Roberto Ferrari recently tweeted this:
From roboadvisory to p2p lending to crowdlending, to PFM, to mobile wallet concepts focused on payments, to the early days of bitcoin, there is a long list of fintech d2c business models which have not reached the escape velocity investors had hoped for since 2008. I would be hard pressed to find one fintech startup out of this list that reached escape velocity without any help from a finserv incumbent – partnership, commercial agreement, warehouse facility, distribution access, white label deal, acquisition you name it. To be clear, I am speaking of real traction, not gravitation-free valuation. This factual observation has led many fintech pundits to state that, although the financial services industry will be disrupted and is in need of innovation, a direct and material challenge from fintech startups is unlikely.
Bringing this factual observation in historical context I wanted to order the immediate waves of fintech we have experienced and attempt to forecast the industry’s immediate future. This immediately led me to seek out the past. A much trickier proposition than I initially thought when studying financial services and technology.
I came up with the following non-scientific historical narrative:
- Ancient Financial Technology Period – 3200 BC to 500 AD: Little is known about financial technology in this period marked by the beginning of mathematics and what astute observers can only assume was archaic credit provisioning and proto-fraud.
- Financial Technology Middle Ages Period – 500 AD to 1499 AD: Arguably the greatest advance in financial technology during this period was the invention of double entry accounting by Italian merchants.
- Classical Financial Technology Period – 1500 AD to 1900 AD: Much like the two prior periods, little is known about classical financial technology. We note the invention of the pantelegraph in 1865 in France (could not resist mentioning that), to verify banking signatures, and the laying of the first transatlantic cable in 1866 which was a crucial starting point for the globalization of financial communications
- Modern Financial Technology Period – 1901 AD to 1980 AD: As with every other human endeavor, this period sees an acceleration of innovation. We note the invention of the ATM, the credit card, the telex. The creation of FedWire, SWIFT, NASDAQ. The deployment of consumer credit on a massive scale, mortgages, securitization.
- Postmodern Financial Technology History – 1980 AD to 2008 AD: The rise of the internet permeates this period. Few people realize that Etrade was founded in 1982, online banking started in the mid 80s, that Intuit started in 1985 with Quicken, that by the mid 90s all major banks had been pushed kicking and screaming into internet banking. Lest we forget, Paypal was founded in December 1998. The bulk of financial technology action centered around financial technology service providers selling decidedly “unsexy” technology to incumbents.
- Contemporary Fintech History – 2008 AD to present: The rise of a new term and a new activity by 2008, “FinTech”. The first FinTech wave, from 2008 til 2014, focused on d2c models (mainly) + payments (mostly retail) + roboadvisory + p2p lending + digitizing distribution channels of banking and asset management. Competition and disruption were the central buzzwords. VC investors the main providers of capital. The second FinTech wave, from 2014 to 2016, saw a shift to b2b and b2b2c models and a widening to other areas of financial services such as insurance + capital markets + specialized lending. Collaboration between startups and incumbents became the central buzzword. VC investors saw the rise of Corporate VC investors (CVCs owned by banks, insurers). I believe we are witnessing the last moments of this second wave. Indeed, I believe we are witnessing the beginning of a third “FinTech” wave, starting with 2016. One which will still focus on b2b or b2b2c models. One where CVCs will play a more dominant role, relatively speaking, compared to their VC brethren. One where more startups will focus on becoming the new service providers to the industry and where the industry will acquire enabling technologies (Artificial Intelligence (AI), Augmented Reality (AR), Internet of Things (IoT), Quantum Computing (QC), Blockchain/Consensus Ledgers) to upgrade itself in all manners and across its business/tech stack. I call this third wave the TechFin wave, to differentiate it from the origins of financial technology and the first two waves of fintech.
