Tuesday, November 17, 2015

Can better customer service disrupt financial services?


It is no secret that customer service at most financial services companies is just awful. Banks, brokerage and insurance companies have been cutting back on customer service for years in an attempt to reduce costs and improve profitability.

At a recent Harvard Business School alumni event in NYC entitled “Innovation in Financial Technology: The Startups” three founders shared their successful (and disruptive) business models focusing on delivering better customer service in financial services. The common thread for all three featured firms was their involvement in marketplace lending.


Marketplace Lending 

Marketplace lending is “about the reinvention of consumer finance” according to the American Bankers Association. Until recently it was better known as “peer-to-peer lending” lead by the likes of Lending Club and Prosper.

David Klein
David Klein is the CEO and co-founder of CommonBond and he described marketplace lending succinctly in a blog post this past summer:

“The rise of marketplace lending in recent years is part of a massive wave of disruption that has taken hold in the financial services industry – and it will only grow larger, as marketplace lending is projected to be a trillion-dollar industry within the next 10 years.”

Klein describes marketplace lenders as:

1.    A non-banking financial institution.

2.    Heavily leveraging technology to drive simplicity and speed of process.

3.    Serving a two-sided market of consumers and investors.

More Affordable Student Loans

CommonBond describes itself as “A values-driven fintech company that is re-imagining the student loan experience.” Klein described the origins of his business based on a very personal experience: the pain of student loans.

While he was attending Wharton he had only one option: The Federal Government, offering one rate, no matter where the people when to school or what their credit record was like. “It was a hard process with really bad service, and I knew there were lots of other people in the same position. But what could they do?”

Klein looked at the simple math of student lending: Investors were getting 2% returns, while students were paying 8% interest. “I saw the opportunity there to refinance student loans, saving student borrowers 2-3% in interest in the process.” A more affordable student loan option was born.

“Some call us a shadow bank, but we consider ourselves a sunshine bank, doing something good for consumers.” Klein is adamant about CommonBond’s benefits: “We offer a better product choice, a cheaper price, and use technology to speed up the process and offer improved customer service.”

He observed “We as marketplace lenders are closing the cost of capital and closing the customer service gap versus big banks. This will allow start-ups in the fintech sector to win.”

Faster Small Business Loans

David Haber
David Haber is the co-founder and CEO of Bond Street. The firm is transforming small business lending through technology, data and design. The company believes small business owners are the foundation for growth in the economy, and yet today’s banking system has left them behind.

As Haber explained he took an unconventional path to fintech, having studied biochemistry at Harvard. He then worked at a small venture capital firm.

He saw small businesses struggling to raise money, along with the fact that big structural issues faced banks serving the small business lending market. He told the gathering: “In most cases you can’t apply for a small business loan from a bank online. Then 80% of the applicants got rejected. It’s a really bad customer experience.”

Haber further noted that the consolidation in the banking industry has concentrated assets, and as a result the percentage of banking assets available for small business lending has dramatically declined.

“A $5 million loan takes the same time to process as a $150,000 loan.” So there isn’t much incentive for banks to lend at the smaller end of the spectrum. “And banks don’t want to cannibalize their lucrative credit card portfolios with more attractive lending options from the customers perspective.”

Bond Street offers small business loans from $50k-$500k with rates starting at 6% and offers and a vastly improved customer experience in terms of speed and convenience. Applications are made online and approvals are given in less than 7 day versus the typical 6-8 weeks a bank takes to evaluate small business loan applications.

Better Marketplace Lending Information

Matt Burton
Matt Burton works the B2B side of fintech. He’s the Co-Founder & CEO of Orchard, which provides analytics to the marketplace lending industry.

The company serves three distinct targets: Investment managers who need data to analyze potential lending investments for risk and yield criteria. Loan originators who need access to a wide spectrum of high quality investment managers and institutional investors, and institutional investors interested in entering the marketplace lending sector.

In essence Orchard provides analytics to the marketplace lending industry. They also created a unique marketplace platform between institutional investors and borrowers, show in a great “online lending ecosystem” chart on their website.

Matt admitted that he fell into his start-upbackwards. “I was working as consultant to the hedge fund industry, looking at small money managers, hoping one would have good system for tracking portfolios of small loans. They didn’t.”

Burton saw the opportunity to fill the analytic gap with great customer service.

“All these guys tried to do it on their own” Burton said. “I decided to start a business that would provide analytics to the marketplace lending industry.”

