#ItzOnWealthTech Ep 25: How Software is Eating Banking with Lex Sokolin, ConsenSys
“Banking, as it is today, is moving sideways from manufacturing to being just a feature.”
— Lex Sokolin, ConsenSys
Lex Sokolin is a futurist and entrepreneur working on the next generation of financial services. He is the Global Fintech Co-Head at ConsenSys, a blockchain technology company building the infrastructure, applications, and practices that enable a decentralized world. Lex focuses on emerging digital assets, public and private enterprise blockchain solutions, and decentralized finance and autonomous organizations.
Previously, Lex was the Global Director of Fintech Strategy at Autonomous Research (acquired by AllianceBernstein), an equity research firm serving institutional investors, where he covered artificial intelligence, blockchain, neobanks, digital lenders, roboadvisors, payments, insurtech, and mixed reality. Before Autonomous, Lex was COO at AdvisorEngine, a digital wealth management technology platform, and CEO of NestEgg Wealth, a roboadvisor that partnered with financial advisors. Prior to NestEgg, Lex held roles in investment management and banking at Barclays, Lehman Brothers and Deutsche Bank. He earned a JD/MBA from Columbia University and a B.A. in Economics and Law from Amherst College.
Lex is a contributor of thought leadership to the Wall Street Journal, the Economist, Bloomberg, FT, Reuters, American Banker, ThinkAdvisor, and Investment News, among others. He is a regular speaker at industry conferences such as Money2020, LendIt, Schwab Impact, In|Vest, T3 Enterprise Edition, and Consensus. His writing is publicly available at https://lex.substack.com.
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This episode of Wealth Management Today is brought to you by Ezra Group Consulting. If your firm is evaluating new technology or looking to improve your current wealth platform, you need to contact Ezra Group. Don’t spend another day using technology that doesn’t offer an elegant user experience. Your advisors and clients deserve better and you can deliver it to them with the help of Ezra Group.
Topics Covered in this Episode
- Why Lex left Autonomous for ConsenSys [06:06]
- The packaged products ConsenSys is currently working on [11:42]
- Lex elaborates on his thought that blockchain plus AI equals existential change [14:18]
- Discussion around the US’ lag behind other developing nations around certain technology [20:40]
- Is it still considered blockchain if it’s controlled by someone like Facebook or a bank, as opposed to being a completely decentralized network? [21:19]
- Why wealth management software is going to matter less and less [26:52]
- Cross-selling and whether or not it is necessary to maintain profitability [31:03]
- Online RIAs – are they just buying revenue, or will they take over the market? [33:50]
- Will the idea we have of banks now go away, as banking becomes ubiquitous everywhere? [37:13]
- Who is best positioned to benefit from artificial intelligence [40:11]
- Abstract poetry comics [46:35]
Companies & People Mentioned:
- Acorns [28:38]
- AdvisorEngine [04:40]
- AllianceBernstein [09:43]
- Autonomous Research [06:01]
- Barclays [06:35]
- Betterment [06:51]
- Bitcoin [23:17]
- Charles Schwab [21:19]
- Coinbase [35:32]
- ConsenSys [03:38]
- Deutsche Bank [09:20]
- Ethereum [23:19]
- Fidelity Investments [21:18]
- Goldman Sachs [09:18]
- GreenSky [39:11]
- Invest in Others [25:11]
- JP Morgan [41:55]
- Lehman Brothers [06:33]
- Lemonade [28:54]
- MoneyLion [30:55]
- NestEgg [04:39]
- OnDeck [28:41]
- Quovo [37:56]
- Revolut [29:47]
- Rich Cancro [07:28]
- SoFi [28:40]
- WeChat [08:37]
- Yodlee [37:56]
If you are interested in more information about some of the topics Lex and I discussed, these blog posts would be useful:
- #ItzOnWealthTech Ep 21: Zen and the Art of Artificial Intelligence with Davyde Wachell from Responsive
- A Consultant’s View on the Leading Vendors in AI for Wealth Management
- 6 Ways AI is Helping Build Consumers’ Confidence in Banking
- Will AI be an Advisor’s Best Friend or Worst Nightmare?
