What it will take to make digital identity real

The biggest problem with digital identity is that it’s just a pain in the ass.

As banks, governments and e-commerce giants try to solve the issue of customers having account overload and password amnesia, the problem becomes that security is just inconvenient: there are so many required security specs for passwords and so many different passwords to remember, it’s just easier to create an easy-to-remember password and use it for everything — and at the end of the day, if an account is hacked, the bank can just return the money. No big deal.

Passwords are how customers identify themselves for every service they use. They know the system is hackable but still entrust companies their data, even if they don’t actually trust them. Fixing the system means there has to be a single identifying entity that people trust, that has an established history of collecting and holding personal information. Banks are the best positioned to do so, but trust has to be part of the process of designing identity verification services and it should be clear who owns customer data and what happens to it.

“The use of digital identity will exceed the use of physical identity when more digital identity solutions emerge in the market — that’s what’s lacking today,” said Matthew Thompson, director of digital business development at Capital One, which launched a digital identity application programming interface (API) this week that lets websites and apps authenticate the identity of their customers against the identity information stored by their banks.

“We have to design for trust in the solutions: trust with the relying party or business partner that they can trust the assertion we’re making, and trust with the consumer that they want to use or share the information in this ecosystem. When those things come together you’ll see digital identity exceed the use of physical identity.”

Who has my data?
Collecting customer data is in the interest of the customer, banks (or any company, really) will tell you. By doing so, banks say, they can improve their products and services. Knowing more about customers — their preferences, routines, where they save and when they splurge — helps them personalize their offerings and deepen connections with customers, which makes them feel even more comfortable granting the banks even more of their data.

Right now, it’s not clear who owns customer data, whether it’s banks and our payment information or Facebook and the details we put on social media. Banks are held to higher standards of privacy and security; that’s part of what makes them so well positioned to take the lead on providing digital identity services.

“We don’t know who really owns our data but I bet you the large banks absolutely don’t want that” to be made explicit, said Pascal Bouvier, a venture partner with Santander InnoVentures, the Spanish bank’s fintech venture capital arm. “There [would] be clear liabilities as well as clear asset and cash flow streams that people either have access to — or don’t. In order for us to fully actualize federated digital identities built off data streams we create directly or indirectly, we need to have some type of clarity on that ownership.”

The ownership question is also more important now than ever, as startups and technology providers look to increase their data-sharing agreements with banks. Intuit has landed agreements with JPMorgan Chase and Wells Fargo; Finicity just signed one with Wells; Xero established similar deals with Wells, Silicon Valley Bank and most recently, Capital One. These initiatives also give banks safer ways to move data and help give customers control over how their data is used — the holy grail of digital identity — by using application programming interfaces instead of the more commonly used screen scraping method, in which customers log into the third party site or app with their bank credentials and that company “scrapes” the information to log in as the customer to retrieve account data as necessary.

Convenience over safety
The widely agreed upon solution is data minimization: That an organization will collect only the data it needs, using it only what it agreed to use it for and getting rid of it when the purpose is achieved. A bartender doesn’t know customers’ ages to serve them, she just needs to know it’s greater than or equal to a certain age.

One way is to let the customers opt in to having their data shared. The Canadian banks have a solution to this. Or put a disclaimer on the bank website that spells out how the data is going to be used. But that’s slightly inconvenient. And even when customers are cynical toward banks, they seem to be trusted enough to continue serving them.

“Consumers will always choose the path of least resistance, and if you rely on your consumers to be interested in their best interest when it comes to security, that’s probably not going to happen,” said Ryan Fox, director of consumer identity at Capital One. “We’re always two-step or multi-factor authenticating our customers. It’s always dynamic, always risk-based, aways multilayered.”

In 2015, Capital One launched SwiftID, which removes the friction of passwords by letting people authenticate biometrically from their phones when signing in from an unknown device. By designing security right in the banking experience, Fox says, the bank can send the customer a push notification they can respond to in a second instead of requiring them to read a lengthy security statement, Fox said.

The important thing for banks to remember when building on their security is that people don’t think about it in terms of what’s most secure; they think about what’s easiest, he said.

“That’s why touch ID had such an adoption rate,” Fox said. “We went away from knowledge-based login to something I can just touch. It was adopted not because it was a pattern they understood but because it took half the time. Is it easier? Yes. Do I have a cognitive load associated with doing this? No? Then I’ll do it.”

