purpose of the Martin Act is to arm the New York attorney general to combat financial fraud. It empowers him to subpoena any document he wants from anyone doing business in the state; to keep an investigation totally secret or to make it totally public; and to choose between filing civil or criminal charges whenever he wants. People called in for questioning during Martin Act investigations do not have a right to counsel or a right against self-incrimination. Combined, the act’s powers exceed those given any regulator in any other state.
In the wake of the dot-com crash, Eliot Spitzer used the Martin Act to subpoena Henry Blodget’s emails from Merrill Lynch and went on to extract a total of $1.4bn in settlements from Merrill and nine other Wall Street firms that had over-hyped Internet stocks. Other firms that have fallen foul of the Act include AIG, JP Morgan, Bank of New York Mellon and Ernst & Young.
Barclays is unlikely to put up much of a fight. Schneiderman’s announcement seems to have been timed to coincide with the two-year anniversary of Barclays’ settlements with British and American regulators over its role in the LIBOR scandal (which led to the resignations of both the Chairman and CEO), and comes barely a month after the company was fined by the FCA for failing to adequately manage conflicts of interest in relation to the London Gold Fixing.
Among the evidence presented by Schneiderman is a chart, taken from a Barclays marketing brochure, which claims to show the results of an analysis of the trading behaviours of participants in the Barclays LX pool (see right).
To quote the complaint:
36. Each circle in the chart represents one firm trading in Barclays’ dark pool. The size of the circle corresponds to the level of trading activity conducted in the dark pool by that firm. Different types of traders are assigned different color circles; the pale green circles are “electronic liquidity providers” (“ELP”), which is the term Barclays used for high frequency traders. Within the chart are two color-coded regions, a green rectangle representing “passive” (i.e., safe, non-predatory) trading activity, and a red rectangle representing “aggressive” (i.e., predatory) trading. The x-axis, (“modified take percentage,” which is percentage of a trader’s orders that take liquidity), and the y-axis, (“1-second alpha,” which is the price movement in the one-second following each trader’s trades), are presented here as relevant measures of trading behavior on the dark pool.
37. The chart represents that very little of the trading in Barclays’ dark pool is “aggressive.” As represented by the chart, most of the trading in the dark pool is “passive,” and most of the ELP/high frequency activity is “passive.” In its entirety, the chart represents that Barclays’ dark pool is a safe venue with few aggressive traders.
38. Barclays’ sales staff heavily promoted this analysis to investors as a representation of the trading within the dark pool, and marketed that analysis as “a snapshot of the participants” in order to show clients “an accurate view of our pool.” In addition, certain Barclays marketing materials appended a notation to the chart explaining that it portrays the top 100 clients trading in the dark pool.
39. These representations were false. The chart and accompanying statements misrepresented the trading taking place in Barclays’ dark pool. That is because senior Barclays personnel de-emphasized the presence of high frequency traders in the pool, and removed from the analysis one of the largest and most toxic participants in Barclays’ dark pool.
Later in the complaint, the missing participant is identified as Tradebot Systems, a HFT firm. What’s missing from the complaint, however, is the original chart, showing Tradebot. I got curious, did some digging and turned up what I believe to be the original chart.
The 2012 chart clearly shows a large circle (marked X) representing a market participant whose size and position matches the complaint’s description of Tradebot as “the largest participant in Barclays’ dark pool, with an established history of trading activity that was known to Barclays as toxic.”
In the graph from Schneiderman’s complaint, the circle representing Tradebot appears to have shrunk and migrated to the left. You may also notice that a small purple (Internal) circle on the far right of the right-hand chart has been re-coloured blue (Institutional) on the left-hand chart.
According to emails quoted in the complaint (which appears to be largely based on the testimony of a whistleblower), Barclays justification for altering the chart is that it was intended to be a demonstration of Barclays’ ability to monitor and classify trading activity in the dark pool, rather than an accurate representation of the trading activity. Of course, it may yet emerge that the change reflected a real change in the nature of Tradebot’s trading (perhaps after having been challenged by Barclays) but, if that were the case, I would expect the rest of the chart to be updated as well..
A good rule of thumb when considering whether an action or behaviour is appropriate or not, is to imagine what would happen if it were observed by a tabloid journalist. If the journalist could come up with a headline and story that would be embarrassing to the firm, you need to rethink. With the current press focus on financial services, it’s not just enough to avoid breaking the law – banks must be whiter than white.
