THE DISRUPTEDFUTURE OF BANKING

RAMEZ NAAM@ramez

[TEXT HAS BEEN ADDED TO SLIDES TO MAKE THEM USEFUL WITHOUT A SPEAKER]

DON’T USE TEXT IN PRESENTATIONS

WHO AM I?

SCIENCE FICTION AUTHOR

14 YEARS IN TECH

HELPED LEAD INTERNAL STARTUP

DOING HIGH SCALE,DISTRIBUTED SYSTEMS,

MACHINE LEARNING,INFORMATION RETRIEVAL

LEARNING FROM A DISRUPTIVE ADVERSARY

NOW TEACHING IMPACTS OF EXPONENTIAL TECHNOLOGIES

SCIENCE FICTION IS HERE

1 MILLION MILES DRIVEN ZERO ACCIDENTS

SEES THINGS YOU CAN’T SEE

REACTS FASTER THAN YOU CAN

DRIVES BETTER THAN YOU EVER WILL

30,000 US ROAD FATALITIES / YEAR1 MILLION /YEAR GLOBALLY

50 BILLION DRIVING HOURS / YR IN US

~8% OF GDP LOST TO DRIVING TIME

“DRIVING” WILL GO AWAY

HUGE INDUSTRIES DISRUPTED

YOUR LIFE CHANGED

IBM’S WATSON

TROUNCED TWO BEST HUMANS

TASK RECENTLY CONSIDERED IMPOSSIBLE

IBM’S TARGET MARKET: MEDICINE

16% OF US GDP

A BETTER DOCTOR, BETTER DIAGNOSIS

MEDICINE A LARGE TARGET

X-PRIZE TRICORDER PRIZE

MOBISANTE ULTRASOUND

$35K DEDICATED ULTRASOUND -> $500 ANDROID

+ TELEMEDICINE AND ALGORITHMIC MEDICINE

Mobisante mobile ultrasound

SENSORS EVERYWHERE

EVERY APPLIANCE, VEHICLE, DEVICE, CONNECTED

SENSORS FOR THE BODY

THE INTERNET OF US

iPhone vs. ENIAC

Michael O’Donnell

$10 TRILLIONTO BUILD IPHONE 5 WITH 1940s TECH

$0

COST OF COMPUTING GOES TO ZERO{AND OF STORAGE, BANDWIDTH, COORDINATION, DISINTERMEDIATION,

ETC..}

WINNERS AND LOSERS

PHOTOGRAPHY AT AN ALL TIME HIGHKODAK CRUSHED

$18 Billion

$10 Billion

$9.5 Billion

$18 Billion

$23 Billion

AIRBNB HAS NEVER BUILT A HOTEL…

BUT HAS A HIGHER MARKET CAP THAN HYATT

AND LIKELY TO PASS HILTON < 3 YEARS

AIRBNB vs. HOTEL CHAINS (MARKET CAPS)

• AIRBNB: $10b• HYATT: $9.5b• STARWOOD: $15B (LIKELY PASSED IN 2015)• MARRIOTT: 18B (LIKELY PASSED BY 2016)• HILTON: $23b (LIKELY PASSED BY 2017)

WANT TO BE A WINNER?OR A LOSER?

DISRUPTED

DISRUPTION STARTS AT THE EDGES

THEN HITS THE CORE

PAYMENTS ARE THE EDGE

20%BANKS EARN UP TO 20% OF REVENUE FROM NON-INTEREST SOURCES:

ATM FEES, CREDIT CARD FEES, ACCOUNT FEES, ETC..

3%CREDIT CARDS TAKE 2-3% OF EACH TRANSACTION

SQUARE WOULD LOVE TO REPLACE VISA AND MASTERCARD

BUT DOES THE WORLD EVEN NEED SQUARE?

