Digital (R)Evolution In The Financial Services Industry; Financial Technology (Fintech) As A Major Disruptive Force In Banking

1. Google = Bank Of The Future;
Future Of The Bank = ?
Digital (R)Evolution In The Financial Services Industry
Alexis Eisenhofer, financial.com - Thomson Reuters, 21 January 2015

2. “Banking Is No Longer Somewhere You Go, But Something You Do.” (Brett King)
“Banking Is Essential, Banks Are Not.” (Bill Gates)

4. The “New World” In 2015

5. Digital Business Models Aim At A Disintermediation Of
The “Man In The Middle”
➢ Producers (brands) and consumers interact directly
➢ "Prosumer": customers influence product design
➢ "Non-physical production" (the core business model of a bank) is ideal for
digital strategies
➢ Innovation in banks has been limited to financial instruments (financial
engineering)
➢ Retail banks in Europe only have 20-40% of their processes digitized (McKinsey,
October 2013)

6. More And More Customers Expect Changes In Banks
➢ Generations X (1964-1979) and Y (1980-1995) reach the age for wealth creation;
"Millennials" (from 2000) do not want consultation
➢ Millennial Disruption Index: "Banking is at the highest risk of disruption."
(71% would rather go to the dentist than to the bank)
➢ Rising equity markets with no risk-free investment opportunity
➢ "Paradox of choice": Too much supply reduces the total demand
➢ "Disenchantment" of financial advisors by two crises; Bad image of banks

7. New Technologies Offer Numerous Opportunities
➢ Big data: volume, variety, velocity, veracity
➢ Access: anyone, anything, anytime, anywhere, any device
➢ Social media (Collaboration and sharing)
➢ Technologies disrupt industries faster than ever
(Skype, Uber, WhatsApp, Spotify, YouTube, Google Maps, Digicams etc.)
➢ One million users in 9 years / months / days: AOL / Facebook / Draw Something
➢ $ 3 billion in Venture Capital for Fintechs in 2013 (2008: $ 930 million) is still
small compared to total bank IT costs ($ 485 billion) - but growing fast

8. Signs Of A Tsunami Are Already Visible
➢ Productivity ratios of retail branches have been deteriorating for a long time
➢ Lower barriers to the provision of financial services
➢ Rising acquisition costs ($ 350 for checking account, $ 2500 for mortgage)
➢ Advertising campaigns are less efficient (declining conversion due to
multichannel sales)
➢ Tsunami: Number of taxis in San Francisco dropped by -65% in a single year
(due to Uber.com)
➢ Accenture expects 30% sales decline in banks by 2020 due to new competitors
(September 2014)

9. Attacks On Institutional Investment
And Investment Banking

10. ➢ Platform for structured
data
➢ All major sources (FRED,
ECB, etc.)
➢ Ongoing updates
Quandl.com: 10 Million Free Time Series Of Financial Data
(Download, API, Excel & Plotly)

11. Plot.ly: Free Graphical Data Analysis
➢ Almost as powerful as
programming language
R
➢ Sharing & Collaboration
➢ Numerous import /
export formats

12. Quantopian.com: Free Algorithmic Trading Community With
Live Backtesting / Valuation Of Complex Structures
➢ Source code and risk
ratios available
➢ Community of highly
specialized
professionals
➢ Business model: Seed
funding of hedge funds
for top users with a
revenue share

13. Rizm.equametrics.com: Drag And Drop Algo Builder & Paper
Trading
➢ No programming
experience required
➢ Backtesting & Paper
Trading
➢ Financing of the
platform through
introducing broker fees
(IB, FXCM)

14. Estimize.com: Crowdsourced Estimates (4,500+ Analysts)
➢ Wisdom of the crowd
(without sell side bias);
Better results than Wall
Street analysis
➢ Numerous rankings,
alerts, calendars
➢ Social Media Features

15. SeekingAlpha.com: Peer Group Blog For Equity Research With
More Than 7,000 Authors
➢ Excellent quality due to
intensive discussions
➢ Disclosure of new, non-
public facts
➢ Free Transcripts of all
earnings calls

16. No One Could Predict Quotes Better Than Google
➢ 90% of all purchases
start with a search (70%
thereof Google
searches)
➢ Already public search
results allow
outperformance
➢ Eric Schmidt (Chairman)
has implemented a
code of conduct for not
forecasting the stock
market

17. LimeBrokerage.com - Sub Millisecond Execution & Clearing
(880 ns Market Data); 20% Of US Equities Volume
➢ "Discount broker" for
algos
➢ Order execution much
faster than "normal"
brokers
➢ Extensive market data
(Level 2)

18. Attacks On Payment Systems And
Savings Deposits

19. Paypal Handles A Quarter Of The World's Online Shopping -
148 Million Customers Are Numerically "Germany Plus France"
➢ After 7 years Paypal has
more online accounts
than all savings banks in
Germany
➢ eCommerce doubled in
5 years at 14% market
share - with accelerated
growth
➢ Possible spin-off of Ebay
brings further growth
for Paypal

20. Alipay Is Already The Largest Provider Of Fixed-Term Deposits
In China (6.3% Instead Of 3.25% For State Banks)
➢ Payment processors
start with deposits
➢ Currently the only bank
in China with a positive
real interest rate
➢ Alipay has better image
than state-owned banks

