Innovating in Forex

Posted on January 25, 2011 by Admin

I learnt recently about TransferWise a new startup that aims to disrupt the middlemen in the foreign exchange business. Midpoint-Transfer are also working on the same idea and will be launching later this year.

Foreign exchange is a horrendously overpriced product at the moment that is begging for disruption. The core idea of TrasferWise/Midpoint is solid – they provide a platform for matching buyers and sellers of currency, who get to transaction at the middle of the bid/ask spread at the time the transaction, and are charged a very small fee for this privilege.

Clearly the savings from traditional banks charges are huge so this seems a great product… diving into the details however things get murkier. The problem is that the consumer is taking a risk over precisely when the transaction will take place. Because they need to match with someone on the other side of the transaction there is uncertainty over when the transaction will take place – and thus a degree of market risk in the price. TransferWise allows you to set a limit on your transaction, but if the market moves against you that is still bad news.

A bigger problem is if they can’t match up buyers and sellers. There is no reason why currency flows in either direction should be even close to matching up in a given week (for instance). All kinds of factors from seasonality, to relative market penetration, to market sentiment will affect which side will be up or down on a given day. Obviously they could clear these balances daily in the market, but then the customer isn’t getting quite the deal they thought they were (though maybe they can make use of volume discounts to get a better deal than the bank). Alternatively the could create some kind of automated broker/trader to provide liquidity to the market but it’s hard to see how they are going to make money at these fee levels.

A different challenge they are going to have is in distribution. I know a guy who sells German property to English buyers. He has a list of forex brokers who share their commission back to him for any leads he provides – clearly he’s incentivized to keep using the existing channels rather than push the new one.

That said despite these challenges it’s clearly an exciting market and an innovative idea, and I’m sure the teams will be able to work through these and other challenges they face.

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ISA’s are a rip off

Posted on December 7, 2010 by Admin

I had an unfortunate incident with Barclays stock brokers this afternoon. These guys have been deducting £30 plus VAT (it’s a consumer product – why quote a price plus VAT unless you are trying to be intransparent) from my bank account for the last few years, despite the fact that the ISA in question has only £114 in cash in it.

I know that I should have closed it long ago, but I was busy and didn’t realize they were charging such exorbitant fees (they get debited from an old bank account I don’t use anymore). So I called them up to ask for my £114 cash back, only to find a £50 (plus VAT) termination fee. Bloody rip off, that’s nearly a 50% fee to give me back my own money. And I couldn’t just cancel the direct debit because they have a minimum cash balance of £100.

So I started doing some maths on their accounts. Lets assume you have the full £7,000 invested in equities. Yields on that are just under 3% at the moment, which means an income of £210 per year. Assuming you are a lower rate tax payer then the ISA structure is saving you the grand total of £42 per year – given the annual fees come to £35 that pretty much aligns with the saving. In effect Barclay’s is capturing all the value from the tax structure, but the fee’s are too complicated for most people to work out.

Rip-off’s and bail-outs – that’s what most of the service our financial service companies are providing us with. It’s time for a new generation to rise up.

Posted in Economics | View Comments

Review #3: Square – Big Thumbs up!!

Posted on December 3, 2010 by Admin

Square is focused on bringing immediacy, transparency, and approachability to the world of payments: an inherently social interaction each of us participates in daily

“I have to admit when it first launched I wasn’t very impressed with square – the valuation seemed far too high and I couldn’t understand how they were going to avoid getting hammered for having high chargebacks, after all criminals could easily setup an account and run through stolen credit cards. After a year though I’m thinking of changing my mind: rockstar management team, giant market which needs the solution and what is starting to look like good traction in the market – are they hiring?”

Provide a free dongle to merchants so that they can use an iPhone or iPad (or soon Android) enabled phone to take credit card payments without requiring a merchant account.
Huge – an estimated 93% of commerce still takes place in the physical realm and taking payments for small merchants has always been a pain (eg minimum payments for using cards?)
Square charges a higher percentage of the transaction than standard merchant accounts. If they can scale to large volumes this will make massive amounts of money.

Square targets small, individual type retailers, who are approved based on their personal status rather than a business account. They are generating a large amount of free PR at the moment which is probably helping drive merchant acquisition

Only one (Verifphone partnership with Paypal) targeting that customer segment at the moment, and likely to be strong network effects (just look at Visa or Mastercard).

