Financial tech is just hard.
I just read Eddie de la Cruz’s great piece on VentureBeat about how the environment in the US is slowly killing his hopes of building a better way for immigrants to sent money back home. He nailed the issues he’s facing, but I think he only touches on the problems in the financial services environment that are much bigger than just the cost of getting money transmitter licenses. In fact, we live in a world where only the biggest gluttons for punishment would ever try to do something truly new in financial services (thankfully, there are still a lot of us out there). Let me explain.
1. Barriers to entry are high
Yes, companies that want to move money need to acquire 48 separate licenses in order to do so. Yes, doing basically anything else meaningful in the space means either getting certified by a regulator or partnering with an existing bank, both of which are expensive. Not just expensive monetarily, but in consuming the entrepreneur’s most precious resource: time. The CEO of a lending startup told me he recently spent two months playing golf because there was literally nothing his company could do until their lending license application cleared the system. His company is now doing well, but that kind of delay can be fatal for small companies burning cash trying to get off the ground.
Intentions are good: we need to ensure that we’re far from reckless when dealing with money. For every well-intentioned startup trying to improve the customer experience, there’s a bad actor that needs to be kept out of the system. But it floors me to see how esoteric the entire process is: it takes dozens of meetings and thousands of dollars in legal fees just to figure out which hoops you need to jump through. Then the real work begins: millions of dollars and years to acquire the right partnerships or licenses — all the while also trying to, you know, build a company. Oh, and if you missed something along the way (even without knowing it), expect fines that can potentially cripple you.
2. Incumbents are glacial
With high barriers to entry, we desperately turn to the industry incumbents to either push forward themselves or create platforms for others to build on. The problem here is obvious: that’s not what big banks were designed to do. Despite claims like the one from the CEO of Goldman Sachs that “we’re a technology company”, this kind of work just isn’t in the DNA of the industry. They’re good at all kinds of things, but cutting-edge tech just isn’t one of them. Changing the core competency of a company — any company — in a real way is an enormous effort, one that few ever come out of successfully (IBM, but then again Kodak). There’s a lot of lip service about becoming tech companies, but it sounds like my dad’s midlife crisis: you can dye your hair and buy the red convertible, but you’re just not going to be 23 again, dude.
However, we’re not without hope: one of the big reasons we sold Level Money to Capital One is because we believe Capital One may be a rare exception to the rule (partly because at 21 years old, we’re like a century younger than most other banks). I really want to be proven wrong and have other banks nipping at our heels.
3. We can’t think outside the box
The biggest problem is incrementalism: because banks and regulators think about new companies through the lens of what already exists, it’s rare that truly breakthrough companies ever see the light of day. I’ll be honest: I loved the idea of Clinkle the first time I heard it. Transfer money to and from any device via high-freqency sound waves, denominated in a virtual currency? AWESOME. But of course we didn’t get that, the powers that be would never have allowed it. Instead we got Treats, a ridiculously incremental debit card play to try to make money social.
Yes, I know: Clinkle had many, many more issues than just regulatory approval. But even if they had been exceptionally well-managed and well-executed, I doubt we would have seen anything close to the original concept.
So, what we have is an entire industry trying to make slightly easier, slightly more convenient, slightly cheaper versions of what we already have. Venmo wasn’t revolutionary compared to PayPal, it was just a little easier. Lending Club wasn’t revolutionary compared to bank lending, it was just a little cheaper. Those differences were enough to create enormous successes for those companies, but that’s a more of a statement about the state of the industry than anything else. For an entrepreneur, it’s a miserable feeling to know that your vision for the future will slowly whittled away and watered down by your environment.
Financial services is far from the only highly-regulated industry that startups are chipping away at, but it may be one of the most difficult. Yes, many financial services companies are succeeding (36 unicorns at last count), but I have yet to hear anyone accusing the industry of moving too quickly. Our current environment dictates that only the best-funded, best-connected companies have a shot, at least until the incumbents finally wake up and smell the silicon. The power to change all that lies with the regulators: until the rulebook improves, the game of financial technology will just be hard.
