2. Digital Finance
Financial services Finance functions
BricksClicks Accounting
& Audit
Business
development
Business
intelligence
Channel integration ● Valuing digital start-ups ● Big Data ● Data Science
● MicroFinance ● MicroInsurance ● MicroProperty
Tangencies Financial
metrics & KPIs
Disruptors, Innovators, &
Aggregators/Disintermediaries
P*QIntangibles
Historical context, Theoretical foundations & Modern applications ● Digital tools
● A new Digital vocabulary ● Machine learning & AI
● Horizons ● Cyber risk
Regulatory
& Compliance
Risk
management
FinTech
InsurTech
PropTech
RegTech
Overview of Digital Finance
Figure P.1
3. High
Low
Medium
Company venues
Combinations of third-party and company venues
Ability of firm to control its message
Venues
Third-party venues
Engagement venues and ability to control message
Yelp
Website
Mobile site
App
Twitter
Instagram
Linked-in
Figure 1.1
4. Clicks Bricks
Bricks versus Clicks
Key attributes of respective venues
● Speed ● Engagement
● 24/7 ● Appointments may be available
● Anonymity ● Social
● Consistency of experience ● Serendipitous
● Impersonal ● Personalized
Figure 2.1
5. Ways to be a “Click”
The three P’s
The product (inclusive of
services) is digital in nature
(e.g., software, coding,
social media, online
teaching…)
The purchase of the
product or service is via an
eCommerce portal
The marketing, promotion,
delivery, and support of the
product is digital
Each one of these can vary from 0-100%, and the amount of human effort to support each can vary significantly as well
Product Positioning Purchase
Figure 2.7
6. FinTechInsurTech
PropTech
• InsurTech + FinTech Purchase of online policies (InsurTech) with electronic payments (FinTech)
• FinTech + PropTech Crowdfunding (FinTech) to raise capital for an online house-swapping
platform (PropTech)
• InsurTech + PropTech Network-monitoring software used by insurance companies (InsurTech)
to assess the cyber risk of online rental businesses (PropTech)
• InsurTech + PropTech + FinTech CAT bond sold online (FinTech) collateralized with policies
purchased online (InsurTech) written on commercial
properties (PropTech)
Combinations of Tech: InsurTech, FinTech, PropTech
Figure 2.8
7. Board of Governors InsuranceFDIC OCC NCUA Banking FTC FHFASecurities SEC MSRBCFTC FINRA NFACFPB
Depository
institutions
Insurance
companies
Non-depository
institutions that
offer consumer
financial products
or services
Broker dealers or
other securities
and derivatives
market
intermediaries
Investment
companies,
investment
advisers, or
municipal advisers
Fannie Mae, Freddie
Mac, and Federal
Home Loan Banks
Financial market
utilities and other
infrastructures
Regulatory bodies and corresponding businesses subject to regulation
Figure 2.9
8. Instagram Amazon
Revenues from Sales versus Revenues from advertising, company examples
General perception: Social media
Net sales 2017: $3.6 B (estimate as Facebook does not segment Instagram
revenues)
100% advertising
General perception: Online retail
Net sales 2017: $177.9 B
61%
3%
18%
5%
10%
3%
Online stores Physical stores Third-party sellers
Subscription services AWS Other
The pie chart can be read clockwise, with Online stores at 61%,
Physical stores at 3%, and so on…
Source: Amazon, Q4 2017 Financial Results Press Release
The “Other” category for Amazon at $4.65 B
is estimated to include $1.65 B in ad
revenue. With ad revenue for Twitter at
$1.21 B and Snapchat at $0.64 B, Amazon is
in a strong position to become a dominant
force in the marketing sector
Figure 2.13
9. A revenue and expense framework (REF) for Digital start-ups
1. Collect Revenue per Employee (RPE) ratios for existing start-ups and Bricks in the same industry segment(s) as
the start-up under consideration
2. If the RPE of the start-up under consideration is materially lower than its competitors, then what is the answer
these questions:
What is the start-up doing differently that will eventually result in an improved (higher) RPE ratio,?
