Last Thursday I had the great privilege of having been invited by the remarkable Laurent Haug to present a snapshot of our vision of the new emerging universe of “digitally native finance” at the wonderful Lift12 conference in Geneva. Twenty minutes is not a long time (and thank goodness Laurent indulged me with a couple minutes more) to convey both the context and the substance of what we believe to be a fundamental shift in the paradigm of the financial services industry, but I hope I was able to give at least a good high-level overview. Most importantly, I hope I was able to convey the excitement we feel at the vastness of the opportunity and the win/win/win (for the customers/companies/economies) available to those who embrace the opportunity for technology-enabled disruption in financial services by introducing them – however superficially I’ll admit – to just a handful of companies who are at the vanguard of this wave of change.
For those that are interested, my presentation and video (updated!) is below:
For those that are interested, here are links to all the companies mentioned in the presentation, those in which Anthemis is invested are marked with an asterisk. Clearly this is just the tip of the iceberg and there are many, many more companies and entrepreneurs and venture stage companies now focusing on creating the future of financial services – a veritable Cambrian explosion of innovation: (note: this selection is somewhat random and driven by a desire to show an interesting / representative cross-section rather than trying to pick out the most important or most successful companies in the space)
(in no particular order)
Personal finance
Simple* – Worry-free alternative to traditional banking
Fidor Bank* – Banking with friends
Movenbank – Spend, save and live smarter
Zopa – A marketplace for money
Wonga – Payday loans alternative
Billguard – People-powered antivirus for bills
Holvi – Smart Banking for Group Activities
ArchiveMe – Invoices and expenses in a minute
Payoff.com* – Money made simple, social and fun
Markets and trading
eToro – Your investment network
StockTwits – The financial communications network
AlphaClone – Follow the smart money
Trefis – What’s driving the stock
Estimize – Uncover the real consensus
Risk management / insurance
The Climate Corporation* – Total weather insurance
OpenGamma – Unified financial analytics
Wealth management
Betterment* – A better investment
Blueleaf* – Simple, personal financial tracking
Covestor – Find and follow investing leaders
Nutmeg – Smarter saving and investing
Business banking
FeeFighters – Comparison shopping for SMB finance
Kabbage – Green to help you grow
FundingCircle – Online lending marketplace
AxialMarket – Online network for M&A professionals
Bilbus – Locate your liquidity
Payments
Square – Mobile payments system
Stripe – Payments for developers
The Currency Cloud* – FX payments automation service
Dwolla – The cash inspired payment network
Ixaris – Open payments solutions
Leetchi – Group payment application
And just in case you are interested/curious, here are the other companies currently in the Anthemis ecosystem:
FinanceACar – World’s first car finance comparison site
MileSense – Turning data into intelligent risk analysis
Metamarkets – Fast insight for big data
BluFin – Look at finance in a new way
MoBank – Cutting edge mCommerce solutions
PayPerks – Powering innovative solutions for the financially underserved
PeerIndex – Understand your social capital
Hooplo – Social games publishing platform
Visual.ly – Data visualization platform for big data
As I said in my presentation at Lift12, it is an incredibly exciting time in this space, and it is tremendously satisfying to see all the work we’ve done to position Anthemis at the heart of this opportunity space starting to bear fruit. Working with the amazing entrepreneurs and companies in our portfolio is a privilege and we are constantly impressed by their vision, focus and energy which is infectious. And beyond our existing portfolio, we have an incredibly strong and varied pipeline of new companies we hope to bring into our ecosystem over the next year or so.
You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete. – Buckminster Fuller
A billion dollars isn’t cool, you know what’s cool? A trillion dollars.
A bit more than a year ago, my friend Fred introduced me to John Prendergast who was in the very early stages of conceptualizing a platform called Blueleaf to help people better manage their savings and investments. As Fred knew, this kind of thing is right up my alley and so I set up a call with John to learn more about his plans.
