Opportunities in Technology-based Finance

#BusinessLeadersSeries is an an editorial series that shares the distilled wisdom of leaders in various sectors on crucial issues and questions that confront the emerging class of global business leaders.

This piece was written by Dennis [DJ] DiDonna, a Harvard MBA and co-founder of EFL Global in response to the question:

"What are the challenges and opportunities that exist in the world of digital currency and technology-based finance?"

Part 1: The World of Digital Currency

Innovation in digital currency and technology-based finance (the fintech space) has enormous enabling potential, due to their ability to leapfrog broken or non-existent structural impediments. For example, digital currency can free business leaders from currency volatility, while also giving access to financial markets and investors previously deterred by risks outside of their control.

However, both sectors also must play within the system in many crucial areas of their business, facing legacy players and regulations which protect their supremacy. For example, regulations concerning security are notoriously rigid and expensive to satisfy, putting new entrants at a distinct disadvantage to existing businesses. Additionally, due to the importance of a stable financial system, often state-run entities receive exclusive licensure to operate in these realms. This means entrepreneurs face insurmountable barriers in access and cost of capital.

Success in the fintech and digital currency space requires fluency in old and new technology, dexterity to navigate archaic and evolving regulations, and patience as the systems evolve slower than customer demand.

Part 2: Three Key Lessons from Running a Fintech Startup

As a cofounder of a fintech company in the credit scoring space, (EFL Global,) we offered financial institutions across dozens of countries the ability to understand risk and opportunity among underbanked customers. Our business depended on financial institutions’ willingness to lend their money to often new and unknown customers, who were unable to qualify for a loan at their competitors’ banks. Over the course of almost a decade, we learned many valuable lessons, but three stick out:

1. A clever solution isn’t a product

Our technology came out of Harvard research on using psychometrics (think: personality tests to figure out someone’s optimism, honesty, intelligence, and skills) to measure entrepreneurial ability and loan repayment. Early results were encouraging, our papers were accepted into top journals, and we felt like the smartest people in the room with success within reach. But there’s a reason most entrepreneurship training focuses on customer-centric product design and minimum viable products: you need to understand what the customer actually wants and is willing to pay for in order to have a successful product. After years of success selling into only the most innovative, early-adopter financial institutions, we made difficult choices to chop up our brilliant-but-bulky product in service to what customers wanted: a cheap, easy, and fast way to evaluate their clients. It turns out that all along, they were more than willing to sacrifice effectiveness for quickness….we just weren’t asking!

2. Incentives rule behavior

When you find yourself confused as to why your customers aren’t making logical buying decisions, realize that their decision-making is undoubtedly rational, it’s just not rational to you. After years of struggling to “cross the chasm” to larger, more traditional banks, we realized that the motivations of bank executives were very different than our own motivations: often times the reward for successfully innovating was overshadowed by the punishment if their project failed. Often, people who choose to be bankers (our customers) are more risk averse than people who choose to work for startups (us). We were projecting our values onto our customers, and selling our product as a way to innovate, which attracted us, versus a way to decrease credit risk, which attracted them. Once we recognized this, we could adapt our marketing and product development to better address their motivations.

3. The obstacle is the way

Famous stoic philosophy adherent and Roman emperor Marcus Aurelius liked to think on his difficulties not as obstacles in his way, but rather that “the obstacle is the way.” When regulators threatened to make our non-traditional scoring process illegal in one market, we responded with fury and bafflement: how could they not realize that we were on the side of the regulators - looking to increase the number of formally banked customers, while at the same time enabling lenders to do so safely? Tackling the regulator issue was difficult, but ultimately led to being one of our competitive advantages over new entrants into the market...what was once an obstacle became a moat for our competition! From the start, we set out to “revolutionize” the banking system, disrupting how banks competed for borrowers, and connecting talent and opportunity to capital. But most of the greatest revolutions in banking - credit scoring being one of them - were actually evolutionary. Not only that, but they required collaboration with the archaic system and players in the market.

Part 3: Success Guidelines for Emerging Business Leaders in Fintech

Digital currency and fintech offer business leaders, especially those in emerging markets, a “leapfrog” opportunity for growth without depending on pre-existing infrastructure and outdated technologies. But the excitement to play by a new set of rules can result in forgetting many of the same rules continue to apply; strategy, along with speed, is required for building and sustaining a successful enterprise. Successful business leaders in this space will remember to create products that customers need, while taking their motivations into account, and considering the difficulties not only as part of the journey, but as crucial tools to create distance between yourself and your competition.

This piece was edited by Arinze Obiezue, a LinkedIn Campus Editor. #StudentVoices #CampusEditors

About DJ DiDonna

Over the course of 8 years, DJ DiDonna lived on 4 continents, co-founding and scaling The Entrepreneurial Finance Lab (EFL Global) (www.eflglobal.com), which created non-traditional psychometric credit scoring to enable access to finance globally. EFL is a for-profit social enterprise, whose technology analyzed over one million people without traditional access to finance, and enabled over $2 billion dollars in loans to the underbanked. DiDonna studied Politics, Economics and Philosophy at the University of Notre Dame, and completed his MBA at the Harvard Business School.