Disrupting the Financial Services Industry: Fintech 1.0
Welcome to my series of articles around a Fintech retrospective. If you are passionate of Fintech as I am, follow the story you won’t be disappointed, I promise! Enjoy
A few weeks ago, I was requested to deliver a lecture about what was going on in the financial services industry for an audience ranging from young entrepreneurs to seasoned experts. My first thought was to present the latest hot topics around the fintech revolution. However, these days we are being saturated by so many buzzwords, that fintech is becoming just a trend topic rather than a foundation of a profound evolution of one (if not the most) powerful industry in the world
Therefore, my immediate second thought was that it would be more valuable to present a retrospective of where everything came from, separate valuable concepts from meaningless buzzwords, and encourage the audience to jump into this “revolution” as many authors has labeled these innovations of the existing financial services as we know them
In order to illustrate this retrospective, I began to define certain relevant events that marked major milestones in this timeline. During my research, I noticed that one of the key factors for understanding what was going on, was to acknowledge that the behavior of the players is constantly evolving: In the beginning, the “disruptive” spirit from the new entrants was focused on challenging the “old” incumbents, creating a sense of a new era of financial services without banks. This ideal was leveraged by the evil image that banks and big corporations acquired. However, these disruptors underestimate the experienced incumbents and their capabilities to react to any threat like this. On the other hand, incumbents underestimate startups as well, ignoring their capabilities to scale through innovating products and services, and therefore losing an important piece of the market share. Nevertheless, at some point this bias changed, and nowadays we are seeing interesting alliances between this two former adversaries, in pursuit of a common interest: offering innovative financial services, setting out what I call in this analysis a “disruptive collaboration”
So without any further preamble, let’s begin
Did you remember your first experience with a bank? I do! I was 5 years old, and my mom took me to open my first savings account. I still remember the excitement of thinking of a way to get everything I wanted (a bicycle of course!), I treasured my passbook and keep checking it progressively. 30 years later, I see myself checking my current account statement the same way! The only thing that changed was that 30 years ago I got my passbook printed, and now I am seeing it through my smartphone… the technology evolved drastically, but my experience with my financial products was exactly the same. This rationale sounded in many people as well, who started to think outside the box of the traditional services we got accustomed
Banks, or the so called “incumbents” didn’t feel the pressure to innovate. The came up with a profitable and proven business model, and gained so much power that even got political influence. In fact, macro economy found it pillars in the monetary policies, which by the way was defined by the same stakeholders. In the 80’s some innovations appeared like the ATMs, electronic transfers and so on. But these innovations, disguised as an improvement to the customer experience, were intended only to reduce operational costs and therefore becoming more profitable. The last decade we, as customers, testified the evolution of the technology around financial products, but without any improvement of our experience or how can we leverage any of them to enhance our financial well-being. This scenario became more evident during the financial crisis in 2008: banks now had to comply with regulatory policies, leaving behind the customer services innovation as the last priority. Risk management became their 1st. concern, followed by operational costs, and in-house enhancements. Instead of being seem as a chaotic scenario, it was the perfect storm for those innovators who were waiting for these incumbents to lower their guards
Fintech 1.0 “Disruptive Revolution”
We arrived to a place were banks were vulnerable without even realizing. Another key factor, was the raising technologies on top of the internet. The successful innovators were those who can join these 2 pieces together, and this is how companies like Paypal (founded by visionaries like Peter Thiel and Elon Musk), seized this opportunity and started to re-think the customer experience. Solving specific problems like electronic payments, and leveraging the internet as a “platform”, they turned the attention of unsatisfied customers, and gave birth of a new era
For those who love definitions, I believe that an accurate definition for this first wave is “non-traditional financial services offered by cutting-edge technology”. Buzzwords like “innovation” and “disruption” gained momentum and many examples began to arise. Typically cases like Uber vs. Taxis, Netflix vs. Blockbuster or Instagram vs. Kodak, encourages new entrants to question and discredit the well positioned business models owed by the “naive” incumbents
But… how did a couple of young entrepreneurs in a garage had a shot to defy the large corporations? Well, here is where we find a 3rd. actor in the ecosystem: the technology companies. The beauty of rising technologies such as cloud computing, making world-class data centers available for everyone for an affordable monthly fee. By accessing to “technology as a service”, these short-budget startups could now compete in equal conditions. So now the “old” incumbents have real threat not only because these promising startups are close to the customers and can innovate faster, but also because they don’t feel the pressure of the choking regulations
