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Daily Intelligence Briefing – March 6, 2018

FEATURED TOPIC: Big Banks and Tech – Partnering for the Fintech Future

 With the rise of mobile payments and e-banking, some have speculated that the big banks could be on the chopping block and tech firms set to take their place. However, most of these banks have been around for quite some time and adaption has played a large part in their success. Sometimes, new technologies are better used as part of a collaboration. Certain automated machines, in manufacturing for example, have been more productive working in tandem with humans as “cobots” instead of replacing them outright. Tech and banking may reflect a similar relationship. 

An initial AI deployment in banking has been the “chatbot”. This lets customers text or ask questions on their smartphones, saving them the hassle of having to go to a branch, search complex product terms on a website, or get passed around a call center. However, deployment across the financial sector is now expanding to more advanced applications. One such implementation has been crunching the immense amounts of quantitative data that banks handle. Personetics is one firm that has created a “cognitive banking brain” that learns about customer behavior and activity. The software, which is already being utilized by Wells Fargo, Chase, Citibank, and others, is connected to data sources inside a bank that creates profiles of each customer with six months of data. This can help anticipate a customer’s financial needs, such as when to shift money between accounts to cover spending, or to boost savings. 

Citi has expressed optimism toward the new technological approach to banking and has called on entrepreneurs to continue to expand this field. Naveed Sultan, global head of treasury and trade solutions for the financial services giant said Citi is already “very engaged” with the fintech space, scanning “thousands” of startups every year — saying it’s taken an equity position in “about 30”. He’s also stated that “there is more opportunity for collaboration with fintech than disruption”. While around $21 billion was invested in fintech startups last year, 71% of that was focused is on the “last mile” — so either focused on the user or the client experience. KPMG credited the strong uptick in the number of fintech investment deals during 2017 to financial institutions prioritizing digital innovation. Branch Banking and Trust Co. (BB&T) is one financial firm looking to increase and diversify their tech investments further via artificial intelligence, chatbots, cybersecurity and fraud detection and prevention, having set aside $50 million earmarked for fintech.

Tech giant Amazon is also launching several initiatives to take advantage of the digitization of banking. Whereas Amazon usually plays disrupter when it moves into a new sector, the tech giant has also been more focused on collaboration with established players thus far. They recently partnered with SunTrust Banks, Ally Bank, and others to raise $16 million in a new round of funding for Greenlight Financial Technology, which utilizes a mobile app and “smart” debit cards aimed at instilling sound financial habits in kids, teens and college students. In what appears to be an even more significant move, Amazon is now in talks with JPMorgan Chase & Co. and Capital One Financial Corp. about a proposal to start offering a product similar to checking accounts. Amazon already has some experience in the field via their Amazon Pay application which already allows consumers to pay for products on third party sites without reloading their credit-card information. More than 33 million people use the payment system, and Amazon has lent more than $3 billion to small businesses that sell on its platform since 2011 could help Amazon lower fees it pays to financial firms and give it a bigger window into customers’ income and spending habits.

As much as the banks might need tech to optimally enter the next generation of finance, tech may need the banks just as much. Global appetite for digital-only providers fell from 74% in the first half of last year to 63% in the second half. Preference for a digital-only main bank has also dropped, from 50% to 44%. This is likely a reflection of a perceived reliability when it comes to private data. Banks remain the most trusted organizations – across industry – when it comes to holding and maintaining privacy and security of personal information globally.And, in 2017, this trust increased from 31% in the first half to 42% in the second half. Meanwhile, trust in technology companies has hardly increased and trust in new technology companies has declined. 49% of consumers trust that their bank can ‘keep my money safe’, while the trust in technology companies is significantly lower, standing at only 27%.

MRP declared financials a long theme on December 23, 2016. Since then, the Financial Sector ETF (XLF) has generated a return of about 22%, edging out the S&P 500’s 21% gain over the same period. The Mobile payments ETF has outperformed both with a return of more than 44%. MRP believes this the growing symbiotic relationship between banks and tech firms should help bolster this outperformance going forward. 

HERE IN THE MEANTIME are some articles relating to the firearms (the stories are summarized in the  TECHNOLOGY section of today’s report):

  • Fintech – Amazon’s Checking-Account Plan Sees Banks as Partners, Not Prey
  • Fintech – Citi wants fintech startups to disrupt institutional banking 
  • Fintech – Chatbots just the beginning for AI in banking 
  • Fintech – Treasury report to weigh in on fintech regulation 
  • Fintech – Digital-only banks losing their appeal 

 CHART: Financials (XLF) vs Fintech (IPAY) vs S&P 500 (SPY)

 



OTHER STORIES HIGHLIGHTED IN TODAY’S DIBS:

