Local Pride - Singapore Swings above weight for FinTech Accelerator

[drllau]

Startup Bookcamp has announced the 10 finalists for its inaugueral FinTech accelerator program starting May. Among the 300 applicants sourced from Europe, Asia and Pacific where four from Singapore which when you consider the demographics (0.3B EU, 1.3B China, 1.2B India, 0.6B ASEAN) is way way above pure statistical chance (though admittedly the numbers should be adjusted to technological capability). The future entrants to BASH are

• Cryptosigma - money transfer platform to Phillipines using bitcoin wallets
  
• Dragon Wealth Asia - wealth management system targetted at Financial advisors
  
• Kashmi - social mobile payment service (alas no obvious website)
  
• Otonomos - block-chain enabler providing incorporation services
  

Since I'm helping with the NameCoin Google Summer of Code mentorship, I'd briefly explain the significance of the two cryptocurrency startups. Due to regulation (anti-money laundering, know your customer, fudiciary obligations), capital requirements and sheer technological sophistication, the banking industry has grown to be intensely concentrated. The typical network/transaction topology resembles that on the left of diagram below. Proponents of legal history (guilty as charged) might recognise the similarity with the Statute of Anne where UK passed copyright laws giving power to owners of printing presses on the tacit condition, they controlled seditious publications.

As a result, a small group of ... hmmm ... free software anti-authoritarians seized the opportunity to promulgate an alternative which is now known as bitcoin. This consists of 3 elements

• global ledger (blockchain) of all transactions formed by consensus;
• individual accounts (signed public/private keys) organised as wallets;
• gateways to existing financial systems with functionality enabled by smart contracts.

The significance behind CryptoSigma is that all bitcoin wallets are owned by the recipient, unlike accounts in banks (or any other service like mobilephone ENUM), thus granting individual control over financial records, transaction history and value apportion into as many subaccounts as desired. The downside is of course if you lose your key or grant access of wallet to untrustworth party, you are totally screwed. You can predict in the long-term, if everyone has a personal wallet accessed via mobile phone, transaction patterns would move towards a peer-to-peer paradigm as exemplified by the topology on the right. This has profound implications, not only security-wise but would scare the living heebeejeebies out of your stodgy traditional bank which requires separate applications to open accounts and insist on wrap services to claw from savings if your kid plunders your credit card. The technoeconomic implications (hey that's my dayjob since I analyse emerging tech trends) are also noteworthy as it pushes the infrastructure costs from a centralised big-iron datacentre towards personal wear/bring-your-own-device. 

Otonomos uses the blockchain to store physical records, in their case company formation data. including shareholdings. Here lies the wonders of a scripting language embedded into the blockchain as with the recent timing protocol extension, you can designate transfers upon a certain date, threshold value or trigger event (as supplied by another wallet). This allows share registries to effectively become their own private exchanges through there are constraints imposed by the language. The company claims that this can be used to improve corporate governance through how far that goes in practice remains to be seen. Coming from a legal background I'd note that things are always easy when companies are profitable and growing, it's when financial disaster or distressed capital calls come that disputes arise for which no dumb contract is worth their two-bits in resolving the issues. In addition, there are technology constraints, blockchain confirmations are usually on the order of minutes up to an hour which are not necessarily what you want in a high volume transaction. In fact, for comparison, the bitcoin network on average processes 7 transactions per second compared with (from memory) VISA peak throughput of nearly 50,000 per sec. But it does fill a niche in privately held corporations which in the case of HK, allow you to operate with only one director (unlike SG requirement for as least one PR/cit + external auditor). Hence it will drive the cost down for passive holding companies.

Whilst still early days, I believe these two companies are typical of what I label the emerging dataflow economy (cf attention economy of the naughties). For people interested in this topic, I'd try to answer any questions on this forum whilst stuck in Singapore. 

Lawrence

http://www.linkedin.com/in/drllau 

[drllau]

The Sydney manager of Ripple (cross-border settlement on top of blockchain) gave a talk last night. Firstly you have to understand the stack (loosely analogous to IaaS, PaaS, and SaaS). The ripple network is a consensus forming curated set of nodes that maintains a global snapshot of currency ledgers. Details for the curious

• Origins of Ripple
  
• Concensus 
  
• Virtual Currency as Carrier 
  
• TrustLines 
  
• Blockchain
  
• Impact of BlockChains - 
  
• Ripple in BlockChain
  
• Ripple & FX for Banking 
  

So at the origination of the tech are firms such as Ripple who construct the Network/Infrastructure as a service, in this case a global quasi-private market of multi-currency liquidity providers. The next stack layer would be platform firms like Bluzelle (a Canadian tech outfit just relocated to Singapore) who craft specific payment gateways and robust processes, then the last layer are the financial providers (banks, B2B trading firms, P2P remittance, etc). So you see the analogy to toll roads, on-ramps and car-fleets from stack perspective.

