Many years ago, enterprise software was written to run on mainframe computers. This was the best (only?) solution at that time that had the requisite memory and processing power to run these applications and so – despite their cost, inflexibility and operational complexity – mainframes represented the optimal computing model for enterprise applications. Until a new computing model emerged. Based on powerful, plentiful and inexpensive blade servers and a number of new, standard software components, this “technology stack” became the new optimal computing model for running more and more of the enterprise. LAMP was the new 700/7000.
Not only was this new model less expensive, more robust and more resilient, it was much more adaptable. Further, the open standards encouraged a tremendous amount of innovation and experimentation which in turn fostered the development of a vast array of specialist but compatible variations. This enabled bespoke solutions for different applications and environments to be easily developed without the need to build a new platform each time. And as each component in the stack had a very specific role or purpose, its design could be optimised without compromise.
The traditional banking business model mirrors the mainframe: a vertically integrated, all-in-one solution with all the resources and tools needed to deliver banking products and services in one big (black) box. In the context of the 20th century competitive and technological landscape this worked fine. It was the optimal solution. But like the mainframe of the computing world, the all-in-one “big iron” approach to banking is no longer the optimal business model with which to efficiently and profitably serve the banking customers of today. A new approach, predicated on assembling specialist providers of the component elements required to deliver end products and services will prove to be the new optimal business model for banking. Welcome to the (banking) stack.
Take for example the process of making a loan. This actually breaks down into a “process stack” that at a high level looks something like this:
Each layer of this stack requires different skills and resources. The value drivers for each activity are different. Each requires a different mix of technology, design and talent and the application of fundamentally different business models and capital resources. As such, trying to house them all in the same organisation means that some or indeed each of these activities are operated in a sub-optimal fashion. Indeed, the stronger the culture, the better managed the bank is (in the context of traditional, hierarchical models), the more acute is this problem.
That said, so long as margins remained high and competition muted, with competitors operating more or less efficient and skillfully executed versions of the same business model, sticking with the “mainframe” model was just about tenable. However this is no longer the case. New entrants – unburdened by legacy technologies and mindsets – are emerging across the stack with business models that are natively adapted not only to leverage the technologies of today but that also address the changing expectations of customers in terms of pricing, design and user experience. In many parts of the stack, incumbent institutions will find it hard to compete as the best of these new entrants gain traction.
The best managed of today’s leading institutions will adapt to this changing landscape. How? By letting go of their traditional business models, opening up their value chain and making an honest assessment of where in the stack they have a sustainable competitive advantage and where indeed they do not. This is not a trivial change for most traditional banks and aside from the adjustments in technology and business model it will entail, perhaps the most challenging aspect in this transition will be to change the culture and mindset of these institutions for whom open architectures and collaboration is often anathema.
But for those institutions that are able to make these changes, the rewards will be significant. By focusing their resources and talents on the areas of the stack where they have a true competitive advantage, exiting other areas where they are structurally uncompetitive and collaborating with (and investing in) companies with disruptive new and powerful value propositions in these areas, they will successfully navigate the transition to becoming an information age bank.
Taking the example above, already it is becoming clear that the traditional models for originating, underwriting and processing loans are no longer competitive. New models from companies like FundingOptions, Zopa, OnDeck Capital, Kabbage and many others are proving to be much more effective and economical. Traditional banks should be lining up to partner with companies like these and in particular become lenders and provide core transaction banking services, areas where they do have a real competitive advantage. They should also be leveraging their strong distribution channels to drive customers to these platforms in exchange for lead generation fees. Of course for the managers and employees responsible for these functions within traditional banks, the transition will be painful, ultimately their jobs will disappear. However, in any case, this outcome is inevitable as their value proposition and competitive position becomes ever more compromised.
By embracing change and working within the grain of this new paradigm, incumbent banks can do much to ensure their future success and survival and will find it much easier to rebuild trust – with customers, regulators and their communities – mitigating the short term pain and setting themselves on a path to sustainable profitability. The alternative is to keep doing the same thing and slowly but surely rust away. The best banking executives of tomorrow will need to be as familiar with APIs and SDKs as they are with APRs and RAROC.