Complete Episode Transcript:
Craig: Welcome to this episode of Wealth Management Today. I’m here with my guest Lex Sokolin, the Global Fintech Co-Head at ConsenSys. Hey Lex.
Lex: Hey there, good to be here.
Craig: It’s fantastic for you to be here! We’ve been trying to organize this for months, and I’m glad we finally got onto your busy calendar.
Lex: Of course. I think you were probably talking to my various robot personas.
Craig: I know, it’s hard to get through all the chatbots you have set up to protect your personal space and your business schedule. But I managed to get through them.
Lex: Not an exaggeration.
Craig: That’s right. And you just had a baby, mazel tov on that. I know that keeps you busy as well, and you’re probably very tired.
Lex: Thank you so much. Yes I’m awake all the time, and I think that’s going to be the case for the next 20 years.
Craig: That’s why I’m constantly seeing tweets from you at weird hours of the night. And you’re located in London?
Lex: Yes, I moved to London around three years ago. I grew up in New York, I built NestEgg and AdvisorEngine out of New York and spent a lot of time in that fintech ecosystem, and was looking for another flavor of an experience. Outside of the US, London is Europe’s fintech capital, so there’s a ton of learning you can do about what people are interested in and what they care about. It’s very different from the US, so that’s been nice. And also, Brexit has been fun to watch because as an American it’s more of a comedy show than a terror movie, so that’s been alright.
Craig: You’re the first person who I’ve heard say Brexit is fun to watch. Most people, even if they’re not UK residents, are a little worried about it. But I’ll take that. I love London, I’ve been there a bunch of times. One of my three daughters, you have two daughters so you’re catching up to me.
Lex: I have a son and a daughter, so one of each.
Craig: I have one daughter who is going to college in London, so it’s definitely a different college experience from being in the US.
Lex: Yeah, I think there are less sports.
Craig: That’s one of the reasons, less sports. No football experience, or at least the whole American football experience. You’ve just joined ConsenSys after three years at Autonomous and building that practice up. So give me a quick overview of ConsenSys for people who aren’t familiar with that, and then tell me why you left Autonomous and went to ConsenSys.
Lex: Sure. I spent a long time in wealth, at least considering the length of my career it was long. I started at Lehman in the wealth business, went to Barclay’s and was in a strategy role there for a private wealth division, and then in 2009 started a robo-advisor, which was pretty early for that. Which sometimes is good, sometimes it’s not. John at Betterment I think did a great job. I have a ton of fun learning how to be an entrepreneur, getting the scar tissue of what it’s like to think about your customers and how to design screens and how to sell things when you’re an introverted person, building up that skillset, raising money and so on. And then in the second iteration of that with AdvisorEngine with my partner Rich Cancro, it was the grownup version of a wealth platform. How do we build a chassis that’s enterprise and institutional, and not a point solution. If you look at some of the competition today, that’s where they’re having trouble, is scaling out robo-advisor apps versus the digital wealth chassis. After doing that for a meaningful amount of time, I was starting to get interested in what are the other innovation frontiers that are happening just in technology overall? So that’s artificial intelligence, blockchain, virtual and mixed reality, banking as a service and the APIs there, digital lending, you can go on and on.
Lex: And then the other dimension is what is happening in the other industries? Because when you’re looking at wealth and only wealth, what you’re missing is the fact that China, in four years, has a chat app with 500 million users and the world’s largest money market fund embedded into it, and you can send money through that app, which also has payment rails attached – WeChat. Or that the largest video game company in China, Tencent, is also one of the largest underwriters for personal loans. So I joined Autonomous in 2016. Autonomous was an equity and research firm, where my clients were primarily large money managers, so people running large mutual funds and hedge funds trying to decide is it Goldman Sachs or Deutsche Bank. That decision is a little easier today, given what remains of Deutsche Bank, but you get the point. And so it gave me an opportunity to develop some strong mental models across these things, which was basically a cheat sheet for how to think. Luckily for me in a sense, within three years Autonomous ended up getting bought. So AllianceBernstein, which you might know is an asset manager but is also a research shop, bought the company last year. And I was excited for that moment because it let me look again for a place where I could operate, get my hands dirty, and get back to company building, which is what we’re doing at ConsenSys. That was a long windup to ConsenSys there…
Craig: It was, but that’s fun. It’s good to hear that background and understand. I mean, I like to understand the thought process personally.
