The Forrester rankings are based on 15 criteria and 5 is the top score. The criteria include the offerings of card payments or alternative online payments, subscription & recurring payment capabilities, currency mgt & settlement, fraud detection, APIs & architecture, 3rd party integration, and more.

Most of the other competitors are already public companies (e.g. Paypal, Adyen, JP Morgan, ACI worldwide, etc), while Stripe seems to hold off.

I personally expected (still expect) that they will come to the public markets via one of the SPAC structures that are mushrooming left and right in the US. Bill Ackman has publicly said that he held preliminary talks with Stripe but nothing promising has come out of this.

Lots of Seeking Alpha authors discuss whether it makes sense at the $36billion valuation to trade the shares on EquityZen, the pre-IPO investment platform.

While all eyes are on Stripe`s services, valuation, and its investors; not many talk about Stripe`s VC activities that are significant. Stripe has always been committed to funding early-stage startups. Stripe Atlas, its service in collaboration with Silver Valley Bank is in alignment with the goal of empowering entrepreneurs to get started.

Stripe`s investment activity started picking up after 2017. Stripe has invested in several startups and in a significant number they have been the lead investor in the Seed, Series A round. Crunchbase reports 22 investments in total and 4 of them are diversity-focused. Fifteen out of the 22 investments were done after 2017. As early as 2014 they participated in the $3m funding of the Stellar Development Foundation.

Most of you may be aware of Stripe`s latest investment in Paymongo, the Philippine payment processing fintech that raised $12million (Series A) with Stripe being the lead investor. Paymongo`s value proposition is focused on one easy integration for merchants. Stripe has also invested in their seed round too.

In 2020, Stripe has invested in 6 startups (including Paymongo). In four of them, Stripe was the lead which may qualify them to be considered as a VC player in Fintech.

Monzo has been in their investment portfolio since 2017 when they participated in the Series D funding of £71million. Stripe also took part in the June 2020 Series G capital raise of Monzo — £60million total.

Stripe`S 2020 investments include two earlier-stage tech companies: (a) Assembled is a US company focused on scaling digital customer support. Stripe was the lead seed investor; (b) Fast is the other US fintech investment and Stripe was again the Lead for its $20million Series A. Fast Checkout is the product for a one-click secure experience.

My `favorite` as it is disrupting student loans, adding value in upskilling is Stripe`s Lamda School investment. This is a coding school that people train now and pay later (sharing part of their future income when they get a job). Stripe participated in their 2018 Series A ($14million) and their recent $74million Series C.

Rapyd is another significant investment. Rapyd is a UK based Fintech as a service provider in the payment and API space. Stripe has participated in both their Series B and Series C rounds. Series B was $40million and Stripe was co-lead with General Catalyst (c.$100million).

Another early-stage lead investment (Series A) is Step, a US venture to develop a mobile banking app for teenagers.

Stripe`s investment activities in early-stage companies resemble more an early-stage VC style approach being the Lead investor in several of them.

Stripe is 10yrs old and continues to grow. The founders have been hiring Amazon and General Motors executives and are very much focused on maintaining an open architecture structure.

Total funding since inception (2013) is $1.5billion

There isn’t another pure startup competitor of Robinhood in the US. We could look at Coinbase who is focused only on cryptocurrencies but has aa growing B2B offering in addition to their B2B offering. Coinbase has roughly one-third of the funding and a valuation of around $8billion. 

In a way, we could say that Robinhood has also a B2B business because their revenues from selling order flow (especially options) is growing (see details below).

We could also look at savings Fintechs like Acorns that have also been growing and benefiting during these transformational times similar to other savings and investing apps. Acorns have only raised $207million to date and its valuation is may be approaching the $1billion. 

As TechCrunch remarks, Robinhood has had growing pains this Spring and made headlines with less fortuitous news. 

2020 pain points included app crashes, first time disclosure of sizable order flow revenues (look at the details), and more. 

There is clear evidence that retail trading overall has been on the rise since 2019 and spike during Q1 2020. This is due to so much cash sitting around (M2 in the US is up 23% and we have to believe that some of it found its way into the stock market) and of course to what I have been calling the `Robinhood effect`. In plain words, the extreme commoditization of stock trading.

Scott Galloway is a clinical professor of marketing at NYU Stern university and a serial entrepreneur who has written a great article Robinhood Has Gamified Online Trading Into an Addiction Tech’s obsession with addiction will hurt us all. According to his estimates of the online trading activity rise (mostly based on the rise of account openings not the size of the trades or volume) it is clear that Robinhood is leading this trend. The increase for Robinhood is x3 times, Schwab is x1.6 times, TD Ameritrade is x2.5 times, and Etrade is x2.7 times.