Timing is perfect, smartphones and tablets like the iPad have started to reach wide penetration and user acceptance

Have built and hired a strong team in the past year and seem set for rapid growth and development

The biggest uncertainty for me remains their ability to keep a handle on frauds and chargebacks. They claim to be using social media and other tricks to verify that somebody is really who they say they are but merchant accounts are very valuable to traditional payment solutions there must be some reason they apply such stringent checks to get setup. In addition the mobile payments landscape is rapidly changing and will require nimbleness and innovativeness in approach. Unclear when, or if, the big boys will enter the market.

Rockstar team, including one of the founders of twitter. They have done a great job hiring in the past year and seem set for success

Already closed $10M series A investment round, likely to require significant additional funding rounds to capture the opportunity globally
Series A round was closed at $40M post-money valuation. Incredibly high for an unproven, pre-pilot product but this could go all the way to IPO or acquisition so plenty of exit opportunities

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2nd review: Noca.com

Posted on December 3, 2010 by Admin

Noca is building a new online payment system to provide significantly reduced transaction processing rates for online shopping, enabling efficient processing for the full spectrum of transaction sizes.
Interesting and competitive idea but they seem to be struggling to either raise funds or get significant traction with merchants – looks like one headed to the deadpool to me… would be interested to find out if it died because of execution failure or lack of customer usage…

They have developed an online payment tool that has no fixed costs – customers enter their checking account information and the charge is debited directly from that account.

Online payments, especially micropayments, is a huge and poorly served market. For online merchants the value proposition is clear, significantly reduced transaction costs with no fixed charge (so very good for micro-transactions). Value proposition to consumers is to be offered reward scheme and secure payment platform – however requires input of bank account numbers which clients do not typically carry around with them

Website does not fill me with confidence as (I’m using Chrome) there are several style errors. Presume most marketing is currently being done directly to potential merchants

Innovative payment approach that overcomes significant issues with all of the major online payment services

The rise of virtual games and other demands for micro-payments mean this could be a segment which experiences significant growth, however progress on the business seems light to say the least with little buzz or growth in users in the last two years

Key risk lies in the acceptance of consumers to inputing their checking account information into a website with a payment system they have never used before. There are not the same consumer protections in place for identity theft from a checking account

Founders came from visa so should know something about the industry, however do not seem to have been able to build a high quality team since initial launch

Likely to require significant investment to scale up and get required traction, and looks to me like they have failed to secure funding.

Plenty of exit options, there are many large players in the space who could be interested in acquiring, such as paypal, visa, buku, etc

Posted in Mobile Banking, Startup reviews | View Comments

1st review: Seeking Alpha

Posted on December 2, 2010 by Admin

Seeking Alpha is the premier website for actionable stock market opinion and analysis, and vibrant, intelligent finance discussion. They have recently launched an app store that enables members of their site to plug into pre-tested apps which help them manage their investment portfolios

Interesting idea with large attractive market and decent barriers to entry. If they can develop sufficiently strong value proposition for developers and users could be onto a winner

Target market is high net worth individuals, money managers and other investment professionals. This is a large, rich market segment

The site makes money two ways:
1. They receive advertising dollars
2. From taking 30% cut from apps which clients buy”

Already have an established userbase of over 500k regular readers with accounts who they can use to start marketing to and to attract developers interest

Strong network effect from developers who build on top of the platform combined with large switching costs for clients who have uploaded their investment portfolios create barriers to entry

Good timing, users are becoming accustomed to purchasing apps and yet competition has not expanded too far yet

Unclear if ecosystem of developers can be built with the desire to build high quality tools valued by the readers and site members

Team seems quite dependant on the founder, David Jackson, but they have more than 50 employees indicating bench strength

They seem to be taking an ecosystem leadership strategy, developing strong partnerships with content writers, distributers and independent developers

Has raised $7M in series B funding (series A not disclosed) from backers including Benchmark capital, Accel Partners and DAG ventures. Pricing and terms of the deal were not disclosed

Could be a potential acquisition target by any of the traditional financial news media businesses

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A framework for assessing startup ideas

Posted on December 1, 2010 by Admin

You might have noticed that I’ve been away from this blog for sometime. I recently left the mobile banking startup I was working with in the Philippines and after a little bit of time out walking in Spain to recover my strength am getting stuck back into things.

I’m looking for my next start up project and I thought what better way to get on top of the latest ideas than by reviewing the latest and greatest financial service based startup ideas, so if you have any companies which have caught your eye recently please send them to me and I’ll take a look.