Do we need blockchains to build digital identities?

As banks plan their future in identity, either as providers of identity services for security or as authoritative identifiers of customers across industries, they could start to partner with startups working on blockchain based solutions to the fragmented system.

Blockchains and shared ledgers let different companies, organizations or other entities rely on the same source of customer data and other personal information — one that’s secure, auditable and looks the same to each party.

Of the many startups looking to tackle digital identity, at least a dozen are focused on using blockchain technology to find solutions, including Blockstack Labs, Trunomi, uPort and Hypr.

We asked attendees at the K(no)w Identity conference in Washington, D.C. to share their views about blockchain technology’s role in the growing digital identity space, and how heavily solutions rely on it.

David Birch, director of innovation, Consult Hyperion
“The characteristics of shared ledgers are actually to do with transparency. If we take blockchain technology and try to shoehorn it into pretending it can run credit cards and stuff like that, it isn’t quicker, it isn’t cheaper, it isn’t better in any way. If you take its characteristics and say ‘what can we do differently because of this,’ the thing that stands out to me is transparency. The blockchain as it is now, its heritage is payments because of bitcoin but in reality its future is in a whole bunch of other things and i think one of the biggest pain points is identity. Banks would tell you the costs that are unmanageable are the costs of Know Your Customer, anti-money laundering and counter terrorism finance. Blockchain isn’t fintech, it’s regtech.”

Laura Spiekerman, cofounder, Alloy
“From a data sharing perspective there’s a role blockchains can play. What I hope happens is that blockchain solutions will become one data point and that over time, whoever is using them is able to prove that it’s effective, which in the long run is meaningful to regulators and financial institutions. It’ll take a while. There are interesting initiatives to create, effectively, databases of people, but I don’t think in the next five to 10 years financial services, banks, regulators, auditors will rely on that at all. In order to be part of the regulated financial system you have to use an existing trusted database, which means it’s not going to be blockchain oriented. It’s going to be LexisNexis, it’s going to be the credit bureaus, the old, boring databases we already know. They’re not totally effective but the regulators know them and that means that everyone that’s on the chain has to use them.”

Matt Thompson, director of digital business development, Capital One
“This is just a platform to get us from where we organize to the objective. Blockchain is just another technical platform that enables us to do more things in different ways but at the end of the day it’s just a platform. It has beneficial application to identity management principles around security and privacy, but it certainly isn’t required. And it certainly owns be the only platform that’s used to enable these trusted services. We’re certainly taking a close look at how companies are looking are using blockchain to enable privacy and security respecting identity management principles and seeing where there might be applications within Capital One.”

Andrea Tinianow, division director, Global Delaware
“You need distributed ledger technology to solve the identity problem because you want to be able to maintain information about each individual person without breaching their privacy and you need to make sure it’s secure and cannot be changed. DLT you get the best of both worlds. If you don’t have DLT that means all the information is in the central depository — which can be attacked, which can be changed. It means you have to change the central body and I don’t think people are willing to do that anymore. If we’re going to give away information — everyone’s most private, personally identifiable information — in one place, it needs to be so secure. For that information to be effective it will need to be shared securely and perhaps with a de-identified identifier.”

Steve Ehrlich, lead analyst for emerging technologies, Spitzberg Partners
“Blockchain technology removes the trust from some central party, and in theory can give it back to the individual so they can utilize their applications, wallets smart contract libraries to dictate the terms under which they’re willing to share information, and they can revoke them if they want to. They don’t have to trust them. If, for example, they say to Google ‘delete my information, I want to give it to somebody else,’ you don’t have to trust they’re going to do that. You can be sure based on code that you have the sole right to do something like that. You don’t have to have blockchain technology. There are a solutions short of it that are improvements of what we have today but requires you to trust that whoever is collecting your data is going to abide by the privacy policies, is keep data secure and not use it for any purposes other than the reason they’re able to collect it from you in the first place.”

Frances Zelazny, vice president, BioCatch
“The chain itself is considered trust, but if the beginning is compromised then the whole chain is compromised. You still need to look at the overall ecosystem to ensure that the entry point is just as secure as the transmission to the end. The Blockchain technology has a place but it should not be considered immune to hacks. If you compromise a blockchain, you’re back to the beginning. It doesn’t take away the need to still add additional layers of security on top of the whole chain or to detect for anomalies in the behavior of who’s accessing the chain.”

