“Games are a stepping stone,” said Brian Mehler, who runs the internal venture-capital division at EOS VC – the arm of Hong Kong-based blockchain company Block.one.
The first generation of games for mobile phones had huge spillover effects. “Games like Candy Crush got people hooked on using mobile apps,” Mehler told DigFin. “Then banks noticed everyone was inputting their personal data to their phones.”
With a warchest to invest, Mehler is in charge of how Block.one uses its assets to invest in projects using its EOS technology.
Block.one came to prominence in early 2018 when it raised a whopping $4 billion in an initial coin offering (an unregulated capital raise, usually to back the promotion of a digital asset, in this case the EOS token).
That fund-raising was conducted via the crypto-currency ether, the token associated with the Ethereum blockchain. Block.one allegedly switched most of that windfall into fiat currencies before the price of crypto-currencies collapsed in later 2018.
It would make a snappy headline to say Mehler is the man investing the $1 billion that Block.one dedicated to venture investment.
Games are a stepping stoneBrian Mehler, Block.one
He’s not; that’s his boss, Mike Alexander, CEO at EOS VC. (Block.one executives declined to detail their treasury operations other than to say they run a diversified book.)
But Mehler joined the firm in early 2018 and was tasked with running the venture division before Alexander joined in July (Alexander was previously Asia CEO at brokerage Jeffries). Mehler, an experienced private-equity investor and operator, helped Block.one’s management establish the partnerships through which Block.one does invest most of its $1 billion of venture capital.
Today those partners include Galaxy Asset Management, a U.S. digital bank; FinLab, a German fintech investor; and SVKCrypto, a globally dispersed investor in blockchain and crypto-currency technology. They account for about $700 million of the total $1 billion VC pot.
Today Mehler is responsible for running the internal EOS VC portfolio. Which at approximately $300 million is still very big, particularly when he co-invests in deals sourced by the firm’s partners.
“For six or seven months, it was just me, running a $1 billion fund,” Mehler said.
We want to see companies use blockchain to improve settlement timesBrian Mehler, Block.one
(The gist of EOS versus, say, Ethereum is that it operates a hybrid model of incentives that are only partly decentralized; the result is a blockchain network that is faster and more scalable, but with different security and privacy features versus those of a fully public blockchain: see here for a background on Ethereum, here for one on blockchain, and here on EOS.)
The firm wanted to spread its funds among partners partly because it is pursuing decentralized computing, and therefore wanted to pursue a decentralized model of investing, too. Galaxy and FinLab in particular have lots of finance-industry connections, so they focus more on explicitly finance-related projects.
The long game
But Mehler and EOS VC’s direct investments reflect a different approach to the eventual mass adoption of blockchain as a technology underlying everyday commerce.
One project, for example, is what Mehler terms a ‘non-fungible token’. This is designed to solve a problem in gaming: you buy (with fiat money) something in one game – a magic sword, or an avatar skin that makes you look like Brad Pitt (not to be confused with a DigFin editor) – but you can’t transfer that item to another game. (A problem DigFin considered here.)
In language that financial execs would understand, gaming doesn’t have standards.
A non-fungible token is meant to allow compatibility and develop standards, using smart contracts under the EOS framework. Mythical Games, a company set up by the creator of the highly addictive shoot-em-up Call of Duty, is working on a solution using EOS (with EOS VC investing via Galaxy, along with other backers including OK Coin and Fenbushi Digital).
How to mainstream blockchain
“Games lead to mass adoption,” Mehler said. “It’s not about trading tokens. It’s about the underlying technology that removes a pain point.”
He believes games will move to small transactions and payments – by making, say, online ticket sales trustworthy and immutable, with smart contracts guaranteeing delivery versus payment.
EOS VC is working on this type of solution with a company in New York that Mehler declined to name. But from games it’s but a small step to much bigger payments for, say, airlines or other mass-market corporations. Eventually this will reach financial transactions – authenticating a consumer or a merchant, keeping track of everything that’s transacted, making it all transparent to consumers and sellers.
