Is Fintech Ready For Open Source?

TL;DR: Yes! And is the platform to prove that out.

Is fintech ready for Open Source?

The first time I asked this question was at a packed entrepreneurship festival l at the NYU Stern School of Business.

The topic of conversation was: “Fintech Ventures – Making Money with Money”.

The panel included innovators Eli Brovermen of Betterment, Vince Passione of LendKey, and Vinay Patel of One Financial Holdings.

The answer? A resounding “Maybe”.

I’ve been asking the question ever since. I’ve asked lawyers and fintech meetup groups. I asked the professor of Management Information Systems at Stern, the head of strategy at a major investment bank, and the head of sales at Thinknum.

Sometime I get better than “maybe,” - sometimes I get “That’s a great idea, but how will you make money?”

So instead of asking, we decided to find out for ourselves. But first, let’s go back to the beginning.

The beginning, sort of

I’m doing a (free) operating system (just a hobby, won’t be big and professional) …

Linus Torvalds said this when he released the Linux source code to “the wild”. At the time that meant posting it on a Usenet newsgroup, today he’d probably upload it to Github.

Of course Linus didn’t invent the concept of open source, that honor is split among early day programmers who believed that the more eyes on the code the better.

But Linus’s contribution could be considered the most influential.

Wikipedia - another open sourced project - nicely sums up the impact of the Linux kernel: “The Linux kernel has since expanded to support a huge array of computer architectures, many more than other operating systems or kernels. Linux rapidly attracted developers and users who adapted code from other free software projects for use with the new operating system. The Linux kernel has received contributions from nearly 12,000 programmers from more than 1,200 companies, including some of the largest software and hardware vendors.”

What is open source?

Open source software is software whose source code is available for modification or enhancement by anyone.

“Source code” is the part of software that most computer users don’t ever see; it’s the code computer programmers can manipulate to change how a piece of software — a “program” or “application” — works. Programmers, who have access to a computer program’s source code, can improve that program by adding features to it or fixing parts that don’t always work correctly.

Current state of open source software, 50,000 foot view.

Over the years, open source software has often surpassed its private competition in terms of security, reliability and utility. It’s also slowly evolved from back-end building block (think: Linux, Apache, PHP) reserved for the techiest of techies, into an effective tool for every user at every level of the full stack.

Good examples of open-source products are:

  • Internet browsers Mozilla Firefox and Google Chrome (Chromium, technically)
  • Wordpress, the content management system powering 30% of the world’s websites
  • E-commerce platform Magento
  • Android
  • LibreOffice
  • Apache HTTP Server

What is fintech?

fintech google trends

A portmanteau of the words “finance” and “technology,” fintech has become increasingly bandied about in the media and in technology circles. Yet despite being in vogue, it’s a term many – including tech savvy and clued-up entrepreneurs – don’t quite have a handle on. Indeed, it’s a fresh enough term to not yet feature in the online version of the Oxford English dictionary

Taken at its broadest, fintech is shorthand for ‘innovation in financial services’, whether that means new products from new startups, or the adoption of new approaches by existing players where technology is the key enabler. source:

A recent report from Accenture found that global investment in fintech has skyrocketed from $930 million back in 2008 to nearly $3 billion in 2013. The UK and Ireland alone received over $700 million from investors between 2008 and 2013.

Fintech in 2015

According to Bloomberg, bankers are leaving lucrative positions for no-salary tech jobs because they believe the industry is ready for disruption.

As investment firms including UBS, Royal Bank of Scotland Group Plc and Deutsche Bank AG have curtailed or shuttered lines of business, particularly in debt trading, the contractions have prompted former bankers to quit finance and put their experience to use in the new field of financial technology, or fintech.”

In fact, 86 percent of the bank chief executive officers surveyed by PWC last year said technological advances will have the greatest impact on banking.

I love this image entitled Unbundling A Bank. Sounds almost poetic.

Bundling a Bank By CNBC Insights

Notice the large collection of wealth management startups on the right. More in a moment.

Forbes covers a few startups to watch and there’s probably names you’ve heard of:

  • Wealthfront
  • OnDeck
  • Stripe
  • Square

So, even in this slow moving, highly regulated industry, open source hasn’t just found a foothold, it’s an entrenched resource that most of the major players couldn’t function without.

Banking platforms rely heavily on open source software especially for their infrastructure.

Finally, note the polish of Opengamma, the open source risk and analytics platform. The high-profile funding they have received from industry leaders shows how far the industry has come in embracing open-source as a viable approach in fintech.

Why open source for fintech?

