Are you ready for Personalized Economy the opposite of FriendsEconomy

In my last blog I focused on the tribe way for financial products, this time my focus is on the ego way of financial products.

The Nordic supermarket chain Rema 1000 launched an insurance company some weeks ago. Their first product is car insurance. The annual insurance fee is a result of how good a driver you are. Every customer have different and individually tailor-made annual fee based on their driving pattern. The company measures this by installing a black-box in the car connected to the computer in the car. This black-box register and stores your speed, you acceleration, your way of breaking, your distance to the car in front of you (if you have a front camera), etc. The black-box is connected to Internet and the insurance company.  Codan and other Nordic insurance companies plan to do the same shortly.  Thomas Jacobsen tell the newspaper DN that “I always try to get better score with the insurance company, so I actually drives more carefully now than before”. The driver has an app where he can follow the scoring day by day.

What if your life insurance company calculate the annual policy fee based on you hart rate/pulse, number of times per week you goes to the gym or does some hours of exercise outdoor (estimated from the pulse), how much you sleep etc. all that information they can get from a Polar, Garmin or any other fitness watch? This way you will pay a 100 % personalized insurance fee.

What if your bank calculate interest rate on you loan and mortgage based on your payment history, where and when you do your payment, how frequent you post on Twitter, Facebook, Instagram, etc. The interest you pay is not alone based on what type of security/collateral you offer (house, flat, car,..) but how well you manage you day to day finance.

Personalized Finance is here to stay, and is enabled by Internet of Things, Blockchain, the Value Web and change in most consumers mind-set.

Are you ready for FriendsEconomy?

This blog post is triggered by an article in the Norwegian business newspaper DN last week. Not so much because the technology or business model is unique, but because the name “tribe” is brilliant. We are about to get used to sharing economy and companies like Airbnb, Uber and some thousands other where you share all kind of assets and things with people you do not know, most often for a payment.

I guess you have heard about the German bank Fidor Bank. If you have your loan with them and you “like” what they post on Facebook, you interest rate on your loan will be lower. If you manage to generate for example 500 likes, your interest will be 0,1% lower for a period, if you manage to generate some thousands “likes” your interest rate will be 0,2 % lower for a period. The more “likes” you generate the lower is the interest rate, down to an agreed upon floor. The same is with total number of “likes” for the bank, if it is high - the interest rate on deposit is high for a period. The logic for the bank is that each person on Facebook have 400 friends in average, and one likes generate 400 potential new customers, and if they also “like”, the number becomes 160 000. That’s why Fidor Bank’s marketing budget is extremely low.

My trigger this time was "tribe". A new insurance company in Norway. If you and your friend sign insurance with the company and NONE of you have any accident or insurance payout for a period, your insurance cost will be reduced year by year. But if you or your friends have insurance pay out, the premium will be higher for all of you.  The insurance company Tribe claims this will generate only “good” customer to the company, a good business model, but also advantages for their customer as long as there is no claims.

This business model is not at all new, only not well known, and it will spread more and more into the financial and banking sector. The trend within insurance more or less started in Germany in 2010 with the Friendsurance operated by Alecto GmbH in Berlin. It spread to companies like German R+V and British Guevara and So-Sure.

Some of these groups of friend gather as group on Facebook pay into a shared bank account. Some of the amount is paid to the insurance company. If claims within the group is less than the amount shared, they payout goes from the shared bank account. But if claim is more than on the bank account, payout goes from the insurance company – a kind of reinsurance service for the group of friends.  If the balance on the shared bank account is not used by end of the year, it is repaid to the group of friends.

The trend here is to utilize on good friends and stay away from bad friends (or unlucky friends), at least when it comes to insurance and finance.

Picture by : Le Moustier Neanderthals by Charles R. Knight (1920)

Traditional banks and new banks

Looking at market share and trying to figure out some trends is an interesting exercise.

In Norway and most of the Nordic small newcomer banks have gain a lot of attentions last few years; with a growth rate of more than 50 %. These are banks with a bank licenses like Bank Norwegian (established from the airliner Norwegian), Komplett Bank (established from the online store – Amazon lookalike – Komplett.no) , Skandia:banken (established by the Swedish insurance company Skandia), YaBank, MonoBank and others. They provide mostly high interest (and highly profitable) pay-day loans, and some housing loans. In UK and US they also having P2P lending and Crowdfunding taking 4-5 % of the market share, not significant in the Nordic yet.