Until very recently, financial services have been relatively immune to the technology-enabled disruptive innovation that has swept through other industries over the past decade or so. This is now changing for a number of reasons, both technological, economic and societal:
continuing advances in communications and information technology – in particular ubiquitous cloud computing and smart devices – is enabling economically viable new approaches to delivering all types of financial services (payments, risk management, investing, banking, insurance…)
demographic change is creating a large addressable population of financial services consumers who have a different expectations (in terms of transparency, control, etc.)
the financial crisis of 2008 has broken many of the bonds of trust that contributed to significant customer inertia wrt financial services providers.
This is opening up one of the most important sectors of our economy to new entrants with new ideas, new approaches and new technologies.
I’m going to give a short presentation, hopefully setting the scene and getting some creative juices flowing before the more interesting part of the workshop where my partner Uday and I will be working with those attending to ideastorm potential new approaches, business models and services that are natively adapted to the technologies and economies of the 21st century. Attendance will be limited to 30 people so if this is something that excites you and you’d like to contribute, don’t wait too long to sign up. The workshop is at 9am on Friday, February 4th and of course you need to be signed up for the conference – if you haven’t already you can do that here.
And if you have any ideas for what you’d like to see or hear or discuss at the workshop, please don’t hesitate to comment below. Â Hope to see you there!
Workshop went well I think and I was really lucky to have such an engaged and interesting group. Would have loved to have had another hour to explore the ideas that emerged…here’s the presentation I gave as an intro:
Betterment ticks the box on so many of our investment themes and fits so well into our vision of digitally native 21st century financial services that they had us at ‘hello’â€¦but the clincher was the amazing team and impressive execution to date.
When asked, I often tell people that we invest in the “emerging Apple’s of financial services”,Â ie that we look for companies who use technology to create powerful, intuitive, user-friendly customer experiences by essentially abstracting complexity away from the user (not ignoring it, but managing it – with skill and dexterity – behind the scenes) rather than exposing it in all its glory to customers with the implicit goal of profiting from then managing (exploiting?) their confusion and disengagement. Â Of course the Apple analogy is not perfect but probably can’t be beat in terms of a pithy soundbite summary of our approach.
So with this in mind, think of Betterment as having a Jobsian approach to savings and investment:Â combining a intuitive and powerful user interface with a robust back-end execution platform, Betterment allows anyone to quickly, easily and without mystery manage asset allocation and risk budgeting using a simple, multi-asset class portfolio.Â No hassle, no time wasted, no blizzard of trade confirmations.Â The first time I saw it, I immediately wanted to be able to manage all my cash balances using their platform.Â (Unfortunately they are currently only operating in the US so not super-practical for me personally but you can bet we’re keen to help them expand their horizonsâ€¦) Say goodbye to the money market account.Â Indeed, if you are based in the US and have a bunch of your savings tied up in money market accounts or CDs, you should definitely take a very serious look at replacing these with a Betterment account.Â Have a look at their product tour:
But the most exciting thing about Betterment is that they have only just got started and it’s scary (good) to think what Jon, Eli, Kiran and Anthony, can and will do over the next couple years.Â And it’s a great fit with our nascent but growing ecosystem and we look forward to helping them work with other great digitally native financial firms like BankSimple, Blueleaf, FX Capital Group and others as they grow their business in the months and years to come. Â And the icing on the cake is getting the opportunity to invest alongside guys like Rob and Eric at BVP who bring a lot more to the table than just capital. Â Congratulations guys and thanks for inviting us along for the ride.