As many of you know, for over a decade – since first discovering the enabling power of the internet and Moore’s Law – I have been very excited by the prospect of revolutionising the way 99.9% of people manage their personal financial balance sheet. (With the first 80% of this revolution being simply to help people recognise that they have a personal balance sheet and that it should be considered holistically and in the context of each person’s circumstances, constraints and aspirations.) I called this PALM – personal asset-liability management (but am not so naive as to think that this is the nomenclature one would use to popularise the notion…unsurprisingly most folks aren’t super aware – or inclined to be – of the importance of robust ALM…)
Indeed of all the various innovative ideas and companies I’ve looked at and invested in over the past decade, this concept of PALM is the one that actually lies in the Paul Graham vector of solving problems you encounter yourself. Indeed, I cannot wait to have a robust, networked, intelligent asset-liability management dashboard to help me manage my family’s increasingly complex balance sheet. And for once, I am also in fact part of the key or core demographic for this type of product (which is not often true!)
Although I would argue that people should start managing their personal balance sheet from the time they enter higher education or the workforce, the reality is that it isn’t until the 30s and 40s that real complexity typically starts to creep into the balance sheet: mortgage(s), other secured and unsecured loans, multiple savings and investment accounts including pension plans and other tax-driven structures, more complex compensation mixes (including equity and options), children, and the awakening realisation that they can’t count on the state or their employers to secure their financial future.
Adding to this complexity is the fact that financial products are almost always sold (and bought) in isolation – with at best limited regard to the consumer’s overall balance sheet – and choices are often driven by non-financial considerations (changing jobs, marriage, divorce, etc.) You might expect me at this point to go off on a rant about how awful this is and that our financial institutions are failing us by cynically selling us individual financial products rather than holistic financial solutions and that this needs to change. Surprise! I don’t have a problem with financial institutions selling products. That’s what they do. Worrying about that is like wishing the sky was a different colour than blue. Misdirected energy.
Ironically, most financial institutions actually spend a lot of time, money and energy pretending to and trying to convince you that they are looking at you “holistically”, that they are looking at the big picture but in order to do so, they need to control more or ideally all of your balance sheet. In other words, sell you more products. Well I don’t know about you, but whether your balance sheet is $50,000 or $500,000,000 – I think it is pretty intuitive that (a) it’s pretty much impossible to do all your financial business with just one institution and (b) even if it were possible, it is highly undesirable to do so. Pre-2008 this was obvious to me (as an ex-banker and someone with high financial literacy); post-2008 I think this is increasingly obvious to everyone.
The solution in my mind was an intelligent (online) wealth management / ALM platform that would allow individuals (and families or other self-determined groups) to aggregate all of their financial commitments – assets, liabilities, cashflows – and then allow them to risk manage (scenario analysis, simulations, rebalancing, etc.) and optimize their personal balance sheets according to their changing needs and circumstances. Mixing a high level of automation in terms of the basic record-keeping, data management and transaction processing with an intelligent user-interface allowing the user and/or their advisor(s) to make well-informed, contextual decisions. In essence, a meta wealth management intelligence layer that put the information advantage squarely with the individual, where it belongs.
I dreamed about building this…
So I remember when John started to describe his vision for Blueleaf to me on that first call, he had me at hello. The vision, the product, the approach all aligned with my vision of using 21st century technologies to bring institutional strength risk management tools to individuals. A few months of refining, learning, due diligence and progress later, and I was convinced that John and his team could deliver on their vision and I was delighted for Anthemis to become the lead seed investor in Blueleaf just in time for Christmas 2010. (And the cherry on the icing on the cake is that now I have a good reason to visit the great city of Boston every 2-3 months or so.) As you might imagine, building the technology to deliver this vision is not trivial and it’s been impressive to see them bring Blueleaf to life.