I made a graph a few years ago when I tried to trend the evolution of the financial market. As these newcomers have an exponential growth, and traditional banks at least until now have had something close to linear growth by 1-2 %, traditional banks lose market share every year. The Nordic total loan market has increased by approximate 6 % year by year.  And the losing of market share will most likely escalate in the future; when newcomers take significant enough part of the total market, even total income for each bank is stable.  Looking at Half year result 2016 and turnover for most large banks in Europe, it might look like the turning point for escalation is here already, a few years earlier than my estimation some years ago.

There are a lot of things traditional banks can do, and I guess some of them will. Bank Santander is a good example.

Central banks using Blockchain - the technology

As posted earlier in my blog many banks around the world are working on the Blockchain technology. But central banks are also investing in this technology both with the idea of issuing a pure digital currency and for improving the transparency and efficiency in the financial market.

As you might know China jumped over one whole step on the ladder of telephone evolution, when they rolled out mobile phone network some 10 years ago to people that did not have wired/cable phone at all. People having a phone went from a few tenfold million to almost a billon in a few years. Today China is ahead of rest of the world when it comes to innovative usage of mobile phone internet, led by companies like Alibaba, Tencent, Baidu and others both when it comes to sharing and collaboration and mobile banking.

Africa

It seems like Africa will do the same when it comes to smart use of mobile phone payment and smart

asset transactions.  First we got one of the most popular mobile payment platforms in the world in M-Pesa from in 2007 in Kenya making it possible for 20 million Kenyans and another millions in other countries in Africa to pay and receive payment using their mobile phone (an operation run by telecom Safaricom partially own by Vodaphone - no bank involved).  Now we got a Blockchain based payment infrastructure in Tunisia, launched earlier this year. It is Tunisia Post Office in cooperation with IT Company Monetas and the local Fintech Company DigitUS. The currency is named eDinar and is a truly crypto currency. eDinar have been around since 2012 with another technology infrastructure, having 600 000 users,  but is now converted to Blockchain technology. This will allow millions of non-banked Tunisian to bank by their mobile phone. Monetas have contacted 12 other African countries with some 300 million people to introduce Blockchain based crypto currency in their countries. This might be the largest Blockchain based payment platform in the world in a few years from now, and enable a lot of unbanked people without a bank account to take part in the financial evolution, get out of poverty and be able to pay and receive money safely. (Map from Wikipedia)

Bank of England (BoE)

Bank of England has long been open on their investment in Blockchain and possibility to launch a crypto currency. The RSCoin idea was launched earlier this year, but seems to be more a good idea than actually planned to be rolled out. Bank of England released a significant Blockchain paper this July “Macroeconomics of central bank issues currencies”. Here they also evaluate for private persons to make deposits in the central banks (in competition with banks) risk-free and in a crypto currency. It concludes that UK GDP will raise 3 % due to lower cost of transaction and better efficiency. In addition central bank gets a new tool to better control and stabilizes the economy.

Both Russia and China has release similar documents earlier. What’s interesting is the macroeconomic though their share likes (this is only a few):

They cannot issue new digital money in addition to money already in circulation that will generate high inflation as money supply will be too large. BoE suggest investors to swap government bonds/debt for digital currency = no extra money supply in circulation.

The cost of payment will be reduced to the cost of mining the block, this means substantial cost reduction for all people and business in the country, increase money efficiency, part of increasing GBP by 3 %. BUT (I am employed in a bank), the banking business will lose some 2-4 % of their revenue stream. Private persons will be allowed to deposit money in central bank with interest bearing wallets, risk free.

My question to central banks is “Have you considered the effect of Fractional-reserve banking?”

Rest of the world

IMF and USA FED invited to a meeting in Washington DC this June discussing Blockchain and Fintech, and what impact this will have on the global financial markets. 90 Central banks around the globe participated. Jannet Yellen of US FED said “I encourage central banks to do all they can to learn about financial innovation including Bitcoin, Blockchain and distributed ledger technologies”.

In addition to Bank of England, Canada, Singapore, Australia and Netherland among others have projects to find ways to leverage on the Blockchain technology. The June meeting in Washington also revealed that most central banks are investing in the technology, but do not disclose their investments and projects in public. (Photo by CDC)

Blockchain in a nutshell

It is “mission impossible” to explain Blockchain in a far too short blog post, but I will try.