Forbes reported earlier this year that the volume of loans made by online matchmakers last year totaled $14 billion and will grow by a compound annual rate of 47% through 2020.

Orchard typically charges clients about three basis points against the amount invested or managed through the company. This year Orchard expects to have about $3 million in revenue. In July the company’s 59 clients make $227 million in loans using Orchard. They’ve raised $12 million in financing, which valued the company at $50 million.

Backers include a prestigious group of former big-time Wall Street executives including Virkam Pandit (former CEO of Citigroup), Jack Mack (formerly of Morgan Stanley) and Capital One  founder Nigel Morris. 

in the Forbes article Jay Posner, managing director of client Blue Cub Capital Management, said Orchard "levels the playing field. The ability to buy loans milliseconds after they're available allows me to compete with larger funds that have more resources."


Burton observed at the HBS event "Lots of people are fleeing banks, especially the under 40 crowd. This will only build the marketplace lending sector." He continued "Traditional banks are facing death from 10,000 cuts from startups."

Measures of Success 

These three startups are delivering compelling evidence that focusing on superior customer service, expressed as a lower cost, faster service or better information can indeed disrupt the financial services sector. 

The clearest vote of confidence in these companies has been their success at fund raising and business growth.

In September of this year, CommonBond raised $35 million in a Series B funding round led by August Capital, and surpassed $100 million in refinanced student loans.

Bond Street announced $100 million in funding last June from venture capital firm Spark Capital and global investment bank Jefferies. "Our biggest challenge for the past year was not having enough lending capital" said David Haver.

In September Orchard Platform raised $ 30 million. The NYC based venture capital firm Thrive Capital lead the round of new investors, which also included former Goldman Sachs president Jon Winkelried, Victory Park Capital and Thomvest Ventures. This latest round brings Orchard’s total fund raise to $ 44.7 million.

Wednesday, November 11, 2015

What my dog taught me about social media.


I got an important lesson about social media recently from my dog, or rather from his passing. I posted the following piece on Facebook without giving it much thought:

Decoy our Black Labrador Retriever died peacefully on Monday night 10-12-15 at the Animal Medical Center in NYC. 

Decoy
He came to NYC over eleven years ago as a rescue dog from Charlottesville, VA. Since then he enjoyed a full life with long walks, ocean swims, interesting smells in NYC, frolics in the snow, back rolls on the beach and dog treats at every port of call. 

Decoy made many friends throughout his life, including the staff at our apartment building, the owner of our dry cleaners and the guys at the local FDNY firehouse, in fact anyone with a biscuit in hand. 

He was a member of our church, where he often worked as an usher and appeared in the annual Christmas Pageant - as a black sheep. 

Despite his best efforts both in Central Park and on Eastern Long Island, Decoy never successfully caught any rabbits, squirrels, ducks, geese or deer, and he made hundreds of attempts at the chase. 

He was a family member and friend who will be missed, and never forgotten. RIP Decoy.

The response I got back was overwhelming. So what did I learn about social media? 

Write from the heart if you want to connect with people. I have to  put aside all the logic, process and strategy I learned in business school and practice professionally once in a while, and let my heart speak in my writing. Apparently it resonates with lots of people. 

Live in the moment. Decoy never worried about what happened yesterday. He lived for our early morning runs in Central Park and visits to the beach on Long Island. As far as I could tell he never worried about the future. I shared this in my Facebook post. Capturing the simple moments that make up our lives and sharing them is what social media is all about.

Trust the Data: I work with lots of clients on social media marketing programs, and tell them to closely observe what creates engagement with their audience; then use that data as a guide to creating content that matters to people. After my article on Decoy appeared, my Klout score (measuring my online social influence) went through the roof.

Of all the messages I got back from the Decoy Facebook post, my favorite was the following: 

Dogs come into our lives to teach us about love, they depart to teach us about loss. 
A new dog will never replace an old dog. It merely expands the heart. 
If you have loved many dogs, your heart is very big. 
Decoy expanded my heart in countless ways, and in turn opened my perspectives on how to share that gift, using social media.



 

Tuesday, July 28, 2015

The Need for Substance Behind Disruption.


Much has being written about the merits of disruptive business models. They are redefining numerous business sectors and creating new companies with massive valuations in the process. But many startups, using disruptive business models, fail for the lack of a sound strategy and basic business acumen.

Many young entrepreneurs, founders and investors dive into business sectors they don’t know much about. And for all the creativity, drive and vision of gifted programmers and founders - writing code is a completely different skill-set than many years of industry expertise, or the basic lessons learned in graduate business schools.