There is another success factor that stumbled the old “well-positioned” players: New entrants came from a school a constant improvement was one of the principles. These perpetual beta products needed a constant understanding of the customer interactions at every touchpoint, which produces so much data to be analyzed, that data became the predominant asset. This was ignored by the arrogance of incumbents, while it became the key resource for raising startups
As stated before, the financial crisis in 2008 set the customers aside from the bank’s priorities. But, ironically, this frontier was the most profitable of all. Regulations & operational expenses became more costly than serving a customer willing to pay for a good quality of service. Banks didn’t take this threat too serious because of a simple fact: customers are traditionalists, the “belong” to the banks, they got used to have an account in a specific bank for the rest of their lives, and even future generations inherited dealing with the same bank. But… what banks didn’t see coming, is a new generation labeled “millenials”: a bunch of youngsters with raising incomes, discontented for everything, allergic to the status quo, with a value for freedom that doesn’t mind to change their banks once, twice or n times in the same year. A character who values the experience of acquiring a product at the same level of the product itself. Someone who has big expectations from banks to figure out their needs, and low levels of patience when things are not what they expected
Well, this irreverent personality does not care about regulations, but is tech savvy and more acquainted with how financial services can be leveraged by the latest technologies. And this is why fintechs found their holy grail: They are close to the customers (startup founders are mostly millenials, too!), they understand their needs, they can pivot their products and receive feedback faster, they have no problem to change the entire business model if they are in the wrong way…. Simply, they got “nothing to lose” and too much to gain
In the meantime, this fintech phenomenon gained momentum and supporters in such a way that even the World Economic Forum (WEF) included it as part of the next humankind revolution analysis, defining the so-called “wheel of disruption”
This study defines a quite interesting point of view that I personally recommend to check out. It establishes well defined areas of fintech applications and use cases, highlighting some representative players. To summarize the best outcomes from this study, I can conclude:
- Payments was the area with most use cases. Several factors contributed to the emerge of payments. From one side, the mobility evolution provided the best vehicle for digital wallets: fancy smartphones with connectivity and security capabilities, plus an ease of apps development, opened a new world for fintechs willing to provide an improved consumer experience. On the other side, governments and central banks showed serious interest into cashless initiatives (especially in developed countries) thanks to its cost effectiveness. As a result, the ecosystem grew, including several actors into the picture: telcos, merchants and utilities companies who saw an opportunity to innovate their offerings
We can find various successful stories like Braintree (acquired by Paypal in 2014), but what it is even more surprisingly is the fact that technology companies jumped into this arena as well: Google Wallet, Apple Pay, Samsung Pay. Of course, the biggest interest was not the financial transaction per se, but more the users interests
Certainly, on every battle there are losers: banks. They lost knowing the customer’s behaviors, due the fact that all the transactions were being issued outside their realm and, consequently, getting more away from understanding their customers preferences
- Deposits & Lending. This was another big punch for the banks. Those were the cornerstone of their business model that prevailed for centuries. Ironically, the regulations push their bank to impose more strict scoring ratings, limiting the target market to a minority. Alternative lenders arose leveraged by crowdfunding platforms, not only by issuing credit with a faster, simple and more effective lending origination process, but also by offering more personalized products tailored to their customers needs. Cases of study like Lending Club, Kabbage or AngelList resounded the industry tabloids
- Insurance shined as the most promised field of disruption. Up to this point, insurance companies were known as rigid, bureaucratic and old-fashioned organizations. Filling long paper forms were the common interaction, leaving most of the insurers evaluations subjective to an statement of truth
Nonetheless, the advances of new technologies found this land fertile for its application. For instance, Internet of Things and wearables would be able to provide a more objective insurers evaluation (health condition, driving behavior, etc.), and gather enough knowledge for personalizing their offerings into a more tailored product (policies adjusted to the customers lifestyle) or going further by extending their value chain with complementary partnerships (gyms, yoga establishments, or healthy food suppliers, etc.)
Follow my next article in which I described the second wave of Fintech, or what I call Fintech 2.0. Stay tuned!
