Plus: Shareholder Activism, Loan Tightening: Europe vs US, Chinese Consumer Lending
|Marc Rubinstein||Aug 21, 2020||21||2|
Hello and welcome is issue #14 of Net Interest, my newsletter on financial sector themes. If you’re new here, thanks for signing up! Every Friday I go deep on a topic of interest in the sector and highlight a few other trending themes underneath. If you have any feedback, reply to the email or add to the comments. And if you like what you’re reading, please do share and invite friends and colleagues to sign up.
When I left my hedge fund job a few years ago, I was sad to leave my colleagues and my plush office in Mayfair. Most of all, though, I was sad to leave my Bloomberg terminal. After I’d left, I was able to eke out a few more months of terminal use, first via Bloomberg’s user transition programme and then by blagging. But eventually my B-unit would no longer get me in. My access to the orange-on-black information pleasure dome was denied.
People talk about the attention economy in the context of the big social media companies constantly. They rarely talk about Bloomberg in the same terms. Why would they? Bloomberg is a global financial data provider catering to investment managers, analysts and traders. Yet on another level Bloomberg triggers the same Skinneresque response in its users as the social media networks do in theirs. Blinking message notifications, capitalised news flashes, feedback on what’s happening right now. Bloomberg provides valuable market data, sure. But it also allows me to check how many people have viewed my profile today. And for an extra kick, it provides a real-time ranking of the network’s Most Viewed People.
The difference with social media is that it’s not free. On the contrary, it’s really expensive. The company charges US$24,000 a year for access. And it guards that access strictly, insisting on biometric ID verification before entry. Which is why when I was out, I was out and for that sum I couldn’t really justify buying my way back in.
The Bloomberg-as-social-network analysis is a useful one because without it, it’s hard to see how Bloomberg has survived:
The average user uses only a small fraction of its functions.
It has a poor user interface.
It has a high learning curve. (A comprehensive training course takes eight hours to complete.)
It’s a closed system.
Yet in the US$32 billion industry for financial data, Bloomberg is the dominant player, with a third of the market. Its position has become even more entrenched over the past ten years, as those around it have lost market share.
Within the industry, there are a few things going on.
At the top end there’s been a wave of consolidation. Several firms have positioned themselves as data aggregators for their customers. Rather than having to plug into multiple data sources, customers need only plug into a few and that makes their life easier. A few years ago Morgan Stanley calculated that Bloomberg could be recreated by stitching together a string of alternative data sources for a tenth of the price. But Frankenstein’s alternative only multiplies the potential downtime, security breaches and helpline waiting times that may arise.
Hence the consolidation. Alongside Bloomberg, there’s Refinitiv with a 23% share of the market, and S&P Capital IQ and FactSet with another ~9% between them.
Such is the degree of consolidation that competition authorities are showing some concern. The European Commission opened an in-depth investigation into London Stock Exchange’s proposed takeover of Refinitiv in June. Of four preliminary areas of concern, two revolve around data.
The London Stock Exchange has responded that it will adopt an open data framework. This is already the strategy pursued by Refinitiv and other large data providers like Factset. Bloomberg stands alone as a closed system, distributing its services principally through its desktop terminal. Refinitiv by contrast supports data partners and has a large developer community.
Consolidation has also allowed the largest players to extract more value out of their data via the monetisation of indices. Over the past few years investment banks have been selling index businesses, born on their trading desks, to the large data providers. Last week’s Net Interest discussed ICE, which bought the second largest fixed income index from Bank of America. The largest is owned by Bloomberg, which it bought from Barclays in 2016. Around half the market’s fixed income assets under management are indexed to the Bloomberg benchmark.
At the bottom end there have been a wave of new entrants. They identify a space ripe for classic Christensen disruption. Bloomberg has been very good at improving its products and services for its most demanding customers. But for many customers the company is now over-delivering—most use only a small percentage of its 30,000+ functions. New entrants are targeting those customers with more suitable functionality, at lower price.