In closed beta since last fall, and by focusing on providing financial advisors with an amazing platform to help them help their customers, Blueleaf has (very quietly) already gathered over $1 billion (yes, billion…) of assets on the platform, including a significant number of multi-million dollar accounts. Often when people hear this, they are surprised – why would advisors trust a new start-up like Blueleaf with all the details of their clients net worth? I think it is relatively simple. First and foremost, because by doing so, they can derive real – measurable and material – value for their customers by using their platform, and secondly because it makes much much more sense for individuals and independent financial advisors to share a complete view of someone’s finances with an independent 3rd-party platform provider like Blueleaf than with any individual financial institution. In other words, it makes advisors look like rock stars and gives individuals a quantum upgrade from the still all-to-common wealth management user interface of a kitchen table covered in account statements… And the wealthier and more sophisticated (and older!) you are, the more you are likely to realise this is true. There are very good reasons to have multiple banking, insurance and broking relationships. The problem is that today, to gain the advantages of multiple relationships one has to pay a real cost in increased complexity that arises from having to manually manage and aggregate these accounts.
And just in case there are any private bankers reading, I think you will agree – if you are honest with yourselves – that almost none of your clients have given you all of their assets to manage. Is it because they don’t trust you? Well yes sort of, but (hopefully!) not in a toxic way. Let me explain: they know (and know that you know, that they know, etc.) that you need to sell them products. Perhaps you can take a long term view of this (which is good) but sooner or later, you need to book some revenue against each of your client relationships. Like scorpions, this is your nature. They also know that having all your eggs in one basket is generally not an optimal strategy. And they know that you might not be at that institution forever and – in a bit of good news for you – their relationship is almost certainly more with you as an individual than with the institution (despite the enormous sums your firm spends on brand marketing.) Hell that’s one of the reasons they have assets spread amongst 4 different banks: some of those assets followed you with your previous career moves…
In fact, I am convinced that the most enlightened private bankers, insurance brokers, financial advisors will embrace and celebrate a platform like Blueleaf as it will make their customers more intelligent, better informed and less paranoid and allow them to do their jobs better and build even stronger relationships with their customers. Of course the weak ones – who really add no value other than shuffling reports around and hoarding information – will hate it. But the clock is ticking on them in any event…
John’s vision for Blueleaf is to have $1 trillion of assets on the platform in the next 5-7 years. Yes TRILLION. Think that’s crazy?Think again:
- That’s 1 million accounts of $1 million each (c. 34% of US HNWIs, 10% of Global HNWIs)
- or c. 9% of US HNWI’s investable assets of $10.7 trillion (or 2.5% of global HNWI investable assets)
- or 10 million accounts of $100,000 each (c. 25% of US mass affluent households)
Source: Cap Gemini / Merrill Lynch World Wealth Report 2010
Don’t mistake ambition and vision for hubris: it will take a lot of hard work and an amazing product and value proposition to get there, but the size of the market opportunity is clear. Equally importantly, I think the time is right to introduce a Blueleaf approach to the market: a combination of shifting demographics, increasing familiarity and comfort with web-based financial management products and the fundamental shift in private investor mindsets in the wake of the global financial crisis are all aligning to drive an increasingly holistic, transparent approach to investing and wealth management. Some of the key learnings from the 2010 World Wealth Report back this up:
Post financial crisis, HNW investors are now much more engaged in their financial affairs. HNW clients are re-evaluating their current wealth management provider relationships and moving assets to firms that can clearly demonstrate a more integrated approach to meeting their needs.
Three unequivocal demands HNWIs are making of their wealth management firms today are:
- SPECIALIZED ADVICE: As clients become more educated about their own investment choices, they increasingly expect ‘Specialized’ or ‘Independent’investmentadvice, and are re-validating advice from their Advisors/Firms through other sources, including peers, the Internet, and other research alternatives. They also expect the advice to be aligned with realistic and appropriate goal-setting, based on their actual risk profile.