And was just thinking this might be the right track for their inaugural global marketing campaign…
Last week I spent the week in Amsterdam at Sibos 2010 where I had kindly been invited by Peter Van der Auwera to participate in the Innovation stream, and in particular in the Cloud Computing and Long Now streams within Innotribe. Â On Monday, I gave a short “scene-setting” talk on cloud computing and app stores in finance called The New Financial Stack (more on this / link hopefully later this week) and also I agreed to produce a video aimed at provoking and/or inspiring some original and non-linear thinking about the future of finance. Called “The Financial Reformation”, it sets the scene for two decades of fundamental change in the financial services industry based on the amazing democratising power of information technologies. I hope you like the result:
But as you might suspect if you have watched the video, this is just a start… Indeed, this initial video could be considered as simply the trailer for a longer form video which will look at the period from 2008 to 2028 in more detail; similar in some ways to the AmazonBay video of several years ago. The first draft of the script for this story is already written but I am very keen to build on and enrich it, not only with the fascinating concepts and insights that I absorbed in the Innotribe sessions at Sibos last week, but also – insofar as anyone is interested – with comments and ideas from the wise crowd of Park Paradigm readers. I’ve got a few ideas as to how best to go about this, and plan to post these later this week or next, but in the mean time if you would like to share your thoughts, please feel free to comment below.
ps I’d like to give a special thanks to the amazing team at Motherlode who were instrumental in turning my ideas into reality and who worked tirelessly to deliver the video in time for the world premier at Sibos; Â I’d also like to thank and congratulate Peter, Kosta and the rest of the Swift Innotribe team for what was simply an incredible four days. Â I hope Swift gives you the recognition you deserve!
You may have noticed that I haven’t posted much in the last couple months and given all the interesting things going on in the world it certainly wasn’t for lack of material. Breaking my arm obviously didn’t help increase my productivity (or make typing very easy) but it wasn’t the main reason for the silence. It’s much simpler than that: I was busy!
Busy investing in a whole bunch of super exciting and interesting new businesses. Busy working on the sale of ODL Group (where I was the lead independent non-executive director) to FXCM to create a true global leader in FX trading. Busy working with my partner Uday and FT Advisors on a number of interesting strategic advisory projects, in particular focused on the electronic and algorithmic trading space. Busy helping two of our portfolio companies raise follow-on financing. Busy working on our own corporate structure and capital raising where I hope to be able to communicate some exciting news in the not too distant future. Busy.
So what have we been investing in? Here is a quick rundown (in alphabetical order):
Babuki – 2008 seedcamp winner, launching soon (will update) with an innovative platform for social gaming
Blueleaf – investment information management and planning software “to help people like you see all their savings and investment accounts in one place; understand their financial information more completely, more quickly; securely share information and collaborate with spouses, family or advisors; save their data, even if they change financial institutions; and maybe most importantly, help them stay financially safe and secure.”
Timetric – builds services to make sense of time-series statistics, based on the Timetric Platform: a proprietary service for publishing, analysing, and performing calculations on very large quantities of time-varying statistical data. Have a look at this neat little demo website they have built for tracking equity portfolios.
Metamarkets – provides global, real-time media price discovery by aggregating billions of electronic media transactions in order to deliver dynamic price data, proprietary price and volume aggregations, and comprehensive analytic media market views to sell-side media principals.
[not yet closed – will update soon]
Over the next few weeks or so, I plan to do a proper write-up on each of these businesses and the reasons we think they have bright prospects. So watch this space.
Now, though it maybe hard to predict what innovations PayPal’s platform will enable, it’s safe to say that the payment industry is going to change dramatically. As money becomes completely digitised, infinitely transferable, and friction-free, it will again revolutionise how we think about our economy.
