Humaniq and LakeBanker are two financial technology startups that utilize mobile and Blockchain technologies allowing users to bypass the traditional banking sector and thereby overcome some limitations of its outdated model. As such, both projects have the potential to improve the lives of millions of people.
Humaniq’s target is the world’s currently un/underbanked population. They aim to “bank the unbanked” and deliver “financial inclusion solutions”. These solutions include user-to-user payments in their own crypto token, a “remote work platform” and micro-finance. LakeBanker is pure banking and financial services: We employ a novel “Crowd-Banking” model in which users form a peer-to-peer network and can earn fees by supplying banking services to one another. We claim that “we will have few employees but millions will work for us”. Our target for this network is the whole world, with expansion into emerging markets being just one part of an ambitious business plan.
Both companies are beyond the idea stage: Having completed a sucessful ICO in April, Humaniq’s mobile app is available in beta. LankBanker spins off from veteran crypto exchange LakeBTC. Their P2P network has been operating in over 50 countries for 1.5 years. The plan to spin off the network and lauch a Token Sale came after they realised the massive potential of this model. LakeBanker is now running a pre-sale where a small number of tokens are offered at a discount ahead of their main Token Sale in mid-October.
Despite the undeniable potential of these projects to change the world for the better, they are not charities; they are ultimately business proposals and should be evaluated as such. Doing so is the purpose of this post. We have no pretensions of being a balanced description of these projects — for that, see Garrison Breckenridge’s excellent article here:
Humaniq and LakeBanker: A Comparitive Analysis
The acceleration of advanced technologies is undeniable, yet the applications and implementations of these technologies…
Instead, we highlight what we regard as some critical flaws in Humaniq’s project in the hope showcasing some strengths of our own. The absence of journalistic balance in this sense remains consistent with what’s true and of potential interest to investors.
Humaniq’s vision is that their ERC20 token, HMQ, will become the currency of the world’s 3 billion underbanked — it is to be the unit with which their users transact with one another. Humaniq say that they will enable users to earn HMQ working from home through their app. To achieve this Humaniq will “work with local companies and brands”, but little more detail is provided about how HMQ is to be earned.
More importantly, how is HMQ to be spent? Humaniq says they are in contact with a number of “national and international” shopping franchises to encourage them to accept HMQ as a payment option. Converting merchants into partners that accept crypto-payments will be a major challege (Bitcoin hasn’t really managed it in 8 years) and since Humaniq offers users no mechanism for withdrawal to local fiat currencies, it’s users may face liquidity issues that make the platform unattractive.
In respect of the liquidity that it offers to users, LakeBanker is radically different:
- The system has its own ERC20 token, BAC, which is used to denominate fees and interest, but user accounts can also hold many other fiat and crytptocurrencies (40 are supported in their Beta with many more to come upon expansion).
- Like Humaniq, Lakebanker intends to work with merchants to accept payments directly from the app. However, in the case of Humaniq, the merchant would need to accept HMQ; in LakeBanker, they are free to limit themselves to whatever range of fiat or cryptocurrencies best makes sense for them. If a user does not have that currency in their LakeBanker account, it can be exchanged near instantaneously and automatically through LakeBanker’s interface with their LakeBTC exchange.
- LakeBanker’s, “Crowd-Banking” model provides a bridge to local fiat currencies: deposits and withdrawals of fiat can be facilitated by intelligent matching between users of the system themselves. For example: Alice wants to deposit $100 into LakeBanker and Bob wishes to withdraw that much. The LakeBanker mobile app will match them and the deposit/withdrawal will be done at the click of a button.
On Chain/Off Chain transactions?
Humaniq intend their ERC20 token to be the currency of billions of currently underbanked people who will use the system to make micropayments. Each time a user transacts in Humaniq’s, the transaction must be confirmed on the Ethereum Blockchain. This raises a number of issues for their business model:
- Ethereum transaction fees are volatile and may become increasingly expensive. A year or two ago transaction fees in Bitcoin were near zero; now the average transaction fee is close to $10. Humaniq intends to make transactions free, which seems necessary as they want to facilitate micropayments for users that earn less than $2 per day. Do they plan to subsidise these transactions? If so, how are they to cover the costs here?
- Humaniq intends to serve the billions of currently underbanked people. Does Blockchain have the capacity and the throughput to handle this volume of micro-transactions?
- Smart contracts are great innovations, but they can have vulnerabilities. A bug can be fatal and millions of people can lose money. See The DAO.
Decentralisation is great, but for many it’s not absolutely necessary. Underbanked populations might not care about on-chain transactions. It is far from clear what the business case is for Humaniq running all their transactions on-chain.
LakeBanker’s interaction with the Blockchain is different: we have our own ERC20 token ‘banc’ (BAC). All fees and interest in the system are denominated in BAC. However, since LakeBanker plans to make all user-to-user/user-to-merchant payments free, transactions can handled centrally on their own databases. As such we should not be impeded by transactions costs, throughput/capacity limitations or smart contract vulnerabilities. Nonetheless, the team behind LakeBanker are still Blockchain enthusiasts. We want our free services to attract millions of users, including the underbanked: through LakeBanker they will get the opportunity to invest in cryptos too. But LakeBanker does not force cryptos on its users.