The whole incident is a setback to Barclays CEO Antony Jenkins’ mission to rebuild the bank’s reputation in the aftermath of the LIBOR scandal. The independent Salz_Review of Barclays after the LIBOR scandal found that there were “cultural shortcomings” and said that the bank needed to undergo “transformational change”.
Bringing about cultural change within financial services firms isn’t easy. Once a culture is established, it becomes self-reinforcing. Those who don’t conform get forced out. For the CEO, talking the talk – even walking the walk – is unlikely to be enough. Culture derives from people, and the processes and structures they form. Changing an organisation’s culture may well require disrupting the organisation first – replacing people, getting rid of the old ways of doing things, and ripping out old power structures, to make space for new ways of doing things. It’s not the sort of thing a CEO can direct from on high – he needs to roll his sleeves up and get his hands dirty.
It’ll be disruptive, it’s be distracting and it’s be very expensive (both in direct costs and revenue opportunities that are missed during the disruption) but it’s what Antony Jenkins will need to do if he wants to bring about the transformational change Barclays needs.
Jack, it was absolutely thrilling to read your blog. Your blog and the – out of that – resulting discussion I really find unique. I am happy to participate in that particular discussion, because we build a real disruptive bank that corresponds with your criterias. The name of that Bank: FIDOR Bank.
How do I come to that bold opinion? Best proof would be to apply your criterias. So, lets see:
1. We are a real bank. We received banking license from the German banking regulators. That was in May 2009, so exactly in the eye of the crisis-storm and this as an entrepreneurial and independent team. No big banking group supporting (or blocking) us. We started business in Jan 2010 with a very rudimental offer.
2. From the start, our concept was designed exclusively for the digital market. By doing so, we focus on the main driver like Web 2.0, e-commerce, gamification and everything that comes around the mobile internet. We see absolutely no sense in a banking-branch, regardless of which bank. A branch is inferior to the Internet in all respects! For this I have also written a blog – but is currently available only in German. Sorry. Must translate that… Nevertheless, here is the link.
3. We have clearly opted for a banking license, because we had from the beginning on the opinion that one must have this license if you want to come to the core of a product and if you want to offer real innovation. The golden rule is simple: “Who wants to hijack a plane, should better sit in it.” (I am not saying, somebody should hijack a plane!!!! ;-))
4. If you hold no banking license, you only can focus on a (wonderful ) UX. That is it. Financial-Products and services are the ones which are made possible by the back-office bank and its core banking system. Not more.
5. We decided from the beginning to build our own middleware, because there was no suitable offer in the market. This is what we now call “Fidor operating system”. Out of that, Fidor TecS AG (a 100% subsidiary to the bank) as a company emerged. We see this fOS as the central tool to generate customer loyalty and stickyness. Our experience: If you work in the context of a concept that has the digital target customers (retail and SMEs) in its center and is not having its own technological expertise, you are lost.
6. Very Important: fOS is an “open” System. Via standard interfaces we integrate 3rd party offerings into our account. The result is as easy as compelling: A normal account has 3 functions: money in – money stays – money out. Fidor Smart Cash Account (as we call it) has already around 20 functions: In addition to the aforementioned , the customer may purchase foreign currencies and sell them and send them, also buy precious metals and sell and ship digitally, can order a mini credit via mobile app (we call it cash emergency) with an instant pay out even on a Sunday (our answer to wonga), can apply for an overdraft online and open it in seconds, can define saving certificates, may invest and participate in Crowd Finance as well as execute peer to peer lending , can use “social brokerage” offers, manage your card transactions in the same transactions-list like all your other transactions, and much much more. Not to forget, that we can integrate digital currencies into our account. Of course. That’s also the reason, why we are the only bank cooperating with two very active bitcoin exchanges. All that is creating a higher Customer engagement, a higher customer cross selling ratio and by that a higher customer life time value.
7. Yes, all that sounds like a complex account. But – in future – the customer can define his/her own account, like we do it today with our smart phone. That’s why we call it a Smart Cash Account. By defining your own complexity in that account, we integrate again the customer.
8. In addition, we operate a community, in which users can ask each other questions and give answers. Here you can rate products and consultants/advisors of all banks as well as you may wish to create products. Or you want to support other users by giving advice how to cut cost of living. Also you can compare your own financial profiles – of course anonymously. Naturally, we are active on all other social media channels and try to integrate the customer into the product also there. One example is our overdraft interest rate, that is driven by the numbers of Likes we have on Facebook. Easy rule: The more likes we receive, the lower the interest rate on the overdraft.
