Fintech Food for Thought

Statement: It is cheaper to create a fintech startup today than 15 years ago, yet very few fintech startups reach escape velocity and have been able to build a sustainable business yet. There are plenty of fintech unicorns but there is only one PayPal to date.

Question(s): Does the fintech startup scene obey an even more severe power law of success or is it too early to tell?

Statement: Financial Services incumbents continue to be hurt by a low interest rate environment that hurts their profitability and severely constrains them in the marketplace.

Question(s): Would a high interest rate environment limit financial services innovation to systematic progress, to the detriment of systemic progress? Would interest rates increases limit the ability disruptive fintech startups have at competing against financial services incumbents?

Statement: Incumbents notoriously do poorly with innovation. They are beset by agency issues, inflexibility, bureaucracy. They are also the first to retrench when failures arise.

Question(s): Will incumbents exhibit the same tendencies at such a pivotal point of transition to the new digital age? Or will they exhibit more resiliency as a matter of survival.

Statement: New technologies, new behaviors, new business models are giving rise to the omnipresence and the power of networks and platforms in an industry where very complex processes are the norm and where mastering these processes require depth and breadth of knowledge.

Question(s): Which is more likely, a) disruption coming from fintech startups alone, b) fintech startups failing to dislodge financial services incumbents, or c) collaboration between startups and incumbents?

Statement: Many fintech startups are building businesses in either fragile activities (lending) or "race to the bottom" activities (remittances, p2p payments)

Question(s): How difficult will it be for these startups to build resilient businesses long term? Will financial services incumbents be negatively impacted?

Statement: Most if not all financial services operations are eminently complex, standards and regulatory rules add to the cost of doing business, even more so when cross border processes are taken into account.

Question(s): Does this mean the capital requirements to build a sustainable fintech startup at scale - and the current size of financing rounds - is too high or too low? How will financing rounds size trend going forward?

Statement: Financial services incumbents boards are light on technology gravitas and knowledge. Fintech startup boards are light on deep financial services knowledge and understanding.

Question(s): Which will close the knowledge and experience gap first? Can the gap be closed?

Statement: Innovation is about taking risk. Running a financial services business is about managing risk.

Question(s): Can these two activities be reconciled? Under what circumstances?

Statement: The financial services industry is undergoing profound change and is also under tremendous stress. Banks, Insurance, Asset Managers are faced with existential threats - real or perceived. Every participant in the industry is responding to change, even forward thinking regulators in certain jurisdictions - UK, Singapore.

Question(s): Can financial services regulators avoid further change to their own business models? Can they get away with systematic change or will they have to contemplate systemic change? Are the equipped to innovate within their midst? What will be the consequences if they do not change and adapt?

Statement: Financial services participants such as PayPal in the US, Starbucks - and others - "hold" sometimes more money on behalf of their customers than certain banks do. These actors do not hold bank licenses nor are they subjected to the same level of scrutiny as banks.

Question(s): Will this trend increase, both in terms of quantity of money held and number of participants? If so, will regulators pay a closer look at these participants and will regulation take into account the weight these participants hold within the overall market structure?

Statement: Bank or Insurer owned Venture Capital firms invest with a strategic mandate. Independent Venture Capital firms are not encumbered but such constraints.

Question(s): Which yields the best outcomes? For investors, for the incumbent parent? Is it sufficient for a bank or insurer to own its own venture fund? Should it be better for a bank or insurer to invest in an independent venture fund? Would both owning a venture fund and investing in an independent fund be optimal?

Statement: Financial services incumbent IT/IS staff are usually convinced they are better at building new products, services, platforms. Fintech Startups are usually convinced they are better at going to market first.

Question(s): Which is the most value destructive behavior? Which behavior is the easiest to correct?

Statement: Fundamental and economically productive product or service or business model innovation in the financial services industry has been scarce- e.g. mortgages, ATM, securitization. Most innovation has benefited the speculating activities prevalent in asset management, trading, capital markets.

Question(s): Will new technologies and their application via fintech further this trend or invert it?

Statement: Many seasoned and reputable venture capital investors have gone on record stating corporate venture firms do not know how to invest and incumbents have a poor record with innovation. Most corporate venture capital investors are convinced fintech startups know little about the financial services industry.

Question(s): Which belief is the most erroneous? If true, which is easiest to upgrade?

Statement: In part due to local legislative and regulatory DNA, in part due to entrepreneurial genius, in part due to the size of their market, Chinese fintech firms (pure plays or children of Chinese tech giants) are ahead compared to their Western brethren. Further, based on recent evidence, cracking the Chinese market is a non trivial endeavor for a US or a European startup. US and European fintech actors do not enjoy the same advantages Chinese fintech actors do.

Question(s): Will Chinese fintech actors expand to Europe and the US? If so, how will Western regulators and legislators react? Will Chinese financial services markets mature to the point of being opened and interoperable with the outside world?

Statement: To date, the vectors of financial services industry disruption and innovation have been technology, a change in consumer and enterprise habits, the Great Recession, strengthened regulatory oversight, entrepreneurial spirit and a low interest rates environment. These have, to a large extent been forced upon the industry and its incumbents. Notably absent has been the political sphere - executive or legislative.

Question(s): Will the political sphere engage with fintech and the financial services industry transformation? What will be the likely effects?

Statement: Fintech innovation needs both talent and capital.

Question(s): Which of talent or capital is more constrained? Are we faced with a demand or a supply issue? How will this change in the future?

Statement: Transitioning from the industrial age to the digital age induces profound implications. The way we organize ourselves, transact with one another, interact with one another are and will be drastically different. So will the skills, business architectures, mustering of resources and capital to sustain new models. Particularly so in the financial services industry. Incumbents have the advantage of political clout, access to high level spheres of power and decision making. Startups and entrepreneurs master the art of creation - sometimes successfully. Be that as it may both need to see the future differently than they experienced the past.

Question(s):  Is that transformation purely technology and business dependent? If not can either startups or incumbents transform the industry for the digital age without political leaders that understand what the digital age needs? Have political leaders emerged in any country or continent that understands the new age we are entering and its implications to the financial services industry and fintech as its enabler?

Statement: We are witnessing many changes within the financial services industry. Yet, Money, the concept of money has not changed for may generations.

Question(s): Should the concept of Money change? If not, why? If so, which is the most likely vector to effect a change; technology, politics?

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