I have not found any figures that support the narrative floating around that retail trading has had a significant or even leading contribution to the stunning US stock market rally since its bottom in mid-March. 

The figures that we can report is that the order flow business was very strong in Q1 2020 and Robinhood`s revenues from selling order flow is leading the pack. 

Alphacution was the first to report Robinhood`s hidden revenue stream last year. I wrote about this last November in Zero-commission brokers selling order flow are the new intermediaries. Who will disrupt them?

Now, starting 2020 there has been a new disclosure requirement around order flow business practices. As a result, we have concrete figures in hand from the entire industry, incumbents and fintechs. 

Frank Chaparro reported in mid-June` New filing shows Robinhood brought in close to $100 million by offloading order flow in the first quarter`. So, Q1 revenues were $100million for Robinhood and Alphacution estimated $69miilion for the entire year of 2018. 

I have two problems with these increased figures. One is the lack of transparency in terms of the Robinhood`s business proposition and monetization strategy. The narrative that has been left floating for years, is that Robinhood makes money from margin accounts and interest on cash. No Robinhood manager contradicted that or presented proudly their growing order flow business. And of course, since everybody else does it (except Fidelity) why not Robinhood. And this is where the irony comes in. How is Robinhood different than incumbents?

The second problem I have is that the details of the order flow disclosures (see here) show clearly that most of these revenues come from option trades rather than plain vanilla stock order. Needless to say that option trading requires more education and sophistication and is riskier than plain vanilla stock trading. And again all this didn’t matter until it did. 

Sales of order flow from Robinhood`s option trades, outsize plain vanilla order flow revenues. 

In addition, back in December 2019 when Robinhood got fined by FINRA for violation of best execution practices, it didn’t matter. The question is when will it matter?

I rest my case, as I have always had a big question mark next to the value proposition of Robinhood. Evidently, it is around the democratization of retail trading. But I have always struggled to come up with a solid argument on `Why` is this kind needed. I have yet to answer it. I do understand the `Why` for fractional shares, I do understand micro-savings into investing, crowd investing, social trading, etc. and other nudges that over time develop better personal financial habits around investing.  

I also understand various DIY offerings but this Instagram like tool does not address any core financial need. We need to manage budgets, invest wisely, save, plan retirement. What big need is Robinhood and its future roadmap solving?

2020 will leave us with sad realizations around Instagram like capabilities for option trading and cynicism around trading bankrupt Hertz stock and the craze on Robinhood of the Electric vehicle stock NKLA. 

Robinhood`s founder has committed to take care of the issues around options trading. 

Commitments to Improving our Options Offering

That does not answer the customer need – WHY! 

Sources

https://techcrunch.com/2020/07/13/robinhood-raises-320m-more-bringing-its-latest-round-to-600m-at-an-8-6b-valuation/

https://techcrunch.com/2020/06/23/amidst-robinhoods-planned-service-changes-a-tension-between-growth-and-safety/

https://www.thestreet.com/etffocus/market-intelligence/robinhood-nikola-goes-from-0-accounts-to-140-000-in-two-weeks-fCWU1AXD20aRNAONEB-G-A

https://www.forbes.com/advisor/investing/robinhood-bankrupt-hertz/

https://www.forbes.com/sites/sergeiklebnikov/2020/06/17/20-year-old-robinhood-customer-dies-by-suicide-after-seeing-a-730000-negative-balance/#5740a3241638

It was the time when Vanguard was making its first leapfrogging attempts in a space that Betterment and Wealthfront had brought to market. Personal Capital was also shaping up the hybrid version of `digital investing`. Deloitte, CB insights, Aite Group, and others were predicting assets under management by 2020 (which at the time, seemed far away for all of us).

Predictions ranged between $ 2.2 trillion and $ 3.7 trillion in assets to be managed by Robo-Advisory services by 2020 and $16 trillion by 2025.

Permit me to take the mean of the range predicted for 2020 (trillions of USD are being transferred from the government to the `people` anyway as we speak) and round it up to $3 trillion for 2020.

2020 — Well we are in the second quarter of 2020 and we are just reaching $1 trillion. A recent report by BuyShares says we are heading to $987billion. So, we are at 1/3 the 2016 prediction even though the S&P500 is up 30+% and the Dow is up 28+%, since Jan 2017.

What is more remarkable is that the current 5yr outlook compiled by BuyShares and based on Statistica data, predicts that in less than 5yrs the AUM will grow x2.4 times, reaching $2.4trillion.