21. TransferWise.com: Extremely Cheap International Transfers -
"Money Without Borders"
➢ International transfer is
the honey pot of bank
charges
➢ Banks charge high fees
even within a single
currency area (e.g.
Eurozone)
➢ Share price of Western
Union has been falling
for years

22. Facebook And MoneyGram: Bank Transfer From The US To
Over 200 Countries Via "PicomoPay" App
➢ 25% of all clicks in the
USA on Facebook
➢ 73% of Millennials want
payment function of
Facebook (Millennial
Disruption Index)
➢ Not a "chicken and egg"
problem (network
effect)

23. Mint.com: Personal Financial Management Service With Multi-
Account Aggregation (198 Mln Accounts In US / Canada)
➢ Personal financial
planning with savings
recommendations by
peer group
comparisons
➢ Financing through
commissions from
selling long-term
contracts
➢ Founded in 2006, taken
over in 2009 by Intuit
(170 million USD)

24. Social Banking "Kaching" Of Australian Commonwealth Bank
➢ Mobile Payment via
Facebook / E-Mail / SMS
➢ Complete integration
into the timeline of
friends
➢ Push Notifications for
payments

25. Attacks On
Lending And Project Finance

26. Lendingclub.com: Peer-To-Peer Lending ("Social Lending")
➢ Peer-to-peer lending,
the world's largest
crowd lending platform
➢ Google hold 8% stake,
IPO in Q4/2014, market
capitalization USD 9.5
bln
➢ Risk management
through pre-selection of
loan applications (only
the top 10%) and
diversification

27. Crowdfunding Is Growing At Double-Digit Annual Growth Rates
➢ Even large projects are
financed
➢ The video game "Star
Citizen" collected 55.5
million USD on the
platform Kickstarter in
2012
➢ Crowdfunding is often
used for social projects

28. Lightfin.de: Private Placement To Qualified Investors
➢ Institutional investors
are pushing into
banking
➢ Platforms bring credit
requests without sales
force
➢ Often ratings are
provided (eg White
Label Moody's)

29. Kreditech.com: Big Data For Credit Scoring
➢ Fully automated rating
of 15,000 data points
➢ Social graph, browsing
behavior and GPS data
to explain the bulk of
creditworthiness
➢ Forecasting accuracy
better than with
traditional models

30. Wonga.com: Short-Term Consumer Loans Up To £ 400 In 5
Minutes
➢ Standardized detection
of small consumer
loans
➢ Credit statement in less
than 5 minutes
➢ Improving efficiency
compared to traditional
retail banking

31. Attacks on Asset Management and
Brokerage

32. Vaamo.de: Asset Management For Everybody -
"Transparent. Simple. Profitable. "
➢ Simplicity as a key
product feature
➢ Customization through
"self-counseling" via
sliders
➢ Cost advantages
through index funds

33. Wealthfront.com: ETF-based, Commission-Free Asset
Management (AuM $ 1 Bln In 30 months)
➢ International market
leader with 1.8 million
visits per month
➢ 3-digit annual growth
rates
➢ Far stronger growth
than Charles Schwab in
their early stage (Direct
Brokerage)

34. Etoro.com: Social Trading - "Friends" Replace Bank
Advisors
➢ The world's leading
Copy-Trading platform
➢ Nearly 130 million
trades since 2007 (with
continued strong
growth)
➢ Comdirect (German
market leader): 5 million
trades / quarter

35. ➢ Leading Community for
Active Traders for
Charting Analysis
➢ Sharing of chart
patterns via HTML5 Tool
➢ Subscription Fee for
Real Time Data
Tradingview.com: Community Of "Active Traders" For
Technical Analysis

36. Strategies For Defense

37. Open Architectures, Collaborations And An Innovative
Organizational Structure
➢ Open architecture: flexibility and network effects
("If you can’t beat them, join them.")
➢ Software-as-a-Service: Continuous improvements through clickstream analysis
➢ Cooperation: V.me by Visa provides white label online payment processing
➢ Outsourcing of software development to small flexible partners (no
cannibalization, new thinking, no legacy systems)
➢ Takeover of Fintechs (Problem: Valuations up to several billion USD)
➢ Promotion of Digital Natives to the Board of Directors (only 9 out of 206 DAX
supervisory board members with obvious IT background, Handelsblatt 2014)

38. Social Graph, Peer Group Data, And (Location-Based)
Contextualization
➢ Consistent use of the social graph (Facebook, XING, LinkedIn)
➢ Similarity analysis, eg “Customers who have a similar profile bought these
securities."
➢ Value-added services: Cost savings by changing providers (Peer group
information)
➢ Framing concepts ("40-year-old father" etc.)
➢ Right time and right context (Location-based data)

39. Design, Integration And Differentiation
➢ Design is a key success factor of applications / products (eg iPhone, Nespresso)
➢ "Mobile First": "Less is more" when designing surfaces
➢ Gamification: Use of game mechanics in non-game contexts to engage users
➢ Financial products are seen as commodities by retail customers; distinction to
the competition is key

40. ➢ Paid content can not be accessed through an aggregator like Google
➢ Higher "customer ownership costs": Free content offerings require investments
in added value
➢ Significantly lower distribution costs of paid content
Paid Content And Customer Ownership Costs

41. Thank You For Your Attention!
“You must unlearn what you have learned...” (Yoda)
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alexis.eisenhofer@financial.com