Presentation on American and Chinese trends in financial technology at the Silicon Valley Innovation and Entrepreneurship Forum in late 2015.
By: Sean Walsh, @SeanWalshBTC
2. Our Objective
30 minutes to cover the most interesting trends in Internet Finance.
3 Stops for audience questions
3. Speaker Biographies
Chen Yu - President & Co-Founder of YeePay
Vitor Prado - CEO & Co-Founder of Prado Gittelson Group
Scott Robinson - Director & Founder of Plug and Play FinTech
Sean Walsh - Founder of Redwood City Ventures
4. Speaker Contact Information
Chen Yu,
Vitor Prado, vitor.prado@PradoGittelson.com
Scott Robinson, scott@PlugAndPlayTechCenter.com
Sean Walsh, sean@RedwoodCityVentures.com, WeChat - BigWaveW
5. What Is FinTech?
Consumers:
1. Online payment systems (ecommerce, peer-peer)
2. Virtual Currencies / Means of Exchange
3. P2P Loans
4. Investment (incl. Virtual Stores of Value)
Businesses:
1. Payment processing
2. Transaction settlement services
3. Investments (making + taking)
4. Crowdfunding
6.
7.
8. Why Is Finance Under Siege By The Internet?
1. Financial Intermediation is effectively a non-productive tax on the economy;
2. Less Spending on tax means more spending on productive enterprise;
3. Banking has grown more centralized over the past 50-years, and Financial
Services profits have grown commensurately;
4. To wit, that tax has reached 7.2% of US GDP, from 3% in 1950 (over $1.2
Trillion per year), and over ⅓ of US corporate profits;
5. Incentives have favored the banking status quo;
6. However, the WWW has granted much greater power to consumers;
7. Metcalf’s Law is relevant to, and beneficial for the lender/borrower network
through more desirable matches (think Craigslist and Newspapers);
9. Transaction Cost of Traditional Finance
One US example: Credit Card purchases…
1. Merchant pays 3% to accept credit card.
2. Merchant pays 100% of credit card chargebacks, which currently averages
2% of revenue.
3. Additional fraud expenses: card theft, identity theft, etc.
4. Annual US credit card purchases = over $1 Trillion
5. Total Cost of fraud to the system is almost 10%, per Lexis Nexis = over
$100 Billion/yr
Who ultimately pays this? Is there a more efficient way?
10. Over 1 Billion People - Internet but No Bank
1. Today there are 6 Billion Cellphones in use (5 Billion are prepaid).
2. 2.6 Billion smartphone subscriptions
3. About 3.3 Billion people use the Internet.
4. Mobile industry predicts over 6 Billion smartphones by 2020.
5. There are about 2.3 Billion people with bank accounts.
6. Bank accounts are not expected to grow as fast as Internet connectivity
and smartphone penetration.
CONCLUSION - Over 1 Billion people could become their own bank (via virtual
currencies like Bitcoin)
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14. Notable Moments in “Internet Finance”
1994 - HTTP status code “402 - payment required” is added to standard by W3C .
1999 - X.com becomes PayPal and abandons virtual currency aspirations .
2003 - Bernard Lietaer, chief architect of the Euro, proposes the virtual currency “Terra”.
2006 - Anshe Chung becomes first millionaire from virtual property on Second Life.
2009 - Mysterious figure “Satoshi Nakamoto” launches Bitcoin network, first transaction
to Hal Finney.
TTM - Wall Street embraces Bitcoin/Blockchain
15. Wall Street A-Team Embraces Bitcoin
Lawrence Summers - former US Secretary of the Treasury, Xapo Advisor, 21 Inc. board member
Blythe Masters - former Managing Director at JP Morgan, invented CDSs, ran $4B physical
commodity business, now CEO of Digital Asset Holdings
Dee Hock - founder of Visa, Xapo Advisor
John Reed - former Chairman of NYSE, former CEO of Citigroup, Xapo Advisor
Vikram Pandit - former CEO of Citigroup, investor in Coinbase
James Robinson III - former CEO of American Express, Chain.com Board Member
Duncan Niederauer - former CEO of NYSE, President of ICE, Tera Exchange Advisory Director
Jeffrey Sprecher - Founder, Chairman, and CEO of ICE, Chairman of NYSE, Coinbase.com investor
Tom Jessop - Managing Director at Goldman Sachs, Circle.com investor
Arthur Levitt - former Chairman of the SEC, Bitpay.com Advisor
Sheila Bair - former Chairwoman of the FDIC, itBit Board Member
Bill Bradley - former New Jersey Senator, itBit Board Member
Robert Herz - former Chairman of FASB, itBit Board Member
16. Use Cases, 1 of 7
Person-Person Transactions (1 foot, Same Country, International)
1. Projected from $15B in 2015 to $86B by 2018
2. Distance = 1 foot
a. Lots of mobile QR code scanning, NFC is lurking
b. Venmo
c. Google Wallet
d. Square Cash
e. Dwolla
f. BAT (for China)
g. Bitcoin Wallets
17.