As you can see from the above historical timeline, financial technology ruled prior to 2008. Most innovations were either b2b or b2b2c in nature. Direct to consumer was the exception (Intuit, Etrade, maybe Paypal to a certain degree). I chose 2008 as a pivot away from financial technology and towards fintech because startups such as Wealthfront and Betterment were founded that year and because, the 2007-2008 global financial crisis finally broke the dam so to speak with systemic and systematic innovation being enabled. Might the period from 2008 to 2015 be an anomaly where d2c became more prevalent than b2b and where for the first time there was a hope, a promise and an intent for startups to directly dislodge incumbents? If true, is the new TechFin wave of the Contemporary period borne out of a natural consolidation stemming from the breathless pace of investments since 2008? Or will it become the new normal for a long period? Food for thought assuredly.
Let us focus on why this new TechFin wave makes sense.
Think about how vulnerable most incumbent service providers are to innovation as they have mostly aborted any meaningful internal R&D efforts and resorted to M&A activities to stay relevant over the years. Think about how some independent VCs may reduce their exposure due to either losses from early investments or less than expected returns. Think about how CVCs will expand to include not only banks or insurers, but also consultancy firms, systems integrators, other third parties that live off of selling/implementing/integrating technology for finserv incumbents. Many of these top firms will want to make sure they stay relevant to their clients and will start investing in promising startups. (Whether firms that do not have a strong culture of venture investing will make good venture investors is another topic entirely.). Think about the wealth of subject matter expertise, capital, brand (even if eroded) and the advantage of being regulated (even if it comes at a cost) finserv incumbents’ CVCs can leverage.
This third wave has the potential to help finserv incumbents close the technology gap. I wrote about this gap in one of my previous posts, see here: a dual gap where basic infrastructure will be upgraded (a necessary step but not a sufficient one on its own) AND where cutting edge technology will be embedded throughout an incumbent’s business stack – for a sense of what that means, see this post on the “plasma” approach to technology/business.
I do mean “potential”. Incumbents will have to operate a cultural evolution in order to learn several skills necessary to actualize this potential.
These are in no particular order and non-exhaustively:
– Master a platform strategy (think of the comprehensive platform strategies tech giants have deployed)
– Redefine their core businesses/services
– Develop new ways to deliver their core businesses/services (API, marketplaces, Banking/Insurance/Asset Management as a Service, or as a Platform)
– Learn how to collaborate (it is not enough to sing commercial agreements and partnerships)
– Upgrade and retain knowledge experts across a variety of subject matters
– Master and execute intrapreneurship (corporate entrepreneurship)
– Architect the right innovation “engine” to translate, digest and disseminate innovation, new technologies, new business models coming from the outside world.
I am sure I am missing a few salient vectors here. The purpose of this exercise is to hint at the possibilities incumbents could create with the right approach.
With capital, brand and knowledge expertise it is not far fetched to imagine a future where a finserv incumbent would be adept at: 1) building businesses from within, 2) spinning off said businesses, 3) invest and partner with young startups, 4) reinvent their core businesses. The end result would make for mean, lean fighting machines.
I believe we are in the first innings of this potential transformation. We can witness most large banks and insurance companies as well as asset managers tinkering with venture investments, with both internal and external innovation groups, with participation in accelerators, incubators. Baby steps all, but important first steps nonetheless.
Setting aside outside stimuli such as regulatory overview, interest rate environment, political interference, the central question is “How should incumbents architect themselves to successfully operate such a transformation and ride the third TechFin wave?” This I believe, is the issue finserv incumbents are in control of and which will define their future. Innovating from within when one is a large organization is also one of the most difficult if not the most difficult exercise in the corporate world, for reasons most know – not flexible, not nimble, natural barriers to change, smartest minds focused on keeping main business afloat. Many corporations have tried in the past and failed. Indeed, some voices firmly believe genuine innovation can only come from outside of a finserv incumbent. Further, finserv incumbents face formidable competitors in the likes of GAFAA (Google, Amazon, Facebook, Apple, Alibaba)
I am firming up my thinking around that central question and would be interested in your thoughts. In the meantime, are we observing the return of finserv Jedis and the rise of TechFin service providers? Is TechFin here to stay?