Satoshi Nakamoto (a mysterious person no one has met) launched Bitcoin in October 2008. Bitcoin is a global cryptographic currency enabling you to pay to anyone in the world in minutes with a cost close to zero. To do so Satoshi removed most of the friction in the banking value chain of today, banks, central banks, regulator and money transfer companies like MoneyGram and Western Union, all take a fee for their services of being “man in the middle”. 

Today there are approximately 200 000 transaction every day, and some 8 million users – both private persons and companies, even some of the largest companies in the world. The number of transactions increases every month, despite all negative press around the payment platform. Bitcoin is here to stay, no question about that.

To make the payment platform work Satoshi invented Blockchain a technology and infrastructure. First of all TRUST is built into this technology and algorithm, due to the brilliant way it is designed you can fully TRUST that your payment will be received by the correct receiver. This means you do not need banks or central bank to TRUST that the payment is handled correctly. 200 000 transaction a day is proof of concept that the TRUST idea works. Secondly this is a peer- to-peer infrastructure.

When you pay from your digital wallet, money goes directly into the receiving wallet, no bank or other intermediaries between. This means there is no friction and no friction means close to zero cost. The cost of making one transaction is close to zero, but not zero. I made a Bitcoin transaction/payment last week and the cost was 0,06 USD for an international payment. Thirdly transaction included in the Blockchain cannot be changed, it is absolutely impossible to change anything in the past in the database. A “miner” (large datacenter) takes hounded of transaction and run them through a VERY large algorithm/calculation and encryption to generate one block of transaction. This block is put on top of the last block so that it forms a chain of block, a Blockchain. This makes the infrastructure much more secure than any infrastructure in the financial industry today. In addition database is distributed; meaning a perfect copy of the database is stored on many servers around in the network. This means 100 % uptime for the network, much better than any other baking network today. If one server breaks down the rest of the servers continue to keeps the network going – business as usual. 

In addition to payment Bitcoin Blockchain can handle other assets like shares on the stock exchange, ownership of property (house, flat, land,..), ownership of your car, and any other asset. This is called color coin in Bitcoin terms and “smart asset” in Blockchain terms.  This means one can use the Bitcoin Blockchain infrastructure to transfer ownership for any type of asset over the internet, for close to zero cost and in seconds – AND SECURE.

There are a few weaknesses in Bitcoin, one of them is volume. By design Bitcoin can handle only 7 transactions per second. For a global payment infrastructure this is not good enough, Visa handles some 50 000 transactions per second. There are some projects working on speed up the transaction per second (TPS), and Thunder Networks seems to be the best so far: https://blog.blockchain.com/2016/05/16/announcing-the-thunder-network-alpha-release/

Banks all over the world is looking into the Blockchain technology and trying to figure out how to benefit from this. Ripple is a Blockchain technology from the company Ripple. Ripple is partly owned by a few banks, among them Bank Santander. Bank Santander launched an internal payment system based on the Ripple Blockchain technology a month ago. Another 50 banks around the world is said to consider using the same technology for payment from Ripple. Bank-to-bank payment

The technology does also include what’s called “smart contracts”. This is logical scripts included in the transaction. For example “Send 500 USD to my saving account wallet number 42a3X67eCC623723 every month at the 10^th of the month. If interest rate is zero reduce to 100 USD a month, and if I am older than 70 years old, stop the payment”. This logical script is self-executable, meaning the business logic is moved out of the banks process and application to be stored inside the Blockchain database.

Ethereum is a Blockchain infrastructure used by IBM, Microsoft, Chain, Eris, Intel and a bunch of other vendors for a “smart contract” type of network. R3 /DLG is a consortium of 50 large banks in the world working on another “smart contract” based infrastructure they call Corda. In the future there will be other infrastructure, but all of them will be based on the principle of Blockchain invented by Satoshi in 2008.

Blockchain will change the way we transfer and store ownership of money, property and other assets in the future. Chris Skinner calls this the” value web”, that is a good word for the changing us of internet in the future. http://thefinanser.com/

Next week I will post about how central banks around the world are planning to use the Blockchain technology, some central banks have already started. 

