Future of Open Finance
Rise of new asset class & alternative investing
Imagine a world where all assets are investible to the public and all assets can also be collateralized to access capital. That there is an easy and transparent way to value and collateralize those collectibles you own if you ever need to access capital. Some of recent developments or trends suggest that such transparency and convenience may be closer than you think.
Trend 1: more assets are becoming investible and accessible to the public
Given the current 0 interest rate environment and government printing money at warp speed, there has been rise in popularity in alternative asset investments. For example:
- Art: Company like Masterworks allows fractional ownership to collectible arts. Lowers the barrier to entry for the expensive arts investments
- Start-ups: Company like Republic allows individual to invest as little as $100 dollars into start-up deals
- Real estate: Company like Fundrise offers institutional real estate investing to retail investors.
- Collections: Company like Rally allows equity ownership in collectibles like wines, memorabilia, watches, or rare books.
These platforms are certainly not created recently, but they have gained popularity recently since investors are looking to diversify and avoid losing value of their savings due to 0 interest rate environment. Our interest rate is certainly not going up anytime soon, and I think this investment trend will continue to grow.
Trend 2: unlock value from securitizing investible assets
For these assets to become investible, they need to go through securitization / tokenization in the crypto world. Securitization basically divide transforms an illiquid asset into security, then the security is divided into equity shares. Those shares can then be traded, ideally an open exchange. This helps the asset to get a fair market value.
The process brings transparency into the value of the asset, which allows the asset to be collateralized. This means that our money doesn’t need to be tied in an asset that we own if we ever need to access capital.
Some interesting examples are:
Recurring revenues: Companies like Pipe & Clearbanc provide funding to companies based on recurring revenue (Pipe currently only offers to SaaS based business and Clearbanc only offers to SaaS based and eCommerce). They benefit businesses by offering capital without diluting company’s equity. As for investors, this is an attractive investible asset, high yield compared to current 0 interest environment while the risk is fairly low.
Lending to Crypto investors: Companies like Celsius & Blockfi provide an exchange for crypto investors to access capital and for investors to earn much higher interest rate than banks. (Celsius currently advertise 12% APY, but I don’t think it’s sustainable and one should understand the risks involved before investing)
Digital assets: Companies like Bakkt simplifies access and usage to digital assets. Digital assets include loyalty and rewards points, in-game assets, merchant stored value, and cryptocurrencies. Bakkt aggregates all digital assets into single wallet, and allows users to use them either at merchants, send to friends, or convert to cash.
Note, in this article I am not trying to advertise for any of the mentioned platform. I am simply excited that there are more ways to unlock values for users and creating more options for investors.
Why I am excited
To me, the fintech disruption is all about removing friction or barriers to entry through technology. Digital banks democratized access to bank accounts and lowered unbanked population. Robinhood and the likes democratized stock trading with 0 commission. Companies like Clair offer real time access to earned wages, and embedded finance have and will continue to simplify access to payments, lending and insurance related products.
With such great momentum, I can see that trend 1 & 2 will help push “open finance” to the next level. And this is what gets a fintech nerd like me so excited! Let’s take a closer look below.
Putting it together — opportunities
For example, combining trend 1 and 2 together, our investment in art can also be used as collateral to access capital if we ever need to. Basically, giving us more options to access capital instead of locking our money in our investments.
Note, I am not suggesting all of us to run out and leverage up. These options were not available or not very accessible to us (the general public) before. By creating more access, I believe also creates more options and opportunities in our life.
As for fintech, creating new assets ( like recurring revenue) or new alternative investments creates new opportunities, such as the following:
1. Infrastructure
2. Platform
3. Integrators
4. Service providers
Infrastructure:
Think of the Plaid for the “alternative assets”. As we can see from some of the example platforms above, the alternative investment offerings reside on different platforms. It’s not hard to see opportunities to create a consolidated view for data analysis, asset validation or to transfer assets or capital across different platforms.
Platform:
Bakkt, Pipe, and Celsius are all examples of successful platforms. Bakkt raised a $300 million series B round before their digital asset platform is launched (Bakkt already had success with their bitcoin market and custodian offering). Pipe, which raised seed round in February, raised another round 5 month later with $60 million.
Despite their initial success, I believe we are just getting started. Pipe, which offers loans against recurring revenue, currently only open to SaaS based companies. There are certainly opportunities in other types of recurring revenue. Bakkt, after extending from Bitcoin to other digital assets, can offer advises to help users maximize the usage of their digital assets based on their consumption behaviors. Celsius, which currently only offers lending against a specific crypto, can expand to other interesting defi that may offer higher interests such as different vaults in Yearn (more on this in a separate defi article).
Service providers:
Service providers can be in any of the following area:
a) Compliance
b) Credit analysis / decisioning
c) Fraud
d) Identity / KYC
e) Custodian
f) Security
g) industry specific data sources
Existing companies such as Onfido for KYC and ID verification, and Alloy for KYC and fraud are all poised to take advantage by offering existing or very similar services to these new opportunities.
Integrators:
There are at least 2 levels of integrators, I will call it bottom level and top level. At the bottom level, integrator can exist to integrate all the underlying sources and data needed. For example, say a platform for investing in wine. The underlying integrator may connect to different data sources to get info on the wine, connect to different exchanges to get the most accurate price of the wine. This allows platforms who want to offer investment in wine just an API connection instead of building from the scratch.
At the top level, integrator can combine infrastructure, service providers, and even different platforms, so that making it easy for any users to embed “alternative investing” into their existing offering.
Integrators are probably for later stage as the alternative investing market grow.
Conclusion
We are at the beginning of open finance, opening the door to investing in all different types of assets, and unlocking the value of those investments for capital needs. This article is just an introductory, as a number of the companies mentioned above deserve a deep dive.
Thank you again for reading.