I remember from our Private Equity course at INSEAD a framework VC’s use to assess startup ideas, OUTSIDE-IMPACTS, and so I’ll probably use some variation of that in reviewing companies I’m looking for. The framework is as follows:

(O) Opportunity: Is this a positive present value
opportunity? (Does it have IMPACTS?)
– (I) What is the idea / industry?
– (M) Is the target market large enough to support substantial
growth / valuation?
– (P) Why does the opportunity generate a positive present
value? What is unique?
– (A) Acceptance: Will customers in that market accept / buy
this new product / service?
– (C) Why won’t the value be competed away?
– (T) Why is this a good time to enter?
– (S) Speed? How quickly can this be implemented?

(U) Uncertainties: What are major uncertainties?
(T) Team: Are the right people in place to address the opportunity?
(S) Strategy: Is the companies strategy consistent with the opportunity, risks, team and exit plan
(I) Investment requirements: Are these reasonable?
(D) Deal: Does the structure of the deal provide the right incentives for investors and management
(E) Exit: Is the deal exitable? How?

Posted in Entrepreneurship, Internet, Venture Capital | View Comments

Behind all successes are a series of failures

Posted on October 8, 2010 by Admin

Success is not about being ambitious – that is easy. It’s about overcoming adversity. In my experience, what separates the winners from losers in business – and probably in life – is how they handle disappointment.

If you strive to achieve, you will suffer setbacks, just as thunder follows lightning. As everyone knows, if nothing is ventured, nothing is gained. Inflexible entrepreneurs who imagine they cannot possibly fail are likely to suffer an uncomfortable shock when their luck runs out. What is needed is a pragmatic approach so that you adapt and rebound if events do not go precisely according to your desires. As Helmuth von Moltke, the Prussian field marshal, said: “No plan survives contact with the enemy.”

You might fail to get a job, miss a deal, be defeated in a contract battle, lose money on an investment. Remember always that no one triumphs every time; and the more attempts you make, the more reverses you will suffer – as well as victories. After all, failures are rarely fatal, and most are unimportant. There will be another company to buy, another great appointment, another race to run. What matters is your attitude to the inevitable knocks. I reflect on this because recently a project I had been working on for some time came to nothing. As I accepted the repulse, my usual set of responses kicked in: ways of stopping myself becoming disillusioned.

Initially I think back to other failures in the past, and how all the intensity of emotion prevalent then has entirely dissipated – time has cured any regret. I try to learn from a flop: what did I do wrong, what shall I do differently next time? In every disaster there is a precious element of experience.

But while improvement is essential, it pays to keep blame in proportion. Chance plays a huge role in life, so do not torture yourself unnecessarily in the wake of a mistake. And by the same token, try to avoid making so many excuses that you sound as if you’re in denial. Honestly analyse the reasons why things did not go your way, and then move on.

Family support is crucial if your career is looking threadbare. An understanding spouse will listen to your frustrations with sympathy, and allow you to let off steam at home – at least temporarily. Moreover, those closest to you will put your agony into perspective – so often we allow ourselves to get carried away with imagined dramas. For those who believe in God, then their faith will no doubt help. Try to avoid complaints and irritation in the workplace – everyone hates an incessant whinger; they develop an odour of self-pity that is most off-putting.

Do not cave in to pessimism or despair. Life is a long journey, the world is a big place, and there will be other opportunities. Of course there is unfairness, but a setback will only cause you serious harm if you allow it to damage your confidence.

Keep busy – never retreat from the fray entirely. Take exercise, research other possibilities, network furiously, redouble your efforts and seek advice about alternatives. As Winston Churchill said: “Never give in, never give in, never; never; never.”

Set new goals as soon as possible, keep occupied by planning fresh adventures, and retain your thirst for experimentation. As Gordon Moore, co-founder of Intel, put it: “Failures are not something to be avoided. You want to have them happen as quickly as possible so you can make progress rapidly.”

Coping with these hardships requires tenacity and self-belief – but nothing of lasting value is ever easy. Samuel Johnson said: “Great works are performed not by strength but by perseverance.”

Almost every entrepreneur I have met has clambered over considerable obstacles to reach their objectives. At least all these hurdles create barriers to entry, which is why highly accomplished business owners are so rare.

We live in a far from perfect world, and this is the phase in the cycle when things are apt to go awry. But educating yourself to cope with each misfortune, while soldiering on relentlessly, is the surest formula for glory I know.