Here are four cornerstones of “substance” that emerging growth companies should consider:

Sound Business Acumen:

Groupon offers deals and coupons for restaurants, retailers and service providers. It made a big splash back in 2011 when its IPO it went public raising $805 million. Investment banks including Goldman Sachs made millions in fees.

Only a few months later, regulators flagged some questionable accounting practices. The company admitted to “material weakness” in its internal controls, restated its 4 Q 2011 financials and the stock tanked by 44%, and $350 million in equity valuation vaporized. Groupon’s accounting practice gaffe reflected the extreme downside risk of not having sound business acumen, especially in accounting matters.

Industry Expertise:

Some startups simply don’t understand the business sectors they’re entering.

The American Bankers Association recently posted a video on the need for financial technology startups to hire both seasoned executives that understand the industry (including regulations) and younger developers who bring creativity, innovative and disruptive ideas.

A great example of this combined skillset in practice is Polly Portfolio.

Barron’s recently featured a cover story on the rise of “Robo Advisors.” Firms like Wealthfront and Betterment offer web portal access for investors seeking a simpler and less expensive way to manage their investments. This approach is perfect for Millennials who don’t see the value in an expensive investment advisor sitting a fancy office.

But do the developers and founders behind these online asset allocation algorithms have the investment management experience, regulatory insight and proven track record to match Wall Street? The jury is still out.

Polly Portfolio has the pedigree of some leading Wall Street hedge fund managers and their quant investment models. The company offers a sophisticated portfolio asset allocation customization feature with great graphics, and the benefit of active portfolio management and rebalancing.

If you don’t quite understand all this, it simply translates to turbo-charged industry expertise in investment management, delivered conveniently to your laptop, at a fraction of the cost compared to traditional investment advisors.

Clear and Tangible End Benefits:

A basic tenant of good marketing is that people are much more motivated to buy benefits from a product or service rather than features. K Mart sells lots of Craftsman drills with nifty features, but in the end people buy a hole in the wall.

Uber stands at the pinnacle of the startup unicorns, companies valued at a billion dollars or more. They closed $1.6 billion in financing earlier this year. Their concept of affordable and safe, on-demand transportation delivered by a smartphone app has translated into 58 countries and 300 cities worldwide. They use a clear and simple “value proposition.” Uber makes makes local travel in all these cities easier, more accessible, and often more affordable than options, in most cases local taxis. 

They are presently estimated to be worth $50B on annual revenues of $10B. Not a bad growth track for a company that started with $200,000 in seed funding back in 2009.

Sustainability:

Smart entrepreneurs design business models that are sustainable. Sometimes this requires them to “pivot” or evolve their business models over time to find something that works. 

Zygna is the company behind online games such as FarmVille, a farming simulation social network game they launched back in 2009. Despite the initial success of the game, it garnered some negative reactions. TIME magazine called the game "one of the 50 worst inventions" in recent decades, due to to its being "the most addictive of Facebook games" and a "series of mindless chores on a digital farm.

Zygna launched its IPO in late 2011 and raised $1.2B with a $20B valuation. 

In the end Zygna became a "one hit wonder" of sorts with FarmVille, and the stock quickly went from $15 per share to $2 per share and it has bounced around that value for the past three years. While the company still have a market cap of $2.4B, many investors took big losses on a company that did not have a sustainable offering. 

The company is now facing a lawsuit that contends that they defrauded shareholders about its financial prospects before the December 2011 IPO. Shareholders also claim that Zygna hid its true earnings potential to enable insiders to sell $592 million in stock before a post-IPO lockup was to expire, thus avoiding the 75% drop in share price. 

It's clear from these huge success stories, promising up-and-coming startups, and roadkill just examined that a combination of sound business acumen, clear end benefits, relevant industry expertise and a sustainable business model will go a long way towards driving long-term startup success.


Monday, June 22, 2015

Fintech Sector: Vive la Revolution.


Bastille Day will be celebrated next month. Known formally in France as La Fête nationale it commemorates the beginning of the French Revolution with the storming of the Bastille, the symbol of the absolutism of the French monarchy, on 14 July 1789.

Much like the French Revolution, there is a new revolution in the works today with the rapid rise of the financial technology or FinTech sector, characterized as a battle between the old and new ways of doing business.

But what exactly is FinTech? The Wharton Business School FinTech blog defines it simply as an economic industry composed of companies that use technology to make financial systems more efficient.  

