22
Apr
2015
1

Defining Fintech, the Ultimate Rorschach Test

I am often asked by peer investors, entrepreneurs, executives, lawyers and consultants what companies and industries I invest in. My answer is always the same: “I only invest in the financial services industry.” So far so good. Invariably, the response I receive is: “Ahh, you are a fintech investor”. Such a response is both clarifying and confusing, which arguably should excite my French-educated mind. Alas it does not and my interlocutors and I then digress in a series of conversations trying to crack what exactly is Fintech.

After three years of such conversations I am convinced there are more definitions of Fintech out in the ether than there are Fintech investors or Fintech companies. Indeed, Fintech could very well be the ultimate inkblot used in a Rorschach test.

Trying to make sense out of chaos I have come up with my own heuristics.

First, let’s define the classical universe of Fintech which has been “the Banking industry”. I believe Fintech to have a much broader application across 5 main financial services activities:

  1. Lending
  2. Capital Markets
  3. Asset/Wealth Management
  4. Insurance
  5. Payments

Second, let’s tackle the definition of Fintech. The classical definition is “technology that enables financial services institutions to conduct their activities”. How this definition is refreshed lies entirely on one’s view on the role of technology, or more specifically software.

To borrow from Marc Andreessen, “Software is eating the Financial Services industry” and I can see three lines of thought flowing from this statement.

The Restrictive View: “Financial Services institutions will use software to refresh their interactions with customers by re-engineering their front end, middle office and back office.” This Restrictive view is espoused by those who believe fintech disruptors and upstarts are doomed to fail, that banks, insurance companies, large payment platforms, legacy systems and services will prevail at the end of the day and that all is needed is an upgrade in technology. As such Fintech will be much of the same, a group of technology providers that sell toincumbents and help them get better incrementally.

The Current View: “Financial Services institutions will use software to refresh their interactions with customers and to compete with upstart Fintech disruptors.” This is the paradigm we are living currently. Fintech companies are no more those that sell their wares to incumbents, they also compete against said incumbents. Think alt lending platforms like Lending Club, payments plays like Transferwise or Stripe, wealth management platforms like Wealthfront.

The Radical View: “Every company active in the financial services industry will be modeled after the Silicon Valley startup paradigm that fully leverages technology in general and software in particular across all aspects of their operations.” Be they startups or incumbents, service providers or competitors, all financial services companies will look more like Apple, Google or Facebook and less like the Citibank, Fidelity or Aetna of yesteryear.

I sometimes come across Restrictive View followers and I am always paranoid they are right. I certainly do not view our Fintech mandate only confined to investing in service providers that sell to incumbents.

I mostly meet Current View believers and mostly agree with them. Nothing wrong with this view which allows flexibility of mind and investment approach.

I get excited when I encounter, in person or digitally, those that share in part or in whole my views and who have helped and continue to help shape my Radical View evangelist. A special hat tip to Chris Skinner (@chris_skinner), Brett King (@brettking), Sean Park (@parkparadigm), Bradley Leimer (@leimer), Arjan Schutte (@arjanschutte), Matt Harris (@mattcharris), Hans Morris (@hansmorrissf), Matteo Rizzi (@matteorizzi), Rob Findlay (@robfindlay), Jim Robinson (@jdrive), Amit Anand (@amitvedand). (apologies to those I omit)

I do espouse the Radical View. This is how I define the Fintech investing universe. This is why I define myself as a Financial Services Industry investor. My view is the entire industry is turning Fintech. A liberating thought. This leads me to view the financial services investing universe according to the following artfully rendered graphic.

Route66-Chart_Final_H-transparent

Don’t hesitate to reach out via twitter (@pascalbouvier) to start a conversation on Fintech and enrich my views as well as yours.

You may also like

It’s the technology, stupid!
Interpreting the new Executive Order on Regulating the US Financial System
My Current Fintech Wishlist
Fintech Food for Thought

9 Responses

  1. Liz Lumley

    This was very interesting, and I always love a chart. However, I think you are missing a ‘view’. Although, I do agree that all of the ‘views’ you describe have adherents in the industry.

    I never bought into the total disruptive philosophy where the dinosaur banks will be destroyed by a group of innovators that will bring forth a new financial utopia. I just feel that view is naive and fundamentally misunderstands the role banks have in society. A bank is not a book store or a video rental store – to confuse them is wrong. Conversely, I don’t buy into the idea that new entrants to the market will ultimately fail because the banks are just, Goliaths, too strong to defeat. I think the future is much more interlayed and diverse.

    The new alt players – Funding Circle, Transferwise et all – don’t compete with banks. They are flourishing in areas where banks don’t want to do business in. No bank I know of wants to be in the remittance business – that is why it is so difficult to transfer money via a bank. Banks don’t want to be in person or small corporate loans. Hence a market has grown up to support these undeserved areas.

    The danger traditional banks face is not destruction or a new Apple Bank – it is becoming a utility, commoditised service – where the more profitable, customer facing, transactional business gets siphoned off to ‘other’ players. That is where (maybe) Apple and co. come in. Apple and Google will never be a ‘bank’ in the traditional sense. (they are too smart for that) But they might start taking the front end and all the services the front end employs, away.

    In the UK banks account for 40% of all national IT spend. We ran a ‘startup breakfast at Finextra last year and the number one question the startups asked was ‘How do you sell into banks?’ Banks are a huge force. They will remain a huge force. It is the shape of that force that will change.