Banks and their business model

The major business model for large banks today are based on taking in deposit, add money from issuing bonds and other funding, and then use the money for making loans to private persons and companies. Interest in from loans is larger than interest out to depositors and bond investors. The margin is the net interest income to banks. For Nordea bank this business model accounts for 50 % of 2015 revenue, down from 54 % in 2014, and for DnB (the largest bank in Norway) it is 71 % in 2015 down from 78 % in 2014. The same trends are for most large banks in Europe.

Picture from: www.lookandlearn.com, artist: Pat Nicolle.

This business model was invented by the Medici family in Florence in Italy around 1450. Before that banks only took deposit and stored it safe for rich families. The Medici bank started to make loans to private persons and companies from the money their customer deposited. In addition they put some of their own money on the table (they was considered one of the riches families in Europe).  They even printed their own coin, the Florin that was used for trade among businesses all over Europe from 1450 to approximate 1650. (€ version zero)

We are at the brink of a paradigm shift now. TBTF (Too Big To Fail) is replaced by (TBTC) Too Big To Change, and is becoming a fundamental risk for all large banks. As the total loan market have increased by approximate 6 % every year last 3-4 years in Norway, large banks loan have increased by only 2-3 %. This means they lose their market share, and within another 10 year they are not any longer system critical financial institutions. The business model is simply not scalable any longer in the digital age.

PayPal, Apple Pay, Google Wallet, AliPay, Klarna and a bunch of other digital payment platforms takes part of banks payment income. Crowdfunding, peer2peer loans takes part of loans and corporate banking market. Bank Norwegian, IKANO, Audi bank, GE Money bank, and other nice banks takes part of the highly profitable loan market with a digital core and scalable business models. By digital core I do not mean digital lipstick, like Vipps from DnB or MobilePay from Danske Bank, I mean everything in the bank is digital, processes are based on digital support and employees are selected to fit the digital delivery.

As Chris Skinner write in his latest book “Value Web”, the biggest banking challenge is leadership”.

I am 100 % sure that the Blockchain technology will change the way most people do banking in the future. I will write a new post on Blockchain next week. The question is if banks will leverage or fail on the new technology. In the history many large companies managed to leverage on new technology like bookstore opening internet store to compete with Amazon and airline companies opening digital ticket booking and boarding pass by smartphones.  But many have also failed like Kodak and Nokia, trying to fight the technology rather than leverage on it.   

Are roBOTS the next technology focus for banks?

Are you irritated by Apps automatically updating and consuming your battery power by themselves on your smart phone? It might happen next generation mobile device infrastructure solves this problem. Remember Apps are installed on your mobile device, like old fashion software application.

1990’s

Some 20 years ago one bought application in the shop, received a CD and user manual and installed the software from the CD. The processor power was your computer or local network server.

2000’s

Then the web application hosted in the cloud took over and no need to install anything on the computer any longer. You needed only a web access and browser, the processor power was on the hosting server in the cloud.

2010’s

But when Apple launched App Store we went back to old days thinking, installing application on your device, using processor power on your mobile device. The apps need to be updated with last versions from time to time.

2020’s

Next move seems to be back in the cloud, also for mobile devices. Social media like Facebook and WeChat is more and more depending on text message infrastructure like the Facebook Messenger and WhatsApp (more than a trillion monthly active users). As Mark Zuckerberg of Facebook told us 12^th April, the next step is to add robotics on top of the text message infrastructure. Bots is short for robotics. Bots are usually powered by artificial intelligence that “understands” a text message. Bots are stored on cloud servers, NOT in your mobile device. And it uses a new business model, based on micro payment. Bots are MUCH faster than Apps, and have processor power thousands times of average Apps on a mobile device. This enables bots to analyze and make decisions for you on a more advanced level than an App.

If you want move money from one bank account to another, send a message to your bank “transfer 100 € from my main account to my saving account”. Or “pay Peter Pan 100 € tomorrow”. There are some security issues of cause, but this will be solved.

If you need a flight ticket send a text message to SAS “Book a flight next Monday around 10.00 from Copenhagen to Stockholm.”  The artificial Intelligence logic inside the bots choose what’s best for you and know your preferences, might  have access to your calendar, and the people you are supposed to meet. This takes you a few seconds, compared minutes to using the web or App today. And you will trust the bots to do excellent decisions on your behalf.