At first sight, it may seem to you an optimist outlook. It is actually, a heavily discounted view from that set out back in 2016 when the sector started attracting more VC investments and incumbents. The first predictions were from 0-$3trillion in less than 5yrs and then from $3trillion-$16 trillion in the second 5yr phase (x5+ times).

And now this study is saying, let’s cut the 5+ times growth rate in AUM to more than half. And let’s cut the AUM managed over the next 5yrs by 85% (we had said $16trillion and now we say $2.4trillion).

Let’s step back and look into the mirror as if it is 2025. Of course, digital onboarding and automated asset allocation offered currently via ETFs will be 100% an option everywhere and probably free.

The more interesting and meaningful question is about the evolution of the ETF market itself which has been the bread and butter of all the digital investing offerings (lumped under the `robo-advisor` umbrella be it with or without human advisory services); and whether artificial intelligence will actually transform digital investing.

1️⃣ Will `robo-advisors` continue to build their businesses mainly using ETFs? Their low-cost core value-add has been interchangeable seen as a win for passive investing and mainly via indices.

2️⃣ Will the 12% of the $4.7trillion ETF market (based on 2018 year-end data, see here) grow and to what extent?

3️⃣ Will active ETFs grow given the current macro environment? ANTs are just emerging and are a step back from the transparency trend and the zero-commission trend. ANTs are active non-transparent and on average their expense ratio is 70bps. Their position reporting is much better than mutual funds (quarterly). Their cost-adjusted and risk-adjusted-performance will have to be seen going forward. They are currently only 2% of the ETF space (see here).

4️⃣ Will artificial intelligence finally take over the asset allocation and the decision of switching between direct indexing or stock picking or momentum.

A few facts to consider:

1. The ETF space grew sustainably in 2019. Statistica reports $6.18trillion by year-end of 2019. That is a 30% increase. Of course, by the end of Q1 2020, the ETF global industry experienced a c. 16% drop ($5.4trillion) which was 100% due to the drop-in asset values. ETFs actually experienced in Q1 net inflows of c. $120billion. These were inflows during the major March selloff. Source

2. An update on my calculations of the assets under management by digital wealth services points to a c.30% increase (by 2019 year-end), which matches the ETF increase. Source

3. The actual role of artificial intelligence in all the Digital wealth offerings, is still minimal. Even the large incumbents with sizable digital wealth AUM, like Merill Edge or Vanguard, are still in the initial phase of digital transformation in wealth management. Vanguard actually has done very little on the needed digital integration front. Merill Lynch is probably ahead with its new CEW — Client Engagement Workstation — that integrates market data, client information, account servicing tools and some narrow artificial intelligence tools (chatbots).

For 2025, we should be making predictions of the extent that Artificial intelligence will be making better decisions for my asset allocation than I do, or my private banker, or my financial advisor, or my digital wealth service provider.

What has gone wrong in Fintech that pushed the original projections of $16trillion AUM in 2025, to $2.4trillion?

Where are the trillions of currencies that are being transferred, going to end up?

Isn’t the digital transformation of the mutual fund industry what will happen over the next 5yrs? Whether it is through DLT as an infrastructure of the mutual fund administration or by the tokenization of fund structures or the disintermediation of the European banks who dominate mutual fund distribution or all of the above? And won’t all this lead to an exponential growth of the `Digital wealth` AUM?

The conversation around the interaction between data, algorithms, and humans never stops.

Once again, A crisis like no other!

The COVID19 induced crisis, of course, provided us with an ideal setting to use more data, test and train algorithms, and experience our and their strengths and weaknesses in the investing arena.

Once again, A crisis like no other is actually the title of an AQR article at the end of March. The 20+yrs old quant king has suffered after a very difficult 2018 (the so-called Red October) which led to large outflows and over 1000 layoffs- Investors pull billions from quant king AQR as performance slumps — Financial News.

There has never been a better time to bring up the conversation on whether Data (fundamental, conventional and alternative) made a difference during this crisis. Did algorithms help and in what way? And what about the interaction of humans with Data and algorithms?

Fundamental macro data is essential, and this will never change. What can and should change is the time lag and that not all data sources are trustworthy. We need to build a real-time information system aggregating trustworthy data, that starts with fundamental data and extends to the currently coined `alternative data`. Eventually, we will get rid of the alternative data term, all together.

