Apple Pay

Apple Watch & Apple Pay

There are plenty of places where you can read about Apple Watch, but I’d like to focus on how Apple Pay fits into FinTech world and its digital banking potential.

After the event hosted by Tim Cook, Apple Watch has been winning a lot of praise for its innovation. Despite a lot of comments out there, my personal favorite comment was David Pogue’s tweet:

I also loved that Tim Cook said he’s been wanting something like this since he was 5 years old. But from a FinTech perspective, beyond Apple Pay, one announcement that stood out for me today was launch of Mint for the Apple Watch.

It’s fascinating to watch an entirely new third-party software ecosystem start up literally before our eyes, with other favorites including the new Salesforce apps announced today. Details on these are available in Marc Benioff’s twitter feed.

I was in Mountain View last week at Intuit, owner of Mint.com, and was impressed by recent developments, especially at the Intuit Developer Group. IDG has embraced an API and platform-centric model (see my earlier post on this topic).

With Intuit products like QuickBooks Online (QBO) and Mint.com winning in the marketplace (e.g. 1M+ subscriptions for the QBO’s cloud offering) and strategy of moving from product > platform like Salesforce, I was hardly surprised to see Mint as an early partner in the nascent Apple Watch ecosystem.

Since at both the announcement of the watch last fall, and even at today’s SF event with Tim Cook, there were not a lot of details on how Apple Pay will work with Apple Watch, it’s useful to recap what we know at this point.

According to a recent report from CNET, who caught up with Edy Cue, SVP of Apple, last week, customers have an option to lock or unlock the Apple Watch, so that you don’t have to approve each transaction on the watch.

What’s fascinating is the the way most customers can use their Apple Watch with Apple Pay by authorizing it when they put on their watch, so that they don’t need to have their iPhone with them to use it.

Seen as a clever and novel approach to authentication, as reported in GigaOM today, wearing the watch to maintain approval for the payment, means if you take off the watch (or it’s stolen), the watch recognizes this and payments will no longer work (unless you reenter passcode or pair it with iPhone).

It’s a new way of thinking about multi-factor authentication that seems natural to me. I can envision lots of digital banking innovation with Apple Watch.

Today’s news also makes it clear Apple Pay’s hardware-based (so-called “secure element” that introduces hardware based security) and tokenization of credit card info is used by both phone and watch, so you don’t need the phone to be secure.

A lot of commentators, included Benedict Evans, have said the there’s a “delight” vs. utility story to the Apple Watch, and I think that’s true, just as Apple Pay is more than a story of how to make an in-store payment.

Personally, with Apple Pay, for instance I love being able to download an app and authorize transaction using TouchID (vs. having to put in Apple ID password).

My wife’s already asking for the Apple Sport Watch for her birthday next month (I guess I’m lucky she didn’t fall for the Apple Watch Edition).

If you missed my post last week on the launch of Samsung Pay and Android Pay, you can read it here, however it’s striking that at last week’s World Mobile Conference in Barcelona, as many pointed out, the big banks were conspicuously absent – despite the key role of mobile to the future of banking.

I was glad to have been at Jason Calacanis’ Launch Festival last week, catching up with old friends like Adam True from Morgan Stanley. I was also glad to catch up with Emmanuel (Manny) Dounias, a private banker who focuses on tech sector.

Although there weren’t a lot of FinTech companies at Launch, the winner of the startup competition was a Bitcoin startup called Abra to help the unbanked (and those paying high fees for money transfer to developing countries).

But this week it’s all about the Apple Watch. You can read more at TechCrunch, but I suggest reading initial observations from Benedict Evans when it was announced, or reviewing AdWeek‘s summary of major brands working with Apple.

And by all means watch the keynote or ad video on Apple’s site since I think that to understand Apple Watch you have to see and experience it, rather than just read about it (so I’ll stop writing).

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Apple: FinTech or Not?

Is Apple a FinTech company? Will Apple ever launch a bank? It’s an intriguing idea – Apple is rightly admired for delivering something magic to its customers through its products simplicity, usability and design.

When was the last time you used those words to describe your bank?