Travis Jarae, CEO, One World Identity
“It’s not a technology problem we’re solving for. We have a lot of great technologists and technology but right now were trying to solve a people problem. Blockchain does a good job at giving us an easier way to explain identity and pass it off to other people in a secure, private way but there are other technologies that can do the same thing. It’s a foundational platform. Think of the Internet. Google sits on top of that as a universal or foundational platform and you can create a product or service and plug into it without having to build a whole platform. It’s just naturally easier for customers.”

Kim Sutherland, senior director of fraud and identity management strategy, LexisNexis Risk Solutions
“Blockchain is not gonna be the super solution for all digital identity solutions but there seems to be a lot of interesting pilot projects underway leveraging concepts related to blockchains for things that are more peer-to-peer related. We’ve tried to understand how blockchain and identity and fraud and authentication all can work together; if there is a way to leverage this in a commercial organization and with government agencies. Most scenarios have been for smaller populations, unique use cases that really fit the model.”

‘The biggest challenge is the distraction over disruption’: FIS chief product officer Rob Lee

Fidelity Information Services, one of the world’s largest banking technology companies, provides the back-end software and financial services technologies for 20,000 clients in 130 countries. Headquartered in Jacksonville, Florida, FIS’ main clients are banks. The company runs a Little Rock-based startup accelerator program, which just selected its second class of mentees.

Rob Lee, chief product officer for banking and payments and a mentor for the financial technology accelerator program, spoke to Tearsheet about the biggest issues affecting banking, what motivates the company to support startups through its accelerator program, and the biggest trends affecting the industry. Here are excerpts, edited for clarity.

What’s the biggest issue banks face with the proliferation of startups developing competing lines of business?
The biggest challenge is the distraction of the discussion over disruption. Banks are every day faced with what are they doing with new technologies how are they blocking disruptors or embracing disruptors. I don’t think that our bank clients are being impacted from a transaction perspective with disruptors going into their business.

What’s the biggest bottleneck affecting how banks operate today?
The biggest problem is that the information [about customers] tends to be siloed across the organizations.

Is the purpose of your startup accelerator program to allow others to build software products that can seamlessly interact with bank platforms run by FIS?
We bring 10 new companies that are building things around the financial services world. All those apps need data and customer information to drive their value proposition and our API gateway provides a way to build on top of that.

So you’re really looking for startups that can partner with the banks?
We invest in research and development and innovation and startup companies not in the accelerator — the accelerator is just one way to do that. [The startups] are really pushing the envelope; for example, we have a company called Alpharank, and they’re using the Facebook social graph paradigm and applying that to financial services.

Is there a trend that is overhyped or has lost your attention?
There was a lot of hype about blockchain a year ago when it was seen as a panacea, and we’ve seen that subside somewhat. We’ve seen a lot of public proof of concepts, a lot of consortiums, and not much actually happening to manage real transactions.

What’s the next big thing?
You’ll see massive changes in the use of voice as an input. Today Siri and Alexa are about 95 percent accurate — there is some latency in that but in the next few years, with all the investment, it’s predicted that it will get to 99 percent accuracy with close to zero latency.





Inside Capital One’s digital identity strategy

identity and indian aadhaar

In an ideal digital world, people would have digital identities and own them entirely, without any one organization — your bank, Verizon, state government, Facebook — controlling all aspects of it.

One reason effective identity solutions haven’t taken shape in the past is the space requires a lot of collaboration among different parties; so far, most efforts have been unilateral, said Matthew Thompson, Capital One’s director of digital business development.

Now Capital One is trying to change that, with a digital identity application programming interface (API) that lets websites and apps authenticate the identity of their customers against the identity information stored by their banks. The bank plans to launch out of its beta mode later this year.

For example, instead of a customer providing her name, address and birthdate when registering a Lyft account, she can enter her Capital One account credentials instead and the bank will share her verified identity information instantly and securely.

“We work hard to put our customers in control of their information and enable transparent exchange and access to it,” Thompson said. “We’re seeing regulation in places like Europe that are effectively driving industry towards [self sovereign identity] as a requirement. We want to be ahead of regulation here by doing what’s best for customers.”

