Automated Finance Apps Are Eating Deposits

Apps automating personal finance will improve financial health and relegate bank accounts to commodities offering highest yield and lowest fees.

Banks wage an ongoing war to hold your money. You’ve seen the tactics — higher interest rates and free credit reports are the modern free toaster to open a new account and setup direct deposit.

You get those free toasters because:

Banks earn money by holding your money.
There’s inertia to deposited money. You’re too busy to move it around optimally, it generally stays where deposited. The bank that gets it first gets to keep making money from it.

In the perfect world, your money would flow from paychecks to where it’s needed at just the right moment. It would earn you the highest return in the right accounts for the right purpose, while ensuring your bills and payments are covered.

A new generation of apps are changing money management by automating personal finance. These apps will become the primary way people manage their money, owning the customer relationship and ultimately their deposits.

Autonomous Finance apps that improves financial health and save time are the new battleground in finance.

Personal Finance Today

Today, your finances probably look something like this.

Your income flows into a main account and perhaps you move some for savings and bills elsewhere. If you’re like most people, you probably don’t do that, just operating out of that one account.

Banks battle to be that primary account.

Maybe there are higher yielding accounts elsewhere? Maybe you should be moving set amounts every month for savings? Maybe you’ve exceeded the SIPC insurance limit and really should split money into separate accounts so you’re protected from a black swan? Maybe you’re forgetting to move funds some months and accruing overdraft fees?

People are busy and distracted. So maybe they do none of these things even though it’s in their best interest.

How Autonomous Finance Apps Change Things

Tomorrow, Autonomous Finance apps will be the primary way you manage your money.

The application manages the movement of funds according to rules you set or that it figures out based on your behavior.

Need $1,000 in your checking account on the 5th of the month? No problem, the app will make it happen and ensure you don’t get hit with an overdraft fee.
Want to put aside $100 each month for a large purchase? Done.
A new savings account is introduced that offers higher yield? Easy, the app manages moving funds so you maximize earnings.

The key thing here is that your primary relationship is with the application. The accounts used become commodities that can be interchanged by you or the app itself. Accounts compete purely on their utility for the purpose they serve—interest rate, fees, etc…

Owning the customer will take more than getting them to open an account and setup direct deposit. The software eats the inertia of how accounts are used. Owning that software and providing the user the best experience is the new battleground.

Who is best poised to create that software? Startups and FAANGs or the banks that most people like less than their dentist?

Autonomous Finance Apps Today

The universe of apps today is large and growing. Each approaching the problem uniquely for their target markets. Here’s a round up of just a few.

Dave — Automated overdraft fee protection
Stash & Acorns — Automated savings
Max My Interest — Maximize yield and insurance protection
Astra — Setup your own rules

Ultimately, only one or two of these businesses are likely to emerge as large, standalone players. We’ll all benefit from how they will rewire the competitive landscape by having more options to manage our money more easily and efficiently.

How to Build a Bank in a Day

Fintech APIs are making it 10x faster and cheaper to bring finance products to market.

Emerging fintech APIs makes this possible….kind of. While you’re not able to actually start a bank in a day, you can get a consumer finance offering to market incredibly quickly now.

Fintech APIs are making finance composable, making it 10x faster and cheaper to get consumer finance products to market.

We’re at a tipping point in finance. Your bank that you know and probably don’t love will fade into the background and consumer brands will own the last mile to the customer. These APIs are powering the revolution.

Let’s say I want to offer a checking & savings account, credit/debit card and a premium service to automatically invest some of your money (like Acorns). I’ll wrap a quirky brand around it and focus my marketing on under or poorly served segment of the market (new grads, unbanked, etc…).