The author talks excitedly about PayPal’s new open platform X.com and how it is poised to change the current payments landscape which continues to be dominated by the credit card companies. PayPal launched this new approach late last year with their first developers conference Innovate09. Here’s what PayPal President Scott Thompson had to say about the conference:
As you might imagine, given my views on both the enormous opportunity that exists to disrupt an increasingly anachronistic financial services industry and my enthusiasm for “platform-based” business models, it is quite satisfying to see someone like PayPal take on this opportunity in such an aggressive manner. Not only do they help to validate the opportunity – bringing both human and financial capital to bear – but they can capture the attention and imagination of a generation of engineers and entrepreneurs in a way that we simply could not (at least not yet), even if we had a very large amount of capital to deploy. And that can only be good news, except perhaps for the management and shareholders of dominant incumbents like Visa:
â€œWhat we witnessed was truly a perverse form of competition,â€ said Ronald Congemi, the former chief executive of Star Systems, one of the regional PIN-based networks that has struggled to compete with Visa. â€œThey competed on the basis of raising prices. What other industry do you know that gets away with that?â€
Of course payment networks are classic “two-sided” markets, with strong natural tendencies towards monopoly providers (due to strong network effects and high barriers to entry. Further the structure of these markets allows providers to levy charges on only one side of the market (merchants) while seemingly offering the other side a free or inexpensive service. Last fall The Economist explained why, in such a market, regulation is often ineffective and can often actually produce worse outcomes in some cases:
The case for tight regulation seems strong, at first glance. In rich countries, where paying by plastic is now commonplace, the firms that run card-payment systems look like other utilities, which have long been subject to price caps. Visa and MasterCard are associations run on behalf of their member banks. Competition officials are usually wary of such shared ventures but accept that it is more efficient for rival banks to band together in one network in order to process payments and settle accounts. A common fee structure stops members from abusing the rule that retailers must take all cards issued with the associationâ€™s brand. It also obviates the need for countless bilateral deals between thousands of banks. Even so, regulators still fret that banks might use their combined heft to overcharge.
They need to tread carefully. Judging how much credit-card firms ought to charge for their services is trickier even than setting the right price for water or energy supplies. That is because the payment-card system is a â€œtwo-sidedâ€ market. What sets this type of enterprise apart is that it caters to two distinct groups of customers and each sort benefits the more custom there is from the other sort. Consumers will sign up for a credit-card brand if it is widely accepted as a means of payment. Merchants will more willingly accept a card if lots of consumers use it.
In my opinion, the best way to ensure good value to all the participants in the payments value chain is to encourage and facilitate competition: new approaches, new ideas, new entrants. PayPal has long been the poster-child for “start-up” innovation in financial services, but had seemed to have lost its way in stuck in the corporate bureaucracy of eBay. It’s great to see them breaking free of that and striving to re-ignite their creative and entrepreneurial juices. (Although I still think they would probably be better off independent of eBay…even better, how about a merger of an independent PayPal and an independent AWS: now that is a stock I would love to own!)
For several years now, it has been dead obvious to me that new and exponentially improving information and communications technologies would create the foundation upon which bright, ambitious entrepreneurs would build new companies and business models that will disrupt the moribund incumbents and their 20th century business models. And that’s why I started Nauiokas Park. We’ve made some good decisions along the way, and we’ve learned a lot. But one thing we got spectacularly wrong was our naive belief that leading incumbents in the financial services sector would embrace our vision and our proposition as an opportunity to hedge the strategic risk of continuing to rely (exclusively) on their existing business models. That they would look at the management failures and massive value destruction suffered by the traditional media and telecommunications companies and look to deploy multiple strategies to mitigate the risk of being caught unawares in the same way. But it would seem that they are uninterested. A toxic cocktail of hubris, myopia, inertia and institutional politics seems too often to blind them to the risks posed to their continued hegemony. As if admitting Christmas exists – let alone voting for it – would make it’s inevitable arrival more likely.
The race the create the Mint.com for the UK has claimed its first victim. Kublax, a Seedcamp 2007 winner which launched in August 2008, has now gone into administration, saying it was unable to secure a further funding round.
I’m pretty disappointed to tell the truth. Not so much because we held a small stake (via our investment in seedcamp) although this is unfortunate, but mainly because I think their business proposition is valid and although they certainly made mistakes along the way, these mistakes were probably avoidable and actually more to do with raising capital and managing a start-up than anything specific to Kublax. Of course to be fair, in any new venture all aspects of execution are at least as important as the idea and/or market opportunity and a two-legged stool won’t stand. Debating which leg is missing or broken and why is ultimately a somewhat irrelevant exercise. The reality is they didn’t make it happen. Nonetheless I feel badly for Tom and Sri, who I know put a lot of passion and effort into building Kublax and stayed focused and pragmatic to the end.