  • Economics and Trade: 
    • LatAm – Chinese start-ups export playbook to Latin America for new riches 
    • Greece – Greece logs solid economic growth in 2017 
  • Politics and Policy: 
    • Syria – Russian business first in line for spoils of Syrian war
  • Finance: 
    • Shadow Banking – Shadow banking grows to more than $45tn assets globally
  • Services:  
    • Voice Assistant – Voice Ordering Is The “Most Disruptive” Shopping Trend
    • Mining – Exploration rebound to continue 
  • Manufacturing and Logistics: 
    • Homebuilders – Trump’s Tariff Is Forcing Homebuilders to Cut Costs
  • Technology: 
    • Nanobots – Nanobots kill off cancerous tumours as fiction becomes reality 
    • Blockchain – Alibaba Subsidiary Reports Successful Use of Blockchain Technology for Logistics Data 
  • Transportation:  
    • Ships – A new fleet of all-electric ferries with massive battery packs is going into production 
    • Air Freight – Air cargo demand grows 3x the rate of supply
    • Autos – Hyundai Motor Warns Tariffs May Jeopardize US Production
  • Commodities: 
    • Oil – IEA sees U.S. oil output surge stealing OPEC share in next five years 
    • Gold – The Gold Bugs Will Soon Be Vindicated 
  • Energy & Environment: 
    • Renewables – This Major Bank Just Pledged To Invest $122 Billion In Renewables
  • Endnote: 
    • CHART: Zinc Turned Upside Down as Prices Tank and Stockpiles Surge

JOE MAC’S MARKET VIEWPOINT

CURRENT MRP THEMES

  Autos  (S)

  Electric Utilities  (L)

  TIPS  (L) / Long-Dated UST (S)

  Defense  (L)

  Industrials & Materials (L)

  U.S. Financials & Regional Banks (L)

  Emerging Markets (L)

  Oil & U.S. Energy  (L)

  U.S. Homebuilders & Construction (L)

  France  (L), Greece (L)

  Palladium  (L)

  U.S. Healthcare Providers (S)

  Gold & Gold Miners (L)

  Robotics & Automation (L)

  Video Gaming (L)

  Lithium (L)

  Steel  (L)

  Value over Growth  (L)


About the DIBs: MRP focuses on identifying transformational change in the global economy and offering an investment thesis whenever an opportunity arises that has not yet been recognized by the market. The DIBs are MRP’s compilation of articles and data from multiple sources on subjects reflecting disruptive change that have potential investment implications for an industry or group of securities. We share these with our clients who may already have or may be considering exposure in the industries affected. The subjects change daily and constitute an excellent update on featured topics. 

   MAJOR DATA POINTS

Top   

  • United States, PMI Services Index, MoM, FEB: 55.9 from prior 53.3
  • United States, ISM Non-Mfg Index, MoM, FEB: 59.5 from prior 59.9
  • Turkey, PPI, YoY, FEB: 13.71% from prior 12.14%
  • Tukey, Inflation Rate, YoY, FEB: 10.26% from prior 10.35%
  • Great Britain, New Car Sales, YoY, FEB: -2.8% from prior -6.3%
  • Euro Area, Retail Sales, YoY, JAN: 2.3% from prior 2.1%
  • France, Retail Sales, YoY, JAN: 6.3% from prior 4.3%

   ECONOMICS AND TRADE

Top   

LatAm – Chinese start-ups export playbook to Latin America for new riches 

Chinese venture capital investment in Latin America jumped to US$1 billion since the start of 2017, compared with about US$30 million in 2015, according to data collected by Preqin. The push by the tech sector piggybacks on years of state-driven Chinese investments in infrastructure in Latin America, with a pool of 2,000 companies pouring more than US$200 billion in the region as of January. 

 Like China’s infrastructure investments in the region, there is the possibility of resistance from locals. The road to Latin America has also been littered with cautionary tales of crippled projects. China’s carmakers have struggled to establish themselves in countries such as Brazil even after building local plants. SCMP

 Greece – Greece logs solid economic growth in 2017 

Greece’s national statistics office announced Monday the southern European nation’s gross domestic product (GDP) rose by 1.4 percent in 2017. It added, though, that the uptick lost traction in the final quarter of last year, with the economy expanding by only 0.1 percent between September and December, down from 0.4-percent growth in the same quarter a year earlier. The stats office noted that full-year growth primarily came as a result of increasing corporate investments and private consumption, while exports slumped in 2017. DW

  POLITICS & FISCAL POLICY

Top   

Syria – Russian business first in line for spoils of Syrian war 

As Moscow came under pressure to exert its influence in Syria to halt a deadly bombing campaign on eastern Ghouta this week, Russian executives gathered in a conference room to discuss business prospects in the war-torn Arab state. They peddled everything from power station engineering services to shipping as they eyed deals they expect to emerge when the fighting eventually ends. 

