29

Apr

2016

Black Swan Events and Fintech

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If you have not read The Black Swan by Nassim Nicholas Taleb, I recommend you do post haste. For a brief description of Black Swan Theory without reading the book, see here.

Taleb makes a distinction between two types of Black Swan events: a) “…those that are present in the current discourse…” and b) “…those nobody talks about, since they escape models…”  He goes on to state that, due to natural human behaviors, the incidence of the first type of Black Swan event may end up being overestimated while the incidence of the second type of Black Swan event is usually underestimated. Further, needless to say that whatever the type, Black Swans are notoriously difficult for human beings to identify and analyze correctly. Our brains are so hardwired to focus on the immediate past or future that we naturally occlude data residing in the long tails.

Re-reading Taleb’s work recently got me to ask myself several questions. Which are the Black Swan events already well documented in the fintech/finserv ecosystem? Which are the ones few talk about that one systematically underrated? I include both Black Swans that can be directly linked to fintech and those that would have an indirect influence on fintech to my musings.

 I can think of the following Black Swan events of the first type that are overestimated:

– Fintech startups will fundamentally disrupt finserv incumbents

– Bitcoin will revolutionize the financial services industry.

– Bitcoin will eliminate the need for financial institutions as intermediary agents.

– The Uberization of Financial Services has arrived.

– New technologies will disrupt financial services

– Roboadvisors are the future of wealth management

– Crowdfunding/Crowdlending is the future for financing individuals/companies

– Regulatory rules (Basel IV or others) become even more draconian and are applied as is, further hampering the finserv industry by reducing profitability, adversely impacting liquidity and increasing volatility.

Are there any other Black Swan events every one is talking about in fintech/finserv?

What about Black Swan events that few people are talking about, i.e. those that are underestimated. Does the threat of GAFA (Google, Amazon, Facebook, Apple) and Ali Baba competing against financial services incumbents fall in that second category? The narrative most mined at all fintech conferences I attend seems to revolve around “fintech startups vs finserv incumbents” where the questions asked are should there be competition or cooperation and who will be the ultimate winner. Seldom do I hear about potential GAFA threats although I know savvy bankers and insurers take the threat seriously. Does this mean this Black Swan threat is underestimated as it does not fit most participants’ models?

Here are other Black Swan events I think may be underestimated in the industry:

– Any action from central banks that would eliminate fractional reserve banking – and implications thereof for the role of banks in money creation and lending intermediation

– A repeat of the economic crisis of 2007-2008 – or even worse another great depression – which would further weaken financial services firms and make them even more vulnerable to fintech startup competition or GAFA competition

– Large financial services conglomerate breakup by legislative fiat or due to market forces, thereby reducing incumbent size to a point where fintech and finserv blend into one thereby redefining the rules of engagement and competition and probably favoring large non-bank competitors. I have Robert Sams to thank for pointing this one.

– A string of natural disasters clustered in time – thereby weakening insurance companies and banks’ balance sheets due to resulting losses. Would such losses weaken incumbents to the benefit of startups?

– Long term and secular deflation with continued negative interest rates. How would bank react? How would asset managers be impacted? How would consumers react vis a vis their savings strategies? How would lending be impacted? I have Jan-Maarten Mulder to thank for this one.

– Quantum computing ushers a new era of financial services, making many existing offerings obsolete

– Oil prices crash and remain low, thereby inducing strings of bankruptcies in the industry, followed by heavy losses with large banks, forcing regulators to step in and further crippling said incumbents to the benefit of their non-bank competitors and fintech startups

– Cybertheft takes on a new meaning and as digital identities become central to our lives, an entire country’s worth of identities is hacked and stolen, thereby chilling digital adoption in material ways. I have Michael Meyer to thank for this one.

Can you think of any other Black Swan events of the second type that would have an incidence on the world of fintech/finserv?

Let the brainstorming begin.

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Pascal Bouvier
pgb2008@gmail.com

Life and work experiences have given Pascal an unmatched vantage point, seeing things as both venture capitalist and aspiring entrepreneur. He currently is a Venture Partner with Santander Innoventures – Santander Group’s Global Fintech fund.

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