The explosive growth of the FinTech Sector is being fueled by a combination of innovative tech entrepreneurs (using disruptive business models) and billions in venture capital investments. Global investments in the sector exceeded $5 billion in 2014 according to Silicon Valley Bank estimates


The fintech space has reached the point where it is now considered competitive across all financial services categories: lending, personal finance, payments, retail investments, institutional investments, equity financing, remittances, consumer banking, financial research and banking infrastructure with well over 1,000 funded start-up companies in the sector.

Particularly vulnerable to such disruptive business models is the financial services industry including global and regional banks, investment advisory firms, financial information providers and securities brokers.

The Economist has defined the FinTech revolution as a wave of start-ups that is changing finance – for the better. They accurately observe that FinTech firms are not about to kill off traditional banks. But these start-ups will cut costs and improve the quality of financial services, unburdened by regulators, legacy IT systems and expensive branch networks.

Innovative data-driven lending will provide better ways to assess risk versus a single credit score or the meeting of a bank loan committee. Algorithms are more objective, and risk assessment using online information is better than a loan officer in a bank branch.

Barons boldly stated on a recent cover,“Meet Your New Advisor” that robo-advisors (using website backed by sophisticated software) will help put many investors into asset allocation models that meet their various financial goals. This change will bring high quality investment advice to the masses, for a fraction of what traditional advisors charge.

Two great examples here are Wealthfront and Betterment – which keep the process simple by asking users a few questions about their goals, risk tolerance and investment horizon. From there, algorithms provide an asset allocation, with zero human interaction. Brilliant.

The Wharton Business School's students observed the biggest obstacle to growth in the fintech sector will be psychological, as the financial services sector has long been dominated by big firms that are resistant to change, stalled by inertia.

But there is a blinding glimpse of the obvious here. The UX or “user experience” for small businesses and consumers with large money center banks and brokers is simply awful. It is expensive, impersonal and can be very unpleasant. Problem resolution is at times slow to non-existent.

David Reilly
While many large Wall Street firms have long chosen to ignore start-up (and develop software solutions themselves in-house) a number of firms are starting to take an interest

“We owe it to ourselves, our customers, our clients and our shareholders to cast a wide net and find new ways to solve existing and new challenges,” said David Reilly, a technology infrastructure executive at Bank of America. “Engaging with the start-up and venture capital community forces us to think about innovation in a different way, more revolution than evolution.”

Recently Goldman Sachs hosted a hack-a-thon featuring developers from Kensho, a firm that is out to shake up the $26 billion financial data industry,  dominated by Bloomberg and Thomson Reuters.

Kensho’s software gives the masses the type of complex, quantitative computer-generated data currently only available to top hedge funds like Bridgewater Associates. In essence, they offer a Goolge-type search for very complex investment questions, posed in plain English. Goldman was impressed enough by this cloud-based software data firm to invest $15 million late last year.

Daniel Nadler
Such an event reflects Wall Street’s growing recognition that the old-school view of ignoring start-ups may be short sighted. “There’s a certain cultural moment now that is quite palpable,” said Daniel J. Nadler, the 32-year-old chief executive of Kensho about the hack-a-thon and Wall Street's broader engagement with start-ups like his.

Fintech firms are using disruptive business models in their most positive sense – to cut costs, provide better / easier access to information, and improve the quality of customer service. And that formula will always attract new customers and drive long-term profitable growth. A fact that prescient venture capital firms have known about, and profited from for years.




Friday, May 29, 2015

Why Non-Tech Execs Should Learn to Code.

Smart phone apps are fast becoming the lingua franca of the tech world. They offer much higher user engagement rates than traditional websites, and are supporting thousands of highly successful start-up business models.

The use of apps will increase exponentially later this year when Google evolves its search engine algorithms to allow for mobile “deep linking” or a way for their search engines to go inside apps and link to a specific location rather than just launch the app.

As a marketing executive with a long history of helping create websites, digital and content marketing programs I always felt at a distinct disadvantage when it came to talking to web and app developers. I just didn’t “speak their language” nor fully understand the development process.

I decided to take the plunge earlier this year enrolling in a part-time Swift development course at a NYC Flatiron district coding school – TurnToTech. Swift is the relatively new iOS app development language from Apple.

In class we learned about the basic process of designing and building apps starting with downloading Apple’s Xcode 6. We became familiar with strings and characters, control flows, functions and closures. We learned about classes and structures, properties and methods. As I said, learning a whole new language.

Lots of Swift code is “open-source” and available online in places like github, so you don’t need to “cook from scratch” every time you start the development process.