But, while others have speculated on the the idea of an Apple Bank (glance at this 2013 article to see a few predictions that came true), I heard a convincing story in 2014 that made me confident that Apple will not be launching a bank.

Deborah Hopkins, CEO of CitiVentures and Chief Innovation Officer for Citi, addressed a group of us from a NewCo event at CitiVentures’ offices in Palo Alto in Oct. of 2014. She told us how she had proposed, several years earlier, to create ‘white label’ bank for Apple, where Citi would provide all the back-end services, but the bank would be branded as Apple. Pretty interesting.

Apple took the proposal seriously enough to have an internal discussion, but Eddy Cue, SVP of Apple, later told Citi’s executives that while a lot of the ideas were intriguing, at the end of the day they decided: “Apple isn’t a $%*!’ing bank.” 🙂

Beyond Apple – Partnership Models for FinTech

I worked as a consultant in retail banking, consumer credit and target marketing in the UK after getting my MBA from London Business School – and ended up getting a lot of experience with affiliate marketing.

We worked for Bank of Scotland’s affiliate banking operation, which sold credit cards and loans to members of groups, such as the Automobile Association (like U.S. AAA). I also worked at Ford Credit Europe. During the same period in the late 1990’ss, in the US, a tech savvy bank Capital One, followed this model – and has often been called the “original FinTech company.”

I think that private label bank operations, where clients receive banking services from a brand that is not a bank, e.g. an airline, retailer, or even technology company (such as Apple) is that they can work, but only under very specific circumstances.

It has worked in the UK, where banks are often held in such low esteem that alternatives, like Tesco Bank (owned by a grocery chain) do well. But other popular brands – that are arguably similar to Apple – such as Virgin, launched services like Virgin Money, only to see them struggle to make them successful. I don’t think the strategy makes sense for Apple.

But not being a bank doesn’t mean Apple isn’t a FinTech company, especially given ApplePay.

Apple Pay

As I tweeted during it’s earnings call when it announced record (and historic) profits, CEO Tim Cook took time early on – surprisingly to me – to call out Apple Pay, giving some new metrics, and saying “2015 will be the year of ApplePay.”

I think that’s pretty significant, even if a debate on Apple Pay continues: One of the better articles on Apple Pay came from Forbes, though you can easily find articles similar to what Re/code published, which take the opposite view.

Like the debate over iOS vs. Android, I am already getting a little tired of the current debate since its too early and key metrics aren’t available, so won’t continue the debate any further here. But I predict that it will be successful.

(Incidentally, if you’re not up to speed on what Apple Pay really means, I strongly suggest listening to Benedict Evans and Michael Copeland’s excellent podcast from Andreessen Horowitz: “Apple Takes on Payments and Your Wrist.”)

One key take away from the podcast is the importance of Apple Pay to online purchases, while the media tends to focus on its use in everyday shopping. It’s also worth reading the TechCrunch article on Apple Pay’s use in self-service situations, such as vending machines, taxis and the like (all good use cases).

Apple Watch & Apple Pay

Turning to Apple Watch, that we learned this week will debut in April, let’s not forget a core part of its appeal is its integration with Apple Pay: “Your Wallet. Without the Wallet.”

And if you don’t have an iPhone 6, with Apple Watch you’ll be able to use Apple Pay, since it works with Apple 5 models.

I won’t to go into the chatter that’s arisen on other mobile wallets, e.g. rumors of Samsung Pay, ongoing drama over MCX and CurrentC, or the rumor of Google potentially buying the other player in NFC, Softcard.

(I’m 100% in agreement with Pete Casella, who invests in FinTech at JP Morgan Chase, who noted mobile payments seem like a potential duopoly in the US – and sees it as a crowded category for startups in the US and UK).

Is Apple is a FinTech business? To me, yes – it provides financial services technology that is relevant and making a difference – even if it’s not yet a core part of its business, and may never be one (Apple makes just 15 cents on each $100 spent using Apple Pay): It’s driving innovation in financial services through technology.

For all that it’s done for customers, its record success in its most recent quarter – and for being partnered with some of the best FinTech innovators, like Stripe, I’m incredibly excited about what Apple could do next in financial services.