Banks already act as stores of trusted information. They have an identity relationship with millions of customers and can provide a lower friction wave for them to prove who they are online. Many solutions in the market today use things that have relatively low success rates and put the friction on the user to prove who they are, like knowledge-based authentication. Answering questions like ‘Which of the following streets did you live on in 2001?’ is harder to answer than it seems for people in urban areas that move a lot.

The recently revealed identity project between IBM, authentication provider SecureKey and Canada’s major banks — Bank of Montreal, CIBC, Royal Bank of Canada, Scotiabank and TD Bank, as well as credit union network Desjardins — is another example of banks collaborating with networks outside themselves to try to fix the problem. They’re creating an app that allows people to verify their personally identifiable information for services like new bank accounts, driver’s licenses or other utilities.

“You don’t want to trust one entity with all aspects of identity, it’s good to have checks and balances in that system,” he said. “And frankly, all the components that are required aren’t core competencies to any one company providing these services. Identity is core to our business.”

In the U.S., BBVA made digital identity the theme for the ninth edition of its Open Talent fintech competition. The finalists, which were announced earlier this month, will have the chance to work with senior leaders across BBVA and make business connections. Also, USAA has invested in and adopted the technology of ID.me, which lets financial institutions remotely verify customer identities. Thompson cofounded ID.me in 2010 and left eight months ago to join Capital One.

“What’s missing in the ecosystem today is the ability to leverage trust you’ve already established with one party and extend that out beyond the one party,” Thompson said, noting he often uses “trust” and “identity” interchangeably. “Trust shouldn’t live in silos. To be effective with identity requires trust by all parties involved.”

What VCs need to know about digital identity startups

The hottest word in financial technology right now is about digital identity.

“Identity is such a core component to being able to deliver financial services,” said Jay Reinemann, a general partner at fintech venture firm Propel Ventures Partners. “It’s the way financial services are priced. It’s a core component of fraud. Even from a governmental perspective, taxation requires identity.”

Here are three big distinctions investors make when analyzing a potential deal in the digital identity space.

Financial inclusion
In the developed world, fixing identity is important for matters of security. In the developing world, it’s a way to bring identity to those that don’t have an economic identity or financial access to those excluded from the formal financial system. Investors’ checklists and how they analyze potential deals will be different in each world.

Also, some jurisdictions don’t have national identity schemes. To some investors it may be easier or more interesting to look at investments in a country that has an identity scheme on the basis that it’ll be easier to create a digital version, but others will prefer to play in the gaps.

PTB Ventures, which invests in early-stage digital identity companies, is backing a company that uses biometric authentication in markets with poor infrastructure for authentication at registration, said managing partner Dave Fields.

“In markets that have really poorly developed infrastructure, creating this basic identity scheme can be really disruptive,” Fields said. However, “if their go to market strategy was based in the U.S. I don’t think people want to be waving their hands in front of cameras every time they need something to eat or are seeking healthcare.”

Reinemann takes a slightly different attitude.

“As long as theres a bad guy they’re always going to find new ways to falsify or to steal an identity to use it for something — whether theres a national identity system in place or not,” he said.

Collaborating with the government 
Despite the many entrepreneurs dedicated to the idea that blockchain technology can solve the fragmented digital identity problem, some VCs say it’s better to invest in a business opportunity build on top of existing technology — blockchain or otherwise — instead of investing in building new technology.

“We invest more in areas where there is a clear business case — trying to find places where to implement solutions,” Reinemann said. “Even in the U.S. … there are very clear requirement of what companies need to gather but a very unclear way of how to do it,” he added, citing banks’ Know Your Customer requirements.

Andi Dervishi, fintech global head of the International Finance Corporation, said it’s interested in companies that mine identity instead of building it.

“As we enter the digital world we leave traces on a day-to-day basis,” he said. “Companies not building identity, but identifying it by reading all these different traces, could be companies we’re interested in because they don’t have this dependence on the government, they look at what’s already there.”

Any early stage business requires some strong collaborating body, Fields said. Fintech startups are partnering with banks — OnDeck Capital and JPMorgan Chase have partnered on small business loans, for example. Digital identity startups are too. When it comes to digital identity, entrepreneurs would be better off thinking of regulators as partners instead of taking an antagonistic approach to them.