The general (ie non Kublax-specific) lesson that I would put at the heart of a case-study on Kublax is that capital is important. Now that might sound blindingly obvious – and of course it is – but stay with me. The lesson I see is that not all (‘tech’) start-ups can succeed bootstrapping a few hundred thousand pounds into a sustainable business model. As a relative outsider, I have and remained perplexed by the ‘one-size-fits-all’ capital model that seems pervasive in European venture capital, which often in reality turns into a feast or famine of capital for individual start-ups. Kublax was built on a shoestring and quite frankly it showed. The chicken never laid the egg and so the end became an inevitability. But I wonder if it could have been different.
You might be wondering why we didn’t invest in Kublax.* It really came down to one thing: we did not have the capital resources required to allow Kublax to hit ‘escape velocity’. I have looked very closely at Kublax over the last 18 months, and indeed we wanted to invest. However as a result of our analysis, we believed that the best risk/reward scenario would have required them to raise at least Â£2 million pounds and possibly as much as Â£5 million. Upfront. Not being in a position to provide this quantum of finance at the time, it would have been foolhardy to commit capital only to be ultimately at the mercy of other people’s investment committees. Further – and accuse me of hubris if you like – we felt strongly that our specific skills, knowledge and networks would be able to materially help the company successfully address some of it’s key strategic and operational challenges. However it would not have been economically rational for us to deploy these resources against only a modest investment. So we were confined to waiting on the touch line for others to drive the process. In the event, none did.
Lack of capital was not the only problem at Kublax, but I think the other key issues that the company faced could all have been addressed given sufficient capital. I will highlight four examples:
capital structure (specifically who owned how much and why)
management depth and experience (in particular in financial services)
product and user experience (never evolved beyond alpha quality); and
marketing and brand awareness
All of these issues could possibly have been solved with an appropriate infusion of capital from a serious and domain-knowledgeable investor. A cynic might point out that these four factors are pretty much the only four factors that matter so saying you would invest subject to being able to improve these is tantamount to saying you would invest if the company was ‘good.’ Well yes. Sort of. I think in the case of Kublax, the investment decision would have boiled down to a ‘build vs buy’ logic. Starting from scratch is hard and for all its faults, Kublax had done a lot of the basic plumbing (hard, unrewarding but necessary) and didn’t get a chance to start laying the tiles (hard but rewarding.) I find it hard to believe that asset is of no value.
In any event, given Kublax’s seedcamp pedigree, I imagine that most or all of the establishment London venture capital firms had the opportunity to look at Kublax. I think it would be very interesting and helpful to the broader UK/European start-up ecosystem to understand the key factors that informed their decisions to pass. Ask your favorite London VC to comment below.
So would we have invested if we had been in a position to underwrite a Â£2-5 million investment? Quite possibly. And indeed we would have made a determination on each of the four points above to really understand if these issues could be addressed, and the execution risk reduced accordingly. Alternatively we might have decided (and still might in the future) to incubate something similar ourselves.
In any event I wish Tom, Sri and the rest of the team at Kublax all the best for the future and hope they take away as many positives as possible from what must be a very disappointing outcome.
* I am referring here to what I call “Kublax Mark II” – in the early stages of the company’s life there were some clear management issues and dynamics that overshadowed the business and market opportunity. However seen from the outside, the company and it’s shareholders eventually addressed these issues and seemed to have a fresh start with some new investors coming on board and importantly a new CEO (Tom Symonds) early last year. It’s at this point we became interested (having explicitly passed a year earlier due to our lack of confidence in how the company was being managed.) Unfortunately one of the lessons is that it seems in the world of capital raising you often really do only get one chance to make a first impression…
Five years ago I wrote a thought piece called ‘Through the Looking Glass’ to provoke non-linear thinking and foster debate on the possible future direction of the financial services industry and market structures. (I later turned it into a short video called AmazonBay.) It was a retrospective told from the point of view of an observer in 2015. It was never meant to be taken literally – in particular with respect to (most of) the specific corporate mergers – rather I used these as a concise and dramatic way of highlighting the possible or even probable consequence of the deep secular currents that I felt would inevitably work to reshape the landscape.