Lex: Yeah. I think it’s helpful for folks to sometimes get shaken up and pulled out of their day to day industry process, because there’s so much interesting stuff going on externally. And out of all the research that I did at Autonomous, the place where I got infected in my mind and where I landed on was blockchain and artificial intelligence. Those are the two, in terms of existential change: what finance is, how we access it, who gets to, when, and how. To simplify, artificial intelligence is going to primarily help distributors. It’s going to help distributors shift from finance firms to tech firms. And then blockchain is going to change manufacturing; it’s going to change how you make the product, how that product is stored, where it lives, how you package it, where the software is to manage it, and so on. And so ConsenSys is one of the largest firms in the space. It has a number of fintech initiatives around digital assets, around decentralized finance, and enterprise blockchain. So we’re working with big finance firms to put initiatives in place, and I’ve joined to co-head the product company around those fintech solutions and kind of package it, stand it up as a strategy, and put it out to market.
Packaging Wealth Products
Lex: So for example… let’s cut through the lingo. Digital wealth is about taking traditional investment product, like ETFs or stocks, and putting it into a portfolio, applying software to it, and then helping people access that traditional product set using mobile apps or websites. That’s fintech or digital wealth. So digital assets are the opposites of that, where you are starting with the question of what is the actual thing you hold? How do you hold the security? Where is it custodied? Where is the information about the share certificate sitting? How do you divide that share into different pieces? What if it’s not a share, what if it’s a piece of the building? What if it’s real estate? Or maybe it’s commodities, maybe it’s gold, maybe it’s a horse. How do you own one-thousandth of a horse? So it’s this fractionalization of assets. As a wrapper, I’m going to use the word token (even though I think a lot of people now have allergies to the words token or crypto or coin or any of that), but the technology wrapper is a token that represents that underlying asset.
Lex: Then the magic thing about these tokens is that they have a whole bunch of properties out of the box that are transformational for the investment industry. So custody and settlement can just go away, because it is inherent in the technology itself; it is an attribute of the fund or the share that it has custody of itself. Other things start to attach as well, like the ability to do dividends, the ability to quote, the ability to potentially send payments out or self-rebalance. Any number of functions you can start building into the instrument. So that’s the asset, and digital asset is figuring out how to rebuild finance from that starting point. So all of the product offering at ConsenSys is thinking about how to reimagine finance on blockchain infrastructure using digital assets across the different asset classes. And that’s a hard question. The pace of it is different, depending where you look. Sometimes it might be in payments, sometimes it might be in commercial networks, sometimes it might be in real estate, sometimes it might be in asset allocation, but you just have to go with the demand.
Craig: Gotcha. So let me go back to something you just said that I thought it was interesting: blockchain plus AI equals existential change. And you said AI will help distributors shift from finance firms to technology firms. So do you mean that their traditional roles as financiers and focusing on wealth is going to change and they’ll be focusing on becoming more of a tech firm model, or what do you mean by that?
Lex: Sure. So I think some of this of course is a rhetorical point, and the first points of pushback are going to be around what is the time-frame of what you’re talking about. But I think there is a strong underlying trends around what’s happening to financial products more generally. We’re going from this world where being the manufacturer of this factory of product is important to a world where finance is just embedded into everything; it’s just a feature. Like Amazon has thousands and thousands of features. You can buy toilet paper, you can subscribe to movies, you can get things shipped in a few hours, you can also bank there, you can have a wallet with money, you can get a card, or you can get a loan. If you’re a merchant and you sell on Amazon, you can get underwritten by Amazon. So there’s nothing special about finance product for Amazon, it’s just one of the very many features. So what artificial intelligence does is it accrues data and then decision-making in an automated way to the tech companies. Tech companies today have a lot more data on people than most wealth managers.
Fintech vs Banks
Lex: It depends. I could take on the challenge and say from Facebook data you can probably impute people’s financial statements. If you scan people’s photos for the objects that they have, for the vacations they take, and for the number of children they have, on average you could manufacture a pretty accurate financial situation.