9. After establishing the first Fidor Hub in Germany, we now roll out internationally. We started in Germany, we now have a Russian franchise and we will come to market in the UK in the near future. 2015 it will go on like this, because Fidor has developed an international franchise concept.
10. In addition, one must see that we will connect these local franchise hubs in order to allow cost-effective real-time transactions between these local hubs then. Thats gonna be really cool and we will publish a press-release regarding a cooperation with a real disruptive partner in that segment in the near future.
And how do we manage all this? Well, we are currently a team of around 70 employees, unified by one mutual and super-important pre-condition: We have the right culture , the right spirit. Culture is therefore in a way more important than maybe the technology itself.
Did I forget something? Certainly …. yes. But, Jack, most important to me: you can tell Marc Andreesen and Chris Dixon that there is a really disruptive bank! That would be my only request… and wish ;-)) If I may be that open and frank.
Rather than reinvent the wheel, I’ve put together some key quotes from – and links to – relevant articles by people who are far more knowledgable and qualified about the topic than I.
A while back, I got into a to-and-fro on Twitter with Marc Andreessen and Chris Dixon about banking, which garnered a fair amount of interest and commentary1234, after Marc declared that he is “dying to fund a disruptive bank“.
So far, finance startups have shied away getting their own banking licence, opting to use an existing bank instead. Movenbank and BankSimple talked up their plans to shake up banking but, in the end, both dropped “bank” from their name and partnered with CBW Bank and Bancorp respectively (Simple was subsequently acquired by BBVA). In effect, they built a presentation layer on top of an existing bank. I don’t think that’s the path to the future of banking. Even if you ignore the downsides of building a business on someone else’s platform, I believe that you can’t be truly disruptive unless you build the full stack.
A bank can be broken down into two distinct businesses. The first is the infrastructure required to offer banking services: the banking licence or charter, branches and call centres (increasingly optional), IT systems, ATMs, AML and KYC procedures, connections to domestic inter-bank networks and SWIFT, the ability to issue credit and debit cards, etc. Some of these are revenue-generating (e.g. fees on SWIFT transfers, payment card interchange fees) but, traditionally, retail banks have offered “free” banking to attract customers so that the second business can offer them financial products like credit, overdrafts, loans, savings, investments, pensions, foreign exchange and insurance. This second business has attracted plenty of competition (including startups like Wonga, FundingCircle and TransferWise), but there appears to be little appetite for investing in the infrastructure required to become an actual bank.
The last company to do so in the UK was Metro Bank, which launched in 2010 (the first new high street bank to do so in 150 years) but has failed to make a make a significant impact on the incumbents’ market share (the top four UK banking groups have 70% of the market for personal current accounts5) and is yet to achieve profitability, having racked up over £150m in cumulative losses. With hindsight, part of the reason for Metro’s slow progress is the fact that, rather than trying to disrupt the market, it challenged the incumbents on their own turf by opening high street branches (26 so far, at a cost of over £2m each) and sought to compete on customer service (e.g. Sunday opening and welcoming customers’ pets into branches). Notably, it did not attempt to differentiate itself through technology, opting instead to outsource its IT to Swiss banking systems provider Temenos.
I believe that the technology platform can provide a strategic competitive advantage. As I’ve written before, the lack of competition in the UK market bred complacency and resulted in a failure to innovate and invest in technology (banks are notoriously reluctant to invest in something that doesn’t generate revenue unless it’s mandated by the regulators). As a result, the incumbents’ core banking systems are monolithic, clunky and ill-suited for supporting the kind of services that are made possible by modern consumer technology and connectivity.
The ability to offer those kind of services would be a key differentiating factor but would require that the new bank build its own platform. I imagine it will look something like this:
A core banking engine, with integrated CRM functionality, wrapped in an API/service layer supporting online banking, and both in-house and 3rd party apps (e.g. personal finance managers, business accounting packages). Building a new engine from scratch, rather than using an off-the-shelf product, will allow the new bank to incorporate new features and functionality, like allowing customers to control which apps have access to their account (in a manner similar to the way Twitter lets you control which apps have access to your Twitter account) and set up IFTTT-style triggers. A modern platform will also make it easy to integrate with new financial networks.
Certain traditional banking services are prerequisites, such as payment cards, access to withdraw cash from ATMs and the ability to send and receive bank transfers both domestically and internationally. However, note the absence of any mention of branches, cheques or accepting cash deposits – all services that are expensive to provide and whose usage is declining precipitously.