(December 2015:) …The global securities and investment banking groups that dominated the market in the last century are now extinct. In their place we have an intelligent galaxy of new specialist advisory, investment management, algorithmic software and consulting firms networked with a universe of powerful transaction facilitation exchanges. Banks now exist only as giant regulated pools of capital.
Following the sweeping banking reforms proposed last week by President Obama, and the fact that we are now halfway to this hypothetical future, I thought it might be worth doing a quick mark-to-market of how my ideas have lined up with reality.
stock exchange consolidation and emergence of new exchange venues (A-) pretty close both in outcomes and timing – the major stock exchanges have been merging a-go-go while at the same time new trading venues have proliferated, and exchange (or quasi-exchange) trading of new asset classes continues to develop strongly.
sports/outcome trading in US legitimized (B-) my narrative had this happening in February 2010, not there yet but Congressman Frank’s bill might open the doors later this year and the trend seems to be on the right track and will probably be signed into law by Obama (!); as an aside was way early on a Betfair IPO…
giant bank mergers followed by break-up of vertically integrated universal banks, with Goldman Sachs leading the way (A) we have seen the big get mostly even bigger (RBS/ABN, BoA/ML, Barclays/Lehman…and while JPMorgan didn’t buy MS, they did get Bear Stearns and WaMu); GS hasn’t yet broken itself into three as predicted but I’m still confident it will lead the way when/if industry structure changes, and more generally the trend of regulatory thinking across the globe is definitely a trailing wind for the kind of change I envisioned. The 2010-2012 timeframe for the re-organization of global banks is probably a bit early but plausibility has certainly gone up (from near zero) significantly since I wrote this.
more (and more) algorithmic / automated intermediation of markets (A-) this was obliquely referenced in my article but was really at the heart of the idea that this fictional ‘AmazonBay’ platform would end up dominating this aspect of markets; clearly the market is heading this way – in fact it may seem obvious now but most people did not fully understand this even as little as five years ago.
Amazon anything (B+) The jury is probably still out on this one, but in my view it is looking increasingly likely that Amazon.com will become a giant of the next economic paradigm; whether or not they use their vast intellectual and technological resources to participate more directly in the financial services arena is not yet clear, but I can tell you the only ‘big company’ job I would not hesitate for two minutes to accept if it were offered would be CEO or CSO of Amazon Financial Services (AFS) Jeff are you listening? 😉
(Note: Remember I used real company names mainly to add vividness to the ideas underlying the narrative. The key concept I wanted to convey with this GS break-up vignette was that the vertically integrated model would decompose under the light of new technology and regulations into a (technology-centric) Sales & Trading component, a more focused, relationship driven Advisory component (cf. the emerging proliferation of pure advisory ’boutiques’) and independent, conflict-free Asset Management businesses (cf. the secular growth of hedge funds and Barclays sale of BGI, etc.))
(February 2009:) …Reacting to new competition, Goldman Sachs becomes the first major investment bank to break itself up. Securities and distribution are sold to Ebay Financial Markets, while the remaining activities are split into two new companies: GS Advisory Services and GS Capital management…
eBay anything (D) Despite the fact that the actual companies cited are more symbolic than literal, the choice of eBay to represent the cutting edge of online, data-driven, algorithmic marketplaces was simply awful. To the extent that it risks distracting the viewer from the key, underlying messages. It is now entirely implausible and so instead of bridging the cognitive gap, the inclusion of eBay simply extends it. Thank goodness this is somewhat mitigated by my inclusion of Amazon.com (see above) as the other new markets avatar but they come late to the narrative…
sports trading developing as an asset class (C+) this clearly hasn’t happened, although there are one or two small funds and firms offering managed accounts; and a vibrant ecosystem of professional traders and the associated software has emerged around the Betfair and other exchange platforms. In my defense, I picked sports as just a provocative and emotionally attractive example of the idea that – enabled by technology – a vast array of new tradable markets in goods but also outcomes, would emerge. Work in progress.
credit crunch and asset bubbles (D) although the overall purpose of the piece was to provoke thinking on the sustainability of existing business models in financial services in the face of radically shifting underlying technological, economic and demographic trends, I failed to include a thread touching on the possibility of catastrophic systemic discontinuities arising as a result of the prevailing market structure and business models. It’s a significant ommission, especially as at the time of writing this I was in the process of exiting my former responsibilities as a senior executive in the credit business due in part to my increasing discomfort with the sustainability and prudence of the risk pricing in that market.