Craig: That’s very interesting, I never thought about that. So you’re saying that just from photos, based on what kind of car they’re driving, what kind of house they live in, what neighborhood they’re in? I’ve seen that kind of data looking at directional or GPS data: knowing where people go to work, to school, where they live, you can impute a lot of information. But looking at the objects in photos based on their value, you could figure out what their wealth is, or at least what their income is.
Lex: And you’re going to be wrong a lot of the time, but on average you’re going to be pretty close to right.
Craig: If you’re directionally right enough, that’s all that matters.
Lex: Yes. A bank can’t go the other way. From your credit card statements it might be able to know the things you buy, but it’s not going to know your personality and your emotional set, and those kinds of things.
Craig: Not until we get the emotional bots that can look at your facial features and know when you’re smiling or when you’re frowning, or the micro changes in your muscles that determine if you’re upset or things like that.
Lex: Well this is the fun thing, in the US this is still kind of forbidden to talk about, but it’s not cool to be tracked in that way. Even though I’m sure your phone does it; you authenticate into your phone and it knows if you’re happy or sad. And when you yell at Amazon Alexa, I’m sure it knows when you’re angry.
Craig: If I had one it would, but I don’t have one. The phone’s listening all the time, it has multiple microphones just for that reason.
Lex: You think you don’t have one!
Craig: Are you saying that there’s one somewhere hidden in here? What’s ConsenSys doing that I don’t know about?
Lex: Watching. But in places like China, this is not a hypothetical. One of the coolest things and super interesting things that has come out recently, and also, of course Chinese news that you read in the western media is filtered as is meant to make an impression, but it’s an interesting progression. So in the US you’ve got your credit card, and people are used to swiping their credit card and now finally you’re inserting your credit card or maybe you’re tapping a credit card, but we’re still kind of stuck with our payment experience. In the East, you didn’t have credit card penetration. So the hack or the solution that came around is a QR code. The same as if you go to a Starbucks and scan the app; you take the phone and you scan what looks like a little digital, pixilated square. For a long time that was the default method of payment in China, even for physical commerce or street vendors.
Craig: Even street vendors you can’t use cash, you have to use WeChat!
Lex: Exactly. Now what’s happening today is that the QR code is being replaced by your face. So you’re going to a merchant, the merchant goes to one of these three AI tech companies (and they’re all backed and controlled by the Chinese government at the end of the day, which has all the data that there is period.), and these tech companies will outfit a merchant. So you’re going to go buy your sandwich, you don’t need your wallet because they’ve got a camera that just snaps your face and your face is your QR code. Which of course it is, you’re a human being. There’s one of you in the physical world, you’ve got unique DNA, etc. Right? So now the technology’s in that place where it says, you are your own password. You can put aside all this stuff about hacking and pretending and stealing identity, those are all real concerns, but that is happening today. It is not science fiction, that is what people are doing. And in the US we’re still arguing about absurd things, like wagging our fingers at Zuckerberg for exposing data in 2012.
Craig: So what you’re saying is this is very common in other developing nations where they don’t have the latest technology, which becomes an advantage because they don’t wind up having all these legacy systems like we’re stuck with. No legacy credit card systems, they just skip right over it and go to QR codes, or skip over that and go right to facial recognition. We’re still three generations behind.
Lex: Exactly. If you want to make it real on the wealth management side, if you are running a practice and you’re multi-custodial and let’s say you hire somebody to come in in the morning and look at the reconciliation system, and one option is priced one way at Fidelity and another at Schwab – this is your life. Or the money hasn’t hit, where’s the money? Let’s get on the phone to figure out where the money is. This is life in the US. Now imagine a world where either Facebook or again the Chinese government or some Eastern European nation or France, all of these are potential locations, just has a single data set and shared workflows for wealth management data and investment accounts. And these things are called blockchains and they have one source of truth, and they have one set of standards for investments and one set of standards for payments and one set of standards for workflows. Sometimes they’re agreed on by the industry bodies themselves, so this is something that Fidelity and Schwab and others can do together as an industry, or it could be (I’m going to pitch right now to the 10,000 RIAs that listen to your podcast) all the RIAs could set up their own node and create their own blockchain network on which data travels, and they could shift the power in the industry towards the independents, because they could decide what the standard is.