Quick look at what it would have taken to do this as recently as 5 years ago:

Find a banking partner — They’ll hold the deposits and handle the banking compliance. There’s no list of who will do this, so start working the phones. You’ll also have to convince them your no-name startup is an acceptable compliance risk. This will take awhile.
Find card partners — You’ll need a card processor, issuer and payment network partners. You get the picture, this will take awhile also and are individual relationships to be built and negotiated.
Build Hairy Software — You’ll need to weave your modern software stack to use the legacy networks these partners work on. This will be painful.

It’s going to take awhile. Be patient and spend a ton of money, you’ll get there.

Now, let’s look at how you get there today.

SynapseFi — Set up an account and you’ve got the tools you need for your checking and savings account as well as card issuance. Great, that was easy.
Build Modern Software — You’re building on a modern software stack. You’ll be able to deliver and iterate quickly.

OK, this will take more than one day, but you get the point. Once you do get to market you can quickly grow the offering and serve your customers with new products. Want to offer stock trading? No problem, Alpaca has you covered.

Alexa, Can I Get a Loan?

Finance is shifting from the banks of the gilded age to the design thinking and A/B testing of the apps on your phone and the web.

Soon you’re more likely to deposit paychecks, get loans and credit cards from Google than Chase.

Finance is shifting from the banks of the gilded age to the design thinking and A/B testing of the apps on your phone and the web.

This massive shift is being driven by changing customer expectations, the emergence of enabling technologies and the massive reach of consumer platforms.

TL;DR

API’s are making financial products, like checking and lending, a UX and distribution problem, instead of a regulatory & compliance one.
High-engagement consumer brands like Google or Amazon can leverage these API’s and changing consumer sentiment to offer financial products directly, cutting out middlemen.
To maintain their positions, banks are in a race to build viral consumer experiences before the consumer tech giants can scale financial products. Guess who’ll win?

Finance, by FAANG

We’re already seeing the first entries with Google checking accounts and the Apple credit card.

It’s easy to understand the attraction to financial services beyond the scale of the market size. Financial products capture huge amounts of consumer data. That data serves as the backbone of better products and UX to tech companies highly adept at leveraging personal information for profit.

So, why now? Emerging Fintech API’s makes it easier to build products like checking and lending today. The API from a bank for deposits separates the regulatory burden (i.e. the historical barrier to entry) from the UX and customer acquisition.

APIs digitize the financial plumbing so that FAANGs can focus on what they are great at, habit forming consumer experiences.

The timing is also right. 71% of millennials would rather visit the dentist than their bank. At the same time, they are increasingly trusting FAANGs with more and more of their needs.

Who Is In Control?

If banks control the underlying APIs, then it may seem like they are still in control. Which layer of the stack matters, and who’s making the money?

Banks aren’t going away, they serve a valuable purpose and will continue to make money. For now.

The last mile to the user will be served by FAANGs. Once they’ve aggregated the user demand, they will have power over the supply side (banks). Including the option of building their own banks to serve this demand.

While banks aren’t going anywhere, they are facing a future where they are cutoff from the end consumer. Ask media publishers how that’s gone for them over the last 20 years!

Banks are in a race to build high engagement consumer experiences before the FAANGs can deliver finance products to their massive and engaged userbases.

My money is on the tech giants.

Fintech 3.0

This trend has huge implications for Fintech entrepreneurs. The biggest opportunities today are in the API’s that help brands deliver financial products quickly.

The first wave of Fintech (Paypal, E-Loan…) brought traditional financial services online and created self-serve, lower cost options. It was driven by a small set of users comfortable online and happy to find a good deal.

The second wave (SoFi, RobinHood…) paired alternative data sources with novel customer acquisition tactics to deliver services more efficiently. Fees are compressing and the users were digital natives.

The third wave will see the emergence and growth of API-driven Fintech infrastructure (Alpaca, Mercury…). They’ll be integrated by consumer brands to bring finance products directly to users, removing middlemen. Fees will approach zero and the consumer experience will feel more like Instagram than Chase. The users are not only digital and mobile native, but have little to no loyalty to existing financial brands.