“We want to see companies use blockchain to improve settlement times,” Mehler said. “Transactions already take place instantly, but but settlements are slow, because there’s a lack of trust.”
But for specific financial applications, Mehler pointed to partner funds such as Galaxy and FinLab. “Block.one is not envisaging the future of banking,” he said.
A few other takeaways
- EOS VC invests across the deal curve, from seed to Series D, including a $30 million Series D investment in Everpedia, a for-profit company running an online encyclopedia (founded by one of Wikipedia’s co-creators). EOS VC’s coinvestments with its partners are not so much about getting a bigger allocation, Mehler says, but to show Block.one’s commitment to the underlying project.
- Companies developing projects that provide services or functionalities attract a higher valuation than a dApp (decentralized application). For example, a company making it easy for people to access a service can scale that to other protocols other than EOS; a dApp’s addressable market is smaller, and the dApp has to prove its popularity.
- It’s hard to put a value on these companies because none has a long track record and there’s no more than 10 years separating any given project from another. Sometimes small, publicly listed companies can serve as a benchmark, but not enough to project discounted cash flows. In general, says Mehler, “Valuations rise because your project is making someone operate more efficiently.”
- He does not compare blockchain to the internet of the 1990s; he compares it to the Apple app store of 2008, when the iPhone made its debut. The only apps available were static experiences and rudimentary. It took games to get people addicted to their phones – and comfortable with using them to spend money and interact with strangers.
- For this reason, it may not make sense to ask whether there is an Amazon of the blockchain world. Mehler says comparing blockchain today to the 1990s internet is wrong because it ignores so many dot.com failures. For example, in the 1990s, many startups had great ideas for undercutting brick-and-mortar retail. But they failed to account for the price of oil, which affects jet fuel prices, which affects the price of shipping. The online sellers had to compete by offering free shipping and free returns, and a hike in oil prices wiped them out. Mehler implies (without explicitly saying) that today’s blockchain startups are likely to meet a comparable fate. If there’s an Amazon for blockchain, though, he reckons it’s in data underlying healthcare and drug R&D – but it will take years and very deep pockets to see who wins.
Cloud, A.I. and new possibilities for finance
Incumbents are starting to get the hang of this fintech thing.
For many financial institutions – the incumbents – the tech wave has often seemed overwhelming. And the pace of breadth of change is unprecedented. But banks, asset managers, brokers and, insurance companies are increasingly finding opportunities.
New business models are creating new opportunities to massively expand the pie, with cloud computing among the most vital of these foundational technologies. Here is a sample of some of the most interesting updates DigFin caught during Day Three at the Singapore Fintech Festival.
Wholesale markets going digital
Kate Birchall, head of Asia Pacific at clearinghouse LCH, says technology is now taking over from regulation as the main driver of change in interbank markets for derivatives and finance. Post-2008 financial crisis, banks have been consumed with new regulation, but now they are implementing new technology to comply more efficiently. “Banks keep cutting costs in processing and in reconciling trades. Tech is now at the forefront of trading at the institutional level much more cost-effectively.”
Kelvin Tan, head of innovation for treasury and markets at DBS Bank, said, “One of the least value-added activities banks do today is reconciliation.” Right now the focus is on deploying artificial intelligence to improve the situation. Over the longer term, institutions may adopt blockchain to eliminate reconciliation altogether, or at least standardize processes to make them manageable.
More technology companies such as SmartStream Technologies are providing services to help financial institutions grapple with the challenges of reconciliation.
SmartStream offers its TLM OnDemand, the market-leading functionality of its TLM solutions through secure, resilient, cost-effective and fully managed web-based services. “TLM allows middle and back offices to process transactions,” said Haytham Kaddoura, SmartStream’s CEO. “Clients gain a lower total cost of ownership for their operations, while at the same time improving risk control throughout the transaction lifecycle.”
BNP taps IBM for hybrid cloud
Bernard Gavgani, group chief information officer at BNP Paribas, says the bank is working with IBM to find a path to migrate what it can to the could while also continuing its legacy systems work. “My challenge is running legacy system with cloud, securely,” he said.