What is a Blockchain?
Craig: Well, I think we’re a ways off from that. It needs to be a plug and play type of device to do that. I mean, even banks aren’t moving to blockchain entirely, they’re still experimenting. Now we’re getting into some areas where I’m a little peeved off, but is it blockchain if it’s controlled by someone like Facebook or a bank, as opposed to being a completely decentralized network?
Lex: I would say best there’s public blockchain, which is depending on where you come from, you may think in the long run, that’s the only feasible solution, and that that can only be open. Public blockchains are how Bitcoin and Ether exists. Public blockchains are very hard to tamper with, so you could say they’re the only places where scarce digital goods exist. But at the same time, you can have other things; you can have a permission public blockchain. So for example, for certain data you could encrypt it and then give keys only to certain consortia, in order to kind of unlock the full functionality. So you can benefit from billions of dollars that go into mining and securing these networks, but at the same time have data that is private.
Lex: Or if that’s still too much exposure, you could say, “I’m going to take the same technology, but instead of defending against unknown parties and my consensus mechanism, what I’m going to do is say, we know who you are based on your access to the legal system. I know you’re the Fidelity legal entity, I know you’re the UPS legal entity, and only through those nodes can do transactions. But in my mind, all of those are steps in an interesting direction, they’re all governed by tradeoffs, and they are all different from a shared database. Even the most private permissions, custom-built blockchain is different from a shared database, because it runs on the same standards that the public chains can run on, and can run software that you could port over from the public chain. So you could avail yourself to the type of innovation that thousands of developers are doing every single day, but still retain control.
Craig: I want to take a little break from this episode to talk to you about one of my favorite sponsors, the Invest in Others Foundation. Invest in Others is a non-profit, you can find them at investinothers.org. They look to raise money and give out awards to charities that are sponsored by financial advisors, so it’s financial advisor’s favorite charities and charities that they spend a lot of time supporting. Invest in Others looks to get sponsorships from the industry and funnel that money to advisor’s favorite charities. I like this non-profit, I think you should take a look at it. Again, that’s investinothers.org. They have a couple other programs: one is a Grants for Good program, delivering money to different needy organizations and needy groups. They’re also starting a corporate awards program, which is going to be a little bit different but still within the industry and another way for financial services and wealth management corporations to help donate money to people in need. I like Invest in Others, I think you should take a look at them at investinothers.org.
Craig: So going back to wealth management, I want to jump right to the controversial thing that you wanted to talk about, because I think it’s an interesting topic.
Wealth Management Matters Less
Lex: Don’t make me be mean.
Craig: Yeah, go ahead. So wealth management matters less and less. Is that related to what we were just talking about, or is there a different reason why wealth management software is going to matter less and less?
Lex: This is a separate and actually less speculative point, and I am somebody who has built quite a bit of wealth management software and found it to be very important and democratizing. So I wouldn’t say that there is not power inherent in automating more of wealth management; there still is. It’s just that we’re now in a place in the cycle where the next platform and the next platform have launched. And we’re also in a place where the other verticals that experienced the exact same vector of change, identical vector of change, those verticals are converging and bundling in a way to make wealth management a components and less individually important. So what’s the vector of change? The vector of change is take a human process, turn it into a machine process, and put it on a mobile phone or the web. Wealth management software. Or empower advisors to run their practices more efficiently, instead of using paper use online account opening and online risk assessment.
Lex: So that exact same thing happened in digital lending. Instead of going to your bank to get a loan, you go to their website and you get a loan on that website. Or you empower lending underwriters in a branch to open accounts without paper using the web interface, and to underwrite using a model that’s controlled by the bank centrally, right? And in insurance with insurance agents, and so on and so forth. So in each of these verticals you’ve now stood up a champion; in wealth it’s going to be Betterment, Schwab, and maybe Acorns. In digital lending, it’s going to be SoFi, On Deck, those kinds of businesses. In payments you’ve got Venmo and Square cash, and in insurance you have things like Lemonade. And what the Europeans are doing is they’re exporting banks to the US. So in the way that in the US wealth management is prestigious and systemically works, in the UK and Europe banks are like that. They have a retirement system guaranteed by the government so they’re not all going broke and dead at the age of 65, so they’re much more worried about FX and banking.