Lykke recently launched the Open Initiative project which is a competition with a CHF50k funding award. This is led by Richard Olsen (founder & CEO of Lykke), Christopher Giancarlo (Cofounder of the Digital Dollar and ex-Chairman of CFTC), and Ashkan Nikeghbali (Chair in Mathematics at UZH)

One of the four different thematics of the competition is focused on building a Real-time information system. Lykke proposes a Wikipedia like system (in certain aspects) with revenue streams built on Blockchain and accessed via APIs. This vision merits a separate article.

In May, as an advisor to AxessThinkTank the Geneva-based ecosystem with a vision of becoming a distributed knowledge hub, we embarked on the first step of a journey focused on `Humans and Machine to manage Uncertainty`. [1]

I had the pleasure to moderate a 50 minutes digital discussion with a diverse group of experienced professionals that work as quants with data and algorithms focused on investing intelligently. Watching the recorded discussion will provide you with the full insights and color from each participant.

There was a consensus more or less than the demand for alternative data, as expected, spiked during this crisis because everybody needed to access the situation in real-time and needed real-time measures. Investors, traders, portfolio managers, pensions, who were already using some kind of alternative data, needed more and relied heavily on high-quality real-time data. The reliance on such alternative data and on actionable techniques to access exposures and make intelligent predictions, skyrocketed. New entrants in the alternative data space, flocked as they needed to manage risks and exposures.

The panelists uniformly confirmed the increased need to manage thematic and narrative risks. In plain words, humans needed to understand their exposure to airlines or to China during the crisis and in the new normal. They needed to ask the data and the machines what the impact of COVID19 would be in real estate. And on and on….

Humans continue to be in charge of narrating the topics of interest or at stake. The machines need to be able to offer actionable insights and forecasts.

There is an increasing need for real-time and continuous re-assessment of this kind of complexity through lots of high-quality real-time data of all sorts. Machine learning and adaptive trading algorithms that reflect and retrain gave confidence to humans in certain asset classes (e.g. commodities) during this highly uncertain period.

Building trust between humans and machines, has always been essential and will continue to be. The recent crisis was a painful but valuable experience that built more trust in humans as to what machines can currently do and with what inputs.

There has been an improvement in actionable techniques that allow humans to extract signals towards generating alpha by combining high-quality real-time data and adaptive algorithms. There has been a better and larger offering from providers, of data, insights, algorithms.

The panelists were from the following companies:

Ravenpack is a leading data analytics platform headquartered in Spain. I was using their free Coronavirus dashboard during the lockdown which had lots of alternative indicators (panic, media hype, fake news etc).

You can check out their research around sentiment impact and sentiment investment strategies — here. Ravenpack highlights that negative sentiment has more predictive power for asset prices than positive sentiment.

CueMacro, a UK based alternative data consulting practice. Saeed Amen, the founder of Cuemacro, is the co-author of the upcoming book on The Book of Alternative Data. It is a book covering ways of leveraging alternative information sources in the context of investing and risk management.

RAM is a macro hedge fund in Geneva that emphasizes the complexity and alpha generation potential of combining structured and unstructured data (see article here).

Macrosynergy is a UK macro hedge that is currently acting as a fiduciary quant house for long term institutional investors. They are combining fundamental data and insights with algorithmic trading.

Predictive Layer is a Swiss company focused on predictive Analytics and forecasting applications. Their algorithms adapted to this crisis and offered insights that only machine learning can produce in a timely fashion. Their value add was clear in the commodities space during this crisis.

The journey `Humans and Machine to manage Uncertainty` continues. Yves Carnazzola, the president of AxessThinkTank, and myself are leading this initiative in the spirit of building a distributed knowledge hub around this thematic.

This will include a variety of additional digital conversations around this thematic, surveys and storytelling landscape reports of the space. If you are a stakeholder in this space and would be interested in taking part in this journey with us, please email us so we can provide you with additional information and details. 

connect@efipylarinou.com

yves.carnazzola@axessinvest.com

[1] I have been a moderator in certain tracks of the Axess Think Tank biannual physical conferences

Challenges and opportunities — Big Data, Alternative Data and AI in Finance — January 2020

Challenges and opportunities — Diving deeper into alternative Risk premia — June 2019

Challenges and opportunities in Crypto investing — Spring 2018

Craig Iskowitz weaved a rich coverage of Motif`s story on May 1st with lots of data and back flashes on how Motif was perceived along its journey. 13 Roboadvisors That Might Become Victims of the COVID19 Crisis is a great read for anyone in wealth management. In the last part he shares a robo-advisor ranking in an effort to start thinking about who will not survive in these markets. The Ezra Group divided 38 providers into to three groups: Market Leaders, Up & Coming and Watch List.