Migrating to cloud is not as cheap as advertized for banks that need to keep using their mainframe servers; instead it’s an added cost. And having some data computed on prem and other data with a vendor can leave banks exposed to attack, as happened earlier this year to Capital One. So in summer 2020, BNP Paribas will go live with part of its data on IBM’s public cloud but with the servers on the bank’s premises. So the bank benefits from having a big tech vendor, as it continuously upgrades its cloud security and service, while also keeping client data protected internally.
Mark Johnston, head of security and networking specialists in APAC at Google Cloud, says financial institutions are becoming savvier users. “The industry is moving beyond cloud as ‘infrastructure as a service’ to a ‘platform as a service’,” he said.
For example, one institution is using Google Cloud computing to reduce calculating daily liquidity positions from eight hours to 30 minutes. If more banks follow suit, it creates a seachange in how they can manage their liquidity risk as well as report it to regulators, especially once they add data analytics on top.
Alan Jones, business solutions director at SmartStream Technologies, says as banks continue to embrace cloud computing, it brings down the costs of difficult manual work such as corporate actions processing.
Standards, standards, standards
As banks and fintechs innovate, they are creating new complexities. Competition is good for the end user but it also creates so many platforms, protocols and networks that innovation can be at risk if the industry doesn’t develop standards for interoperability and benchmarking.
“Collaboration requires open, interoperable standards, with so many new players in the payments industry,” said Chris Clark, regional president at Visa.
Johan Toll, head of digital assets at Nasdaq, noted his company delivers its technology to over a hundred markets. “How to increase interoperability among them?” he asked. Two solutions: moving more services and data into the cloud, and using A.I. to improve how firms view and analyze that data.
David Hudson, J.P Morgan’s global co-head of digital and platform strategies, said adopting such technologies aren’t really about cost savings, but to enable big institutions to be agile and to drive standardization. “There’s always a ‘new something’ so our ability to move fast with the times is essential,” he said.
MAS works with industry for AI rules
Monetary Authority of Singapore is developing a framework with financial institutions for promoting responsible adoption of artificial intelligence and data analytics.
The framework is called Veritas, and will let banks, asset managers, insurers and others benchmark their AI and data solutions against MAS’s principles of fairness, ethics, accountability, and transparency. That in turn will drive trust in big data and A.I.-driven solutions.
Digital payments to the fore in Singapore
Google Pay, NETS, SmartStream and MasterCard announce new efforts at Singapore Fintech Festival.
One of the biggest themes at the Singapore Fintech Festival is digital payments. It’s a field full of innovation from fintechs, Big Tech, and lenders. DigFin presents some of the biggest announcements.
ATM for rides
NETS Group runs Singapore’s payment rails. The company has a track record of innovating: it was the first in Asia to adopt an electronic debit network, even while global payment companies like Visa and Mastercard still relied on franking. (Franking is referring to postal stamps to confirm a payment was sent by mail.) Other “firsts” followed.
Today the company is now helping Singaporeans use their bank debit and credit cards to pay for transportation, says Jeffrey Goh, group CEO. It has just introduced NetsClick, the first ATM card tokenized for taxi rides, with the user’s bank account debited for the journey. And it just followed this up with allowing bank customers to use contactless ATM cards to pay for rides on the city’s MRT subway system.
OCBC partners with Google
OCBC Bank has entered a partnership with Google to reintroduce the Google Pay app to Singapore. Starting in January 2020, OCBC customers will be able to make C2C or C2B transfers between mobile phones using Google Pay.
Bank customers won’t need an electronic wallet to make mobile payments, says Ching Wei Hong, the bank’s COO. The bank is using the partnership to boost users of Singapore’s new PayNow digital payments network.
Users of Google Pay can also earn rewards when they use it for transferring money or making payments, which go directly to the user’s OCBC bank account.
Google Pay offers a similar feature in India, where it gained rapid adoption on the back of India’s interbank payments system, United Payments Interface (UPI). PayNow, which went live in Singapore in 2017, is a similar peer-to-peer transfer service. The Association of Banks in Singapore estimates the first half of 2019 saw 28 million PayNow transactions worth S$4.6 billion. With Google Pay now supporting PayNow-based payments, the company expects volumes to grow rapidly.