- TRANSPARENCY AND SIMPLICITY: HNW clients want increased ‘Transparency and Simplicity’ and ‘Improved Client Reporting’ so they can better understand products, valuations, risks, performance, and fee structures. HNWIs are reviewing product disclosure statements and investment risks before even conferring with their Advisors. They also value better reporting and more frequent updates after being blind-sided during the crisis, when they lacked a real-time view of what was happening to the value of their investments. And increasingly, the type of products they seek out are the ones they can understand.
- EFFECTIVE PORTFOLIO AND RISK MANAGEMENT: The vast majority of clients see ‘Effective Portfolio Management’ and ‘Effective Risk Management’ as important after the crisis. As a result, they increasingly want and expect scenario analysis on proposed allocations and products that is aligned to their individual goals and expectations, and in-depth research around all types of products so they can better understand the risks. For instance, many wealthy clients are very concerned about their exposure to markets and want to limit their downside risk. At the same time, they know they need to diversify and have global exposure, particularly to fast-growing markets. As a result, they want evidence through risk-scenario analysis to facilitate investment decisions that meet their goals while remaining aligned with broader volatility and risk-appetite limits.
These are a pretty darn good articulation of Blueleaf’s mission statement; it’s great to see this kind of independent confirmation. Now enough talking and back to work. Lots to do and $999 billion more assets to bring on to the platform. (And if you’re reading this from the US and are an early adopter type person or financial advisor, please request an invite. I think you’ll like it.)
I do have one complaint however: I just wish they’d hurry up and launch in Europe too!
See it in action:
Blueleaf Advisor Demo Videos
Blueleaf Client Demo Videos
Over the years he watched digital projects lose battles for research dollars. Even though film’s market share was declining, the profit margins were still high and digital seemed an expensive, risky bet.
He recalls efforts in the 1980s to drive innovation by setting up smaller spin-off companies within Kodak, but “it just didn’t work.” Venture companies in Silicon Valley are “pretty wild”, “in Rochester, people come to work at 8 and go home at 5.”
When disruptive technologies appear, there is a lot of uncertainty in the transition from old to new. “The challenge is not so much in developing new technology, but rather shifting the business model in terms of the way firms create and capture value.
These are just a few excerpts from a great piece “What’s Wrong with This Picture: Kodak’s 30-year Slide into Bankruptcy” from Knowledge @ Wharton that (inadvertently) does a terrific job explaining the context and gigantic opportunity that drove Uday and I to create Anthemis and it’s networked ecosystem approach to re-inventing financial services for the digital century. Let’s take each of these in turn:
< < Over the years he watched digital projects lose battles for research dollars. Even though film's market share was declining, the profit margins were still high and digital seemed an expensive, risky bet. >>
I lived this directly and in full Kodachrome color my last few years working for Dresdner Kleinwort, culminating in the creation and subsequent dismantlement following my departure (in 2006) of a new business unit in Capital Markets called Digital Markets. This was the brainchild of then CIO (of the year!) JP Rangaswami and myself, built on the basic premise that exponential technological progress was going to drive an entirely new optimal business model for capital markets activities (as opposed to simply enabling accelerating growth of the existing traditional business models which it had done so well for the previous two decades or so.) That technology, rather than simply being an (important) enabler of the business, was set to become the central driver and that accordingly we had an exceptional opportunity to get out in front of this disruptive change – embracing not resisting – affording us the once-in-a-paradigm-shift chance to fundamentally change (for the better) our competitive position. Further, we felt that Dresdner Kleinwort was ideally positioned in its mediocrity to seize this opportunity: we had much less to lose than the market leaders. (And as history shows, in fact the firm had pretty much nothing to lose…RIP.) But the problem was – and almost always is with large, established, publicly-listed companies – that the vast majority of decision-makers had significant vested interests in maintaining the status quo, and insufficient sensitivity to the downside. Classic agent/principal conflict. Turkeys just don’t vote for Christmas. It’s not rational for them to do so. This is a fact of life, not something really worth bemoaning.