(Note: Humaniq’s whitepaper suggests that in the future they will move off the public Ethereum Blockchain but remain decentralised. Since transactions will still need to be comfirmed on the new Ethereum sidechain — and they still want to offer micro payments to billions of users — it is hard to see that the same problems relating to capacity, throughput and the need to incentivise nodes with transactions fees will not remain.)
Both Humaniq and Lakebanker allow users to make payments from their respective mobile apps. The front page of Humaniq’s website claims that its users can “send, receive and request funds with no transmission commission.” Clicking through for more detail one reads that “with almost zero-cost transactions, micropayments become easy-to-make and affordable”. Moving to their formal whitepaper, we read that “for the first few months of the network’s existence transaction fees will be zero for end users” but that “this is to be changed in future, since the founders cannot pay Ethereum fees forever.” Further, Humaniq state no information about whether user-to-merchant payments will be subject to fees. There is very little clarity here.
LakeBanker’s claims about free payments are less opaque. In the LakeBanker system all payments, domestic and international will be free, for everyone, forever. This includes user-to-user and user-to-merchant payments. (NB. Quotas may apply for institutional investors and to manage compliance risks relating to dust transactions or other abuse.)
Both Humaniq and LakeBanker intend to be much more than a simple payment network. In addition to its remote work platform, Humaniq plans to offer micro-finance to those without access to traditional forms of credit. LakeBanker plans to capture many millions of uses through its free payment options — a huge market for them to offer a rich ecosystem of financial services. In both cases, these startups will face all sorts of risks, especially credit-default risk. How do these two startups plan manage these risks?
Humaniq say they will offer “direct lending to entrepreneurs” in which they “support lending by cutting out the middle-men and bringing lenders and borrowers together”. Further they claim “Anyone — young, old, male or female — can receive loans”. However, their description of their microfinancing options contains no stated mechanism for risk management. In particular, there is no mechanism for checking the potential borrowers income, expenditure, assets, debts, purpose of borrowing and so on. From the point of view of any financial professional, the lack of any method for risk management in a finance company is a major red flag. Without a way of conducting the appropriate due dilligence Humaniq might face an unworkably high credit-default rate.
By contrast, LakeBanker talks a great deal about how we will manage risk, especially credit risk. Along with using Big Data analysis and Artificial Intelligence, their “Crowd-Banking” model is a central part of LakeBanker’s overall risk management strategy: When one user requests credit from the system, other users with appropriate training can be hailed by the app and given the opportunity to earn fees by providing the due diligence information described above. The low overheads here mean that LakeBanker can do much more due diligence than any regular bank (or Humaniq), including continuous checking throughout the loan. We also do it better: LakeBankers will tend to be local and know their communities well.
(An aside: Humaniq makes a big fuss about how their token accepts only integer values — their target market of “undereducated people” allegedly not being in a position to understand fractions. Fine. Are those same users expected to understand the terms of a credit agreement? Does the tenure of a loan have to be integer as well (78 weeks rather than 1.5 years maybe)? What about the APR of the loan? Are these users expected to understand what APR is even? If not, what are the consequences of offering these users micro loans without any mechanism for credit or compliance risk management? The overall point is that badly undereducated users — if that is indeed the reality of the world’s underbanked — present more serious problems for a finance company than an inability to do fractions.)
Conclusion: Making Money.
Humaniq claims to pursue “profit with a purpose”. In that they have something in common with LakeBanker: we too are a for-profit organisation, but with a higher purpose to change the financial industry for the good of everyone. Humanitarian ends notwithstanding, investors will want to know how these companies actually plan to make money.
LakeBanker can give a simple answer to this question: Our Crowd-Banking model delivers (1) massively reduced overheads when compared with traditional banks and (2) exceptional risk management. The former allows us to provide core banking services for free and thereby attract many users. The latter allows us to generate high risk-adjusted returns from the financial services that will offer to those users. This simple answer is, of course, fleshed out in much more detail in LakeBanker’s whitepaper.
By contrast, on the question of making money there is apallingly little information in Humaniq’s website or formal materials. We are left to guess: Maybe Humaniq will take a cut of the earnings users generate through their remote work platform. They do not say. Maybe they will take a cut of the spread when they “bring lenders and borrowers” together in providing micro-finance to users. They do not say (nor do they say how they will manage the credit risks here). Maybe they will charge merchants fees (if they can convince any to accept payments in the HMQ token). They do not say. What they do talk about (an awful lot) is a spectacular array of ways in which they plan make the world a better place: Humaniq will
- bring people out of poverty
- reduce class inequality
- mitigate the refugee crises occurring in many countries in the West
- help to create gender equality
- improve healthcare, income, and education
- boost the Chinese economy (this is a curious one: since 1978 the Chinese economy has — without any help from Humaniq — experienced the fastest sustained expansion by a major economy in human history.)
It’s is nice to dream. But investing in a financial technology company is a serious business. In the case of Humaniq, potential investors are left with little idea of how these grand ambitions flow from a business model that will actually generate a profit.
Blockchain technology is great. And there is little doubt that it will likely change the world for the better, at least in some ways. But it is easy to get carried away here, and to confuse poorly-thought-out visions of a better tomorrow with compelling business proposals. The price of that confusion will be a lot of failed companies and even more unhappy investors. We should avoid that, if we can.