Paying for protection
In a perfect world, consumers would get the money from the deals that allow companies to monetizing our data, said Andre Boysen, chief identity officer of SecureKey. Amazon pays about a 2 percent for taking customer credit card information to make a transaction. That pile of fees over the course of a year would average about $50 if Amazon put that burden on the customer. Most customers wouldn’t pay that.

That’s one reason business-to-business companies make for easier investments, for the time being, than business-to-consumer companies: Customers aren’t willing to pay for their protection. There’s a knowledge gap, however. Customers generally understand that their data is being used for reasons beyond identifying them and being sold to third parties to use in some way. Most allow it so they can easily interact with the services they like.

“Actions can be driven by who is more directly bearing the cost of these things,” Fields said. “At a consumer individual level we suspect there are privacy violations but it’s hard to attribute the cost of it. A lot of times the violations are being born of the businesses… but potentially privacy of an individual will be more solved by people who are directly bearing the costs.”

WTF is digital identity?

Moving shopping and banking online means our transactions are more than making money: They’re about getting data.

“People are extremely aware of how digitized their lives have become and how little control over that. They want to know that if they’re providing this info they’re getting something for it and it’s not just for banks or large technology companies to use for their own purposes,” said Steven Ehrlich, lead analyst for emerging technologies at Spitzberg Partners.

That data says a lot about us — a lot more than a piece of plastic with a photo and address on it. There lies the digital identity dilemma: legally accepted drivers licenses and passports supposedly show that we are who we say we are in the physical world, but don’t do the same in the digital world. As the digital world evolves, that could get complicated. But right now banks, technology firms and governments are all looking at how to make it easier for people to prove they are who say they are, effectively allowing customers to own their own identity. In this WTF, we dive deep into digital identity.

So, what’s a digital identity?
A guy walks into a bar and shows the bartender his ID. In doing so, he gives the bartender more information than he needs: his name, date of birth, address, height, weight, eye color, whether or not he’s an organ donor. But all the bartender needs to verify is this guy’s date of birth, because all he needs to know is if he’s of the age to be in a bar.

People do this online everyday: when they want to login somewhere or make a transaction they often give away more data than they may realize they want to, and to a company that doesn’t need all of that information.

“How the consumer behaves when online, what they share about themselves, where they’re located, how they interact with their device — all of those components are really what creates digital identity,” said Kim Sutherland, senior director of fraud and identity management strategy at LexisNexis Risk Solutions. “There are use cases where your digital identity never has been connected to the physical world and there are other times when your digital ID and physical ID do need to intersect.”

What’s the problem?
Everyone owns your identity, except you. According to the government, you are what your drivers license or identification card says you are. Amazon, Facebook and Google identify you by the places you check into and map, what you purchase and where you have it delivered. But the airline operating your flight home won’t believe you’re you if you give them the email tied to all that data. And Amazon doesn’t ask for your drivers license when you want to buy something, you enter a password.

Where do banks come into this?
Banks are well positioned to provide identity verification services because of the amount of data they hold and the level of trust consumers and corporations have in them as authoritative institutions. Even when confidence is low.

“Banks really think about their role as custodians of personal data and the identities of their customers,” said Ehrlich. “They recognize it’s becoming more important to have access to this information so they can optimize services but do it in a way that is transparent, secure and equitable so people continue to use the services and provide them with even more data.”

Now banks need to look at what data is necessary for them to conduct their operations and how they can best use the information to optimize their services in a way that makes their clients feel they really are equal partners.

What’s the solution?
The holy grail of digital identity is that people only provide the minimum data necessary for their purpose. There isn’t a credible plan to make it happen across the world and across industries. But everyone involved is working on it.

“In order to get to that situation we need to find a way for people to be in charge of their own information so they don’t necessarily have to trust a bank or Google or Facebook,” Ehrlich said.

Biometric authentication efforts are the most visible examples.

IBM is working with security company SecureKey and several major Canadian banks on an app that would push notifications to people when utility providers need access to their information. For example, when signing up for a new phone line, the customer would receive a notification saying the wireless provider needs to verify his or her name, address, date of birth and social security number, and that it will access that information through the customer’s bank. The customer approves, by biometrical authenticating on the phone, and the bank transfers that data to allow the customer to open the account.