For example, Alpaca offers anybody an API enabling to offer users stock trading. They handle regulations and the product can focus on UX and user acquisition.

Imagine every Google Finance page connected to your Google bank and brokerage account. Google could offer one-click trading and deposits, at zero fees, subsidized by revenue earned elsewhere. They could analyze the user’s finance data to offer other finance products (robo-advisor, loans, credit cards…), but also mine the data to improve other areas of their business.

They’d have such a rich view of the user’s finance history, they could sell incredibly targeted (i.e. high cost) ad space to providers of those products interested in reaching a very specific audience. They would also be able to attribute a search ad display all the way to the purchase of an item, even if purchased offline. That’s an incredibly value feedback loop for ad buyers.

Hope you enjoyed the post, feel free to reach out with questions & comments. You can reach me on twitter!

Interview with Crypto Gurus

Interview discussing the future of digitized securities and what it means for investors.

Last week I had the chance to have an in depth discussion with the folks at Crypto Gurus about Fetch, Security Tokens and Open Finance. We delve deep into the thesis that Security Tokens and Open Finance need each other to grow and prosper.

You can view the view embedded below or directly on YouTube. Enjoy!

AWS for Finance

Ethereum is poised to become the enabler of a new way of fully digital finance. Just like AWS did for software backends.

Today, financial innovation is slow, costly and reserved for the few. Often it happens manually in spreadsheets and is available only for the largest of investors. Open source blockchains and digital native assets are changing this, just like AWS and open source did for software development.

Ethereum is the AWS of finance, radically transforming the cost to build and release financial products.

It used to be expensive to buy the servers and software licenses required to release software. Companies raised millions and spent much of it on Oracle licenses and server racks. Two things happened. Open source systems (bye-bye Oracle database) replaced many expensive software licenses, and AWS offered a pay-as-you-go system to replace high upfront costs. As a result, the cost to build and release a software product dropped 10x and massive experimentation blossomed.

Everybody benefits from the great software created as a result. Want an app to help meditate? Maybe find the cheapest gas station? No problem, software has you covered.

This same thing is happening in finance today. Open source systems on Ethereum are replacing the expensive and manual systems (DTCC, clearing, trustee) reducing the cost and time to bring financial products to market. We’re on the cusp of an explosion of more efficient and open financial products.

The Layers of Finance

While investors usually only pay attention to the top of the stack, what products they can access, much of the important work happens under the surface. To appreciate why we’re on the cusp of change, it’s important to understand what’s going on under the covers.

In traditional finance, layer upon layer of administrative (and very often manual) work falls to interlocking players who have not modernized significantly in decades. This creates a baseline of inefficiency and cost that restricts innovation.

Ever wonder why the minimum or cost for a financial product is so high? The reason usually lies in fixed costs or restrictions that come from an intermediary lower in the stack. Tokenized Finance upends this by replacing much of those intermediaries and fees with trustless code, it’s digital at the core. That’s critical because it’s the first step into turning finance into an API, making programmable money a possibility.

A Simple Example

Let’s take securities-based lending as an example. It’s a simple financial product, cash loans using securities as collateral, and growing quickly.

In traditional finance, brokerages and banks offer customers competitive rates with minimums ranging from $50,000 to $250,000 to access a cash loan. That’s not bad and gives investors an opportunity to take a non-purpose loan while still retaining their investment positions.

In Tokenized Finance, the financial product itself is code, protocols built on Ethereum A great example is MakerDao’s CDP which allows investors to deposit their collateral and take a cash-like (DAI) loan. It’s simple and the rates are not too different than what is available in traditional finance.

The big difference is the lack of a minimum. Code just works. It works exactly the same if the amount being deposited is worth $1 or $1M. And because there are no fixed marginal costs from intermediaries, the financial product as code can deliver the same value to the smallest and largest of investors.

Now, this may not seem like a big deal right now. Do you really want to take a $1 loan? Probably not. It does however provide a glimpse into what a future of code-driven financial products can offer.

