Impact of Finance

I have been following this great multi-part project at The Washington Post on the declining middle class.  The latest piece struck a chord with me.  I lean left - I generally believe people are good, and that many need assistance when times are tough.  Assistance is not only necessary, it is a core component of what makes us human.  Fraud happens, but that should not distract us from helping our fellow neighbor.

I am now in the finance world.  I get more and more exposure each day of the machine that Mr. Tankersley describes in the article above.  So, knowing this, I have a quibble with this article.  It is extremely narrow-minded.  To measure the impact of finance solely by it's contribution to the economy is myopic.  Such an analysis negates all the externalities that occur given the growing investments in finance.

As I marinade on the system that is finance, we are benefiting elsewhere by the development that has occurred over the last few decades.  In particular, I argue that the growth of the internet as a foundational contributor to our economy is directly tied to the learnings, development, and talent cultivated throughout the recent finance evolution as Mr. Tankersley describes.

The metaphor used in the article, that finance is like a plumbing system enabling capital to move from those that have to those that need, is directly akin to how many describe the internet.  The exorbitant growth of the finance system in recent decades has led to new technology discoveries and an emerging talent pool - assets that are rapidly transferring to other industries.

Take data intelligence, for example.  Over the last decade, we have seen hyper growth in the amount of structured data, given the growth of the web and other advancements.  Vast datasets are becoming accessible for analysis in numerous industries, from commerce to education to even government.  Many of the technologies to handle these vast datasets are rooted in finance, as are many of the early people, transferring their knowledge and experience.  And growing the economy...

Structuring the FinTech Disruption: Apple vs. MCX < Apple + MCX

For anyone following the general disruption happening of the electronic payments space, or the Apple Pay / MCX war in particular, this exchange is an interesting data point.  There are two takeaways I see from this.

The first is that "it's on".  The siege by new players / models on the electronic payments ecosystem is starting to impact the conversation, if not the bottom line (yet).  Apple Pay and other technologies are beginning to pierce the fees framework that has long filled the coffers of the existing electronic payments system.  Today the more successful emergents operate as a friend to the existing players (but that will change).

The second takeaway is that the existing players do not yet fully grasp the siege underway.  The war is not Apple vs. MCX; it's Apple + MCX vs the status quo.  In this discussion, Apple Pay is being blocked by retailers because it is "too friendly" to the existing system, perpetuating the existing fee structure rather than attacking it.  MCX and it's parter retailers understand that the existing fees structure is outright robbery given today's technology, and they are taking a stand.

The Apple Pay / MCX battle is one between two armies on the same side, each with different strategies and assets.  Apple doesn't win by taking a portion of the existing fee structure, and neither does MCX.  They and the other disruptors win by decimating the economics of the current system.  Apple is building an army of users before striking.  MCX already enjoys its army of retailers and sees Apple as a threat to this asset.

Battles will be lost, but the war will be won.  This salvo may not strike the death blow, but more attempts are coming.  The existing electronic payments system is bloated with technology that has been displaced with significantly cheaper, more secure options.  Significant value that the current system enjoys will be returned to the consumer (through lower prices), retailers will retain some as will new players within the system (e.g. Apple).  The days of merchants paying 2 - 4% per transaction are numbered.

Blockchain and the Internet of Value

We have seen how the internet of information has transformed the world over the last two decades. More recently, the internet of things has emerged as a new frontier of innovation. Following close behind that is what some call the internet of value. Like its siblings, the internet of value is decentralized, open, and a blue ocean for innovation.

The potential for an internet of value goes beyond just making more efficient the existing trillions of world commerce. Wences Cesares, CEO of Bitcoin startup Xapo, provides themetaphor of phones:

There were never more than 1.2 billion landlines. Then the cellphone came and we’re at 6.3 billion. Why? It’s not because only those people wanted to communicate. The landlines were all post­pay. You need to have credit to get one. The cell phones were pre­paid. Suddenly you could get one with cash. It had nothing to do with technology. It was an economic restriction. Now there are 1.5 billion bank accounts, same threshold as land lines. I think [an internet of value] will allow us to see 6.3 billion people banking on their cell phones. That’s what’s so exciting to me. That’s a much better world than we have today.

