Change before you have to — Jack Welch
Knowing others is intelligence. Knowing yourself is true wisdom — Tao Te Ching
The FinTech industry is now in it’s youth. It is no longer the new kid on the block. Rather, it is a paradigm that incumbents are adopting.While Lean, Agile and Sprints have entered the common lexicon of bankers, regulations are slowly making their impact felt on FinTech startups as they chose to imitate the very entities they sought to disrupt. The concept of core competence is never more important than today. But then,as some would say, it was always about client service.This article examines the state of FinTech today and provides a framework to analyze the future.
While the year 2016 was a very exciting year overall, I was looking forward to a great end to that year by travelling home to my family in India. Every year, just like clockwork, my mind tries to approximate the height of the tallest building hiding the bright sun from plain sight in the bustling megalopolis.
What surprises me is my overall impression about how similar, rather than dissimilar, global mega cities are. Amidst the constant urgency of catching the local metro to get to work, people sometimes forget to enjoy the bright sun or the light wind rustling through trees on the road. In fact, if peoples’ minds were silent enough, I am sure some of them could hear the birds chirping over the din of hawkers and constant cacophony of horns signaling a growing wave of frustration with how slow the traffic is moving on the roads. A stark contrast in neighborhoods, overflowing dumpsters and a slew of luxury cars paint a vivid portrait of change and constancy co-existing in the same moment. A bit like quantum superposition.
I could have used the same words to describe the FinTech landscape in India. Today, Asian unicorns backed by innovation, and demographic dividends are replicating and leapfrogging western counterparts in some respects. That is the dissimilarity which is also a continuing example of a second mover advantage. They are similar in their thirst to disrupt incumbents. In my mind, the curve looks like the picture on the left. Fintechs are now maturing, re bundling bank offerings and trying to scale up. The traditional financial service companies (incumbents) are trying to find the best plans to defend their moat (often through partnerships and and then use the very same tools (including poaching talent and acquisitions through Corporate Venture Capital (CVC’s) ) that the FinTech world is creating to grow even more. In the sweet spot is Private Equity and more importantly the Venture Capital world that is straddling and continuing to bet on FinTech startups in the hope that one of them becomes the bank of the future.
The Landscape Today
As per Forbes, the Global Fintech Landscape Reaches Over 1000 Companies, $105B In Funding, $867B In Value towards the end of 2016. As per KPMG: Total global fintech funding was a strong US$8.2 billion in Q3’17, after more than doubling to US$9.3 billion in Q2.
However, mega Trends in the FinTech industry today present mix signals. There does not seem to be a clear answer on the winners and losers. Today, everyone is co-existing. In fact, e-commerce companies have entered the financial services market making it increasingly blurry and uncertain:
Venture Capital investment into FinTech continues to increase but skews towards Insurtech and Regtech. Despite greater regulatory uncertainty, 67 ICO’s have raised $2.7 Billion in 2018 and are becoming the new version of Private Equity (PE). Geographically, Europe saw a spike in financing in 2017 while Asia witnessed a decline in VC funding.
500startups, Ribbit Capital, Accel Partners and Bessemer remain the most active FinTech VC’s.
The Blockchain, in some senses, is facing a crises. If it doesn’t create an efficient consensus forming mechanism, it is unlikely to gain acceptance of the global community that Visa and MasterCard enjoy.
Ethereum Smart Contracts are proving harder to implement than thought before. While in theory, they were intended to upend all types of contracts across the world
There is a tremendous blurring of businesses today. While WeChat and Alipay dominate the payments space in China, Banks are trying to respond by forming their own alliances such as Zelle Pay in the US.
There are no uniform strategies for growth today. The world has become a place to fail and scale quickly. Despite many predictions, cash is still king . Also, while the majority of banks are closing branches, some banks are expanding the number of branches they have.
As per Jones Lang LaSalle (JLL): the net number of branches in the U.S. declined from 91,900 in 2016 to 89,900 in 2017. This 2.2 percent decline represents a moderate acceleration over the last few years and reflects the industry’s ongoing evolution to serve customers more effectively while reducing operating costs.
However, what is true is that the branch of the present does not look like the branch of the future. Virtual conversations via mobile apps and smart branches are reinventing the format of the retail bank branch.
If Goldman Sach’s completely digital platform Marcus is an indicator of the shape of things to come, banks may be on track to staying ahead of the FinTech pack. As per CBInsights, Marcus reached $1Billion in lending faster than earlier FinTech players such as Sofi and Lending Club
The Cryptocurrency craze will drive up demand for chips (GPU’s), FinTech companies into digital wallets and exchanges (RobinHood, Coinbase, Square Cash)
Banks are quickly sunsetting legacy IT systems and moving towards Software as a Service (SaaS) rentals operating out of a cloud. This will reduce costs, increase agility, spur acquisitions and make banks increasingly competitive. Banks have realized it is better to lease than to create. Riding on this realization, banks are now on the offensive battling FinTech startups using mature FinTech companies.
Technology flows to areas in the world where there are lesser regulations holding back innovation. Singapore has emerged as an important hub. Many other hotbeds such as South America, Nigeria need technology to leapfrog. A unique experiment is Venezuela’s creation of the Petro which many think is neither a currency nor a token.
For now, incumbents have the cash to buy talent, companies, technology and compete on scale and familiarity with regulations. Round one could be termed advantage incumbents. The only thing slowing them down is internal inefficiencies. These internal efficiences are also the reason that young talent keen to make a dent in the universe earlier in their careers are shying away from traditional financial services
As per Quartz, the top 3 schools with the most undergraduate and graduate alumni hired by the 25 biggest Silicon Valley employers in the last year were Stanford, Berkeley and Carnegie Mellon. This also reflects that business and technology have become synonymous.
A Fuzzy Future Built On Network Effects
While some players hate chaos, others thrive on it. The future is extremely complex, volatile and becomes murkier every day. A look at the CBOE Vix (Volatility Index) is a good picture to visualize the volatility in markets today. A ViX higher than 25 indicates higher volatility
At different points in time, we have heard “ Cash will be extinct”, “Banks will no longer exist” etc. The truth, today, is co-existence and partnerships. People will no longer be surprised if Apple creates an autonomous vehicle or Amazon creates a bank. In fact, the larger the platform, the greater it’s network effects:
Therefore, the answer lies in rapidly delighting consumers while gaining scale and network effects. User experience design and branding have become key to communicating and building on the value proposition.
All Changes Are Mindset Changes
Think about the biggest contribution of Bitcoin to society. It served as a jolt to the financial services and economist community by being the single largest proof of concept of a digital currency governed by what some may say absolute anarchy. Bitcoin’s market capitalization is about $187 Billion. But, its success is not about a financial value. Rather, it is a reminder that disruption is the only constant. It prompted a debate that led people to question the viability of the current economic framework including the value of a dollar. It also reinforced the fact that all truth is perception and the value of a currency is what you perceive it to be.
Therefore, all changes are truly mindset changes. Success breeds complacency and complacency stifles disruption. While incumbents and FinTech companies alike figure out their place in the world, the key to success can be reduced to an ancient Chinese saying: “you are somebody’s reason to smile”.
It’s time for the financial services industry to be just that-an experience that brings a smile to people’s faces.