The writer runs Risk Capital Partners, a private equity firm, and is chairman of the Royal Society of Arts

Source: FT Article

Posted in Entrepreneurship | View Comments

The customer experience of savings on the mobile phone

Posted on September 18, 2010 by Admin

Regular readers of this blog will not be suprised to learn that I’m extremely interested in the problem of how to make savings products for the unbanked work on the mobile phone.

So I made this short video which illustrates the customer experience for how this could work, would love to hear your comments and suggestions:

Posted in Microfinance, Mobile Banking | View Comments

Some ideas for driving savings usage…

Posted on September 11, 2010 by Admin

How can we generate savings for poor people? It’s an interesting problem I’ve been thinking about a lot recently and today I’ve been researching SMARTYPIG.
Some of the key marketing ideas which they use which we could think about:
• It’s free
• It’s good: saving saves you money (ie cheaper than debt)
• It’s safe: protected by deposit protection insurance

What’s really interesting is that they do some interesting things to drive savings usage around goal-setting, such as:
• Make savings goals public on social networks
• Auto-debit from current account etc
• Flexibility to create goals (as many as you want, for what you want)
• Customer can create barriers to them withdrawing funds
• Discounts from retailers if you use the funds to purchase from them

My favorite user quotes:
“”I LOVE SmartyPig! I don’t think I would have saved that much without the sort of ‘set it and forget it’ functionality of SmartyPig. Now I’m just addicted to watching my balance grow”.
“This is what I have been looking for. A way to save for travel by setting a goal, contributing regularly through automatic transfers, and sharing that goal in public on a social networking site. It motivates me to tighten my belt and focus on the goal.”
“Fun fun way to manage my son’s savings account – he and I are both learning about the joy of saving for something worthwhile.”
“Thank you!!!! I’m extremely excited to reach my goals…Christmas and Emergency Fund here I come!”

Of course, thinking how to translate these ideas into a mobile/SMS tool is another challenge…

Posted in Internet, Microfinance | View Comments

Why P2P won’t work for Microloans

Posted on August 31, 2010 by Admin

Interesting article here about P2P lending for MicroFinance. Zidisha seems to be operating in Sengal with plans to expand shortly to Indonesia – I’m pretty surprised they are already looking to expand to other countries as they’ve only lent $10,000 out on the platform so far so are still deep in pilot phase, will be interesting to see if they can manage pilots in two countries so far apart.

This model fixes one of the primary flaws with sites like Kiva or MyC4 which imply that your funds will go directly to the entrepreneur on the website but which in practice are merely lend to the MFI who then onlends them to any of their clients. This breaches user trust (as this details is only found in the small print) and means that it’s not really P2P – its really just a fancy marketing strategy.

One of the great advantages of this model is that it should be massively scalable. With no credit risk being taken by the institution they could scale up as fast as possible, reaching the maximum number of clients they can. They also don’t need capital to protect against defaults or need to be limited by the amount of savings of institutional debt they can borrow.

The big challenge with this model, in common with all P2P sites, is the massive volumes required for the company to break even. The profit per loan is really very small which means you need a huge loan portfolio to breakeven on your fixed costs of technology and management. You also need to spend a large sum on marketing to drive those volumes. Assuming a 50% variable margin and a $1M annual expense rate (which I think seems reasonable to me) then this means they need a $40M loan portfolio to break even – and it could easily be higher. This corresponds to roughly 1.6 million $100 loans issued per year (assuming 6 month term) which would be a massive operation (probably costing far more than my conservative estimate on costs).

Zopa, the original P2P site, is still only doing around £5MM of loans per month. If they can’t prove the model with an average loan size of around £5,000 I see no chance of it working in the Micro-space.
Regulation of P2P lending in developed markets has also been difficult to get right, there is no way emerging countries central banks are geared up for this kind of lending innovation.

That said, despite the challenges there are a number of other interesting extensions to this model which might be worth exploring:
1) Why are we just focusing on intermediating funds from the US. What about a completely P2P model whereby low income people lend to others in their community, providing an investment opportunity for them – plus these guys will know the others and could do the credit risk assessment themselves
2) Going one stage further, why even handle the cash? P2P lending is already extremely common in most poor societies – you could replicate the Circle Lending model (the most successful P2P model so far) and just provide simple mobile/web tools for tracking existing iou’s amongst clients

Posted in Internet, Microfinance, Mobile Banking, Product Development | View Comments