Many like Cesares believe an internet of value will lead to a similar improvement in enabling access to more commerce.

The primary technology that will lead to an internet of value is blockchain. For the purpose of this blog post, we use blockchain to refer to any transaction processing engine with no central authority required that allows for contracts and transactions between parties. “It’s a technology that allows data to be stored in a variety of different places while tracking the relationship between different parties to that data." (source)  Blockchain is considered the biggest disrupting force in financial services, according to Oliver Bussmann, CIO of UBS.4 Bitcoin is the most widely known example. Another of note is Ripple.

As noted in the definition, the opportunity of blockchain is not limited to currency­based transactions. The technology can be applied to any transaction or contract where security and trust between participants is needed.

There are two areas of near-­term interest as we work to understand the blockchain impact; blockchain as it relates to digital currency (i.e. Bitcoin), and blockchain as an infrastructure (i.e. Ripple). Most focus on blockchain’s impact on fiat currencies, given the emergence of Bitcoin, and the companies and infrastructure that are required to deliver on such a vision.

Blockchain Currency: Bitcoin

Bitcoin is the most prominent blockchain­-based currency in circulation. Others, often referred to collectively as “altcoins”, have not yet developed significant markets as compared to Bitcoin, taking only 8% of all value stored among blockchain-­based currencies.

Bitcoin is trading at 30% of its high as of late. Despite the recent price decline, many observers suggest that we look at the entire ecosystem emerging around the currency, rather than its market price, to understand its growth trajectory:

As the above metrics indicate, the Bitcoin ecosystem is growing. In addition, an entire startup ecosystem is emerging surrounding the development of Bitcoin as a currency:

Wallets store Bitcoins for future transactions. Payment processors manage the transactions themselves. Exchanges bring together the parties of the transaction ­ the buyers and the sellers. Financial service providers are building services on top of the Bitcoin ecosystem. And Miners operate the underlying technology that maintains the trust within the system.

Bitcoin growth has been particularly significant in China in recent months: 

(slide images via CoinDesk)

As the Bitcoin ecosystem grows and matures, the opportunity evolves beyond its role as a currency. Beyond its role as a currency is what else can and will be done with the system. A concept is known as pegged sidechains, “which enables bitcoins and other ledger assets to be transferred between multiple blockchains (source)” is expected to enable non­currency transactions with the same flexibility and security as the current currency transactions enjoy. Some of the altcoins launched have been developed for other transactions beyond just currency. However, none have managed to develop enough of a market to have impact. Enabling this sort of technology within Bitcoin itself eliminates much of the current impediments to innovation in this area.

Blockchain Infrastructure: Ripple

The currency side of Blockchain is interesting and potentially transformative, but it is still very immature. The more relevant area, however, is blockchain’s potential at revolutionizing any transaction infrastructure, significantly reducing costs and improving system security. Bitcoin and most altcoins are trying to revolutionize the current system, purposely intending to supplant the existing players. A nascent few, however, are working within the system to deliver the economic benefits without the intent of displacing their existence.

Ripple is an example of how blockchain can improve on existing banking infrastructure. First focusing on international money transfers, the Ripple protocol allows banks to transfer value anywhere in the world for the minimal cost of implementing its technology. Transfers themselves are near free, and are transacted in the home currency of both the sending and receiving bank. Exchange rates are made part of the same transaction in real­time, reducing exchange rate risk.

The Ripple protocol is open sourced ­ there are no license or usage fees associated with its implementation. Ripple makes its money off the underlying currency that supports the protocol. As more banks employ the protocol to transact, the value of the underlying currency increases.

So far Ripple is the only startup we have seen that is working within the existing system to implement blockchain technology. They already have representation within China. However, significant opportunity exists to support their efforts, should their intent prove valuable to the banking community.

Phases of Data Intelligence: An Update

A couple of weeks ago, I wrote about the Phases of Data Intelligence.  I just came across Benedict Evans' presentation at GE's Mind + Machines event.  He had a more simple yet similar version of the same idea.

