The path of least resistance for fintech startups

Eddie Thai and Sheel Mohnot of 500 startups wrote an article last week titled Fintech Investment is Exploding — 5 Ways Governments & Ecosystem Builders Can Help. I have spent my whole career in the financial services industry and have continued to have many conversations with financial services professionals as I build my business. I thought I might offers some of my impressions about two of their points.

First it is important to remember that the industry fintech startups are trying to take over has been largely unchanged for decades (one can even say centuries). Like every other industry they have websites now but services and business models are largely the same. In fact many prefer it that way. They’ll take the status quo every day of the week.

2. TRADITIONAL FINANCIAL INSTITUTIONS MAY HOLD DOWN FINTECH STARTUPS, INTENTIONALLY OR UNINTENTIONALLY.

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An analogous hypothetical would be forcing Visa to be exclusive to certain issuers and merchants, rather than allowing ubiquity.

This is absolutely the case…for now.

Many banks or financial services firms (in the 401(k) industry that includes RIA firms, TPAs, and recordkeepers) prefer to have their own “proprietary technology”. The larger they are the more true that is. (Sub)consciously they know that many of their services are commodities and they need a way to distinguish themselves other than by price.

We end up with a whole lot of companies reinventing the wheel and few making large leaps. I believe those leaps are going to be made by a few startups that achieve size by working alongside the current institutions rather than by going head-to-head. As those startups grow their brand recognition they will be touted as trusted partners in the banks’ sales materials.

Further speaking to the intentional, or not, holding down of fintech startups, the same methods that banks use to hamper their competitors (e.g. paper forms and blackout periods to close accounts and transfer funds to a new institution) hamper the startups. Don’t hate the player — hate the game.

3. CUSTOMER PREFERENCES MAY NOT BE READY FOR CERTAIN FINTECH SOLUTIONS.

Customer acquisition is very difficult in fintech.

It’s relatively easy to build a big invite list, but it’s very hard to get people to actually change financial institutions.

They are making the point about retail customers but it is just as true for business or institutional customers but perhaps for different reasons. For retail customers a new financial institution needs to offer enough incentives to make it worth the hassle of changing. Comfort also plays a part. Even if my bank raises my fees I feel comfortable knowing that is the only change. My account numbers will stay the same so I’ll keep getting my paycheck, my cards will stay the same so I can still buy gas and groceries, and, while my branch might close, I will still log into the same website to confirm my money is safely there.

For businesses the stumbling block is risk. I mentioned status quo in regards to the banks but it is the same for businesses. Changing banks successfully is not going to get you a promotion. Have a problem changing banks and you might be shown the door. Financial institutions need to be an order of magnitude better, or cheaper, in order to get a company to move their business.

(The way around this is to get through the side door by being the provider for a new service a business needs and offering them bundle pricing or convincing the business to consolidate services over time.)

At the retail level there is not just a growing acceptance of technology invading all aspects of their financial institutions (from customer service to asset management) but it is starting to be demanded particularly for younger generations. Not only is going into a bank an inconvenience, these days going to the ATM is an inconvenience. Why wait on the phone for a banker when I can get somebody to answer my question quicker with live chat? No listening to Kenny G while on hold.

I’m banking (no pun intended) on that not only to continue being the case but for the rate of adoption to accelerate. Fourteen months ago I wrote some predictions to my old firm about what I saw to be the future of client service in our industry. Change is happening a lot faster than the timeline I laid out.

Because change has been slow to come to the financial industry there is huge opportunity. I think the winners are going to be shown not to be the companies with the best timing (insert classic saying that you can’t time the market) but the ones that work with, rather than against, the current players.