< < He recalls efforts in the 1980s to drive innovation by setting up smaller spin-off companies within Kodak, but "it just didn't work." Venture companies in Silicon Valley are "pretty wild", "in Rochester, people come to work at 8 and go home at 5." >>
My experiences as a senior manager at Dresdner Kleinwort / Allianz led me to increasingly understand that there was a fundamental incompatibility between successfully managing a large incumbent organization and successfully nurturing dynamic, entrepreneurial, disruptive new ventures. I like to think of it as the corporate equivalent of Heisenberg’s Uncertainty Principle: just as one cannot simultaneously know the position and momentum of a particle, neither can one reap the advantages of a large-scale, established corporation and simultaneously drive and manage emerging, innovative new business models. (Call it Park’s Corporate Paradox?) And in the past 5 or so years since leaving the traditional corporate world, my empirical experience of working closely with start-ups (including starting one!) has only increased my conviction in what I now believe is a fundamental truth. Dresdner Kleinwort (and Paribas before that) – as old hands in the markets world will I hope attest – had positive reputations in the industry for their (relative) ability to innovate, to be at the forefront of new markets and ideas. I believe a key reason they were able to do this was actually because they were well, let’s just say “loosely” managed. They were anything but well-oiled machines. Which, frankly, if you are going to take best advantage of the benefits of being a large, established corporation, is what you need to be. The innovation that emerged in these organizations was a by-product of their relatively weak organizational structures. Put another way, if disruptive innovations are akin to viruses (which I think is not a bad metaphor) then these companies had relatively weaker immune systems (than their market leading counterparts like Goldman Sachs or JP Morgan for example.) However, that is not to say that they had no immune response, and ultimately the incumbent prerogative to maintain the status quo and protect the vital organs won out (in Paribas’ case accelerated by its acquisition by the more tightly managed BNP.)
The important truth to grasp is not that one (the incumbent) is better or worse than the other (the start-up), rather that they are incompatible – structurally, culturally, strategically – in the same host. Yet they are Yin and Yang, and need each other, “complementary opposites that interact within a greater whole, as part of a dynamic system.” The optimal state occurs when they exist in symbiosis – this is in fact the central tenant of Anthemis – our vision, our mission is to act as a substrate that catalyzes, nurtures and enhances this symbiotic relationship. We exist to “improve the health of other companies who grow near us.”
< < When disruptive technologies appear, there is a lot of uncertainty in the transition from old to new. "The challenge is not so much in developing new technology, but rather shifting the business model in terms of the way firms create and capture value. >>
It’s not really about the technology per se, it’s about what technology allows you to do. Often I hear people describe us as “financial technology” investors, but at the risk of being pedantic, this is not really the case. We invest in people and companies that use technology to enable better, often disruptive, new business models. Businesses that seek to address the fundamental needs of their customers in new and better ways that were previously either impossible or sometimes even unthinkable without the enabling power of fast evolving information and communication technologies. It’s not the same thing. And although we invest in these new companies, we are not investors – at least not in the mainstream sense. We aren’t a venture capital or private equity fund. We are ourselves leveraging technology to create a new type of organization, one that we believe is highly additive to the existing ecosystem of large incumbents, start-ups and traditional venture and growth investors. Complementary rather than competitive.
Too often, the conversation around innovation is framed as big v. small, good v. evil and works against the grain of what we believe is the objective reality. We want to re-frame the conversation, work with the grain of the history and the market to help the various different participants in the (financial services) ecosystem leverage their innate advantages (and mitigate their inherent weaknesses.) And if we succeed in this mission, we are certain that we will create enormous value for our own shareholders along the way.