Cross Selling is Key
Lex: So all of these different industry champions, they all have millions of customers now and they’re all vastly unprofitable. So the solution to being unprofitable is, let’s sell more stuff. And the stuff that they’re selling now is cross-industry. So you go to Acorns, you get PayPal and you get a credit card. You go to Betterment, you get a bank account. You go to Revolut, which is the UK’s biggest neobank with a couple of million users, you get payments and banking and cryptocurrencies, and I think insurance is one of the modules. And 26, the German one, definitely has a roboadvisor and insurance. SoFi, the student lender, has wealth and insurance and mortgages, right? So in that context, where hundreds of billions of dollars are propping this thing up and the only outcome is for them to keep getting more whole-featured, I think the importance of any individual wealth software, like let’s build the best tax-aware rebalancing software, or the best goal-based planning software, on a local level that’s meaningful, but on this global landscape it’s just not enough to counteract that force.
Craig: One thing that I’ve noticed is a lot of these firms are all migrating to the same group of services, but they’re coming at it from different directions. Whereas Acorns came at it from micro-payments so micro-savings, then added banking and wealth and MoneyLion started out with lending and then added wealth and payments. So they’re all moving to the same broad group of services. Is that what you’re saying, that everyone’s got to sell all these things in order to be profitable, or they’re never going to be profitable and it’s just all going to explode. If they have millions of customers but they’re still unprofitable, selling more stuff is not going to make it better. It’s like, I’m losing money in every widget so I’ll just make it up in volume.
Lex: It’s cross-selling, but it’s designed in a much more integrated way at the core. So it’s not like I’m doing investment banking business and once in a while I send a wealth management referral. It’s my client comes to me for all of their financial needs, and they’re all served in a phone app that takes about half a second to load. It’s not like the 80’s, where you’ve got paperwork and maybe cross-selling will materialize. It’s at the very core of the services, they are full financial assistance. As the client bases and the data within these companies grows, I think they are betting that they’re going to continue to get more customized and know better and better what clients need. There’s also this kind of intergenerational bet that I’m sure you’ve heard said thousands of times, about these clients becoming wealthier over time and having broader needs over time, so getting their attention early is valuable. Whether or that is true, it actually doesn’t matter, right?
Lex: Because you take any business that’s getting some amount of traction and you give it $250 million of softbank backing, and they can figure out how to spend that to buy revenue. So the fact that so much of this stuff is happening in the private equity markets and that there’s not the filtering mechanism of going public to make a real business, just means that these bets are going to continue until they’re worth $10, $20, $50 billion on the private markets. And at that point if some of them die, who cares? Because you’re still going to be left with one or two standing, and those one or two standing are going to do the thing that everybody’s converging to, and they’re going to do it, I think, fairly successfully.
Is Betterment Buying Revenue?
Craig: I want to come back to your fellow Columbia alum, Betterment’s John Stein. So are they just buying revenue? I mean I see Betterment as never being able to succeed or be able to pay back their VC funding, because it’s just an online RIA basically, there’s nothing special about them. So is that something you agree with, or do you see them as eventually becoming unicorns and taking over the market?
Lex: I’ve got nothing but admiration for John, I think he’s done a bang-up job innovating in the space. And I think if you look at what people wrote (including me) four or five years ago, they said you reach 10 to 20 billion in AUM and you’re going to be breaking even, and these guys have done it. So they reached 15-20 billion of AUM and they’re breakeven. So even though there is a capital stack on the venture side, it is under pressure and it needs to return three to five times the valuation. At least everything they do now from now on is gravy, and at least everything that they do from breakeven forward makes them seem more right. So any traction they have on top of the breakeven is going to make their investor decks look and feel strong. And then number two is, because of that scale and that brand level, they’re going to have opportunities that are higher NPV opportunities, right? So if they wanted to go into supporting security tokens, that would be easier for them. If they wanted to partner with Coinbase, which is now worth 10 billion bucks, that would be easier for them.