“People will feel much more secure if they know they can control their information and permission it out only if they want to,” Ehrlich said.

He added that there’s a design element to the solutions as well. Organizations working on solutions worry that everyday people won’t have the tech savvy to work with encryption, but that can be solved by creating a user interface customers want to try and use.

How long will this take?
As they say in the Valley, it will change the world in our lifetime. Future generations will be taking this for granted.

Is PayPal the U.S. answer to Alipay?

The U.S. may not have an exact answer to Alibaba Group’s Alipay, China’s dominant third-party online payment platform, but PayPal is certainly starting to look like it.

Both provide online payment capabilities to merchants and consumers. Both are using data from their existing customers to offer consumer credit and small business loan options. Now, PayPal is catching up to Alipay in that it’s starting to get into consumer-to-business mobile payments and working to become more than the yellow button on your business’ website, as Amit Mathradas, general manager of small business at PayPal, puts it. It wants its products, partners and consumer and merchant clients to come together in a more comprehensive way.

“PayPal is growing with the merchant and taking a lot of direct input and feedback from our businesses,” Mathradas said. “We’re working hand in hand to help develop solutions so they can focus on running their business while we handle the fintech.”

So far this year, PayPal has announced that customers will soon be able to buy things at physical shops with their PayPal balances through Android Pay, that it will extend a pay-with-Venmo option to PayPal accepting merchants by the end of the year and closed a huge deal with TIO that will bring 10,000 billers into the PayPal network. Last week, it revealed its latest offering, PayPal Business in a Box, in partnership with e-commerce platform WooCommerce and accounting software company Xero.

That’s a lot of new data to be working with on top of what PayPal already has: 16 million merchant and 203 million consumer accounts. And with all these new agreements bringing even more customers into the network, PayPal can, like Alipay (now officially Ant Financial) use the customer data from those transactions to give consumers and merchants access to other financial services that look a lot like typical core banking products.

“The transaction volume you take part in using your PayPal account helps qualifying you towards our Working Capital product,” which offers small business loans backed by WebBank, Mathradas said.

PayPal Working Capital has provided $3 billion in loans and cash advances to 115,000 businesses since its 2013 launch.

Mathradas said while PayPal’s merchants had long considered it an important payments partner, they had been asking for things like access to cash and consumer credit to help drive increase in online store conversion. When merchants sign up for Business in a Box, they’re automatically registered for a PayPal business account that integrates into its WooCommerce store and Xero account with application programming interfaces.

There are 28 million small businesses in the U.S. that account for 54 percent of all of U.S. sales, according to the 2016 U.S. Small Business Profile by the SBA Office of Advocacy, and Xero has those in its sights.

“We’re going to change the game for small businesses because they make our economy go round and round, said Herman Man, Xero’s head of product for the Americas. “When it comes to their ability to monitor financial performance, real time is crucial to their survival.”

Mathradas declined to comment on PayPal’s threat to traditional banks.

“The one thing we do offer is an end to end solution. We can serve merchants or consumers that want be paid online, at a trade store, at a store, that need working capital, that need credit. One-stop shop is what separates us from anyone else out there. We’re going to continue using these assets to grow.”

How drones are changing the way Allstate assesses damaged homes

Just as Amazon’s drone delivery service is transforming retail, drones are making inroads in the insurance industry.

Allstate is using drones to assess damage property damage in Texas, Oklahoma, New Mexico and Colorado, particularly on rooftops — radically cutting the amount of time the process takes.

“What’s amazing is, if you consider the pure drive time of an adjuster taking the picture [on the rooftop] and getting back in the truck and going to the next location, we’re doing two or three locations a day, and with a drone we’re doing eight or nine or possibly more,” said Allstate spokesman Justin Herndon. Allstate is the second-largest property and casualty insurer in the U.S.

Allstate used drones to inspect rooftops of homes damaged by Hurricane Matthew last fall in Georgia and South Carolina. The company said drones cut down the time it took to inspect rooftops, and the pictures they took were high quality 4K-resolution images.

“The images are better than what many people see on television, and you can zoom into a single shingle on the roof,” Herndon said.

Drones are used during a claims process after the first notice of loss, according to Allstate. After the customer gives the green light to have a drone used, the company calls a vendor that deploys the drone. The vendor then sends the image back to Allstate almost instantaneously, at which point Allstate makes a settlement offer. The company has been testing the technology for a couple of years, which as of this spring had moved beyond the testing phase. Allstate plans to expand the use of the technology to other parts of the country.

