Fintech is to financial services what Amazon is to retail… and Covid is the accelerant of this revolution
We always underestimate the change that will happen in 10 years…
When Jeff Bezos set out to build ‘Amazon the online-bookstore’ very few foresaw a world where the firm would grow to be ‘Amazon the everything store’ delivering us third party goods across every product category both physical and virtual… not just through shopping but also the enablement of new modes of entertainment and content delivery that changed our lives for ever (and that’s without even touching on what they have done in enterprise cloud services!)
When Apple sold the first iPhones in 2007, few appreciated what the breadth and depth of the third party driven app store would become, the services it would support (TikTok anyone?) or how it would fundamentally change how we engage with both the digital world and each other.
One of the (few) positives from the Covid pandemic is how, in some cases, it has already accelerated much needed change
Covid-19 can serve as the same kind of change driver. In financial services this is especially true. Like other industries, our world changed overnight and has forced a rethink of processes and interactions that were historically seen as fixed. To date the adoption of best in class fintech has been a potent future slowly delivered. Adoption was often more a necessity forced on institutions by the painful retirement of end of life legacy product. For all the Innovation labs and Fintech initiatives in Wall Street the reality of mass adoption is somewhat different…
“Why is change in banking infrastructure just so damned slow?” asked my wife… While mother’s day conversations might be different in your house, you can’t deny she still has a point. She was reacting to the Waters technology article I referenced on LinkedIn about the millions of lines of COBOL code still supporting the industry. She has also been by my side for the six years of the Illuminate journey as we set out to build a market leading VC in the financial markets technology sector.
Illuminate focuses on finding and backing companies that are replacing the legacy technology stacks in financial services institutions with next generation solutions, or solving new problems that the existing stack is ill served to support. Our fund has made some great investments that are gaining significant traction but starting a company in this space is not an easy road to walk as an entrepreneur. The reason for the high p/e multiples is that the long-term stickiness is hard earned: this stuff takes time to penetrate. In a world where the iPhone has revolutionised how consumers access the internet, and Amazon has changed the face of retail; to an outsider looking in the changes in financial services and enterprise tech can seem glacial.
Now of course neither Amazon nor Apple were overnight successes. Often what feels like an overnight success is actually the result of decades of work and roller-coasters along the way. When you work hard, and position your business to benefit from long term structural changes, you increase your chances of being in the right place at the right time for when there is a real catalyst for change be that scalability, cost, regulation or Covid.
How fast can the change come in financial infrastructure?
Well firstly let us remember that any enterprise’s core infrastructure is critical to its ability to operate so can’t be changed overnight. This is especially true of financial markets given the additional regulations: they needs to be reliable, fast, secure and scalable. Change has been hard to drive because anything that risks this reliability could be put in the bucket of ‘a potentially career ending call to get wrong’. Whilst the industry always talks a strong technology game around big data, artificial intelligence, cloud computing, robotic process automation and, of course, blockchain, real use cases have remained largely the exception rather than the rule.
The need for change however is real — and it’s why we founded Illuminate in the first place. Everyone in the industry knows the change must come, some are acting, but most are still using the analogous ‘physical bookstore’.
2020 has changed things — and old excuses no longer stack up
In January if your tech stack was a legacy installed system in your own physical data centre with full resilience to a nearshore BCP site and an offshore operational site, it was not cutting edge by any means, but it was entirely acceptable. Components would get swapped in and out and the stack would modernise over time, but we might reasonably expected that process to take perhaps 10 or even 15 years.
In May 2020 it is eminently clear that this timeline is no longer acceptable. I was speaking last week with our old friend Alex Langridge from Per Ardua when he said to me:
“We’ve seen a wave of emergency digitisation and the overnight adoption of an agile culture”.
It’s not often I write down something that Alex says to me word-for-word but in this moment he absolutely nailed it.
It might be acceptable to arrive in 2020 with a legacy installed tech stack… but to arrive in 2024 with one will not be. It cannot be optimal, ideal, or reliable that when your workforce is fully distributed that your technology is not. To put it another way if your work force is already in the cloud, then why is ok for your tech not to be?
This is an opportunity for the best firms to set themselves apart
The myriad of operational challenges that fall out of a 100% distributed work force are many and varied but the simple challenge of task prioritisation and management oversight are key amongst them. Yes, markets have continued to function, but the process has been possible only through a painful set of adjustments and the future proofing of this will have to be addressed in surprisingly short order. This is not just about digitisation as a nice to have and mentioned at a high level in a Chairman’s report. The future of work and of human interaction and what those look like are being changed indelibly.
We do not yet know when or who will go back to work as “normal” but we know that the new normal is not the old one. Two things are already perfectly clear:
- All organisations need to be prepared and able to move to a lockdown scenario at a moment’s notice, either to deal with a second and third wave of Covid-19, annual bouts of it or its derivatives, or whatever similar issue might arise in the future.
- Business contingency planning as we know it is about to be gone forever. Why keep a fully redundant building and systems when we know that the whole world can literally catch the same cold. In a world where we must be lockdown ready, the lockdown scenario becomes the new BCP environment and if we might have resisted that before we have just proved it can be made to work in an already very extended test…
Not to blatantly talk our own book again but…
What all of this means to me is that the digitisation of financial markets is about to be catalysed by Covid in a way that we simply could not have imagined even three (exceptionally long) months ago.
The adoption of fintech is a must have. Digitisation 2.0 has gone fast track. The fundamental building blocks of a future proof enterprise infrastructure are ready to achieve mass adoption and the future is in fact now.
