Everex vs LakeBanker: What to look for in a fintech startup?
Everex and LakeBanker are two fintech startups at various stages of offering ICOs (Token Sales). Everex’s ICO is currently underway, while LakeBanker’s is now running a pre-sale where a small number of tokens are offered at a significant discount ahead of their main Token Sale in mid-October. These two companies at first sight have similar proposals; in other ways they are radically different. These differences will be important to potential investors. This article investigates them in detail. It argues that LakeBanker has the more credible business model and draws some general conclusions about how to evaluate fintech ICOs.
Both Everex and LakeBanker have P2P models aimed at reducing the cost of banking and helping to reach un/underbanked populations. Each intend to create international financial networks of users and institutions within which they can offer payment and remittance services, currency exchange and other financial services. Everex’s network is targeted at un/underbanked populations, focusing on remittance payments and micro loans. LakeBanker’s target is the whole world; expansion into emerging markets is just one part of their ambitious business model.
Both startups are beyond the idea stage: Everex successfully tested its remittance services with Burmese migrant workers living in Thailand. 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 launch a Token Sale came after they realised the massive potential of their model.
Despite these similarities, the differences between these two projects are really very large. Those interested in participating in the Everex/LakeBanker ICO/Token Sale should consider the following 3 points of comparison.
(1) On Chain/Off Chain?
Everex handles transactions in their “CryptoCash”. These are ERC20 tokens representing digitized fiat currencies. Thus each time a user transacts in Everex, it 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. Everex intends to make user-to-user payments free. Do they plan to subsidise these transactions? How will this work from a business perspective?
- Everex intends to serve the 2 billion unbanked. Does the Blockchain have the capacity and the throughput to handle this volume of transactions?
- Smart contracts are great innovations, but they can have vulnerabilities. A bug can be fatal and millions of people could 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 Everex running all their transactions on-chain.
LakeBanker’s interaction with the Blockchain is different: they have their 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 they should not be impeded by transactions costs, throughput/capacity limitations or smart contract vulnerabilities. Nonetheless, the team behind LakeBanker are still Blockchain enthusiasts. They want their free payments 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.
(2) Expansion into un/underbanked populations?
Both startups intend to expand their operations into emerging markets of the un/underbanked. For Everex, this market is their principal target; LakeBanker by contrast plans to operate first in more developed countries before embarking on the challenge of serving the un/underbanked.
For both startups, the obvious difficulty here is how un/underbanked users get cash onto the platform in the first place. For Everex this is done through existing financial infrastructure: “users convert their paper, or digital fiat-currencies to Cryptocash at their local bank branch, or at currency exchanges”. There are problems here too:
- Everex says they will not charge users for deposits. So how are these institutions incentivised to accept the deposits? How does Everex convert them into partners?
- Everex targets the unbanked which by definition have no relationship with mainstream financial institutions. They often live in remote or undeveloped parts of the world. How are they to deposit into the system?
LakeBanker is much more decentralised here: any user can be a LakeBanker and provide services to others — they are incentivised to do so. Hence deposits and withdrawals can be facilitated by intelligent matching between users themselves. For example: Alice wants to deposit $100 into LakeBanker and Bob want to withdraw that much. The LakeBanker mobile app will match them and the deposit/withdrawal will be done at the click of a button. Networks of LakeBankers can be created wherever there are people with smartphones (and smartphone saturation is growing at a startlingly high rate in emerging markets). One user can service ten who can service a hundred and then a thousand and so on.
The comparison here is striking. In relying on banks for deposit Everex is at best a supplement to the existing financial industry. LakeBanker is more like a nuclear bomb.
(3) Risk Management?
Both Everex and LakeBanker intend to be much more than a simple payment network. Everex plans to offer microloans to those without access to traditional forms of credit. LakeBanker plans to capture many millions of uses through its free banking options — a huge market for them to offer their rich ecosystem of financial services.
In both cases, these startups will face all sorts of risks, especially credit-default risk. Managing those risks well will be essential the success of their respective businesses. Here the two startups could not be more different.
In the case of Everex, their KYC (“Know Your Customer”) and due diligence data is collected from their mobile app. Here is a quotation from Everex’s White Paper:
“In order to minimize the credit default risk, [the] financial analysis is based on three main data feeds provided by the user, i.e., personal data, social media data and the user’s transaction history.”
To any financial professional this method of risk management will appear almost laughably inadequate. It is far from clear that accessing a user’s Facebook profile provides any real check on their creditworthiness: it fails to verify information that is absolutely essential, for example income, expenditure, assets, debts outside the Everex platform, purpose of borrowing and so on. Without these checks Everex’s default rate might be sky high. This should be a red flag to potential investors in their project.
Again the difference with LakeBanker is huge: while Lakebanker gathers data from its app for analysis, they also employ their “Crowd” of users as part of their risk management strategy. When one user requests credit from the system, other LakeBankers with appropriate training can be hailed by the app and given the option to earn fees by providing the KYC verifications and due diligence information described above. The low overheads here mean that LakeBanker can do much more due diligence than any regular bank (or Everex), including continuous checking throughout the loan. They also do it better: LakeBankers will tend to be local and know their communities well.
From the point of view managing the credit default rate, Everex’s “social media” strategy is far less comprehensive than the multiple in-community checks that the LakeBanker network of users will sustain. Finance is all about risk management. The difference here is significant.
In summing up, it is worth noting a striking difference between the Everex and the LakeBanker white papers. The former is filled with technical diagrams showing the interaction of various components of their system with each other and the Ethereum Blockchain. But serious questions about key parts of their business case go unanswered. LakeBanker’s, by contrast, is light on technicality and instead focuses on describing their business model as a serious financial proposal.
The danger with some recent ICO offerings is a veneer of impressive technicality that — amplified by the hysteria around the potential for Blockchain — distracts from the core credibility of the business model itself. Everex and LakeBanker are finance companies, not technology companies. The technology needed to revolutionise the financial world is already here. What is needed is the right business model. Investors would be wise to focus on that first.
This article was written as a response to Jon Southurst’s balanced evaluation of these two projects at https://bitsonline.com/p2p-banking-lower-costs-underserved/