What’s the Future?

Let’s add up what we know about Tokenized Finance.

Transforms the core of finance into API, similar to how AWS turned software infrastructure into an API.
Removes the fixed costs and antiquated rules of the financial intermediaries, removing barriers to bringing financial products to market and the costs inherent to them.

This means that software teams can now build and release financial products quickly. In addition, without fixed costs to every transaction, they can experiment with business models not before possible.

Today, that’s resulted in Tokenized Finance products that mimic traditional products with lower minimums and costs. MakerDAO for securities-based loans, Compound for money market just to name a few.

What’s more interesting is what will happen as the ecosystem grows.

Permissionless innovation with a reduced cost to bring products to market means rapid experimentation is now possible. This will create financial products not possible or conceived of in traditional finance.

The future is bright.

Wyre Podcast

Chat with team at Wyre about what a brokerage will look like in the future.

Thanks to the team at Wyre for having our me on their podcast last week. We had a great time covering a range of topics from the state of wallet software, regulation to the future of Fetch and financial services.

You can listen to the podcast and there is also a transcript of the conversation on the Wyre Blog.

Software is even eating the hardware…

Software is not just eating the world, it will also eat the hardware margins of the leading mobile vendors and level the distribution of mobile industry profits.

Today’s mobile market has clear winners. Samsung makes more profit from Android phones than Google does from all of their operations [Asymco], while Apple earned 57% of global smartphone industry profits in Q1 [Link]. The integrated players, Apple and Samsung, are drowning in the profits from integrated production, efficient supply chains and differentiated, well marketed products.

The software and service players are not monetizing mobile in any comparable way….yet. Google, Amazon (and to a small degree Microsoft) – are playing the role of disruptor. Their strategy resides in subsidizing hardware with services (ads) and content, which will eventually reshape the distribution of wealth in the mobile industry. Two reasons this is working:

Hardware innovation has slowed – The spec war is over. Capacitive touch screens and cheap sensors were the last major improvements. Some are on the horizon (flexible screens), but in general even the less expensive smartphones are capable for most users. Does anybody really know or care how many computing cores their phone has?
Whole product matters – Consumers view the device as a mobile extension of their digital life. So seamless access to the services that support their life (email, maps, search, apps, etc…) are as, if not more, important as any hardware spec.

What’s a mobile goliath like Apple or Samsung to do to keep their monopoly sized profit machine running? For one, continue to invest in R&D to stay in front of the hardware innovation curve and find the next breakthrough. Second, they need to rapidly round out their digital life offerings, getting more users onto their service and content platforms.

They will do everything they can to fill their software, service and content deficiencies to ensure that as hardware margins decrease, they can make it up in service and content margin. Otherwise they will see their products become less attractive and less profitable. How well they do this over the next few years will dictate how much of the industry’s profits they retain from the attack of the disruptors.

[This post also appears as a guest post on the Telefonica blog]

Why do so many mobile apps suck?

If you work at a mid size enterprise and are in charge of rolling out your company’s new mobile app offering, unfortunately your options suck. Your boss or their boss probably just used a beautifully designed consumer app, and they had a vision for something your company could do on these incredible phones to make your customers happier. Now it is your job to make it happen.

This app will be harder for you to build than that whiz bang camera app of the week. You will have to figure out how to:

Not only support the devices out there, but budget to support all the new ones coming (new OS versions, as well as new platforms and form factors)
Integrate with whatever backend systems hold the data that your app will need
Make sure the app is secure enough so your IT group doesn’t shoot you

If you don’t happen to work out at one of the few companies that has assembled a strong mobile development team, then these are your options:
Use a Mobile App “Platform”

Whenever there is enterprise grade complexity, there are never a lack of platforms to choose from. I’ve been looking closely at these the last couple of months, and can put most of them into one of two buckets:

MEAPs – Mobile Enterprise App Platforms

What they do -A combination of tools and services a company can use to build an app. They generally offer some guarantee of future proofing the app, promising support for new devices and OS updates. If this seems like a vague description, it is because the products are just that, vague.

