07

Jul

2017

Tales from the Money 20/20 Crypt (the 2017 Copenhagen edition)

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I landed a full day ahead of M20/20 in Copenhagen to ensure I would be rested and to fully maximize my week in Copenhagen – I used to live in Denmark many moons ago. Restful I was, mournful and despondent also as Loki tricked me, with Tyr‘s help no doubt as the deed occurred on the SAS plane I landed with. I got districated and left my ipad on the plane. Loki’s dirty work for sure. Ensued a full fintech week armed with only an iPhone and my dextrous fingers. I was tech-light in a fintech heavy conference, the male equivalent of Sarah Lund without a gun, ready for the Killing. Imploring the Norse Gods did not help, I was on my own and could only rely on my wits. A tough challenge, so say my most ardent critics.

Be that as it may, let me attempt to relay my impressions and learnings.

First, let’s dispense with the small stuff. “Banks are dead”. There, I said it, and I realize this may sound like pure folly at a time when many seek bank licenses, but more of that latter. Fintech evangelists had said so and no one believed them. Fintech entrepreneurs said so and no one believed them. After all, there was little tangible proof of such outlandish assertions. A year ago, the talk was still about fintech startups partnering with banks, the likes of which would not be out of place with the fairy tales Hans Christian Andersen‘s fertile imagination birthed.

I did not hear many tales of partnership. I did not hear many tales of business as usual. I did not hear many tales of oversold fintech hype or pushback thereof.

I heard many bank CEOs and high ranking executives saying that banks as we know them are dead, each with their own words- and I paraphrase:

 We just launched our corporate venture arm, but frankly, if you ask me, we are not doing enough with startups and with technology

– We want to be a technology company with a bank license

– The future of banking is this intelligent mobile application that will figure out all your needs

– We need to be successful at hiring technologists

– Frankly, what Amazon or Apple is doing gives me much more concern than any other startup or direct competitor we are facing

– We need to learn how to be much more open 

– We are behind technology wise and we need to redouble our efforts

– There is no going back, open banking, APIs, marketplaces are models we need to master very soon

I heard or read similar statements shortly before M20/20 and I am sure I will hear more of the same over the next year. Lest you believe this line of thinking is limited to banking and banks, follow what the major insurers and payment company executives are saying, and the refrains are eerily similar – so said the few insurers present in Copenhagen.

Past the initial mourning phase we all experience after a “close” relative has been pronounced dead, matters tend to get complicated post haste. Although I am now certain most bank executives are convinced a bleak future lies ahead for the complacent ones, there is no consensus for what needs to be done, no universal truth to follow. Succinctly put, the astute observer will have fleshed out two lines of thinking: a) build better with new technology or b) build something radically new.

The former line is equivalent to a wall building exercise – shiny new walls. The historians amongst us will quickly point to the follow of such endeavor. The latter line is equivalent to building bridges, a more exciting endeavor, full of promises shaped in the forms of platform strategies, network effects, “as a service” and so on and so forth. I am inclined to favor the bridge building exercise.

Indeed, we were treated to all sorts of panels and discussions around open banking, APIs, API strategies, PSD2 strategies, bank as a service – yours truly moderated a BaaS panel with a stellar group of panelists.

We were treated to some excellent conversations with crucial points being made, such as 1) business strategies for BaaS or open banking are as important as the technology underpinning such efforts, 2) the purpose of open banking or BaaS is to drive down the marginal cost of delivering a product or service to near zero, 3) one can only achieve BaaS or platforms strategies with a complete rethink of core banking systems. The last point is a key learning which I have harped on over the past three years and in previous posts on this blog. Core banking systems are antiquated and in dire need of rejuvenation. Whether new service provider entrants will take the lead, existing ones will overcome their legacy offerings, or new and mature fintech companies such as Zopa or Klarna, to name but two, will take it upon themselves to build new systems from scratch and succeed remains to be seen. What is certain is that all will try. The industry demands it.

A point which I did not hear being discussed, which is equally material, is how network effects are important to any new financial services model. Arguably few if any new entrants have captured network effects and many incumbents are protective of their current business models, which are not conducive to capturing said effects in the digital world. One way of capturing network effects is to build marketplaces, another is via unbundling and rebundling of a given set of products or services. On both counts we are still in the early stages financial services wise. The rebundling which I discussed in a previous post, is slowly picking up steam. Witness, Klarna and Adyen securing bank licenses, or the likes of Transferwise, Revolut, Monese, N26 adding to their initial offerings (apologies for those I am forgetting). Some of these firms vie to capture network effects as they build their platforms, AND, by the way, they should all be viewed as tech companies with a banking license.

We were also treated to the news that Visa had invested in Klarna. Add to the mix MasterCard’s purchase of Vocalink, and post M20/20 Vantiv’s bid for WorldPay, I am now eagerly anticipating the next acquisitions of payment assets with a strong European presence. Which are the next targets? Who will be the next acquirers? Are these plays defensive or offensive? How valuable will these assets prove to be? My bet is more than we currently realize.

We also were treated to excellent conversations around digital identities (there were a number of ID startups in attendance), blockchain, AI, as well as many panels specialized on one aspect or another of payments. We were also exposed to regtech and regulatory sandboxes. All are subjects I was expecting would be expanded upon.

I did note, with some surprise, omissions or under-representation of certain topics which are bound to pick up steam and become of some importance for the industry.

I list them in no particular order:

– The impact of IoT on financial services at large (for insurance, for payments, for lending, for savings)

– The necessary intersection between IoT and digital identities (identities of things)

– The rise of edge computing and its impact on financial services (banking, insurance, retail, wholesale) especially as the industry is finally espousing cloud computing which is by definition centralized

– The tangible threat posed by Amazon, Apple, Facebook, and more particularly by Alexa and its sisters to brands (last I checked banks or insurers are also brands)

– Marketing to millennials (Instagram, Snapchat and organic brand building, Facebook or Google and paid search)

– How the next generation smartphone operating systems, which incorporate AR/VR (think ARkit with iOS 11) will fundamentally change search/discovery/interaction/education and the implications for fintech and financial services.

– WeChat (anything about WeChat) and AliPay (anything about AliPay), learnings, which can be replicated in the Western World, and which cannot (especially in the context of platform strategies, BaaS, marketplaces)

These last two points are to me the most material blind spots.

Finally, although I am sensing a dearth of interesting new fintech concepts and startups in the US, I see no such marked deceleration in Europe, at least for the time being. I also see many more venture funds active in this space, which may lead to either funding of startups that should not be funded, or valuation creep, or both.

That’s about it for me, and I now ask you: What were you learnings? Your observations?

I wonder if Loki and Tyr will visit me in Amsterdam next year. I also wonder if the organizers will outdo themselves next year. This event was very well put together.

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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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