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Digital finance by Perry Beaumont
The document discusses the landscape of digital finance, exploring various aspects such as financial services, metrics, and the integration of technology in finance. It highlights trends, regulatory environments, and opportunities for digital start-ups in fintech, insurtech, and proptech, alongside the importance of understanding key financial metrics and data collection methods. Additionally, it addresses the evolution of purchasing behaviors and revenue models in both online and brick-and-mortar contexts.
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Digital finance by Perry Beaumont
- 1. Selective Figures fromDigital Finance by Perry H. Beaumont
- 2. Digital Finance Financial servicesFinance 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 ofthird-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 versusClicks 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 bea “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 GovernorsInsuranceFDIC 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 fromSales 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 andexpense 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 methodsfor 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 mayfail 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 digitalfinancial 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 ahypothetical 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
- 14. Follow the cashflows: Various contexts of finance Raising flows Managing flows Protecting flows Raising flows: Banks, Loans, IPOs, Friends and family, Online venues Managing flows: Asset managers, accountants Protecting flows: Risk managers, insurance companies Analyzing flows: Auditors, Securities Analysts Figure 4.5 Analyzing flows
- 15. The widest partof 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 onlineinsurance 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 Employeeratio 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 Employeeratio 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 inrelation 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 categoriesand 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 beopportunistically 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 evaluatingwhen 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