How they came to be – Many of these usually come from companies that have been engaged with companies as professional services vendors, and saw the general trends that I listed above. They also realized that they were building some basic components across all their customers, so the obvious next move is to bring these components under one umbrella, market it as a platform and shift their revenue from hard to scale, chunky, unpredictable services revenue into predictable, scalable licensing revenue.

Why they suck – While there may actually be some productized code in these platforms, they generally are customized per deployment. To take advantage of the productized parts, the customer can either assemble pre-built components into a mediocre app of some sort, or live through a costly, maybe lengthy customization phase – which they were trying to avoid in the first place by selecting a platform to build their apps.

Visual App Designers

What they do – Enable non-developers to build an app using some set of WYSIWYG tools

How they came to be – If scarcity of app developers is a problem, than let’s make it possible to build apps without them.

Why they suck – These generally involve translating some visual design language to native for all the major mobile platforms at some lowest common denominator. This results in a poorly optimized user experience on every platform. Steve Jobs says it better than I ever could:

We know from painful experience that letting a third party layer of software come between the platform and the developer ultimately results in sub-standard apps and hinders the enhancement and progress of the platform. If developers grow dependent on third party development libraries and tools, they can only take advantage of platform enhancements if and when the third party chooses to adopt the new features. We cannot be at the mercy of a third party deciding if and when they will make our enhancements available to our developers.

This becomes even worse if the third party is supplying a cross platform development tool. The third party may not adopt enhancements from one platform unless they are available on all of their supported platforms. Hence developers only have access to the lowest common denominator set of features. Again, we cannot accept an outcome where developers are blocked from using our innovations and enhancements because they are not available on our competitor’s platforms.

–Steve Jobs

Build a Team

Good luck here. The scarcity of mobile app devs is well documented (read more here). If you are a qualified mobile app developer right now, your options are endless. You can opt for the cool small company/startup of the day, or any high-profile, brand name company you want – they all need you. Recruiting and retaining a team at a mid size company is going to be painful.
Hire a Vendor

There are any number of companies out there that will build an app for you. From large service providers to 3 man outfits based in a far flung locale. I won’t dig into the pros/cons of this since this option has and will always exist in roughly the same form, everybody differentiating in whatever way they can to maintain some margin in what always becomes a race down to zero margin.

None of these are great options, and it feels very much like companies building web sites in the late 90s. The options aren’t that great, and the results don’t ever wow you, they just kind of work. Just like building for the web did, this will evolve. Talent will become more available, the tools will mature and the platforms will settle down. Along they way though, there is going to be a ton of opportunity for products that can make this process less painful.

How Cornerstone put Android in a tractor

When Onskreen open sourced Cornerstone early in 2012, we had no idea what was going to happen. At the time, Google was using their powerful stick to beat away customers who wanted to include Cornerstone on their devices (read more about this here); and open sourcing the product was the best way of getting the product out to users.

After being open sourced, the first thing we expected to happen, did happen. That is, the mod community took to it and started to make Cornerstone ROMs for some of the most popular devices out on the market. In fact, when CyanogenMod (the most popular Android ROM) wanted to include Cornerstone in their releases, Google had to publicly declare they would restrict CyanogenMod from including the Play Store if they did this. You can read the thread here. This was exactly what Google was doing to OEMs behind closed doors already, and was the first time I know of that they had to declare it publicly.