Adding A.I. to payments
SmartStream Technologies is developing artificial intelligence solutions to improve banks’ digital payments capabilities, says Andreas Burner, chief innovation officer.
The technology company is applying machine learning and neural networks to identifying patterns in the data that banks already possess. Banks hold the lion’s share of customer data, and SmartStream is helping them access it and make sense of it.
Digital payments solutions enable acquirers, card networks, issuers, gateways, ISOs and others to get a holistic view of their payments. “Our innovation lab is working with banks to understand how to apply machine-learning tools to payments innovations,” Burner said. “Volume, velocity and variation in digital payments is changing at an unprecedented rate.”
The company has established a dedicated practice to collaborate with all participants in a client’s digital payments world, creating innovation solutions to bridge the gaps in the areas that matter to end users – and to build models that can handle exceptions workflows that kick in when a payment fails or doesn’t go as planned.
All aboard the express
Mastercard has launched Fintech Express, a program to work with third-party fintechs to support them as they help grow the digital payments world, says Rama Sridhar, executive vice president for regional digital partnerships and new payment flows. Mastercard’s first partner is Rapyd, a fintech that uses APIs to provide customized payment solutions to regional and global e-commerce companies, among other corporations.
The partnership gives Rapyd access to Mastercard’s product, partnerships, licensing and legal teams, and helps Mastercard service Rapyd’s corporate clientele. This gives the fintech fast licensing as a card issuer, integration into the Mastercard network, and advice. Rapyd will be able to quickly issue cards for its corporate clients in Asia Pacific. Mastercard hopes its Fintech Express platform will attract more payment-oriented fintechs.
MAS: make fintech sustainable
Data localization, reconciliation and open APIs leading themes at Singapore Fintech Festival’s first day.
The Monetary Authority of Singapore uses its humungous Singapore Fintech Festival (SFF) to drive the government’s agenda. And because of Singapore’s pole position in the industry, and the scale of its conference extravaganza, the MAS can use the event to shape its message.
And its message this year is sustainability. “We need to make the world greener,” said MAS managing director Ravi Menon. And that means a greener financial system, he said.
Data governance doubts
While Singapore’s government pushed green fintech, bank CEOs expressed concern about data and how it’s being regulated in some countries. Noel Quinn, CEO at HSBC, said local laws requiring customer data to remain within the country put at risk the global services that financial institutions are trying to create to serve financial inclusion goals.
Bill Winters, CEO of Standard Chartered, said storing data in local countries wasn’t a problem, but when the data can’t be transmitted abroad, it undercuts cloud computing and global data analytics.
DBS chief executive Piyush Gupta noted that such barriers obstruct progress in KYC, AML and other security requirements – although he also noted that governments and policymakers in some markets realize their localization laws need to be updated.
Companies used SFF to announce new initiatives. One of the areas that fintech has struggled to reach is reconciliations in payments and securities – a huge goal across the industry because of the intensely manual nature of such work. SmartStream Technologies used the exhibition to promote a new product, SmartStream Air, which uses artificial intelligence to carry out reconciliations in almost real time, by comparing and matching data, highlighting any disputes.
DBS Bank, for example, is using SmartStream products to bolster the digitalization of its institutional and trade-finance business, said Raof Latiff, managing director for the institutional banking group. Streamlining its operational workflows allows DBS to focus on new innovations for its customers.
Open banking options
Another major topic at the event was open banking, and open APIs. The rise of digital banking has given way to a need for open banking, said Francesco Simoneschi, co-founder of London-based fintech TrueLayer, which provides verification tools. Banks will begin to use APIs to communicate with other players in order to be able to verify customer identities, rather than rely on people providing bank statements – particularly in developing markets.
“Digital identity is the holy grail,” said Michael Tang, leader of global financial digital services at Deloitte. But financial institutions engaging in open banking will need to ensure trust, which requires a business model that values the customer, instead of seeking to take advantage of their data.