They’re doing it across each of Bloomberg’s main silos—data and analytics, news and chat.
In data and analytics, Bloomberg is being challenged by a raft of start-ups. Some of them target smaller investors like me who baulk at paying Bloomberg’s US$24,000 subscription fee. Others target bigger customers who want to go deeper into more specialised data than Bloomberg supports. I use two alternatives—Koyfin and Sentieo.
Koyfin raised US$3 million in funding a year ago when it had 10,000 customers. Although it competes principally with the likes of Yahoo Finance and Google Finance, it also has a market among those who currently share a Bloomberg terminal with colleagues.
Sentieo is a more specialist tool for users focused on equity research. It has raised US$30 million of funding and currently has 900 customers. (Net Interest trade secret: if you read last week’s piece on ICE and wondered how we were able to collate everything Jeff Sprecher has ever said in public, Sentieo’s your answer.)
In news, Bloomberg’s biggest challenge comes from Twitter. Bloomberg’s edge in news is its instant summarisation. Traders don’t have to parse entire press releases because Bloomberg knows what they are looking for and does it for them. Twitter has crowdsourced that function and makes it available for free. *Walter Bloomberg consolidates the service for his 131,000 follower-users by delivering all caps news updates at similar speed to Bloomberg LP. At least he does when he’s not suspended.
“If you’re competing with Bloomberg, you’re in the messaging business, and everything else is designed just to make sure the right people are signed on at all times.”
The contender here is Symphony. It was formed in 2014 by a consortium of investment banks led by Goldman Sachs to provide a secure messaging platform. Initial impetus came out of a privacy scandal a year earlier when Bloomberg journalists had used terminals to spy on customers’ comings and goings. It picked up momentum by offering banks ownership of the encryption key to their own messaging.
Today, Symphony has a user base of around 510,000 clients spread over 400 firms. And although chat is where it started (over 1.2 billion messages have been sent on the platform) chat is merely the entrypoint into an ecosystem that goes broader. Unlike Bloomberg, Symphony is an open platform, allowing integration with other software. It fosters the production of chatbots within the service to automate messaging (they account for 20% of the 1.2 billion messages); it integrates with the likes of Salesforce; and it operates an app store for developers. Many third-party partners have already plugged into the ecosystem, including data providers such as FactSet and Koyfin.
The amount of information available to satisfy Symphony’s front-office customers is still far below what Bloomberg offers. However, among back-office workers Symphony has found invaluable new use cases. Traditionally ignored by Bloomberg because their firms did not typically allocate them a terminal, they now have a secure, compliant ecosystem in which they can collaborate. Bloomberg fits the Christensen incumbent model not just because it exceeds the needs of some customers but also because it ignores the needs of others. (Bloomberg sought to redress this in 2017 by launching a US$10 per month chat-only service.)
The question facing Symphony today is whether it moves upmarket into Bloomberg’s domain or whether it slides into the enterprise collaboration space instead, in competition with the likes of Slack. Since its launch, Symphony has migrated from a chat tool to a collaboration platform to a business workflow platform. In an internal memo in 2017 its CEO wrote:
“While I can’t predict the future, from what I know today, I foresee that there will be 3 players in the market: Teams will dominate the market thanks Microsoft’s push of O365 to their more than 85M user base. Slack, with its yearlong head start and broad prosumer business model will be next as they will mature and start winning enterprise wide deals and Symphony, which will be the market leader in all regulated and information sensitive markets.”
It would make sense to eye up the Slack market rather than the Bloomberg market. The market for enterprise collaboration software is about the same size as the market for financial data, but it is growing more quickly. Bloomberg has a value of around US$60 billion but Slack has a value of US$16 billion with a fraction of the market share. If Symphony is able to leverage its strength in security – a key requirement in financial services – into other industries, it may be more successful doing that than picking off Bloomberg customers.
Meanwhile, Symphony has learned from the master. Some of its start-up tactics come straight from the Bloomberg playbook. One of Bloomberg’s guiding principles was to always listen to the customer (which lives on today in its first rate customer service). Symphony has built many of its features in coordination with its customers. According to its CEO, “A year ago, customers started approaching us looking for workflow automation tools and that was the beginning of a new chapter for us.”