I think we should follow Apple’s example by doing amazing things – as as they did in bringing security, convenience and “magic” to payments – elsewhere within financial services … and delivering from initial conception to roll out at rapid speed (based on conversations I’ve had with someone at a bank involved in launch, who said it was unlike anything they’d seen).

Innovation and speed-to-market should drive all of us in the world of FinTech – whether you’re a bank, investor or a startup.

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The Future of Money

Unlike Money 20/20 in Las Vegas last month, this week’s Future of Money and Technology in San Francisco was more of a true Silicon Valley event with generally more technical attendees and venture-backed start up’s, and fewer speakers and sponsors from traditional/online retailers or the card industry.

There was more discussion, as one might expect, on startup’s, bitcoin and where things are going in next five to ten years.

Personally I was struck that group of panelists drew a complete blank when asked which startup or relative newcomer would transform financial services in the next ten year (excluding Stripe and Square). The field seems wide open to the experts.

Key Takeaways

Look for the Cloud to drive up adoption of long-standing tools like account aggregation and data integration, with leaders like Yodlee continuing their evolution into platforms for other banks and partners.

While getting less buzz, especially given the chatter about Apple Pay, expect a shift from mobile payments to wealth management and big data solutions, in terms of what’s important in the FinTech landscape in 2015 and beyond.

In next 12 months, look for the big banks to embrace Bitcoin, initially just as investors as they will wait for clearer direction from regulators before the use of any form of cryptocurrency within their core businesses.

The Silicon Valley (vs. NY and London-centric) FinTech ecosystem is far more focused on disruption within FS (vs. incremental improvements) or enabling better services from big players, through selling to them.

Intuit and Personal Capital

Starting the day off was a fireside chat with Bill Harris, CEO of Personal Capital and former CEO of Intuit, and Barry Saik, SVP of Intuit, who’s runs their consumer ecosystem including its Mint.com product.

Harris remarked on the power of information to drive behavior, noting that people who see their actual spending and how it fits with their goals through online or mobile apps actually spend about 15% less to achieve their goals.

He also sees opportunity in FinTech for start up’s and established players to better serve the needs of consumers, at all levels of income, much as Personal Capital meets the needs of the so-called “mass affluent” by providing better returns through lower costs and more efficient use of technology.

Saik pointed out that Millennials in particular, and young people in general, are less taken with banks and traditional provides of financial services – comparing their online and mobile experiences with other activities; they ask, “why is it so complex/slow/confusing” and seek FS providers who are as easy to use as Uber.

In other remarks, both panelists commented on the problem of good information and advice on financial services, and cited that as an opportunity. I’ve often wondered why Motley Fool, a company that I negotiated with earlier in my career when launching an online bank, didn’t capture more of this opportunity and go after other segments than their core market of self-directed investors. Perhaps there’s an opportunity out there, where Ed Tech meets FinTech?

The session concluded with Harris noting that Big Banks, in the US, vs. FinTech startups are examples of East Coast (hierarchical, annual planning focus) vs. West Coast (whiteboards, collegial atmosphere) business culture.

The API Ecosystem

Next up was an informative session on the API Ecosystem in Financial Services. Certainly from my experience working at Morgan Stanley and earlier with likes of Barclays, MBNA and CheckFree, I see the promise of greater integration and more innovation by means of the somewhat wonky (to the non-technical) API.

Although XML and web services fell short of their promises to transform, Restful API’s and the Cloud are enablers of new, consumer friendly services from established players, like Wells Fargo and Chase, plus start up’s like Simple (now part of BBVA) and Addepar.

The API Ecosystem demo started off with probably the highest energy moment of the whole day, with Justin Woo, a Developer Evangelist at PayPal. With great excitement, he showed how easy it to enable a site or app to accept cards, through adding a few simple lines of code calling the PayPal API.

Jeff Kaditz, CTO of Affirm, Max Levchin’s latest FinTech start up, spoke about the role of API’s in allowing people to break free from the traditional bank solutions that people increasing do not trust, he says.

Kaditz got a few laughs for making fun of Wells Fargo’s logo, which include the horse and stagecoach as an example of how rooted big banks are caught up in the past. Ironically, as I’ve tweeted on Nov. 19th, Wells Fargo’s Digital Channels is ranked among highest in the US, so I would disagree with him on that front.