Lex: If they wanted to offer insurance, that would be easier for them. And I think if you look at the numbers for adding products, they’re not trivial. In the banking product, if you’re able to take a 2% spread, a 2% spread is 200 basis points, right? So again, all of these additional things are gravy. But a unicorn valuation’s not sufficient, and Betterment I think is a pretty conservative example; SoFi is the much more aggressive examples. SoFi has raised I think 2 billion bucks from solving. That’s an oversimplification, but give or take. So are they going to be able to come out with $20, $30, $40 billion public market valuation? That is a heavy lift to do. So I think that’s a question mark, but it’s sort of like it doesn’t matter, because there’s still capital on the sidelines to keep funding that growth. And if you’re in a break-even position, you’ll get more capital to get even bigger.
Craig: I’m trying to summarize what you’re saying here – that there’s so much capital that they don’t care if some of these firms aren’t profitable, they’re buying their revenue and funding this development, because they expect someone’s going to be successful out of all these different firms. But one question I wanted to ask was, will the idea of banks that we have now go away because we don’t need them, as banking becomes ubiquitous everywhere?
Lex: Banking, as it is today, is going sideways from manufacturing to being a feature. And what that means is that banking as a service, as here’s where you put capital and you get interest back or you get a payments part back, that’s just a thing you access with APIs. As a theme, that’s about three years old. A number of Silicon Valley companies have leaned into it, and if you think about data aggregation companies like Yodlee and Quovo, this is the next step of that theme right. So let’s say you look at the long tail of banks in the US; not the top 10, but the next 8,000. You build a software that is able to open accounts in 100 of them. So now you are providing an API, one point of access, and you can place money across any number of accounts, they’re FDIC insured, and they all have their own costs and connectivity for money management, money movement, account management, payments, and things like that.
Lex: And then you can plug in that banking products without being a bank into whatever you want. It can be an airline flight, a trip, or insurance and travel site. Same thing’s happening to insurance and the example there is maybe Kayak wants to sell you travel insurance through an API gadget that they built out. Same for wealth, right? If you pull in through APIs the ability to open accounts. Same for lending and credit. Right now one of the fastest-growing fintechs in the US is called GreenSky, and what they do is sell loans through home improvement contractors. So you need something in your house, the contractor comes and says this is going to be $15,000, and they come with an iPad and you can get a loan right there for that work. GreenSky powers the platform, and they get the underwriting from banks.
Point of Sale Lending
Lex: I think everything is in point of sale. Everything lives inside the moment of intention and the moment of intent, right? That’s why the tech companies are so powerful.
Craig: I like it; the moment of intention or the moment of intent. Everything becomes an impulse buy; get a loan, get a product, buy this, buy that, get a loan.
Lex: You’re getting me depressed.
Craig: You’re the one who moved into this area, not me. Let’s talk about who is best positioned to benefit from artificial intelligence. Are wirehouses best-positioned to benefit from artificial intelligence. And if so, why?
Lex: Artificial intelligence is a second-order effect; it’s a derivative of the cloud and the data that’s captured in the cloud. If you are not running your software in the cloud, and if you’re not capturing customer activity and data and things that are changing in that cloud, there is no AI to speak about. And then for AI to work, what you need is hundreds of thousands of data points. So if you want to teach a robot to tell the difference between a cat and a dog, you better have some pictures of cats and dogs. This is why the internet is good; there’s a lot of pictures of cats and dogs, therefore Google knows how to tell them apart. It’s impossible for me to imagine small practices in wealth or in any industry being the builder of the software. The natural builder of the software is a massive company with millions of customers, and that’s also who can afford to hire the talent for it.
Lex: So the way you kind of see it happening is of course Google, Facebook, Amazon, Apple. But outside of those it is JP Morgan, Goldman Sachs, maybe some of the Spanish banks, have been more aggressive around these fintech investments. And it’s hard to be a public company and do these well, because your hedge fund investor says, “How’s this going to help you next quarter? How much money are you going to make from spending $3 billion on AI?” And the answer is none for 10 years, and then a whole lot when everyone else dies. And that’s not something that being a public company affords you. So there is this dynamic, but some companies have been able to get out of their own way and invest, and JPM and Goldman have been leaders in that. Just look at Deutsche Bank, right? Deutsche Bank’s response to, “We don’t know how to run our business,” is to say they’re going to lay off 18,000 people and then invest $13 billion in technology. You don’t even have to think about any content or substance of what it means to invest in technology because I don’t know if they know what they mean, but the messaging of that is enough to tell you where the direction’s going.