Symphony also copied Bloomberg’s trick to kickstart its network. In 1985 Bloomberg sold a 30% stake in his business to his first big customer, Merrill Lynch (a tactic ICE employed as well, as last week’s Net Interest describes). Last year Symphony raised another US$165 million at a valuation of US$1.4 billion, welcoming Standard Chartered and MUFG onto its shareholder list, alongside Goldman Sachs and a long list of other banks.
Symphony’s challenge currently is squeezing revenue out of its customers. It overtook Bloomberg’s 332,000 user count in 2018. But it charges US$24,000 for up to 100 seats, rather than the US$24,000 Bloomberg charges for one. Also, its network tends to be more internal than Bloomberg’s, with as many banks on it but fewer of their clients. Last year the company earned US$60 million in revenue, still a long way from Bloomberg’s US$10.5 billion.
People have predicted the demise of Bloomberg for years. In 2014 Institutional Investor wrote an article, The Race to Topple Bloomberg. They followed it up in 2017 with Can Anyone Bury Bloomberg? Others have piled on, too.
But Bloomberg’s a tough device to dislodge. It retains prime real estate on its users’ desks and it’s a social network and it’s a luxury good. In combination, these features have lent it immunity to Christensen’s disruption theory. Slack may be an easier challenge.
More Net Interest
According to the FT, activist investor Edward Bramson has increased his stake in Barclays to 5.9%. He’s been involved in the stock for over two years and has been needling management to reduce its exposure to investment banking throughout. Already this year he’s sitting on a £193 million loss on his investment. The episode shows how difficult it is to be an activist in the banking sector. Over the years many have tried: Hudson Executive Capital at Deutsche Bank, Cerberus Capital at Commerzbank, Bluebell Capital at Mediobanca, Teleios Capital at Aareal.
The problem is that the cost of re-allocating capital to boost returns can be higher than it looks. Deutsche Bank equity trades at a 65% discount to book value but who has the capacity to unwind a €1.4 trillion balance sheet? More importantly, regulators won’t let you; they won’t even let you take capital out even if you make a start on the balance sheet. In fact, it’s the regulators who are the real activists here. No outsider has been as successful at influencing bank capital allocation strategy as them.
Loan Tightening: Europe vs US
Every quarter the Federal Reserve surveys senior loan officers across the nation’s banks to see how happy they are to grant new loans. It seems that they’re not happy at all. The quarter through to July showed a rapid tightening in lending standards to businesses, up there with the fourth quarter of 2008 when the financial crisis was at its peak. This stands in contrast with Europe and the UK where lending conditions have remained more stable. Why the difference?
One reason could be divergent virus control, although cases are now picking up in Europe as they stabilise in the US, so that may change.
Another could be the loan guarantee programmes, which were much larger in Europe than in the US, relative to GDP. An equivalent loan officer survey run by the European Central Bank (ECB) concluded that “government loan guarantees played a significant role in most countries for maintaining favourable credit standards for loans to enterprises.” However, ECB meeting minutes suggest some concern over whether such favourable standards will continue into the third quarter.
Tighter credit standards could pose a problem in the US. But if they become nearly as tight in Europe, that could be worse—Europe is a lot more reliant on bank lending than the US.
Chinese Consumer Lending
Apparently there’s huge demand for debt collectors in China right now as consumer debt problems mount. One debt collector said that 30%-50% of some non-bank consumer loan books may have gone bad. Earlier today the law department of China capped consumer loan rates at a 15.4% APR (annual percentage rate). This could ease the burden on borrowers but it will make it difficult for lenders to offer loans, which could squeeze some of the fintech lenders. Ant group, the subject of Net Interest a few weeks ago, looks like it will come to the market in September. Its consumer lending business will no doubt be in the spotlight.
(Illustration by Daniel Hertzberg for POLITICO)