 Syrian government officials turned up at the gathering in Moscow with a file of 26 projects in which Damascus is seeking Russian investment. These included a planned rail line linking the Syrian capital to its airport, industrial plants to produce anything from cement to yeast and tyres, and power generation projects in Homs. But the projects face significant challenges, not least the question of who will pay. 

Nowhere is the question more acute than in oil and gas, the sector in which Russia is most interested. Western sanctions mean financing is not available for new investment in hydrocarbons and any Russian company supplying equipment or services to Syrian oil producers risks punitive measures. FT

  FINANCE

Top   

Shadow Banking – Shadow banking grows to more than $45tn assets globally 

Shadow banking — the parts of the financial system that perform banklike functions such as lending but do not have the same safeguards — accounted for 13 per cent of total global financial assets, according to the Financial Stability Board, the international group of policymakers and regulators that makes recommendations to the G20. The data form part of the FSB’s annual monitoring exercise of shadow banking, which it says is necessary in order to calibrate policy responses.

 The inclusion of China and Luxembourg — home to a large part of the world’s investment funds — makes this year’s monitoring report the most detailed yet. The report covers 2016 figures. But since then China has launched a continuing crackdown on its shadow-banking sector. China contributed $7tn, or 15.5 per cent, of the $45tn assets comprising the FSB’s conservative definition of shadow banking, while Luxembourg contributed $3.2tn, or 7.2 per cent. FT

  SERVICES

Top   

Voice Assistant – Voice Ordering Is The “Most Disruptive” Shopping Trend 

Until recently, visual presence has been one of the largest, if not the largest, factors in a company’s brand — but Amazon Alexa and other voice assistants are drastically changing the ways consumers encounter products. Companies spend big money on buying up shelf space in the stores of leading retailers, to ensure their products are at the forefront of a consumer’s shopping experience. Yet increasingly, customers are no longer putting themselves in front of physical products before purchasing them. 

 Amazon’s recommendations for customers who do not specify brand-specific products are currently based on the company’s proprietary “Amazon’s Choice” algorithm, which leverages a machine learning model to discern what products a customer most likely wants.  Futurism

 Mining – Exploration rebound to continue 

Miners are finally moving beyond preserving their profit margins and juniors are starting to benefit from increased equity market appetite for exploration after years of restricted diet, an S&P analyst told the Prospectors and Developers Association of Canada (PDAC) 2018 conference. The ratings group says global mineral exploration spending is set to rise 20% in 2018 after an uptick last year. 

 Spending on the search for nonferrous metals will expand further in 2018 after turning a corner in 2017, the agency’s market intelligence unit said in the report, released to coincide with the global mining conference. The renewed optimism follows a 15% rise in global spending on the search for nonferrous metals in 2017, according to S&P’s research, which was the first annual increase after four straight years of lower global exploration spending. Spending grew to around US$8.4 billion in 2017 from $7.3 billion in 2016, S&P said. MJ

  MANUFACTURING

Top   

Homebuilders – Trump’s Tariff Is Forcing Homebuilders to Cut Costs 

About 40 percent of the Texas homebuilder’s framing lumber comes from Canada. The Trump administration slapped punitive tariffs on Canadian softwood timber last year, claiming the industry is unfairly subsidized. The move has driven lumber prices to near record highs. Tilson Home Corp., where Martin is president, has so far refrained from passing on the added costs to homebuyers. To do that, it’s cut back the number of home plans it offers and is considering swapping pricier fir for cheaper Southern yellow pine, even though its tendency to bow in the Texas humidity makes it more difficult for construction crews to work with. 

 Framing lumber, including installation costs, accounts for about 18 percent of the average home’s selling price, according to the National Association of Home Builders. The rising price of timber comes at a bad time for U.S. builders, which are already contending with labor shortages and scarce supplies because of summer wildfires that wiped out some timberland in British Columbia. The import duties leave companies paying $1,360 more to build a single-family home. B 

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  TECH

Top   

Fintech – Amazon’s Checking-Account Plan Sees Banks as Partners, Not Prey 

Banks have been warily watching Amazon.com Inc. for signs it would threaten their world. The tech giant’s latest move looks more like an opportunity — at least for one of them. A proposal to start offering a product similar to checking accounts is “for now not showing any signs of disrupting the industry,” Brian Foran, an analyst at Autonomous Research, said in a note to clients Monday. 