Greater revenue (P*Q) via P as a result of _______?
Greater revenue (P*Q) via Q as a result of _______?
Possibilities for filling in the blanks above could include advancements/efficiencies via technology,
distribution innovations, product enhancements, improved risk management, streamlined
operations, customer service offerings…
3. Collect Employee expense per Employee (EPE) ratios for existing start-ups and Bricks in the same industry
segment(s) as the start-up under consideration
4. If the EPE of the start-up under consideration is materially higher than its competitors, then what is the answer
these questions:
What is the start-up doing differently that will eventually result in an improved (lower) EPE ratio,?
Are certain employees needed only for the early phases of the operation?
Will the need for employees decline as the start-up grows?
Will employees with a lower cost base (e.g., commission-linked compensation) increasingly replace
higher cost base employees?
If a start-up’s RPE is materially lower than its competitors, and if its EPE is materially above its competitors, then a
serious deliberation is in order as to whether the venture is truly positioned for long-run success
Figure 2.15
10. Three common methods for generating and collecting digital financial data
Digital data
Data collected from a firm’s website via user activitiesData collected from postings made by third-parties
about the firm on various platforms
(Google Alerts, Buzzbundle, Awareio)
Data collected per a firm’s social media campaigns, and user responses to those
(Twitter, Facebook, Instagram…)
Figure 3.1
11. Growth
Overfitted models may fail to capture turning points
Cycles of a core business, or economic sector
A challenge that can exist with a model that is overfitting the data is that is may
narrow in on a specific point for an expected outcome (as at Point A) as
predicated upon the incorporation of past data, but fail to capture a turning point
(as at Point B) which might be captured by a model that is not overfitting the data
Point A (overfitted model)
Point B (non-overfitted model)
Overfitted versus Non-overfitted modelsFigure 3.2
12. Stages of digital financial metrics: From creation to dissemination
Digital
at origination
Digital
at collation
Digital
at dissemination
Online sales
Online sales are combined with other data elements
Aggregated values are formally reported
XBRL
Online financials
QuickBooks
Salesforce
Online banking
eCommerce
platform
Figure 4.1
13. Steps in a hypothetical journey of sales data
Can Digital Financial Metrics comprise 100% of a firm’s financial reporting data stream?
Online sales generate digital
revenue numbers at point of
sale
Results are collated for
management to review
Data creation Data collation Data reporting
Revenues of individual sales are
rolled up into an aggregate
value
Figure 4.3
15. The widest part of the funnel represents
the objective of obtaining a large number
of leads
This narrower part of the funnel
represents the number of quotes
generated to potential customers from
the leads received
The narrowest part of the funnel
represents the sales generated from
quotes
One way to achieve a greater efficiency of
the funnel is to generate more than one
quote from a given lead… this is
commonly referred to as obtaining a
cross-sale
Activities contributing to leads can include calls, Emails, marketing campaigns, Adwords, and more…
Perspective of a typical sales funnelFigure 5.3
16. High
Low
Medium
Intensity
Purchasing an online insurance policy
Trading platforms (Charles Schwab, eTrade, TD AmeriTrade, and others)
Money transfers (PayPal, Venmo, Apple Pay, and others)
Intensity of technology in relation to finance activities
The user is also evolving from low touch to high touch
as we move along the x-axis.
