How design is our fundamental competitive advantage
Wired asked me to give a talk about how Fintech companies are innovating by design. This is a topic that is really important to me as I believe design is such a big part of what we do.
Below is a version of the talk I gave at this event. You can also read Wired’s account of it here.
Fintech is quite a new industry. When we first started GoCardless, we definitely didn’t see ourselves as a Fintech company, it wasn’t even a term we’d heard of before. So how is what we are doing different from what existed before us? I think the clearest answer can be seen in the numbers.
The banks spend close to $200bn each year on technology — and yet none of that spending seems to see it’s way to the consumer experience or fuel many innovations.
Why is this? Well it turns out that most of this spending goes towards maintenance. On top of this, it’s estimated that up to 20% of this spend is totally wasted — it doesn’t even go towards keeping the lights on.
On the other hand, just $12bn was invested into fintech companies around the world last year. Take a moment to think about this. All of the Fintech innovation we’re seeing right now is costing less than a quarter of what the Banks are throwing away each year in wasted technology spend!
So how is this possible? My belief is that for a lot of fintech companies design is our fundamental competitive advantage.
Before I talk about how that’s the case, it’s worth clarifying what design means. For many, design is about how something looks. However, for me — that is only one small part of it. Design is about creating beautiful solutions to human problems. It’s more about defining how something works than it is about how something looks.
Looked at through this lens, it is really clear that this is one of the key things that differentiates the next generation of fintech companies from the banks & service providers that came before us.
As Peter Thiel says, in order to win a market your solution needs to be 10x better than what it’s replacing. Some solutions are 10x cheaper, others are 10x faster. In our world, it is making things 10x easier that counts. It is hard to measure in precise terms how much easier one thing is than another. However, it is taking a design-centric view and constantly challenging the status quo that drives us to build better solutions.
As an example, small businesses have historically never been able to access Direct Debit. No one had ever really questioned this. Why is it that the british gas & vodafones of the world collect payment via Direct Debit but noone else does?
It turns out that the answer is really simple — the banks just wouldn’t give them access. This is mainly because the banks couldn’t figure out how to operationally support lots of small businesses. The system is really complicated, and gives people a pipe directly into a customer’s bank accounts. They were understandably worried that smaller companies would screw things up and cause problems. So they just kept the system closed off.
So how did we overcome this?
Well, it turns out that there are hundreds of settings in most Direct Debit transactions — but we didn’t want our customers to have to worry about them. So we just abstracted them away and manage them in the background. By doing this, we just exposed the things that mattered; who I’m collecting from, how much, and how often. We got rid of the possibility of making big mistakes.
This enabled us to open up access to anyone — even if it is just to pay your mate back for lunch. Instead of going to the bank, completing a 3 month application cycle and often being rejected, you can sign up to our service online and collect payments immediately. For me, this is the essence of design — solving hard problems bound by tangible constraints.
By doing this we were able to open up access in a totally different way, helping us build our business really quickly. We now process over $1bn for tens of thousands of businesses each year — over half of this driven by these small businesses we’ve opened up access for.
However what sets apart the newer fintech companies is not just our inherent belief in the value of design. There are three keys elements that are driving our success.
The first key is that we are starting with a clean slate.
A lot of coverage focuses on the way in which modern companies don’t need to worry about the technological debt of old players like the banks. This is definitely true.
We don’t need to worry about maintaining legacy systems. We can take advantage of modern technologies and techniques developed by huge companies like Google & Facebook. And, we build on top of and contribute to open source projects which spread the cost of maintenance across entire industries.
However, it isn’t just the technical clean slate that makes the difference. It’s also that we can design from a clean slate. Much of what defines the possibilities of a design are the constraints under which we operate.
For example, if you are a bank that has to support all of your existing customers, many without the internet, email, or smartphones — then that is a constraint. You still have to send letters by post, have physical branches, or process cheques.
However, when you start from a clean slate — you have much more freedom to define the constraints you want to operate under. You can decide which customers you want to focus on, and which you don’t want to cater for. This enables us to focus our designs on making a smaller set of users deeply happy, rather than giving a wide set of users just an ok experience.