    I think the future is really this. A shifting ecosystem of new entrants – especially ones that fills the gaps, and do a better job of, businesses banks don’t really want to be in. A few remaining banks that have learned how to leverage and partner with new innovative technology – not only tech that faces the client – but tech that enables a more agile and leaner middle and back office. And the remaining, utility, processing banks – those banks may well find a new life as the ‘back end’ of an Apple or a Google bank.

    Is that a ‘Restrictive view, a Current view or a Radical view’? I don’t know. I think it is the ‘Ecosystem view’.

    cheers,
    Liz

    1. Pascal Bouvier

      thoughtful response Liz. We might be separated by semantics. What you describe as another view is I believe the Radical view I tried to explain, albeit poorly maybe. To clarify, my hypothesis is finserv = fintech because of consumer behavior changes, regulatory changes, technology changes. Further, “banking activities” ⊂ “fintech” and by that I mean fintech does not only apply to banks. I do agree with you that the future will see tectonic shifts with new entrants winning in some areas and adaptive incumbents winning in other areas. For either to thrive, they will have to treat data & technology in ways the finserv industry has not in the past.

  2. I do think there is a desire to “buy innovation” now and to become like a tech company that does banking…

    The sheer amount of cultural bias and lack of respect for how far away they are from that in banks is astonishing.

    The problem is for many years, lipstick on the pig kinda worked.

    I hear “omni-channel” is this seasons “mobile banking”.

    1. Pascal Bouvier

      the “buy innovation” now is certainly one of the narratives. easier said than done i agree. i view it as an evolving narrative with bank bureaucracy in some instances having to go through this stage and hopefully evolve to more data and technology centric development paths

  3. I’m going to (mischievously) suggest that perhaps the “radical view” (whether Pascal’s or Liz’s flavour) isn’t all together that radical. And that what /is/ radical is to believe that banks will free themselves of their technical, financial and regulatory debt fast enough to remain competitive.

    I’m with you both in that the most likely outcome is that unless banks actively choose not to they are likely to be left with the positively unsexy, rather unprofitable utility-like services. But longer term it’s hard to see this business as being economically sustainable, even if they overcome all other challenges.

    A couple of alternative, perhaps outlier scenarios that may re-anchor the discussion: One is that large financial institutions reshape in to drastically smaller, practically pure-play technology companies, with perhaps just a few hundred or a thousand employees designing and refining trading / liquidity / risk algorithms and writing smart contracts, skimming a few basis points for the privilege of being accountable to regulators.

    Seeing as we’re navel gazing, another possible (longer term) scenario is that a plethora of local community, digital token based currencies augment national currencies, with each local currency having interoperability, allowing a continuous shifting ecosystem of Valley-like applications to service the end-user. This scenario is just beginning to happen in several cities; the benefits are cross-fertilised by end-user value outside of financial services (e.g decentralisation of power, community empowerment through voting, an increase in the sharing economy, localism initiatives such as energy sharing, sustainability). It’s not hard to see that support for such systems also has broad political appeal.

    So perhaps there’s a longer term scenario where software fundamentally changes how capital actually serves society?

    ¯\_(ツ)_/¯

    1. Pascal Bouvier

      i wish my radical view to be not so radical. this would mean all incumbents get it and will pivot smoothly, relatively speaking. i have not address crypto on purpose as i wanted to leave that discussion for a follow on blog post. you beat me to it by introducing another very radical idea. i personally do not believe in private digital currencies (distributed or not) to carry much weight. i think govt sponsored digital currencies has a much higher probability of happening in the medium term. i believe that will be game changing for banks, payments companies, insurance carriers amongst others, propping up just what you are describing. further, and arguably, crypto is a technology like any other and as such should be viewed as one of many to potentially reinvent the finserv stack (part of the radical view? i believe so).

      another tantalizing chain of thought to mine is how nation-states will behave going forward what with such technology disruption and stratified global consumer behaviors. would not be surprised if, akin to crypto semi centralized or decentralized networks, city states or large cities will be the norm of the future for how we organize ourselves – incidentally driving us back to the future of city states in the middle ages and the renaissance of Europe.

      1. James Lloyd

        Some great insights here; I look forward to the crypto follow-on post. I share the view that nation-states are, in aggregate, likely to witness increasing atomisation – driven both by technological and sociopolitical trends. Witness Scotland’s once-and-future independence, the pro-democracy protests in Hong Kong or the Singapore-on-the-Thames that is London (Brexit or no Brexit). Interesting times!

      2. Jason Taylor

        The thing is Crypto does not need a nation state to justify it’s existence, it’s rise and rise is brought about by no government or institutional body, it’s a grass roots disruption. Any ‘government backed’ crypto-currency is just a second rate version of something like Bitcoin. It’ll be limiting in some form or another on usage and subject to the control of one entity, things which Bitcoin does does away with. Why would I hold a USAcoin that would be subject to all manner of restrictions on it’s usage and transfer of value across borders when I can click a button and support something else with an existing user base globally without restriction?

        The challenge crypto is to the nation state cannot be overstated, it’s huge- money is something affecting everyone everywhere and is usually the source of great triumphs and tragedies in the world.

        1. Pascal Bouvier

          we shall agree to disagree here. i yet have to see a crypto currency that makes sense and could replace fiat, and I include BTC in the lot. Note that I make a difference between the protocol and the ledger (distributed or permissioned) which is where the real value lies imho.

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