Setting up a PayPal account and making a money
transfer involves far fewer steps than opening a
brokerage account and actively trading, where
multiple steps can be invoked (e.g., purchase only
when a price is at a certain level or lower and cancel
after 3 days…)
Lower
touch
Higher
touch
Activity
Figure 5.4
17. High
Low
Medium
Revenue per Employee ratio
Maturation phases
Consolidation phases
Earliest phases
Revenue per Employee (RPE) over time
Ways that the Revenue per Employee ratio could
improve over time involves either the numerator
(Revenue) becoming larger, the denominator
(Employees) becoming lower, or both, and scenarios for
these could include the following:
• Fewer tech persons required over time as the
software evolved into more of a steady-state (though
oftentimes tech staffs grow to accommodate
enhancements)
• Greater revenues as the product becomes more
widely used and price mark-ups follow (though
competitive pricing may help with gaining market
share, or may be forced by offerings of new entrants)
Lower efficiencies and
economies of scale
Time
Higher efficiencies and
economies of scale
Figure 5.5
18. High
Low
Medium
Expense per Employee ratio
Maturation phases
Consolidation phases
Earliest phases
Expense per employee (EPE) over time
Ways that the Expense per Employee ratio could
improve over time involves either the numerator
(Expense) becoming smaller, the denominator
(Employees) becoming larger, or both, and scenarios for
these could include the following:
• Employee training and supervising requirements
decline over time along with employee expenses
owing to a more experienced workforce
• Future employee additions do not require the greater
level (and higher expense) of special skills that were
needed at the firm’s time of launch
Lower efficiencies and
economies of scale
Time
Higher efficiencies and
economies of scale
Figure 5.6
19. High
Low
Price
Business models in relation to Price and Touch
Touch
Low
Starbucks
AirBnB
While the original business model of Starbucks was to take a low
touch-low price coffee sale (vendor) to a high touch-high price
coffee sale, the business model of AirBnB was to take a high touch-
high price stay (hotel) to a low touch-low price stay (home)
High
Hilton
Coffee cart
Diversity of options
Low High
Figure 5.7
20. Financial metric categories and KPI corollaries
Financial metric categories and examples (Bricks or Clicks) KPI corollaries (Clicks)
For companies that have both Brick and Click revenue streams, the question can arise as to whether
these entities might be better run as a single integrated effort, or if there could be value to the
businesses being treating separately. There is no one single correct response, and the considerations
cited here can be helpful with guidance to draw out various considerations.
Profitability
Liquidity
Efficiency
Solvency
Profitability Revenue per visitor
Liquidity Cost performance index
Efficiency Conversion rate
Solvency Customer lifetime value
Net Profit Margin:
Net Income
Net Sales
Sales to Working Capital:
Annualized Net Sales
AR + Inventory – AP
Accounts Receivable Turnover:
Net Credit Sales
Average Accounts Receivable
Times interest earned:
EBIT
Interest expenses
Figure 5.9
21. Growth
Tangencies can be opportunistically introduced at any stage of a cycle
Cycles of a core business, or economy
A tangency can attach itself to any point of a cycle, with the potential of creating
an ancillary revenue stream via a new though complementary product or service
Tangencies and points of attachmentFigure 6.1
22. Criteria for evaluating when to place a Xtech
outside of the firm versus inside
• Opportunities to improve, enhance, or
motivate existing lines of business
• Low potential of channel conflict
• Serves as a natural extension of an existing
internal business segment
• Is related to a target market of a current line
of business
• Is more symmetrical with existing business
priorities
• Potential to impact the entire firm
• Existing resources are well-positioned to help
leverage the venture in terms of operations,
distribution, marketing, or other
• The internal culture is aligned with the culture
of the new business
• Considerations related to compensation, flex-
time, benefits, and other are consistent
• A greater potential for growth with more freedom
to experiment and develop
• High potential of channel conflict
• A brand new product
• A brand new segment of the market
• Is more asymmetrical with existing business
priorities
• Impact of success or failure is likely to be
contained to the venture (without knock-on
effects to the entire firm)
• Speed of getting up and running is key
• Value of operating quickly under a new structure
is paramount
• A unique culture is associated with the new idea
• The way persons are to be compensated and
work environment expectations all differ from the
existing firm
Place inside Place outside
Growth
Channel
Placement
Market
Timing
Culture
Organization
Penetration
Figure 8.6