A good example of this is M-Pesa, the mobile based money transfer service in Africa. It was set up in Kenya by the telecom companies to solve the problem of money transfer for a largely unbanked population. Because they were starting from a clean slate, M-Pesa was able to design a service that much better catered to their users needs. As a result, they’ve quickly become the leading transfer service in many African countries.
This just goes to show how powerful an effect starting from a clean slate can be. By starting from scratch, the telecoms operators were able to beat the banks at their own game, even though they were just as big and beuracratic.
The second key is to work in short, iterative cycles.
In order to make something truly great, it isn’t enough to make a product and then leave it as is. Compare how much greater the latest iPhone is to the first version they shipped. What would have happened if Apple had just stuck to their first try?
Design is not about making one big decision — it is the sum of thousands of small ones. Unfortunately, none of us are fortune tellers. It is hard enough to make one good decision at a time, let alone anticipating and making good calls on thousands up front.
The solution to this is three-fold. First, to break down problems into small individual steps. Second, to minimise the cost of bad decisions. Third, to speed up the rate of learning at each step.
All of these depend on working in short, iterative cycles.
However, this kind of approach requires having an agile team that is able to deploy new versions of your product on a daily or even hourly basis. It also relies on having the infrastructure to support this. For example, relying on automated testing instead of manual QA departments. This mentality and infrastructure is the product of the internet age, where code can be deployed continuously instead of in annual product release cycles. Something only made possible in the last 10 years.
The final key is focus.
The Banks offer a huge range of services to a huge range of customers. Whether it’s payment processing, a consumer loan or savings accounts, you can go to your bank for all of these services. But if they are busy making everything, how can they perfect anything?
This contrasts significantly with most Fintech companies. Whether it is TransferWise with FX, CrowdCube with fund raising, Nutmeg with investing, or FundingCircle with business loans. One thing that all of the fintech companies that are succeeding have in common is that we are each laser focused on solving a very specific problem. It’s by being this focused that each of us is able to push our products forwards and best the existing solutions.
This focus comes about via necessity. We are so resource constrained, that it almost feels unfathomable that we would be able to build new products alongside our core offerings. This forces us to keep on going deeper on our core products, building very specific, niche expertise in what we do. I’m pretty convinced that my colleagues understand how Direct Debit works better than any individual on earth!
But out of this focus & depth come unexpected innovations. Everything from optimising payment timings, to figuring out how to onboard merchants in seamless ways. These are the small innovations that add up to make a great product and give us an edge over our competition.
Now if these three things are key to our success, then an interesting question is whether fintech companies will be able to maintain their edge as they scale. Are we only able to innovate because we’re small enough to focus, work iteratively and still have a relatively clean slate?
My belief is that the internet changes this equation. It has opened up markets that are a different level of scale than what existed before. It’s also enabled businesses to scale with much fewer resources than previously possible.
For example, The biggest bank in the world ICBC serves close to 500 million customers. This took them over 30 years and close to half a million employees to amass. Compare this to Facebook who are about to hit 1.5 billion users, which it amassed with less than 10k employees in 10 years.
This difference in speed and scale of customer acquisition means that fintech companies are going global way before looking to diversify their product offerings. This is opposite to the trend of banks retrenching to their local markets.
A nice side effect of this is that as more businesses become global in nature, fintech companies have an opportunity to use their global ambitions and footprints as a way to offer a better service.
For example, our customers love how we are bringing together disparate Direct Debit systems around the world into a single coherent mechanism. It makes these systems usable for the first time, even for some of the biggest companies around the world. This is the kind of innovation that can only be accomplished by being incredibly focused on what you are trying to achieve.
I believe that in the long run, fintech companies will grow to dominate specific product verticals across the world. We can build huge companies whilst staying incredibly focused.
The big question this leaves is how will the banks operate in such a world? Will they be able to transform their organisations to compete with all of us, will they carve out specific areas where they will continue to thrive, or will they be displaced by a plethora of new startups?
I’m not sure any of us have the answers, but I’m super excited to find out in the coming years. However, one thing is for certain, all this innovation means it’s going to be 10x easier for users in the future — and that can only be a good thing!
If this sounds like something you want to be involved with, we’re hiring and would love to talk. Head to gocardless.com/jobs to see what’s on offer.