Around 20 percent of property and casualty insurance companies are currently using drones, a percentage that could double next year, according to Novarica. The uptick in the number of insurers using drones is partly the result of a Federal Aviation Administration ruling last June that set guidelines on drone use by businesses, including the requirement for the drone operators to have passed a drone-piloting exam, along with the need for a visual line of sight between the operator and the drone. Insurance companies may still need to send a person to assess areas the drone is unable to reach.

Allstate is partnering with a startup, Eagleview, to carry out the drone inspections of rooftops. Other startups operating in the field such as Fluttrbox are working with insurers to conduct on-demand inspections of commercial properties by drone.

“It gives consistency for the insurer — it gives them better quality imagery and consistency at a lower price point, ” said Fluttrbox founder and CEO Aristo Mohit-Coker.

A drone can be used to analyze a rooftop at any point of an insurance company’s evaluation process, either after a claim has been filed or to assess risk beforehand. Analysts note that drones can assess properties that would otherwise be difficult to reach.

“They could be not very easily-accessible buildings where they don’t have a lot of information about the construction, or they’re in remote areas, or they’re buildings that are older or are considered risky,” said Jeff Goldberg, svp of research and consulting at Novarica.

Despite the advantages of drone technology, Goldberg said insurance companies must find ways to safeguard the privacy of individuals, especially given that privacy laws vary by state. Ensuring that the public is informed about how drone-delivered property assessments will work should also be a priority.

“Do you want to be known as the insurance company that’s known to be spying on people? Public perception is just important as the law.”

Calling BS on Visa’s mobile payment numbers

Visa published a report claiming the use of mobile payments has surged in the last year. Tripled to be exact. This looks almost too good to be true, and when you read further down the article, it certainly is.

According to the Visa study, the number of Europeans regularly using a mobile device for payments has soared since 2015 from 18 percent to 54 percent.

The study looks comprehensive, polling over 36,000 online consumers in 19 European countries. Such a huge jump is a big red flag that there is some fundamental problem in the study. The questions and methodology were not released in detail.

Another red flag with the numbers in the study is the accompanying press release that claims 86 percent of users in Israel are mobile payments users. A quick survey of a very digitally savvy co-working space in Israel showed totally opposite results. Most people answered with “no.” Some added a caveat, “Wait, is a car hailing app considered mobile payments?” or “I used digital payments in the US — I wish I could use it here.”

Perhaps downloading an app from the app store is considered using mobile payments for the sake of this study?

It is also not clear what the 100 percent here is? Is it all the people who bank? Maybe it is all the people with smartphones or all the people who have a payment app on their smartphone? How is a mobile payment user even defined? 

Luckily, other studies shed a bit more light on the adoption of mobile payments, or lack thereof.

According to 2015 data from Trustev, only 20.7 percent of iPhone users and only 14 percent of Android/Samsung users have ever used Apple, Android, or Samsung Pay. Of the users who have used these mobile wallets, a vast majority only use them once a week. 38% of users with an Android Pay or Samsung Pay app have never even used it. This is a far cry from Visa’s 54 percent mobile payments claim. 

It seems Visa uses “mobile payments” to mean “mobile commerce”. As this paragraph from the press release explains, “In the UK, over two-fifths (43 percent) purchase high-value items such as holidays and electronics on a mobile device as well as regular transactions such as paying household bills.”

Even if we take Visa’s numbers to mean mobile commerce, the picture is not that rosy. According to the World Payments Report from Capgemini and BNP Paribas, while digital payments are increasing, cards still remain the fastest-growing digital payment method since 2010, holding at 11.8 percent. Digital payments only hit a 10 percent growth rate last year, accounting for 426.3 billion transactions.

In 2013, mobile payments and mobile commerce combined, which seems to be what Visa was actually measuring, were only 4 percent of of all debit or credit card transactions that year. Even if you apply the 2015 10 percent growth rate to 2013 figures, volumes are still pretty low.   

Let me be clear, Visa: paying my gas bill on an app is not mobile payments, nor is using Travelocity.  

It was good clickbait. Chapeau.