18. Use Cases, 2 of 7
Person-Person Transactions, continued
3. Distance = same country
a. money sent to email addresses
b. money sent to Bitcoin wallet addresses (typically 33-34 characters)
c. all of the same services as 1-foot, plus PayPal and Facebook Messenger
4. Distance = international
a. Over $582 Billion sent in 2015.
b. Fees are down from 10% in 2010, but still average nearly 8% ($45B per
year)
c. This is considered by many to be the leading use case for Bitcoin which
costs 0%-3%, though regulatory obstacles remain.
d. Capital flight is an interesting consideration here.
19. Use Cases, 3 of 7
E-commerce - Product Purchases
1. Gift card exchanges
a. $124 Billion in cards sold in 2014 (US).
b. Up to 10% go unused.
c. Another 10% get sold into secondary market for 60% of face val.
d. Many of these are digitized through mobile apps like Gyft, and Raise
Marketplace.
e. Purse.io is a Bitcoin-based variation of this, where consumers can
purchase anything on Amazon for 15-25% off listed prices.
2. Purchases with Bitcoin
a. Largest merchant processor is Bitpay with ~25k merchant customers.
b. Large Merchants: Dell, Expedia, Overstock, Microsoft, NewEgg, Dish
c. Transaction growth is slow, due to Bitcoin’s Store-of-Value use case.
20. Use Cases, 4 of 7
E-commerce - Service Purchases
1. In-game Currencies seem stuck in niche subculture and in decline
a. World of Warcraft (Economy valued at $3B in 2011, but userbase down 50% from 2010
peak)
b. Eve Online (Economy of $36 million per year)
c. Second Life, Entropia
2. Mobile In-game / In-app Purchases aka - Freemium has won the market
a. This is responsible for about 80% of total app revenue which will be $77B by 2017.
b. Dominated by a few players
c. Clash of Clans, Game of War, Candy Crush - users advance standing through purchases
3. Peer-Peer Services
a. Streaming Video (Adult, Distance Learning, Breaking News, Pirated TV):
i. $Cashtags on Meerkat/Periscope to receive tips.
ii. Streamium - Bitcoin micropayment processing for video streamers
b. Fiverr - thousands of personal/business services for $5+ (and then accept Bitcoin)
c. Twitch - accounts for more than 43% of all live video-streaming traffic by volume.
21. Use Cases, 5 of 7
Real-money gaming: Fantasy Sports, Poker, Online Arcade Games
Investments (Equity Crowdfunding)
1. Title IV of US JOBS Act has opened much of this market to non-accredited investors.
2. Second Market, Onevest, Angel List
3. RealtyShares, Fundrise.com, Crowdfunder
4. Acorns, Wealthfront (now managing over $2B in client funds), Betterment (approx same size)
5. So-called Robo-Advisers is projected to remain very small (<%5) of market, and incumbents like
Schwab and Vanguard are moving in the space.
Interest Bearing Accounts
1. China is leading the way
2. Margin lending on BTC exchanges
3. Jua.com / Bitbank
Product Crowdfunding
1. Kickstarter / Indiegogo / GoFundMe (over $1B raised)
22. Use Cases, Crowdfunding
Crowdfunding:
1.Average successful crowdfunding
campaign $7000
2.In 2014, crowdfunding added
270,000 jobs and injected $65B into
the global economy
3.For 2015, crowdfunding is expected
to raise $34.4B
4. $529M pledged to KickStarter in 2014
23.
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25.
26. Use Case, 6 of 7
Peer-Peer Lending
a. Low loan rates
b. $9B in 2014, $64B forecasted
for 2015
c. LendingClub - $3.5B in 2014
i. investors make between
5-9% ROI
d. Prosper 2.0 - $1.6B in 2014
i. Average loans at
$13,000 with 13.9%
interest rates
27.
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29.
30. Use Cases, 7 of 7
Store of Value - BTC price in $
31.
32. Cyber Security
Cyber security issues:
1. Bank/Processor security breaches
a. Heartland Payment Sys (130M)
2. Merchant security breaches
a. Target (110M)
b. Sony Online (102M)
3. Health Insurance security breaches
a. Anthem (80M)
4. Government security breaches
a. US Social Security (76M)
What is the solution?
33. What Countries Lead The Pack?
1. Kenya: Mpesa (~20 Million users, and expanding to new countries)
2. China: Mobile Wallets, P2P Lending, Crowdfunding, Bitcoin Mining &
Exchanges, Interest Bearing Accts, etc, etc
3. India: largest microlending market in the world (Over 70M borrowers)
a. Despite 2010 meltdown, high-water mark has been surpassed, and
market is growing rapidly.
4. USA: Bitcoin, Fin-Tech Startups
5. UK: crowdfunded mortgages
a. Small, but growing.
b. Attractive due to ZIRP.
34. Notable Regulation - USA
1. US JOBS Act
a. Title 4 threw open the doors to equity crowdfunding for non-accredited
investors in Q2 2015.
2. New York Bitlicense (late 2014)
a. Seen by many as redundant, misguided, and an egotistical PR stunt
by the NY Superintendent of Financial Services.
b. Has caused many Bitcoin companies to cease NY operations.
c. First license issued 9/21/2015 to Circle.com.