His version is:

• Build the data stream
• Ingest the data within the enterprise
• Do something useful

He has a plethora of "3-bullet" nuggets on the Industrial Internet. Worth a watch if you are in to that sort of thing:

Network Effects, Compounding Interest and Inequality

I have seen a rash of "the rich are getting richer" stories in recent months, because, well, they are. But most articles I have consumed focus on tax policy and other mechanisms that have for the most part assisted in this shift of wealth over the last few decades.

This one took a different tact, and it got me thinking about the impact of the concepts of network effects and compounding interest on inequality.  This article focuses on the environmental effects of having wealth on a child's development.  Interesting, but there is a larger ecosystem at play that further expands the gap between rich and poor: the network.

I am fortunate in that I grew up in the US in an upper middle-class family.  I did not have a ready-made network for me to access, but I had other assets that have allowed me to develop my own network much more rapidly and effectively than many.  Principally, my network began because I had more flexibility as to how and when to earn an income.  Paying for college was not a worry, and my living expenses were subsidized (thanks Mom & Dad!). affording me to take an unpaid internship at The White House while in college.  This opportunity not only began my career, but also began the development of my network that continues to compound and pay dividends.  I have reconnected with several folks I met during those early years over the last year, as I develop my latest business.

Providing opportunity is one component of a much larger ecosystem.  Those in need also must have the means and flexibility to fully exploit opportunities.  Policy, philanthropy and other initiatives that attempt to address inequality have to look at the entire ecosystem.  Failing to do so may lead to exponentially less potent effects.

Industrial Internet

I have been following the "internet of things" idea as it has emerged over the past few years.  I own a Nest.  I want a Sonos.  Etc, etc., etc.  But, I've always struggled at understanding the underlying value of such systems.  I haven't seen real problems solved by these devices yet.  I have no doubt that it will come, but the space is just too immature at this point.  Enter the "industrial internet".

I had the fortune of attending the Colorado Innovation Summit in Denver back in August.  There, GE's Jeff Immelt spoke of their significant investment of what they call the industrial internet.  Essentially, this is the enterprise version of internet of things, or industrial IoT.

My "ah ha" moment was the realization that opportunities in industrial IoT can win simply with a clear ROI.  And win they are - Mr. Immelt spoke of several examples already in play among their businesses where they are applying industrial IoT to deliver double-digit returns.

The same is true on the consumer side, but the definition of return is so much more difficult given human behavior.  And how that return is delivered on the consumer side can take so many forms.

However, among key industries, incremental improvements in efficiency have significant impact on profitability, given the minimal cost of implementation of many industrial IoT concepts.  These investments will have a huge impact on every industry and the global economy in the coming years.

Source: GE Estimates

Phases of Data Intelligence

"Big Data" has been a thing for a few years now.  As with any new idea, the hype and promise of what it is can overshadow the effort required to actually deliver.  Big data is no exception.

Many focus on the promise of "predictive" intelligence without understanding the effort of basic data collection.  Others focus on dashboards and other tools without building the infrastructure needed to deliver those pretty pictures.

Through conversations with many, I see the following stages to data intelligence:

Stage 1*: Data Collection - many systems, processes, tools already through off a ton of data.  For most industries and applications, this data is often not stored, let alone organized for use. 

Stage 2: Data Infrastructure - for storage and organization, quality infrastructure is required.  This is where much of the foundational innovation has happened in the last 10 years or so, that has spurred idea of big data.  The idea of it being too costly or too difficult to store and organize vast amounts of data is no longer true.

Stage 3: Data Visualization and Interpretation - this is an area that some skip by either hubris or eagerness.  Hubris is when those not in the trenches believe they know the right path to extract intelligence from data, and build accordingly.  Eagerness manifests by going after predictive intelligence before knowing what data and information is available. 

Stage 4: Data Intelligence - this is the stage where real value is delivered.  The steps above are the plumbing to get you to this point of actually learning from the information gleaned from data. This is the stage where action is taken, given what is learned.

Predictive intelligence is an extension of data intelligence, whereby historical data is used to preemptively make decisions in the future.  As "cool" as it is to do, there is so much that can be learned and value uncovered by effectively developing intelligence from historical data.

*Given that there is so much data thrown by existing systems and processes, I take the data stream as a given.  This may not be true for some markets / industries, but it is fast becoming the norm that the data is there for the taking / analysis / employment...