Craig: So is that the right thing to do and just bad messaging, or is it also the wrong thing to do?
Lex: I’m biased. I’ve been an entrepreneur in the space, and I think the most interesting stuff is the frontier. So I’m probably earlier to trends than I should be. That said, I think these small channel experiments or these, “I’ll give the hard tech thing to my intern and see what they do,” is the totally wrong approach, and that the only way to do it is to do it seriously as a transformation project, and to imagine the full scope of what an AI or blockchain or any of these things can do, and committing to thinking about the whole thing running on that type of infrastructure. Because anything less is not going to move the needle. So I think it does make sense to invest $13 billion in tech for sure, but I think they made that decision a little bit too late.
Craig: So they can’t catch up?
Lex: Most likely what happens if you can’t catch up is that you rent the software, right?
Craig: They’ll get it one way or the other.
Lex: Yeah. So you rent from IBM or Google or someone like that.
Craig: Then would that be a better way to do it, rather than trying to build it yourself? That’s not their core competency. Even JP Morgan or Goldman, their core competency isn’t AI systems.
Lex: That’s totally fair, I agree with you. It is a business line by business line decision. So let’s say you’re running a capital markets desk and you have some smart ones, and one of the things that they’re able to do is use AI in augmenting their trading strategy, or not even their trading strategy but how the trading order routing happens. So make a more efficient implementation of the trading process, yeah do that yourself for sure. Should you try to replace Google or Facebook’s machine vision? Probably not, take that off the rack. The danger is if you do nothing, then you’ll just get commoditized out, and all you can do is provide banking products to the tech provider.
Craig: Isn’t that happening anyway? You said banking’s going sideways, so aren’t they all being commoditized out anyway? Is there any hope for them?
Lex: I think the middle and the long tail are the ones that are under pressure in the way that I described, I think the types of organizations that are making the investment now, either will get lucky in how their investments turn out. I think those types of organizations will look more like tech firms in the future. And we see this happening in the messaging too, right? Every bank you know of has come out and said we’re a technology company, which just shows you how people are thinking.
Craig: Indeed. We’re running out of time, I want to get a couple of quick questions. So I was on your website, lexsokolin.com, and I noticed a link to abstract poetry comics.
Lex: Is this an accusation?
Craig: No, I’m interested. What is abstract poetry comics. I looked through it and I didn’t understand what it was.
Lex: On the side I do a lot of visual arts, and the visual arts that I do are abstract. And I tend to use technology to make the visuals. The comics part is pretty straight-forward; if you put panels or pictures in order and you put words under them, that tells a story. And you can call it comics or narrative or graphic novels, but deep down at our core that’s how we communicate, is through visuals and language. If you look at the first cave painting, it’s the same thing, it’s a comic. So my avante garde, visual art approach is to try and combine some of this fresh abstraction with writing a story.
Craig: I think it’s awesome. Steve Jobs was one of the first ones to combine technology with art, and see that those two things can be combined, and make them better. So trying to get out of the focus of pure tech and then merging it with art in some way, I’m a big proponent of
Lex: You’re being too kind with your comparison, but I would put a follow-up on that. I’d say the older I get and the more confident I am in my career, the more I allow my eccentricities, to flow.
Craig: Why not? And with that, I’ll say the newly named Lex, now going by one name on Twitter. Lex, right? So you’re now a one-name celebrity. Lex, thank you for being here! I thought this was a great conversation. We covered a lot of ground, and I appreciate it.
Lex: Awesome, thank you so much for having me. Always a pleasure. if anyone wants to check out, I’ve still got a weekly newsletter that I try and keep up called Future Finance. You can get it off either that site that Craig mentioned, or off my Twitter. I talk about all this stuff daily, it’s just sort of a slice of my brain
Craig: When I post this on my blog I put a full transcript, and I’ll put links to all these things as well.
Lex: Amazing, thank you.
Craig: Great, thanks Lex!