 Amazon is in talks with JPMorgan Chase & Co. and Capital One Financial Corp. about the product, people familiar with the matter said Monday. The targets are millennial consumers, the people said, asking not to be identified because the discussions are private. The strategy could help Amazon lower fees it pays to financial firms and give it a bigger window into customers’ income and spending habits. B

 Fintech – Citi wants fintech startups to disrupt institutional banking 

Financial services giant Citi reckons fintech startups are missing out on a major opportunity to disrupt institutional banking. Indeed, it’s inviting entrepreneurs to do so. It has established four “innovation centers” in Singapore, Dublin, Tel-Aviv and London to act as its feelers on the fintech scene. And its investments are focused in four key areas, according to Sultan — namely: Client experience; scalability; operating model agility; and innovation. 

 While around $21 billion was invested in fintech startups last year Sultan noted that a majority (71 per cent) is on the “last mile” — so either focused on the user or the client experience (“consumer banking, insurance and areas of those nature”, as he put it). Which he argued means that fintechs playing on the institutional side “actually have a far greater stance in terms of collaboration”. TC

Fintech – Chatbots just the beginning for AI in banking 

The banking sector is also accelerating its adoption of AI. An initial AI deployment in banking is the “chatbot”. This lets customers text or ask questions on their smartphones, saving them the hassle of having to go to a branch, search complex product terms on a website, or get passed around a call centre. 

 National Australia Bank’s “virtual banker” can recognise 13,000 variations of 200 common questions from its business banking customers, while NAB’s digital bank UBank has created RoboChat with IBM Watson to respond to questions on home loans. Commonwealth Bank launched a chatbot called Ceba in January; by the end of the year, it expects it will understand 500,000 ways customers might ask for 500 different banking activities. AFR

 Fintech – Treasury report to weigh in on fintech regulation 

A top Treasury Department official on Monday said the administration’s forthcoming report on regulating nonbanks will tackle questions around financial technology companies and whether they need to be regulated more like banks. Craig Phillips, counselor to Treasury Secretary Steven Mnuchin, said at a conference sponsored by the Institute of International Bankers, said Treasury is working on the final of a series of reports recommending changes to financial regulation. The last report will address nonbank financial institutions in general, and fintech firms in particular.

 Phillips said that the report will consider regulatory shortcomings concerning two broad categories of nonbank financial institutions. The first are traditional nonbank institutions, such as small-dollar lenders, specialty financial institutions, and mortgage originators and servicers. The second are fintech firms centered around marketplace lending, payments and settlement activities for securities.

 The report will consider “regulatory asymmetries” between fintech firms and regulated institutions, and will be guided by a desire to maintain the innovation of the new fintech firms without creating an uneven playing field between federally regulated and unregulated institutions, Phillips said. AB

 Fintech – Digital-only banks losing their appeal

The mobile banking revolution has seen a host of new entrants in places like the UK emerge, to great fanfare, hoping to take on high street veterans. This week app-only newcomers Starling Bank and Monzo took the top spots in Smart Money People’s ‘Best British Bank’ awards. But, while digital usage in banking continues to grow, people are moving more towards the mobile and online channels of traditional players, rather than the app-only challengers.  

RFi Group questioned more than 1000 consumers in each of 10 different countries, finding that global appetite for digital-only providers fell from 74% in the first half of last year to 63% in the second half. Appetite for a digital-only main bank has also dropped, from 50% to 44%. Another advantage that traditional banks have is their perceived reliability when it comes to private data. Finextra

 Nanobots – Nanobots kill off cancerous tumours as fiction becomes reality 

A new prospect for cancer treatment opened up last month, when researchers for the first time successfully used tiny, nanometre-sized robots to treat cancerous tumours in mice.  Researchers from Arizona State University and the National Center for Nanoscience and Technology of the Chinese Academy of Sciences injected nanobots made from a folded sheet of DNA into the bloodstream of mice.

 These targeted the blood vessels around cancerous tumours, injecting them with bloodclotting drugs to cut off their blood supply. According to the study, published in Nature Biotechnology, in February, the treatment was successful in shrinking the tumours and inhibiting their spread.  

 Scientists are exploring the use of nanobots for a number of healthcare uses, not only for fighting cancer, but also to unblock blood vessels in hard to reach areas, taking biopsies or measuring the level of certain chemicals in otherwise inaccessible areas of the body. FT

 

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Blockchain – Alibaba Subsidiary Reports Successful Use of Blockchain Technology for Logistics Data 

Lynx International, a subsidiary of the Chinese e-commerce monolith Alibaba, recently announced that it has successfully integrated blockchain technology into the company’s cross-border logistics business. According to the company, its blockchain-based system keeps track of all relevant information regarding an imported shipment, including details about production, transport method, customs, inspection and third party verification. 

 Given that Alibaba owns Taobao and AliExpress, two huge online shopping websites catering to China and the rest of the world respectively, it makes sense that the parent company is attempting to streamline its logistics process. Alongside the import business, Alibaba has also launched blockchain-based programs for the healthcare and food quality control industries. CCN

 

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