Banks are limited due to regulations & reputations
Changes in consumer preferences have opened the door for Fintech solutions
As 2016 closes I will share insights associated with the methodology and outcomes of my 3 (edtech, fintech, real estate tech) updated investment theses. The goals of “Notes on a Thesis” are to 1) present my research, 2) connect with relevant founders, 3) cultivate a discussion around the thesis, and 4) provide templates for aspiring VCs.
I started my professional career in the summer of 2007, working for a Canadian investment bank. Little did I know that everything would hit the fan only a year later when Bear Stearns would cease to exist. What followed was a recession that would change the way individuals viewed financial institutions and how regulators monitored all operations of the banking industry. These macroeconomic trends in consumer preferences and the regulatory environment have shaped my view on the most promising startups in the fintech sector.
Regulation has been reactionary
Many years later, I decided to take a role within a large US bank’s global risk department. My goal was to determine how new regulation was (both negatively and positively) impacting the operations and growth opportunities for multi-national banks and understand how regulation was opening the door for fintech startups to gain considerable market share. What I found in my tenure at the bank was that regulation such as Basel II/III — which are is a comprehensive set of reform measures, developed by the Basel Committee on Banking Supervision, to strengthen the regulation, supervision and risk management of the banking sector — have done some good to make sure banks are adequately measuring the risks of their operations. The goal of these rules is to prevent another 2008 economic debacle. However, the regulation does create obstacles and internal processes that slow down revenue generating opportunities for banks to compete with the ever changing preferences of the greater banking industry.
Banks have perfected operations for a past environment
This insight from my experience in the risk department coupled with my research in the fintech space has shaped a core aspect of my fintech thesis: Banks are required to respond to regulatory change constantly, tying up capital, while customer expectations are growing exponentially resulting in banks to becoming more efficient at their business right as it changes.
Regulation is generally reactionary and tries to add structure to events that have already happen — which puts established institutions at a huge disadvantage. Fintech startups have seized the opportunity through the “unbundling of the bank” movement and targeting Gen X and Millennials who have established mobile banking relationships with non-traditional players.
More importantly, consumers are more open to new relationships that are focused on origination/sales — the focus of fintech startups — which generates 60% of global banking profits.
Path to high growth is through actionable insights
In a world where more than 90% of data has been created in the last 2 years, fintech data should lead new products and services, delivered in new ways. Fintech startups have gained consumers through the emergence of the Advanced analytics offer transformative potential to predict “next best actions,” understand customer needs, and deliver financial services via new mechanisms ranging from mobile phones to wearables. I believe that the success of fintech startups will be a function of their analytic capabilities, as opposed to online access to traditional banking products. Last decade’s unbundling of the traditional bank has created a crowded fintech market. The high growth startups will be able to distinguish themselves from the pack by leveraging their predictive analytics tools since traditional banks lack the internal expertise to create tools that leverage data and speed up settlements. I anticipate that banks will continue to partner and acquire startups that met the needs of customers that they cannot reach thanks to limitations in their core competencies or regulatory pressures.
Earnest Sweat is an Entrepreneurial Engineer for Camelback Ventures and an Investor in Residence for Backstage Capital. If you have any questions or requests please connect with Earnest through LinkedIn, Twitter, or AngelList.
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