So much like the open internet was built on the LAMP stack (Linux, Apache, MySQL, PHP/Python), the next financial generation is shaping up on similar stacks only we're now at a formative stage. Hence all the VCs keen interest in placing bets and tech companies jostling to establish their stack position as well as other startups trying to grow an audience (not to mention existing financial firms defending their turf). Exactly what does it mean for startups? ... I suppose it depends on where you want to sit on the value stack, but I'd point out that

• ecosystems have a habit of destroying non-value creating intermediatories
• infosystems are dynamic, a sudden market shift can mean you've bet on the wrong techbase
• you can think of markets as red sea (existing competition), blank space (ignored) green shores or blue ocean

In the case of ripple, they've identified 10 global gatekeepers who act as FX clearance but the industry takes 2+ days to settle (with lifting costs) adding $1.6T cost overheard (aka friction), and even then, 4% of wire transfers fail. By switching to a global ledger, they deliver value through transacting instantly and directly with end2end visibility and control. Just like google created a competitive market with their AdSense bidding, Ripple forces competition amongst the FX market makers which means the gatekeeper role loses its pricing power which means the cost savings are captured elsewhere, 

ultimately to customers (supposedly). The speaker gave personal example where sending $1,000 to his son, the Japanese bank charged $150 in fees and FX spreads. 15% margin for a financial transaction creates a price umbrella which innovative startups can target via use of lower cost infostructure despite teething pains. 

So can a founder come up with a radical new FinTech wrinkle that can dramatically change the cost structure of a particular industry? If so, accelerators like JFDI (+DBS +UOB +OCBD, not to mention startupbootcamp, HSBC, Citicorp, UBS) are willing to listen so long as you've done your tech/market homework and got a decent team.

[drllau]

My last post for now on the topic of FinTech (unless somebody wants a webinar on technoeconomics of blockchains) is to look at FinTech from the point of view of an investor. There are some guestimates that the total VC investment in FinTech since this decade is ~$50B which seems rather incongruous given that the TOTAL capitalised value of bitcoin is only $6.4B. If cash handling only incurs a < 0.5% overhead then why all the hype about electronic payment? What people overlook is financial leverage ... a cost saving of $1 can under the right circumstances be expanded an order of magnitude or more. There are significant fixed costs in the current financial system (compliance, capital ratios, overcapitalisation), and much like IT infrastructure has moved from proprietary premises to hybrid clouds, there are hopes for a similar transformation to this century's financial infostructure. The diagram below indicates how an asset (say seed investor) in real economy is ~ x3 of the recurrent revenue which is leveraged by VCs via financial engineering to x10 or more. And conversely if a fractional banking institution is hit by higher costs, their ratios suffer disproportionately.

So the way to seek alpha is to understand the real economy and where to hunt for value. One example is SatoshiPay (pocket change for the web) which is targeting nanopayments. Typically a bank charges 20-30c to handle electronic transfers but this Bitcoin payment mechanism is addressing the white space of transactions < 1 cent with upside potential in automated M2M commerce. mCommerce is all about reducing friction, but with the prevalence of ad-blockers, the current content model is broken. Some studies indicate that depending on bandwidth plan, you can waste 8c on ads around content and paywalls don't allow a new brands to gain mind-share. In particular, any fee structure make small content expensive. There's a mental transaction fee - cognitive load into comparing/making the payment up to the time-wasting hassle of form filling. Instead SatoshiPay enables premium content to be revealed, allowing blog authors (currently only wordpress plugin) to charge for high value works. By putting this underserved market into the formal economy, measured GDP is increased and this is captured by the financial system. Similar reasoning can be applied to other portions of the economy. A lot of household expenditure can now be monetised (cf personal car -> Uber) leading to increased capital efficiency. 

Economists argue that bitcoin is merely a means of exchange and don't satisfy the currency requirements of unit of account (value fluctuates) or store of value. In recognition of this gap, digitx has positioned themselves as asset ownership tokenisation platform. Partnering with custodian services, they allow physical gold to be deposited in Singapore and issue fractional ownership certificates defined with the Ethereum smart contract language. Financial history buffs will instantly recognise the analogy to goldsmiths in  England which kickstarted fractional lending. Providing a physical service to enable backing of a real tangible asset gives intrinsic value to tokens. In particular, punting on Asian wealth psychology as gold has intrinsic value (weddings, dowry, etc). The transaction rules enforced by the consensus-based global ledger allows arbitrary splitting of value, formal exchange, and then eventual consolidation and solidification back into a real-asset. When modern banks are nothing more than a fancy pawnshop (think mortgage) then this can become an existential threat. 

So these two cryptocurrency examples show how value is both created (capturing and increasing the transaction flow) and destroyed (alternative to inefficient pawnshop) providing the "Why" rational to invest in these two particular startups. Having an undiscovered know-WHY may be the most important asset for a startup (see book Zero2One) besides the know-how (programming). Some recent publications point out that outsized valuation is due to right timing. VCs work on 10 year funds so their investment pattern is 1-2 years source dealflow + invest, 5-7 growth and governance, then 2-3 harvest. So if one had started in cryptocurrency in the last 5 years, would have a slight advantage over new comers who've yet to discover the prior pitfalls. The reason why FinTech will not be totally disruptive the way BBS evolved to blindside AT&T is that the financial system has high switching costs. Local banks are starting FinTech accelerators because they wish to defend their customer base and to understand the emerging threats and opportunities. As a comparison, take a look at CISCO's iPrize where they offered a bounty of $1M for potential market ideas worth $1B (which shows smart economics). In one interpretation, idea beauty contests allow them to tap into crowd-sourced market research without direct expenditure with followon seed holdings interpreted as an option to acquire at a later stage. One also needs to be realistic about the impact of Singapore, some figures indicate that total FinTech investment is ~0.4% of world total so the chances of a unicorn are probably proportionate (all else being equal). The challenge for the technopreneur is what can be done to move into new value creation beyond replicating existing financial services.

Lawrence

http://www.linkedin.com/in/drllau