The FinTech Tipping Point

The relationship between FinTech firms and incumbent financial institutions appears to be entering the next phase of their evolution. The first two items in this week's newsletter explore how FinTech has transformed finance and provide a context for strategic partnerships that can produce results.

Traders in cryptoassets are working to make a similar leap, even though the U.S. Securities and Exchange Commission (SEC) denied a request from an exchange operator to list a bitcoin ETF. That would have brought cryptoasset trading to a mass investor pool. It will happen eventually. On to the links:

How has FinTech transformed finance?

"The tipping point in finance has happened," says Huy Nguyen Trieu, CEO of The Disruptive Group, London. "From the startups that have gone through unbundling and rebundling, from the large tech companies which are very heavily leveraging technology to get into finance, but also, and most importantly, from some of the very large banks that have started their journey and are reaping the benefits." This is apparent in three FinTech trends, he says:

• Hyperscalability, where a technology firm like Ant Financial gains customers at a vastly faster rate than the large incumbent financial institutions gained their customer base.
• Unbundling and rebundling, where hundreds of startups focused on a single traditional financial service are now are offering an increasing number, much like the banks they unbundled.
• Traditional financial institutions get it, where some banks are on the way to creating innovative financial services on their own or by collaborating with FinTech firms.

How banks and credit unions should select FinTech partners

Ron Shevlin, director of research at Cornerstone Advisors, has been on a campaign to make sure financial institutions know what it really takes to build profitable partnerships with FinTech firms. Very few banks have the experience to create a partnership in which all parties share in the risk and rewards of product or service delivery. If you want to go any farther, he writes, answer these questions:

• How do we make sense of what's out there?
• How do we figure out who we should be seeking out?

Shevlin suggests a framework for financial institutions that want to develop real answers to those questions. "The Innovation Mechanisms of Fintech Startups" lists the primary clusters of FinTech services available to institutions and a description of the ways that FinTech firms create value.

Both are necessary to create a FinTech partnership strategy. As Shevlin puts it, "The problem with all these efforts to find FinTech partners is that it puts the partnership horse before the strategy cart." Whether this will lead to a golden age in FinTech partnerships that can serve as the future of banking remains to be seen, but without a strategic purpose, a partnership will be in name only.

Commodity investors eye a new category: cryptocurrencies

Crain's Chicago Business gives an update on cryptoasset trading in Chicago, with a focus in this article on commodity traders. "Chicago investors are more comfortable with this idea of investing outside of traditional markets in stocks and bonds," says Lamont Black, a DePaul University finance professor. "Many people would say cryptos are part of that alternative asset investment class."

Fixing the internet

The internet and its technologies are so closely tied to the future of money and finance that two reports on the state of the internet today seem relevant. In its August issue, Vanity Fair published a feature on Tim Berners-Lee, the inventor of the web protocols that brought the internet to widespread consumer and commercial use. "Berners-Lee has seen his creation debased by everything from fake news to mass surveillance," Katrina Brooker reports. He isn't happy, either, but he's determined to fix it. "For people who want to make sure the web serves humanity, we have to concern ourselves with what people are building on top of it," he says.

Picking up on some of the same themes, The Economist on June 30 published a special section on how to fix what has gone wrong with the internet. "The internet was meant to make the world a less centralized place, but the opposite has happened," Ludwig Siegele writes. Together, the pieces give a good history of one of the primary technological drivers of the digital information age.

CRYPTO CURRENTS

Blockchain Reports. You know you love them. Here are three recent ones you can mine over the month of August for that salient blockchain and cryptofinance insight.

Coin Desk released its Q2 blockchain report, which notes that "while bitcoin's bear market continued, development activity carried on without distractions." Increased use of payment channels "in which small, frequent transactions between two parties are conducted off-chain and the blockchain is reserved for final settlement" boomed in Q2. As for ethereum, it gained some regulatory clarity as "an official of the U.S. Securities and Exchange Commission declared that ETH, in its present form, was a not a security after all."

Pitchbook published its Q3 Blockchain Market Map. "We’ve seen a flush of investment go toward startups focusing on crypto-investment, compliance and enterprise solutions, among the multiple segments demarcated within the market map," the private equity and investment research group wrote.

Ocean Tomo, an intellectual property research and valuation firm, published its first Blockchain and Cryptocurrency Industry report. The major difference with this report is its survey of the blockchain patent landscape. Applications surged over the last two years, to more than 1,600 in 2017 from less than 400 in 2015.