3. California Bitlicense
a. Was also widely criticized as a destructive burden and political grab
for fame.
b. Was shelved by CA Senator Mitchell on 9/9/2015
35. Notable Regulation - China
1. In early 2014, Chinese government forbade Bitcoin exchanges from
transacting directly with banks.
2. This was effectively solved through the use of 3rd party money agents.
3. Chinese exchanges now claim that the banking restrictions have been
lifted.
4. What effect does/will the GFW (Great Firewall) have?
36. Speaker Contact Information
Chen Yu
Vitor Prado, vitor.prado@pradogittelson.com
Scott Robinson, scott@plugandplaytechcenter.com
Sean Walsh, sean@redwoodcityventures.com, @SeanWalshBTC,
WeChat - BigWaveW
Notas del editor
Silicon Valley Innovation and Entrepreneurship Forum
STOP HERE - panelist commentary, and audience questions
What are underlying forces driving Internet Finance disruption?
There are really 2 primary reasons for the massive disruption we’re witnessing…
The $1.2 T annual Financial Services tax entrepreneurs have to play with.
The ease of matching lenders/borrowers using the Web.
There are about 7.5B people in the world.
There were only 1B land lines installed because they required credit check.
People with bank accounts did grow by 700M between 2011 and 2014 (and 62% of adults have a bank account).
World’s adult population is about 5B (⅔ of total).
These slides were provided Professor David Lee, of Singapore Management University, currently a Visiting Professor at Stanford
It should come as no surprise that many of the 1+ Billion previously mentioned people are outside of the US.
The point is that mobile phone are ubiquitous in China, and much of the EM
STOP HERE - panelist commentary on How much force does/will the growing juxtaposition between having Internet access, but no bank account, have on Financial Services disruption in the Emerging Market?
Even at the 48% internet penetration rate, China still has 2.5 US’s on the Web.
So, if all their mobile phones upgrade to smartphones over the next few years, China will have 5x US’s on the Web.
It is fair to say that the last 20 years have been littered with attempts to create virtual currencies of one sort or another.
What caused the failures? Many fell prey to banking regulation. In the words of Marc Andreesen, it is “cosmically difficult to work with US banking regulators”.
X.Com was Peter Thiel and Elon Musk
BAT = Baidu, Alibaba, Tencent
WeChat, Alipay, QQ
STOP HERE - panelist commentary on P2P transactions - How do you classify P2P transactions, and what trends do you see?
This is a good slide for Panelist input, especially Chen’s input on China, recent govt commitment to capital controls ($50k max per yr),
Interestingly, cross-border B2B payments is a $28T per year market: http://www.businessinsider.com/earthport-ceo-hank-uberoi-on-building-the-fedex-of-payments-2015-10?utm_source=feedly&utm_medium=referral
The gift card stats equate to a secondary market of $40B face value, maybe $15B in potential net revenue.
Daniel: Twitch - accounts for more than 43% of all live video-streaming traffic by volume. Twitch was bought by Amazon for $970M. Some successful streamers can make over $100,000 by just streaming music/videogames.
http://www.twitch.tv/year/2013 -Incredible statistic for peer-peer services
Kickstarter - Funding Platform for seed investments
https://www.crunchbase.com/organization/kickstarter
Alternative financing via the Internet
If these market stats are true, this may be the biggest story in Internet Finance for 2015
I think the biggest risk with P2P is lack of consolidation of the borrowers’ repayment reputations, allows borrowers to jump to other lending platforms.
A great form of alternative financing
http://www.nunatak.com/wp-content/uploads/2015/01/Nunatak-Update-v5-FinTech-Eng.pdf
STOP HERE - panelist commentary - Is P2P sustainable? Also, any thoughts on or experience with Crowdfunding?
I think it’s important to recognize a few facts…
BTC was diluted by over 10% in 2014
BTC will be diluted by about 8% in 2015
BTC dilution will drop below 3% by 2020, and quickly approach 0% thereafter
Virtual currencies are in their infancy relative to fiat currencies
BTC averaged under $15 until 2013. Current 2 year return is about 15x.
STOP HERE - AUDIENCE QUESTIONS on the multitude of Use Cases we’ve just discussed
US M2 is growing about 8% annually now: https://research.stlouisfed.org/fred2/series/M2
But BTC, an exploding global network phenomenon, will be ¼ of that by 2020 (at below 2%)
STOP HERE - panelist commentary
Tom Ridge: https://www.ridgeglobal.com/tom-ridge/
Symantec: http://us.norton.com/
“Cybercrime is a clear, present, and permanent danger. While it’s a permanent condition, however, the actors, threats, and techniques are very dynamic.” - Tom Ridge
Credit/Debit cards leave a money trail, so people can use to expose individuals
ex-Federal agents leverage their knowledge in NSA and other federal department for higher paying jobs
Hackers have exposed personal information of over 110 million people
In 2014, Symantec’s Internet Security Report revealed that 253 data breaches took place in 2013, 62% increase from 2012.
Target breach in 2013, affecting roughly 40,000 debit/credit cards
IRS Breach earlier this year exposed over 300,000 people’s information