But Affirm, like Simple or WealthFront, is a great example of a FinTech startup, with enormous ambition, strong backers, and a vision to “fix problems” using technology and a fresh approach, e.g. API centric solutions.

John Beatty, cofounder of Clover cited how Information Security approvals take months if not years at big banks. With an open API (unlike most banks), its platform for Android devices enabled POS solutions to reach the market quicker.

Christine Laredo of Yodlee, who moderated the API panel, also marked how FinTech start up investment was $3B for the last year — 3x the level in 2008.

Bitcoin, Stripe and Stellar

Although I couldn’t attend the entire panel, Sean Percival of 500 Startups joined moderator Mark Rogowsky of Forbes, and several other Bitcoin executives, including Sonny Singh of BitPay, and Jackson Palmer of Dogecoin.

The Bitcoin conversation continued with a panel on Stellar: Building a Common Financial Platform. Moderator Dan Rosen of Commerce Ventures and Joyce Kim of Stellar noted 30% of the session’s audience said they hold bitcoin, yet across the US and around the world, the percentage of much smaller.

Stellar, as a non-profit, was also represented by Jed McCaleb, who created Mt. Gox, the first bitcoin exchange, and Ripple, prior to founding Stellar.

Greg Brockman, CTO of Stripe, spoke about the relationship between Stripe and Stellar, noting that they invested $3M for 2M Stellars, a virtual currency, and work with Stellar since they share the vision of greater “inter-operability” between currencies, virtual and real currencies, and passion for the future of commerce. Brockman also noted that while Stripe is in beta with their bitcoin offering, he expected it to go live shortly.

Brockman talked about the frustrations with inter-operability, and the details that inhibit payment innovation, while Kim of Stellar highlighted innovations like the 1% inflation rate, the focus on a “freemium” model to encourage adoption.

Everyone on the panel agreed that the future of bitcoin and other crypocurrencies is just beginning. McCaleb noted he founded Stellar to address what he saw as issues with bitcoin, including mining that negatively impact the environment.

Although below the radar, just three months after their launch, I was impressed with Stellar’s vision, how clear Kim was about Stellar’s vision and mission, and the alignment of the panel on relatively “uncool” issues like protocols and messaging.

The panelists seemed unconcerned whether Stellars would be the next bitcoin – and came across as far more motivated to reduce payment complexity and inefficiency, and create a smarter, more transparent network for payments.

But with demand outstripping their forecast – and 4M wallets in use today (47% of whom did not hold another virtual currency like bitcoin), Stellar is worth watching both for its initial product as well as their long-term vision and set of partners in the FinTech space.

Angel & Corporate Venture Investments in FinTech

David Rose of NYC-based Gust, a rival to AngelList, and expert on Angel Investing gave a fact-filled talk on what it takes to be a good Angel investor, citing the need to have a long-term vision, people skills, self discipline, willingness to learn, self control, and desire to be at forefront of innovation (without the drawbacks of being an entrepreneur).

Rose cited statistics, such as the fact that 5 of 10 Angel-backed startups will fail and you will lose all of your money. Also, if you have the ability to back in 10 startups as an Angel, on average 2 of the 10 will return your money (by being acquired or bought for their IP). If you’re lucky or choose right, you will make money on 1-2 of the 10, but to achieve the 25% IRR goal for its investment class, you’ll need that 1 of 10 in your portfolio to achieve a 30x return.

Rose noted that angels are in it more for just the money – it’s also about keeping up with changes in the world, and making a difference. But he cautioned about being naïve about investing in startups, noting that the “J” curve where you invest in a money-losing venture, as most are, is not for the faint of heart.

Mike Sigal, CEO and founder of Cashflower, a FinTech startup based in S.F., led a similarly clear-eyed assessment of what corporate venture investment teams look for in FinTech. He noted that corporate VC is now 20% of FinTech investing.

Pete Casella spoke about how his team at JPMorgan Chase looks to make strategic investments of $5m+ in startups that can positively impact the Chase business, and the Bank requires a desk or P&L center sponsor the investment. While he said Chase seeks to “build its own” in key areas like mobile, UX and core business areas, Jaidev Shergill of Capital One ventures spoke about how the Bank seeks to learn, and learn where to invest in its infrastructure, by investing in non-strategic areas as well.

