NOTE: This was first published at hacking.finance, a collection of anecdotes and stories about innovation within the financial services world, sponsored by Anthemis Capital.
hacking (v.) Engaging in the intellectual challenge of creatively overcoming limitations of systems to achieve novel and clever outcomes.
Letʼs be honest: perhaps the most innovative thing to hit consumer finance in recent memory happened nearly a decade ago. And even then, Venmo has itself been swept up in the massive financial industry, having been acquired by Paypal vis-a-vis Braintree. Why is innovation within consumer finance so rare? Why is “creatively overcoming limitations” of the financial system so difficult? Why are “novel and clever outcomes” so fleeting within global finance?
the most innovative thing to hit consumer finance happened nearly a decade ago
Hereʼs the rub: to even begin to answer these questions, one must look at the financial system through a different lens, one must approach it with a different worldview. If you study the financial system through the lens of finance, youʼll only arrive at some derivative of an answer already given. Certainly innovation has happened since Venmo, youʼll also notice that these innovative companies in consumer finance focus more on the “consumer” than the “finance”. By looking at the financial system through the people-first lens, rather than the money-first lens, these companies have found the hack. Sadly, these companies are more the exception than the norm.
Throughout my career in fintech, Iʼve found that one of the most valuable assets I have is my background in neither finance nor technology. Iʼm a self-taught engineer with an academic background in philosophy and political science. Yes, I think in terms of “systems”. But, even more importantly, I look at systems in philosophical terms: determining the root causes, namely the underlying human behaviors that cause a given system to arise in the first place. Fundamentally: philosophy is about how something (a culture, a system) or someone (an individual) thinks about the world.
So, if I may, Iʼd love to explain the difficulty of financial innovation through the lens of various players within it, according to the systemic behaviors and thinking that got us here to begin with. Obviously, there are many nuances that go into explaining the financial system at large, but, if youʼd allow me some flexibility, I hope that this at least provides a framework for discussion.
How banks think
The financial system fundamentally works on a single principle: massive amounts of economic activity can be enabled when money is put to work in creative ways through various instruments, namely different forms of debt. To be clear: this is a great thing for global society. This financial system enables education, home-buying, entrepreneurship, and established business growth, among other things.
Consumers give banks and other financial institutions their money primarily to keep it safe, but also to put that money to work such that other people can do things with it. Banks are the caretakers of both money and the instruments that money can enable, they take fees in exchange for this role in enabling economic activity. The business of a bank, and therefore its lifeblood, is collecting the interest itʼs owed and ensuring that it has enough money when people go to collect money thatʼs been entrusted to it. More than anything, money is the end goal for the financial institution. When banks, particularly big banks, don’t have enough money, it can be a calamity on a global scale. This is essentially what happened during the 2007–2008 financial crisis. Banks are not just purveyors of money and credit, they are fundamentally purveyors of trust.
The business of a bank, and therefore its lifeblood, is collecting the interest itʼs owed and ensuring that it has enough money when people go to collect money thatʼs been entrusted to it. Money is the end-goal.
Everything about the bank is built for managing and moving money. They monitor their assets, their debts, their balance sheets, and their investments with their treasury, their technology and their talent. The financial system itself is made up of people throughout the world dedicated to the business of “keeping up with the numbers” behind banking. Banks have always been interested in technology. But with the recent digital explosion, they have been unable to keep up with the pace of innovation: remember, technology is a support industry for them; itʼs not their core business. Enter fintech.
How fintech thinks
Simple has spent the better part of the last decade building a bank from the ground-up, with the user in mind. I was an early adopter and have loved it ever since. It was, dare I say, simple. The customer support was top-notch, the design was intuitive, and it was everything my bank wasnʼt. Why? Not because banks donʼt have the talent or the time. By partnering with a bank (Bancorp, then BBVA Compass, in Simpleʼs example) for infrastructural and regulatory purposes, Simple was able to focus on the things that matter to a consumer: the interface, the interactions, and the support. This consumer-centricity became their core business, and it led to their acquisition by BBVA in 2014, as a part of the Spanish bankʼs US expansion efforts.