P.S. Fintech seems to have a semantics problem, with companies saying one thing while meaning another. Earlier it happened with Lemonade and its misuse of P2P. 


9 alarming facts about online lending

alarming facts about the online lending industry

Online lending has been a very popular space of late. Investors have risked billions of dollars of risk capital in getting these platforms up and running. Startup online lenders like LendingClub and Prosper are lending billions of dollars out to individuals every month. Business lenders like Kabbage and Funding Circle provide access to capital for thousands of small businesses who either can’t or won’t go to traditional sources of funding. But not all is peachy in online lending.

Here are 9 things that may change your view on the online lending industry:

The lower end of the credit spectrum is deteriorating

lending club charge offs increasing
from monjaco

Looking at the LendingClub data, higher credit quality loans have been performing relatively in line with how they’ve performed historically. That’s true of the the platforms 36-month loans as well as the 60-months. Some of the more recent vintages, highlighted in the image above, have charge-offs levels above historical norms.

Action is probably on the way to further regulate the industry

In early March 2016, the Consumer Financial Protection Bureau requested borrowers to alert the federal agency of any complaints they have about online lending firms. Experts believe this is an initial shot across the bow as more oversight is thrust upon these startup lenders. Goldman Sachs is probably sensing this move as it readies its own offering in online lending — the bank recently hired a former CFPB attorney to head up compliance.

The industry sends a lot of direct mail…a lot

“In July [2015]alone, Lending Club mailed 33.9 million personal-loan offers,” the Wall Street Journal reported. “The average monthly volume of personal-loan offers sent through the mail has more than doubled in two years to 156 million in the year through July from 73 million in the same period in 2013,” it added. The new CMO at online lender to millennials, Upstart, said his firm is most excited about acquiring new borrowers via direct mail.

China suffered one of the largest online lending scams in history

Ezubo, which means easy-to-lease in Chinese — is being investigated for alleged illegal operations. Chinese authorities believe 95% of the borrower listings on the online lender’s website were fake. 21 executives of the Internet firm were recently arrested as Chinese officials estimate that the firm defrauded investors of 50 billion yuan ($7.6 billion).

Online lenders are dialing back using Facebook to assess credit worthiness

It’s hard to assess the creditworthiness of young borrowers in part because they just don’t have a lot of credit history. So, online lending has required the upstart lenders to create their own credit models. One input they were using were borrowers’ Facebook profiles. The idea was that by scanning a borrower’s presence on the social network, an online lender can take in enough personal data to correlate it to the likelihood of responsible payback. Anyway, that’s not happening now as Facebook is decreasing the amount of data is makes available to these players. It appears Facebook doesn’t want to get regulated as a credit agency.

Online lenders are creating their own hedge funds to fund their loans

The entrance of institutional investors into the online lending space helped form the industry. When they were first launched, loan marketplaces suffered from sluggish demand from investors. By tapping into professional investment vehicles, the industry went from peer to peer lending to marketplace lending. But these sources of capital aren’t endless and in one case, an online lender (SoFi) is creating its own hedge fund to invest in the loans on its platform (and on other platforms).

Online lenders becoming popular for small business…but they’re not happy with them

Small businesses are going online to find access to credit. A new survey from the Federal Reserve Bank of Richmond showed that over 20 percent of small businesses have applied with an online lender because they’re finding success there (online lenders had the second highest rate of approval at 71 percent). But not all is peachy in online lending-ville — the survey found that approved firms were generally not very satisfied with their experience. In particular, these firms cited concerns with interest rates and unfavorable repayment terms.

One of the most accurate indicators of SMB credit worthiness is…shipping patterns

Online lender Kabbage uses a variety of different sources of data when it looks at loan applications. Kabbage, which has funded over $1 billion in loans to small businesses, found that analyzing the shipping patterns of small businesses was, in itself, an effective basis for a credit model. In fact, credit models based on shipping patterns outperformed a traditional FICO-based model.

Lenders forwarded 924 million yuan ($142 million) on Chinese P2P platforms for down-payment loans in January, (more than 3x the amount made last July)

Experts are increasingly concerned that there’s a real estate bubble in China. Compounding the issue are popular P2P platforms that are ramping the amount of money they’re lending out to home borrowers, fueling demand for homes. By March 2016, all 20 P2P lenders that offered loans for home down payments had halted the service, in response to a government investigation.