But then a funny thing happened. Other companies, releasing Android based non-tablet/phone devices started to adopt Cornerstone also. We saw a few use cases that were really interesting:

Qualcomm/Smart TV and St Microelectronics/Set Top Box – Qualcomm with their Android based smart TV platform built to run on their new SnapDragon chip (read more here) and Orly, ST Micro’s Android based set top box both use Cornerstone to provide a richer experience on large TV displays. Integrating video and Android apps to make use of a > 40″ display and lean back living room experience.
All-In-One Computer – A can’t-be-named-yet OEM used Cornerstone as the basis for an upcoming AIO computer. The 27″ device would be ridiculous without multi-tasking so users can engage with and monitor various apps at the same time on the huge screen.
Tractors – Yep, tractors. They used Cornerstone to upgrade their in machine control system. The built in display is being upgraded from a relic OS to Android so the company can take advantage of modern s/w development practices. However, federal law requires certain information to be displayed at all times. So they are using Cornerstone to enable a mutli-tasked display and split their app development into smaller, functional units rather a monolithic app that was hard to maintain and upgrade.

There were a few larger trends driving adoption:

Android as a technology and not ecosystem -Similar to Amazon with the Kindle Fire, these companies are using Android as a basis for technology, and not looking to it as an ecosystem blessed by Google. For them, Android serves as a modern OS with a supported developer environment. Not being concerned with the Google ecosystem, these companies can adopt and modify the OS without concern of the politics around certification.
Google TV’s failure – I’m not sure any real consumer has actually ever bought one before. So for the TV products using Android as the OS, they are very much using the OS purely as a technology platform. Once they do that and see the one app at a time UX on a 50″ TV, it begins to look ridiculous and the need for multi-tasking becomes obvious.

It is great to see the product used in ways we never imagined when we built it, and I’m looking forward to seeing these products get to market as well as see how others use Cornerstone in the future.

When open means closed, it gets confusing

Google owns Android, and everybody else is a second class citizen.

This should be obvious, but Google was able to confuse everyone for a number of years by releasing the source code. This offered the veneer of openness while remaining actually closed. At Onskreen, we saw the implications of this the last couple of years and it all played out behind closed doors. However, recently, Google made a very public move by shutting down Acer’s plan to launch a device based on a modified Android stack (read more here.

Certification has some technical requirements, none of which Cornerstone was in violation of. The real problem was that using Cornerstone gave the device manufacturers a differentiated UI. The goal of that was to offer a superior user experience to users, and thus engender loyalty directly to the device manufacturer as opposed to the brand of mobile OS. This may have not been in violation of Google’s technical requirements, however, it did violate Google’s goals. So they essentially banned it.

The act of coercing our common customers (device manufacturers), I don’t actually have an issue with. The problem is the false veneer of opening the code and then basically ensuring that nobody does anything with it that Google does not approve of. It was a great initial marketing tactic by Google that is now running into its limitations and beginning to cause more problems than helping Android.

I should be clear, I think Android is great. I use an Android device and Onskreen does a ton of business around it. It would just be better served with a transparent governance model from Google. The open, but closed approach does nothing but confuse the ecosystem and reinforce that Google’s ‘Don’t be evil’ mantra is outdated in their fight to the death to own mobile.

[Update 1.18.2013] – Samsung has released a version of multi-tasking on their Galaxy devices, and been certified by Google for those devices. Samsung is the major Android distributor (as of mid last year, they sold almost 50% of all Android devices worldwide with no other manufacturer above 10%), so clearly they had the clout to force Google to certify their multi-tasking implementation. It’s unfortunate that the only way that this could happen was with Samsung’s clout, as opposed to being enabled via the Android certification process that is supposed to level the playing field for Android. The implications for this are severe if you are not Samsung:

Me-too devices are a guarantee – Differentiating Android in any meaningful way is just not going to happen unless you are Samsung. Some others (LG) have come out with a version of multi-tasking after Samsung, but it is clear that Google had to certify those devices after certifying Samsung’s devices. The problem is that LG and the others are now followers as far as the market is concerned, and have no real means of leading.
Stephen Elop looks like a genius – With Nokia surging (at least in stock value), the decision to go with WP and not become another Android clone looks like the right one.