All in all, I would give myself a mid-term grade of B+/A- with room both to improve and to slip back. Mostly on the right track, especially with respect to big themes but perhaps a bit optimistic in terms of some of the timelines. What do you think? Better? Worse? To be fair, the correct measuring stick is not so much whether or not I was right or wrong, even in terms of ‘macro’ predictions but whether or not this article and video helped catalyze serious discussion, debate and thought about the potential for disruptive and non-linear change in the financial services industry. Alas I have no idea how one could even attempt to measure that, but any thoughts or anecdotes you might have with respect to this would of course be appreciated.
AmazonJP Morgan, displaying a sense of urgency that is perhaps driven by the pending launch of Appleâ€™s tablet-style computeranti-trust legislation which will end the US banking oligopoly, is turning its Kindle devicebanking and payments infrastructure into a platform. The SeattleNew York-based company has announced that it will allow software developers to â€œbuild and upload active contentapplicationsâ€ and distribute it through the KindleChase Store â€œlater this year.â€ AmazonJP Morgan will be giving out a KindleChase Development Kit that will give â€œdevelopers access to programming interfaces, tools and documentation to build active content innovative financial services and products for Kindle.Chaseâ€ The company will launch a limited beta effort next month. From the press release:
â€œWeâ€™ve heard from lots of developers over the past two years who are excited to build on top of KindleChase,â€ said Ian Freed, Vice President, Amazon KindleBo Nusmore, EVP, JP Morgan Chase. â€œThe KindleChase Development Kit opens many possibilitiesâ€“we look forward to being surprised by what developers invent.â€
Vertically integrated black box? Or open platform? Which type of bank makes for a more robust system? Which type of a bank is more evolutionarily fit to compete on a level playing field? I know that their is an enormous moat protecting large financial institutions from competition but I would hope they would be using the super-profits that this affords them to prepare for the day the moat is breached. And perhaps behind the parapets they are. Because I pretty sure there are an increasing number of very clever, ambitious (and even angry) folks starting to congregate on the edge of that moat and while it might take some time and a dash of luck, it would seem certain that eventually they will be inside the castle. And then, it just might be too late.
I’ve been avoiding putting together a list of predictions for 2010 (more on that later) but just couldn’t resist suggesting that 2010 could well be a breakout year for weather risk management. All of the conditions necessary have finally started to come together and with the worst of the 2008/2009 hysteria behind us (without passing judgement on the future direction of markets), companies (and hopefully individuals) will start to wake up and respond to the risks and opportunities inherent in weather variability. I wouldn’t be surprised if weather risk was one of the top three risks faced by the vast majority of (non-financial) corporations, perhaps even the most important risk in some cases, and of the same order of magnitude as liquidity, foreign exchange, commodity and interest rate risk – all risk categories for which massive global markets in risk pricing and transfer exist. Weather in this regard remains significantly underdeveloped:
(via Ben Smith, First Enercast Financial) For example the Department of Commerce estimates that more than $1 trillion of U.S. economic activity is exposed to weather. Even if a small fraction of new risk is hedged through derivative contracts, 2010 will be a very good year for these markets.
The massive costs incurred in much of the northern hemisphere over the last few weeks due to heavy snowfalls and cold temperatures are just one more example of how important a factor in economic outcomes weather risk can be. For example, just take the exceptional – and uninsured – costs incurred by local authorities and airport operators across the UK for snow removal, sanding, salting, loss of revenues, etc. Previously, a manager of a company (or government entity) who suffered an exceptional weather-related loss could shrug their shoulders and plausibly say “it was out of my hands.” In a way that would be impossible if for example their organization suffered a massive loss because their buildings or equipment perished in a fire and they were not insured. In that scenario, shareholders or taxpayers would be incandescent with rage at the incompetent risk management of the managers. Not managing weather risks is no different in substance (now that appropriate weather insurance and derivatives are increasingly widely available), only remaining so in perception as awareness lags.