Casella also made a pointed comment that while he’s seen maybe 50 mobile wallet seeking financing in the last year, he sees the market for these services as maybe two or three providers at most.

Shergill cited the case of working with SnapLogic, a company founded by Gaurav Dhillon and backed by A16Z, as such a company, while Citi Ventures Ramneek Gupta gave example of Silvertail. He noted they helped foster a pilot, guide them to a commercial relationship, and how the firm was later acquired by RSA.

Overall the corporate VC’s came across as helpful, but cautious, not looking for a big return on their money, so probably easier to negotiate terms with vs. some other venture firms, but probably less motivated to help you win in the market, since they don’t need a 3-4x (let alone a 30X) return on their investment.

But all the VC’s mentioned, at least to some extent, how they brought value to the portfolio companies by providing startups with connectivity into the large financial services enterprise.

At Morgan Stanley, one role I held was precisely this kind of “navigation” role, helping to connect the Firm innovation (whether in the form of new business models, like Hired.com or approaches to data center virtualization, like Bracket Computing) so I can say first-hand that these kinds of assistance do matter.

What are key lessons for FinTech entrepreneurs? I would call out the panelists advice to “Do your due diligence” with any corporate VC. Avoid term sheets with ROFA’s. Ask good questions about what they will do for you, and be clear about what type of help you need in growing your business.

One comment from Casella was to stay away from mobile payments, saying he’s looked at 50 companies targeting this space, and sees the need for at most two that will be successful – although I think on a global basis, this will be a higher number.

And, as one VC said, stay clear of anyone who makes a lot of demands of your time, especially for PowerPoint presentations 😉

2014 Future of Money Startup Competition

Powered by the startup competition platform, younoodle, The Future of Money & Technology event announced several winners of its startup competition.

The winners were:

Linqto Personal Banker: a software development company specializing in Enterprise solutions for banking and educational verticals.
CrowdCurity: a marketplace for web security solutions
TrustingSocial: an innovator in credit scoring with social, web and telco data, to make lending faster, cheaper and friendlier.
Xignite: a provider of market data cloud solutions.
CUneXus: specialized sales & marketing systems to help lenders maximize the value of customer relationships.

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Tuesday Recap: Money 20/20

Money 20/20 continued today, starting with a keynote by Ken Chenault, longtime CEO of American Express. What was interesting was both how much Ken embraced disruption, and versed he seemed in technology and his views on prospects that many conference attendees would be seeking to take market share from American Express. Beyond noting he welcomes competition, he stressed that he was not at all afraid to cannibalize his own business in order to reinvent AMEX.

Chenault said he “could care less” if plastic eventually goes away – eliciting a strong response from the audience, and sees AMEX as poised to continue to succeed in today’s more digital world. He also said he was disappointed to see Dan Schulman leave American Express to run PayPal, but expressed confidence he had a deep bench on his management team.

Chenault was excited that American Express was part of launch of ApplePay, and dismissed a question asking whether Apple could eventually disintermediate them, saying he doubts Apple sees that as their core business and seemed fairly unconcerned about MCX and CurrentC. I think that both sentiments are correct, although it is early stages of the game.

Next up was Tom Taylor, VP of Amazon Payment Services, extremely compelling speaker, and lot of the session was dedicated to a case study of a UK retailer, AllSaints, that essentially does everything (design, make & sell its own clothes; design, build and operate all its stores and web site using its own people) except for its strong partnership with Amazon.

Another good session was on payments for affiliate networks, marketplaces and direct sellers. Bill Clerico, CEO of WePay made good points about how handling marketplaces are very different from traditional e-commerce, with the need to manage the risk of buyers and sellers.

Another session — wittily called Planet of the API’s: Making Banking & Payments Programmable — explored how API’s can change how consumers will interact with their banks. Zach Perret of Plaid spoke on how creating an ecosystem of bank API’s could lead to all kind of new end-to-end experiences with online services that would not necessarily come from your bank.