MOBILE PHONES PER 100 PEOPLE

Cellulari

UBIQUITOUS SMART PHONES WILL ENABLE PAYMENTS WITHOUT ADDED HARDWARE

$1.6 TRILLION

CHINA

$1.6 TRILLION IN MOBILE PAYMENTS IN 2013

317% GROWTH FROM 2012

VISA AND MASTERCARD WANT TO OWN THIS SPACE TOO

BUT 3% SKIM CREATES AMPLE INCENTIVES FOR MERCHANTS & RIVALS

ANALOGY: MOBILE SOCIAL & MOBILE MESSAGING

UBIQUITOUS HARDWARE LOWERED BARRIERS TO ENTRY

ALLOWED MULTIPLE NETWORKS TO SOAR RAPIDLY TO HIGH SCALE

DISRUPTEDMONEY WIRING ESPECIALLY VULNERABLE

DEVELOPING WORLD MAJOR GROWTH AREADRIVEN BY ‘REMITTANCES’ FROM EMIGREES

$500 B Transfers

$528 BILLION IN REMITTANCES IN 2013

8% YOY GROWTH

>10% OF GDP IN 20 COUNTRIES

$50B IN MONEY TRANSFER FEES

10%

FEES AVERAGE 10%. CAN BE 12% OR HIGHER.$200 KENYA = $24 IN FEES. OUTRAGEOUS.

0%?

BITCOIN AS A TRANSFER PROTCOLINHERENTLY GLOBAL AND INSTANT

PROCESSORS BIDDING AT 1% CHARGES

DISRUPTED

80%THE REAL MONEY FOR BANKS IS LOAN INTEREST

80% OF REVENUE: LOANS & SECURITIES

BANKS DEPEND UPON DEMAND FOR THEIR LOANS

US INDUSTRY IS LESS AND LESS CAPITAL INTENSIVE.

A LONG TERM NEGATIVE TREND FOR LENDING.

RECENT EXAMPLES

$280 million funding

$22 BILLION exit

$800 million funding

$10 BILLION value

AIRBNB NEVER BUILT ONE OF THESE

BUT AGAIN:

NOT JUST RECENT.

A LONG TERM TREND TOWARDS INCREASED CAPITAL EFFICIENCY OF PROFITS

PROBLEM 2: COMPETITION IN LENDING

PEER TO PEER LENDING

“AIRBNB FOR LOANS”

CONNECTS BORROWERS TO LENDERS

DISINTERMEDIATES BANKS

LENDERS GET HIGHER RATES THAN BONDSBORROWERS GET LOWER RATES THAN CREDIT CARDS

LOANS OFTEN PAY DOWN CC DEBT

LENDERS BUILD PORTFOLIOSTYPICALLY COVER ONLY FRACTION OF A BORROWER

SPREAD & SHARE RISK

188% YOY GROWTH

P2P LENDING STILL TINY VS $1.8T US LOAN MKT

BUT DOUBLING EVERY 9 MONTHS

2/3 NEW LOANS FROM INST. INVESTORS

DEFAULT INSURANCE NOW AN OPTION

GOOGLE LEAD $125M LendingClub ROUND

OTHER COMPETITORS BEYOND P2P

PRIVATE EQUITY FIRMS

$70+ BILLION IN LENDING IN 2013UP FROM $50B IN 2012

SHIPYARDS, HEAVY INDUSTRY, ETC..

NIGHTMARE SCENARIO:

LARGE ASSET HOLDERS MOVE INTO LENDING

ASSISTED BY ALGORITHMS THAT VET LENDERS

& NETWORKS THAT DISINTERMEDIATE BANKS

TRILLIONS IN AVAILABLE ASSETS

?

WHAT SHOULD BANKS DO?1. MOVE FAST IN A FAST CHANGING WORLD

2. KEEP YOUR CUSTOMERS HAPPY!

3. UNDERSTAND YOU’RE NOT THE ONLY GAME IN TOWN

4. KNOW YOUR ADVANTAGES:– FDIC, PERCEIVED STABILITY, CONVENIENCE,

RELATIONSHIPS

5. DISRUPT YOURSELF BEFORE SOMEONE ELSE DOES

THE DISRUPTEDFUTURE OF BANKING

RAMEZ NAAM@ramez