Of course I am biased, having invested in Weatherbill, which is at the vanguard of transforming weather risk markets:
(via J. Scott Mathews, WeatherEX LLC) The weather market was built upside down, which is quite a feat, even for financial engineers. What we mean is that it started on the wholesale level without any retail underpinnings. It started out like a castle in the air…The changes coming in 2010 for the weather derivative market will be keyed â€œfrom the bottom up.â€ Solutions companies such as Guaranteed Weather and Weatherbill who bring management choices to â€œground levelâ€ risk holders are helping to complete a strong base to keep that castle from crashing on us.
The difference between weather derivatives (Weatherbill.com) (or any other new risk management tool) and say books (Amazon.com) is that risk management tools need to be ‘sold’ – there is a learning curve, however shallow; and while most people instinctively understand and can conceptualize their weather risks, their survival instincts – honed by decades of doing business with rapacious financial services firms – and fear of ‘getting their eyes ripped out’ means that they are understandably cautious when considering using weather risk management instruments for the first time.
This is where Weatherbill’s business model I think is particularly well adapted to the opportunity: on the one hand, they have a very modern (open) approach to pricing: anyone can go to their website and play around in their pricing ‘sandbox’. Try doing that ten years ago when you wanted to price up a complex FX or interest rate option. Basically it was build your own model or keep sending pricing request to your favorite sales person (who would then have to go beg the trader for a price, and in addition to the regular parameters, the client’s identity, the salesperson and the trader’s mood would also be imputed into the price. That is of course if he felt like making one.) On the other hand, (and this is something that has evolved over the past couple years) Weatherbill has aggressively sought out distribution partners – insurance brokers, industry platforms (eg travel sites), etc. – as trusted providers to their respective customer bases, they are ideally positioned to help their customers manage their weather risks by leveraging Weatherbill’s platform. I first wrote about this a few months ago, and since then they have signed up a number of new and significant partners.
I love skiing and my family take a season pass at Les Trois Vallees. Obviously weather risk is central to running or enjoying a ski resort. While there are many different types of risk you could look at in the context of a ski resort, in the interests of simplicity (ease of understanding/customer acceptance) and maximum pain relief, there are two risks that I would have loved to have had an embedded hedge for in our season ticket (and I suspect the same would go for someone buying a week-long pass for their holiday, in fact they would probably be even more sensitive/appreciative.)
Not enough snow to ski risk: ie not that the snow is great or this or that…the basic risk that the pistes are closed. For most modern ski resorts this is actually a function of temperature and not precipitation, as they use snow-making machine to lay down a base. Temperature risk is much easier to measure and price (than snowfall) and has much lower geographic variability ie you don’t need a weather station on every piste on the mountain.
Rain risk: ie the only time it is absolutely unpleasant to ski is when it is raining. Also, rain typically doesn’t help the existing snowpack, making skiing after rain often unpleasant as well.
Using Weatherbill to hedge their risk, Les Trois Vallees could offer a ski-pass that reimbursed me for every rainy day and for every day say less than 80% of their runs were open due to lack of snow. In an age of increasing climate uncertainty (or perception thereof) I am 100% certain this would help them market (and sell more) season tickets. And for week-long tickets, it would be a great marketing tool for advance sales (with significantly positive cashflow benefits), and great for improving the user experience. Imagine a vacationer whose week in the Alps is ruined by 5 days of torrential rain…getting their money back on the lift tickets (irrespective of whether or not they braved the elements) would go a very long way to having them consider giving it another try next year.
Of course this is but one example, I’m sure all of you can think of hundreds more. In fact it might be harder to think of services or businesses that are completely immune to the weather. So really, what are you waiting for? Start hedging!