Itʼs no secret that financial technology, or fintech, has exploded recently. From the cryptocurrencies that make the headlines to the underlying infrastructural businesses that help banks operate on a daily basis, financial technology is booming…and it’s not slowing down anytime soon. When people think about fintech, they rightfully think of the “institutional fintech” investments that are flowing into startups and business servicing areas like lending, wealth management, capital markets, and regulatory/compliance.
Where is a lot of this investment coming from? Obviously. Banks. How do many venture capitalists begin their career? In banking. Who are the primary customers for the majority of “fintech”? Banks. A large part of the fintech sector is people who come from banks investing in technology built for banks. Again, to be clear: this is a very good thing. The efficient allocation of capital is one of the most important features in our society.
As institutional fintech exploded, along came the rise of personal finance managers. They wanted a slice of the fintech pie. Just as banks need technology to service their financials, consumers also need technology to do the same. People started to leave companies like Visa, Citibank, and Ellie Mae to start and lead well-respected companies like Level Money and Personal Capital. Thus began the trend: people from banks investing in companies led by people, who come from banks, building technology for individuals. Again: this is a very good thing.
Fintech is largely people from banks investing in companies led by people who come from banks who are building technologies meant to serve banks. This is a good thing. But everyday people need “fintech” too.
The role of finance from a philosophical point of view is to enable and empower people. Not institutions. Not banks. Not credit agencies. Individuals. Families. Societies.
The problem occurs when people donʼt stop thinking like banks…even though they are building tech for people. This opposition is where the real opportunity to hack finance lies. By approaching finance from the mindset of the consumer, not the financial institution, people and companies see the problems in a different light and through a different lens. This is what we need to find “novel and clever outcomes”.
How a person thinks
As a reminder, banks think about money as the end goal: itʼs all about the numbers. They care about their assets, balance sheets, debt, etc. People, on the other hand, do not think about money as the end goal. Our end goal is a great life. A beautiful significant other. A healthy family. Meaningful and purposeful work. For the individual, money is simply the means to the end goal.
People, on the other hand, do not think about money as the end goal. For the individual, money is the means to the end.
For example, take Max Levchinʼs Affirm, founded in 2012. As a people-first company tackling the personal credit industry, they not only make it very easy to get and pay off a loan, but they tie it to what youʼre purchasing via the merchant. Affirm understands that youʼre using the loan to obtain something else. They feature merchants on their site, they call out quotes from what their customers have been able to achieve with their loans, and they focus on support. Sure, they could focus on the ease of getting a loan, or their interest rates, or how they seek to protect your credit score. But thatʼs not what a consumer is thinking when theyʼre looking at Affirm. Just a quick glance at Maxʼs social media presence…ahem…affirms their worldview. They are radically people-centered, which is going to serve them well as they scale.
From a philosophical point-of-view, the reason that personal fintech has succeeded thus far is because the people they are serving overlap with their thinking, for the most part. If youʼre 35 or 40 years old, youʼre looking for a mortgage from a bank. Youʼre thinking about retirement. Youʼre thinking about a higher-paying CD or a larger savings account. And, by golly, our personal-finance-app-that-thinks-like-a-bank can help you! Weʼve got an app that looks like a fancy spreadsheet to help you get a grip on your finances. We will show you promotions for that mortgage. That CD. That credit card.
The reason that many apps have worked to date is because they think like a bank at the exact time that their target customer needs the services that a bank offers.
But if financial technology is going to service the largest generation in American history, the millennial, itʼs going to have to “think different”. This generation not only has the most spending power in our country, but they increasingly donʼt care about ownership. They care about experiences. Theyʼre attached to brands. These are things outside of the wheelhouse for todayʼs fintech, because these are things outside of the wheelhouse of the financial systemʼs worldview to date. For technology, and the financial system at large, to keep up, it has to think like a person again.