My co-workers asked the obvious question: “What’s it like?” and “Is it really hard?” My answer was simple “It is like being in France and jumping on the TVG bullet train. They’re speaking a foreign language, and it’s moving really fast.

I learned how to do business effectively with people in the EU by getting on a plane and spending time on the ground in the UK, France and Italy. I needed to learn both the culture and process of how they get things done, which in many cases was different from the way I learned to do business in the US.

The same applies to learning code and working with developers. They have their own culture and process for getting things done, one that needs to be understood and respected by non-tech executives.

I now have a much better idea of how apps are developed, that there is usually more than one way to accomplish a task, how long development should take and a better idea of how much it might cost. I also know how to look at “source code” and have an idea of what it is trying to accomplish.

This kind of knowledge would be helpful to all sorts of non-tech business people, from senior marketing executives to operations people. I’m sure the business people in many start-ups would also benefit from having a better understanding of how websites and apps are created, tested and optimized without having to learn-on-the-job.

I don’t have plans to become an app developer anytime soon, but I will be much more effective working with developers moving forward, and I owe a debt of gratitude to the instructors and my classmates at TurnToTech in NYC – who where patient and helpful as I ran hard to catch up with the technology that is redefining the way business is done in so many ways.



Friday, May 15, 2015

Time to leave your big bank?


Community banks are fast emerging as the unsung heroes of the US economic recovery, following the fall-from-grace experienced by their big money-center bank brethren. Is the time right for more consumers and small businesses to take a hard look at their relationship with big banks in favor of community banks?

Community banks as a sector of the banking business have seemed always to have their priorities straight: Putting the interests of their customers first, reinvesting in the communities where they live and do business, and avoiding high-risk investments / business practices like derivatives and currency / commodity trading. They also seem able to sidestep most bank regulatory entanglements. 



Turns out these smaller banks are now are looking like both a sound investment and a critical part of the economic recovery. The Wall Street Journal cited these trends in a a recent article “Good Banks Come in Small Packages.” The smaller banks now hold a majority of the commercial real estate loans. They also have boosted key lending like C&I (commercial & industrial loans). Earnings results for smaller banks are robust as well.




There are some obvious reasons that the community banking sectors is on the rise, including:

1.    Community banks offer a better value to customers: Most locally owned banks deliver the same range of services from checking accounts to debit and credit cards at a much lower cost than big banks. They often offer, on average, better interest rates on savings and better terms on credit cards and other loans.
2.    Community banks invest in growing local economies: Small businesses, which have been at the forefront of the economic recovery and have created the majority of new jobs depend heavily on small banks for financing. Although small and mid-sized banks control less than ¼ of all bank assets, they make more than half of the volume of small business loans.
3.    Bank with an institution that shares a commitment to your community: The fortunes of local banks are intimately tied intimately to the fortunes of their local communities. The more the community prospers, the more local banks benefit. Big banks generally are generally not tied to their places where they operate. Indeed, they often use a community’s deposits to make investments in other regions, on Wall Street or to help pay big regulatory violation fines.
4.    Support productive investments, not gambling: Community banks are in the business of turning deposits into loans and other productive investments. Meanwhile big money center banks devote lots of their resources to speculative trading and other Wall Street bets that may (or may not) generate big profits for the bank, but provide precious little economic or social value to it customers or communities where they do business.
5.    Local decision making: Community banks make loan approvals and other significant decisions on a local basis. They often using personal knowledge of the businesses or individuals to help provide qualitative insights into the lending decision, approving loans that a big bank, using computer generated models and less personal evaluative criteria might reject.

The Independent Community Bankers of America trade association provides an excellent overview of itself and the advantages of community banks and overview community bank facts at Independent Community Banks of America overview.

A final and somewhat blinding glimpse of the obvious is around the issue of honesty and integrity. Big banks continue to make headlines by pleading guilty to a seemingly endless stream of criminal and anti-trust violations for activities such as price rigging foreign currencies, mortgage related charges and tax evasion and manipulating interest rates.

A study by the Boston Consulting Group determined that legal claims against the world’s leading banks have reached $178 billion since the financial crisis. The study concluded that big banks have now come to accept big fines as another cost of doing business.

Despite these massive legal charges, banks recently have returned to profitability for the first time since the financial crisis. Any wonder their fees and rate charges have skyrocketed?

Seems that nearly any way you look at it, community banks are the smart choice for personal and small business banking, and will continue to help empower success and growth for the US economy into the foreseeable future.