I`ll just pick on the first group `The Market Leaders` only because it contains Stash who definitely has us all looking at why it was able to raise this large amount of funding (Series F) in these market conditions.

Craig includes in `The Market Leaders` the big old names of Vanguard and Schwab that are pure investing giants, along with micro-investing apps like Acorns and Stash and MoneyLion (which is more focused on banking and lending).

He makes a point about the large number of paying clients that these three apps are serving. 15+ million customers compared to 30 million Vanguard clients. These are numbers as of January 30, 2020. We have unofficial evidence already of a spike in account openings across all digital offerings. In the #ItzOnWealthTech Ep. 46: The Mad Rush into Digital Advice with Bill Capuzzi, Bill Capuzzi CEO of Apex Clearing mentioned that they saw a 200% increase in new account opening in March.

For Stash to stay on Craig`s list and to not disappoint their investors, they need to execute well on their re-bundling. They cannot afford to stay only in investing like Schwab and Vanguard. They already started their re-bundling in 2019 and effectively their roadmap to become a fuller stack. They used their Series E funding to partner with Green Dot`s Banking-as-a-Service and introduce a debit card. After one year they have acquired 750,000 banking customers and continue to pay up to acquire more.

Tearsheet reports that Stash reached $1 billion in AUM in February 2020, with 4 million customers on the platform (not clear how many are paying any subscription which ranges between $1-$9 per month with $0 minimum). On the Stash website, they report 4.3+ million customers. However, only 750,000+ are banking customers.

Meanwhile, most of the large standalone robo-advisors are also creating fuller stacks with personal finance offerings — saving accounts, debit cards. Betterment, Sofi, Acorns, and soon Wealthfront, are in the same game.

One of the Stash key recent investors is Lending Tree (unclear if they actually put in money or have a strategic partnership), so they must be planning to add credit to their services. With the dazzling choices of Baas and Saas offerings, there is no secret sauce for almost anything. The trick is the go-to-market strategy that can create network effects. And this is where maybe Stash has one first-mover advantage. Is the optional `Stock-Back` reward program that they also introduced last year something that has actually worked for them?

On May 1, Pulse 2.0 reported that `nearly $10 million Stock-Back rewards have been earned by Stash customers since the launch of the debit rewards program almost a year ago.`

Stash customers earn

`0.125% Stock-Back rewards on all of your everyday purchases and up to 5% Stock-Back rewards at certain merchants with Stock-Back bonuses`

If all $10million stock-back rewards were earned at 0.125%, then that translates to Stash having processed $8 billion in payments through their debit card. That is an average $10,000 per banking customer per annum. If all purchases were at the merchants with the special deals with Stash that gave clients an average of 2.5% stock-back, then it translates into $400million in payments and around $500 of purchases per customer.

Is all this worth the Stock-Back patent?

Stash keeps investing in their Stock-Back program. They introduced 200 more stocks for 2020. Their digital design allows them to change easily the amount of the reward and offer special deals for certain periods and target to different plans of subscription. For example in May, they increased their rewards for CVS, Netflix, Hulu, Spotify, Disney to stock-back rewards of 2% from the usual 0.125%. (Details here) Their picks obviously are the best way to build customer loyalty, as all these are top choices for most people during the lockdown. They also offered 3% for two Food delivery stocks, Seemless and Grubhub only for plus subscription customers.

This kind of customizable service is definitely Fintech innovation.

It would be good to know what percentage of Stash customers actually opt-in their Stock-back reward program. And then, what is the actual distribution of rewards that were paid out amongst the individual stocks like Amazon, Starbucks, Walmart, and the diversified fund which is paid out as a reward when you make purchases at merchants that are not publicly traded and on the Stash list.

Are business analytics of Stash customer behavior confirming that once a customer receives a reward in a stock, they actually become more familiar with the company and allocate more funds to invest in the company? This is the narrative that Stash is floating around as they report that they are seeing an increase in customer deposits. Stash is hinting that there are network effects from the Stock-Back Rewards into their investment business.

It is worth monitoring Stash to see

• Number of Banking customers growth
• Average account size growth
• The Stock-Back reward program growth
• What value there is in the Stock-Back patent they refer to
• Any new smart credit offering

Nerdwallet April 2020 comparison shows that the customer acquisition cost for Stash is very high. They are still paying a lot to lure new customers.

The US standalone robo-advisory space is on a journey of rebundling. Stash is the youngest of those that have made a name already and has just become the most well-funded robo-advisor with over $300million total funding.

To keep things in perspective, I have ranked 6 US robo-advisors with their total funding (and one originally Canadian) by age.

An earlier version of this article appeared on Daily Fintech.