The disruption we may expect to see on the horizon is for firms to move from mere consumers of [open source software] to major co-developers, like their silicon valley counterparts. ~ Jamie Edwards

Now, more than ever, financial firms need a lower total cost of ownership for software. Price competition is razor sharp and firms can’t afford to spend cash on outdated license models. Breaking down monopolies tends to result in lower costs for end users. Open source doesn’t equal free, but it does usually mean a radically smaller price tag.

Plus, firms want to avoid vendor lock-in. When you deploy an open source project, you control the code. You have the freedom to go without the developer, or to choose a third-party integration partner, if that’s what makes the most sense to your business.

In addition to the cost benefits that can be realized by embracing open source, financial institutions are also able to enjoy greater levels of software innovation. For example, in areas such as cloud computing and big data, innovation is being driven by open source – in these areas, it’s no longer about whether to choose between a proprietary or an open source vendor, it’s which open source vendors you choose.

Security Concerns

Open source software is more secure than you think. In fact, experts argue that the transparent nature of open source software makes it more secure.

It is important to understand that validating a software’s security strictly depends on your ability to audit it. And the audit of software depends on your access to the source code.

While the audit of proprietary software depends on the cooperation of the software’s owners, open source software can be audited as needed.

This concern has become more and more severe as backdoors in well established software have been disclosed. In the face of this, the ongoing debate on whether open-source software increases software security or is detrimental to its security has become pointless. Only open-source software can be freely audited and therefore, proprietary software must be considered inherently insecure.

If I look at how people break software, they don’t use the source code. ~ Dr. Ian Levy, technical director at the UK’s Communications-Electronics Security Group (CESG).

In fact, there’s a concept in software development known as “Linus’ law” that says “given enough eyes, all bugs are shallow.”

In a commercial open source environment, no member is able to commit code without undergoing a through an approval process. Even after this any new code goes through a sophisticated process of review, acceptance and rejection. This process leads to well-tested, enterprise-ready software.

All that being said, there is no software system that is completely risk-free, but open-source software allows you to be proactive in detecting these risks.

Why wealth management as the next step in open source fintech?

The digital revolution is arriving later to wealth management than to other industries such as media and retail because the wealthiest investors are older. But 2015 looks like the year this industry is pulled into the next century, as the $41 trillion bubble of wealth works its way down to Generations X and Y.

With the advent of robo advisors, the wealth management fintech segment is exploding right now.

Wealthfront is KPMGs 2014 innovator of the year. Schwab just released their own “intelligent” portfolio. (I’ll debate the intelligence of their portfolio a little lower.) And it seems there’s a new robo advisor on the block every day.

At the same time, possibly due to improved investor education through resources like r/personal_finance and the Boggle head forums, there’s a trend away from sales oriented brokers to fee only investor advisors (aka wealth managers) with a fiduciary duty to the investor.

Robots vs. Humans

Robo advisors compete with investment advisors on the basis of lower costs and on the basis of higher trustworthiness.

A computer can’t have an ulterior motive or a conflict of interest, but with brokers and others that make a commission your investment, that can’t always be said about humans. The real story though (as tends to be the case) is more nuanced.

Let’s get back to Schwab’s Intelligent Portfolio.

What happens if automation is used to hide the conflict of interest? As we see in Adam Nash’s teardown of Schwab’s service, there’s other ways to extract a profit out the unwary investor.

Cash has a significant chance of a negative real return over time due to inflation risk.

Cash assets can present a conflict of interest when the investment manager is advising cash and then re-investing it for its own revenue.

In a research paper published in Financial Analysts Journal last year, Vanguard founder John Bogle cited cash drag as one of the ways investors are not making the most of their investments.

And yet, Schwab’s new offering requires a cash position from a minimum of 6% to as much as 30% cash, according to Schwab’s disclosures.

“Why would an investment service purposely not invest almost a third of your account?”

To find the answer, follow the money.

A different way…

We believe the future of wealth management is the cyborg advisor. A human that uses technology to enhance relationships and scale personalized service.

In my opinion, the robo advisor is becoming a commodity. Another robo advisor emailed me the other day, this time offering zero fees on their core service. In fact, the fee for providing this functionality must drop to near zero as the functionality becomes commoditized.

It’s for this reason that, although today each is a tech news darling, a single robo advisor will not come to dominate the wealth management industry. The industry will continue to be served by a combination of automation and human interaction. The advisor, the human element will never be obsolete.

As for the basic portfolio management functionality (the robo advisor)? It will be the robo advisor “makers” that profit from the tech. Just as Magento became THE platform for creating shopping carts, WordPress became THE platform for creating websites, will become THE platform for managing portfolios.

It’s the makers, the community of developers around each platform that bring and extract the most value from the technology. Our goal is for to be at the center of this community.

With that in mind I’d like to introduce - Wealth Management, Set Free.

Written on May 26, 2015