Commoditised products like foreign exchange, credit and deposits are a competitive market and it’s easy for customers to access competitors’ product offerings, so it would make sense to create a marketplace where customers can get direct access to 3rd party products as well as those offered by the in-house Treasury product teams. In fact, providing a banking platform-as-a-service and white label services to other financial startups could generate significant revenues.
Efforts by UK regulators to foster competition in the banking market by encouraging more new entrants mean that now is probably the perfect time to launch a bank like this in the UK. In fact, last week brought the news that one of the co-founders of Metro Bank has teamed up with the former chief executive of First Direct (HSBC’s online and phone banking brand) to launch “the UK’s first truly digital bank“, although they appear to be following in Metro Bank’s footsteps by outsourcing the technology platform to Fiserv, a US financial technology provider.
The UK is arguably the best location for a disruptive bank to launch, with a financial technology talent pool that is probably the best in the world, and a sizeable addressable market that’s ripe for disruption. Once established in the UK market, a new bank will be well-positioned to take advantage of the single European market for financial services to expand throughout the EU and, with a tried and tested technology platform, it should be easy to attract the investment required to launch in the US.
The potential rewards are huge but so is the investment needed. Building a new technology platform and putting in place the support structures required is a major undertaking, not to mention the marketing spend that would be required to go mass market. VCs have become used to backing small teams of young technologists who build and launch a business over the course of a three month accelerator programme, or providing growth capital to companies that are scaling a proven business model. Whether they have the risk appetite for a disruptive bank remains to be seen.
- VCs Start Pining to Own a Bank at bankinnovation.net
- To disrupt banking, do you need to own the bank? at qz.com
- Financial interaction: the next generation by Roger Ehrenberg
- If you think ‘rip out and replace our systems’ is naive … think again at thefinanser.co.uk
- Calculated from the 75% quoted by the OFT in their January 2013 Review of the personal current account market less TSB’s 4.3% share after being spun out of Lloyds
tl;dr – Bitcoin will not survive long-term. The value of Bitcoins will ultimately go to ~0. However, the underlying technology and protocols are a testbed/prototype for future implementations of distributed, decentralised financial technologies.
“The test of a first-rate intelligence is the ability to hold two opposing ideas in mind at the same time and still retain the ability to function.” — F. Scott Fitgerald
I previously wrote about Bitcoin’s flaws. However, despite the fact that I doubt Bitcoin will succeed as a currency, I expect that it will leave a positive legacy. For all its flaws, Bitcoin has garnered far more usage and media attention than any previous cryptocurrency. That will have long-term ramifications, for a number of reasons.
tl;dr – Bitcoin will not survive long-term. The value of Bitcoins will ultimately go to ~0. However, the underlying technology and protocols are a testbed/prototype for future implementations of distributed, decentralised financial technologies.
When I return home from an overseas trip, I toss my left-over notes and coins into a drawer. Euros and US dollars obviously get used (as long as I remember to take them with me!) but the dirham, rubles, rupees, yuan, francs, and dollars from Hong Kong and New Zealand just sit there gathering dust – pieces of paper and metal that are effectively worthless here in London.
However, for all its faults, physical notes and coins remain the only way in which you can transfer currency in a decentralised fashion. Electronic money – the ones and zeroes in our bank accounts, the records of credit card transactions and inter-bank transfers – ultimately rely on central banks and mechanisms like CLS, which keep track of how much money each bank has.
Bitcoin is an effort to bring the advantages of physical currency – specifically the ability to transfer wealth with little-to-no cost and without needing to involve anyone else in the transaction – to the electronic medium.
(Many assume that Bitcoin transactions are anonymous. They’re not. All Bitcoin transactions are recorded publicly in the blockchain. At best, Bitcoin transactions are pseudonymous; at worst, network analysis – something that security and intelligence services are very good at – can provide major clues to participants’ identities.)
I first became aware of Bitcoin in 2010, when someone paid 10,000 bitcoins for a couple of pizzas. My instinctive gut reaction was that it was an interesting technology but, ultimately, would prove to be nothing more than a fad. Three years later, I have yet to be proven correct. Enough people have supported Bitcoin that an eco-system has built up around it. There are online exchanges where you can buy and sell bitcoins for dollars, euros or pounds; payment processors that allow merchants to accept bitcoins for goods or services; casinos where you can gamble your bitcoins; and online marketplaces where you can use bitcoins to buy drugs.