Networks not hierarchies
We believe that the most successful companies of the future – both large and small – will be the ones who embrace a network-driven philosophy and operating ethos. The vertically-integrated Sloan-ian corporation of the 20th century, so ideally adapted to the economy of the Industrial Age, will increasingly struggle to remain relevant in the environment of accelerating cultural and technological change the characterizes the economy of the 21st century Information Age. Large, sector-leading incumbents will need to become more self-aware of both their defensible strengths and core competencies and of their inherent weaknesses and blind spots, which includes the ability to manage disruptive change. They will need to purge all vestiges of not-invented-here mentalities and pro-actively support (both financially and commercially) wider, outside innovation networks while developing optimized methodologies for bringing these outside innovations into their organizations as they mature. And continuously remain aware of the always changing ferment on the edges of their competitive space. Small, cutting-edge start-ups will need to become increasingly good at leveraging existing infrastructures – not just compute and storage infrastructure – but distribution and industry specific infrastructures, or as John Borthwick of Betaworks points out, the best new disruptive innovators “do what (they) do best and outsource the rest.”
This new paradigm creates a significant opportunity for a new type of company to emerge. Companies that are natively optimized to act as a connective layer between the old and the new. Companies that are deliberately tuned to operate within the new network-centric economy. Companies that are explicitly built to nurture ecosystems of talent, technologies and products and services. Anthemis is one of these new companies – a “third place” so to speak – positioned between the established industry leaders and the emerging new innovators, acting as a sort of “translation layer” helping the former to understand and adapt to the changing environment and the latter to identify and focus on the biggest market opportunities while leveraging the core strengths of the existing industry infrastructure. While our focus is on financial services and marketplaces, I am certain this same opportunity exists across any number of industries or markets. Indeed, Betaworks – “A New Medium Company” is a good example of a successful emerging company with a similar positioning and philosophy but focused on the media space. If they don’t exist already, I am sure similar constructs would work well in other industries.
Rusting away
Often when I give presentations on our vision of the future of finance, I am challenged with the question: “But do you really think [insert favorite giant financial services company] will disappear?”, I am at pains to make clear that (a) I don’t know (b) it’s possible, though not necessarily likely, or will take a very (very) long time and (c) that it kind of misses the point in that one would hope that their aspiration is to thrive and not simply survive.
There are a number of different failure modes for established market leaders, most of which are relatively unspectacular and many that don’t actually result in the company disappearing. We remember the Lehmans, the Enrons and the WorldComs but thankfully these are actually the exception. The greatest risk for these companies is not catastrophic overnight disaster but a slow inexorable decline into irrelevancy or even bankruptcy. Big companies typically don’t blow up, they mostly just rust away. The actual speed of this decline often depends on the nature of the sector, it’s “installed” base and particularly it’s regulatory “relevance” in particular. Leaders in highly regulated and deeply embedded (in our economies) industries like finance and telecoms can survive for years and even decades by deploying their considerable resources to protect their position and slow (but not stop) their decline. But how much better off would their shareholders, employees and customers be if they instead marshaled these same resources in a more constructive direction, embracing their real strengths and acknowledging their structural weaknesses in order to evolve and succeed in our changing world, rather that just settling for survival? (Side note: this strikes to the heart of the principal/agent problem that plagues many big, listed companies – for the middle and senior management of these firms, simply ensuring their company survives is often a more than good enough outcome, requiring significantly less energy and psychological commitment while delivering sufficient financial rewards and positional prestige to meet or exceed their personal aspirations. I am not criticizing so much as acknowledging that human nature being what it is, that it is damn hard to resist such a path, even for those with the best intentions.)
Say Cheese
The experts at Wharton note that “adapting to technological change can be especially challenging for established companies like Kodak because entrenched leadership often finds it difficult to break old patterns that once spelled success. Kodak’s history shows that innovation alone isn’t enough; companies must also have a clear business strategy that can adapt to changing times. Without one, disruptive innovations can sink a company’s fortunes — even when the innovations are its own.”
The world is changing. Financial services are no longer immune to these forces of fundamental change. Changing technology, demography and culture are unstoppable forces that if ignored will slowly but surely rust away the competitive advantages of traditional business models. Resist it or embrace it. But you can’t change it. It’s a bit scary sure but also incredibly exciting. Jump in. If you are in financial services, we can probably help.
It’s a better choice than waiting for your Kodak moment.