While Yodlee CEO Anil Arora said he doesn’t see the need for every bank to publish its own API’s — it’s just a technology he said, and doesn’t solve anything in itself (and of course, his company has built out integrations with over 10k financial institutions, a source of competitive advantage for Yodlee). But Perret of Plaid took an alternative view, saying that Plaid expects to see at least 10,000 new start up’s / apps leveraging bank API’s over the next couple of years.

There were a couple of other good sessions today: Turning the topic to lending and the changing world of credit, there was an good discussion of alternative credit markets, with a roundtable featuring Ken Lin, CEO of Credit Karma, Aaron Vermut, CEO of Prosper Marketplace, Mike Cagney CEO of SoFi and others.

Key take away is that these companies are all solving for different issues in the current credit marketplace, where some find it difficult to obtain credit, or overpay due to market inefficiencies. Most agreed peer-to-peer term is overused, and emphasized use of risk models, data, and fact they acquire customers in new and traditional (direct mail!) models, just with a different mix.

The last session of the day was a debate on ApplePay, featuring Jim McCarthy, Global Head of Innovation and Strategic Partnerships at Visa, and Jim Smith, EVP and Head of Digital & Direct Channels at Wells Fargo, among others.

Jack Stephenson, SVP of First Data, commented on the “reality distortion field” attributed to Steve Jobs, being a factor, on some level, in that he’s never seen anything as big and complex come together until this effort to work with Apple.

Jim Smith said his team had been looking “for some time” for the right model for mobile payments, and were excited to be involved in the launch of Apple Pay, which will bring together banks, card networks, merchants and the right security model.

But many said it’s still early in the game, and Google Wallet will continue to evolve, with some noting that partnerships with biometric firms and other changes leveling the playing field, while adding the media were “missing the point” with MCX vs. Apple Pay story, a view supported by the team at Paydiant, the Boston-based software platform behind MCX.

A fitting end to the recap for today’s events at Money 20/20 – an event that some said might as well be called ApplePay 20/20 – with the day’s chatter commenting on the fact that Money 20/20 had just been bought by a European company (no word on whether the payment would be made in Bitcoin).

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Day One: Money 20/20

Well, the number of attendees at Money 20/20 is astonishing, as a first timer this year. From speaking to fellow attendees such as Tom Groenfeldt, who writes for Forbes.com, consensus seems to be Benjamin Lawsky, the regulator from New York State, who spoke about his work on developing frameworks for virtual currencies like Bitcoin, was the most interesting talk so far.

His views on the potential importance of Bitcoin match that of others in the Silicon Valley. In fact, one of the more interesting talks on Bitcoin recently was at Dreamforce when Marc Andreessen spoke with Emily Chang from Bloomberg West, saying to “short Apple Pay” and go long on Bitcoin — he’s a well-known investor in the Bitcoin ecosystem, in players like Coinbase.

Strikingly absent from Money 20/20 sponsorship list is Apple, or much in the form of direct reference to Apple Pay in agenda or keynotes, however as Bloomberg’s coverage of Money 20/20 stated aptly, this year the event might as well be called Apple Pay 20/20. Although the story in Bloomberg indicated Apple wasn’t present at the conference, and Apple declined comment, there are several attendees from Apple here in Las Vegas at the event, according to the the list of attendees from the organizer.

Although Apple may be less visible as an overt presence at Money 20/20, more striking is the absence of Square, at least from a key sponsorship perspective and in terms of the major keynotes and fireside chats.

We’ll be hearing from other players, such as Google Wallet (which is well represented at the event, and is a sponsor), of course.

And while mainstream media ran stories of Apple Pay being blocked (at least effectively, by disabling NFC on card readers) by retailers like CVS and Rite Aid, there were reports Apple Pay signed up 1m users in the first 27 hours, 3m in the first week. Lots of ink spilled over MCX and whether they are behind the payment wars. Sure to be a topic discussed this week.

Also, former head of Google Wallet, Osame Bedier, was added as a last minute keynote speaker for Monday’s session, to presumably speak about the launch of Poynt. Should be interesting, and looking forward to hearing reaction from the Google team on the ground here in Las Vegas, as well as other presenters at here at Money 20/20.

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