Year Zero - more Fin than Tech

I have been having versions of the same conversation over the last few weeks, and I wanted to consolidate a few thoughts rolling around in my mind for Fintech (and probably startups) in general. Individually, these are fairly obvious. But, I think it is helpful to reframe our point of view.

As a Fintech operator, I would characterize the trajectory of the last decade+ as less “Fin” and more “tech” over the last decade. But now, we are in year zero of, not one, but potentially three regime changes in business and markets.

And at this point in time, it can be easy to over estimate the level of innovation in the short term, but vastly underestimate the value creation over the very long term.

Year Zero of a risk free rate of return

By now, everyone is well aware of the Federal Reserve interest rate hikes. We are feeling it everywhere.

But I would hazard to guess that many folks working in startup land are unaware that there is actually a 5% rate of return for a “risk free” (let’s see how the debt ceiling works out in a few months) asset.

I did not intuitively grasp this until recently, when I did something that was pretty innovative for a Millennial like me: I bought some T-Bills (3 month duration for a 5% APR).

I had learned things like risk free rate and discount to face value in business school, but I never really intuitively grasped it during the last phase of my career, probably because the interest rate was effectively zero since 2008, when I started working.

On a related note, whenever FedNow launches, it will theoretically shorten the time for settlement in the US from T+3 to T+1. If finance is the relationship between time, money, cost of capital, and risk, what does it mean when the time variable in the largest payments pool in the world shortens from three days to one?

Year Zero of AI

So again, no surprise here. AI’s been blowing up since mid last year with the DALL-E 2 and GPT 3.5 releases, but the generative approaches feels like it’s left Fintech untouched.

In fact, whenever I've queried other operators and investors, the state of the art for AI and ML in Fintech in their minds is fraud prevention. That has effectively been the case for the last decade, meaning a paradigm shift has not happened yet. But we are in Year Zero. Everything that came before it seems like prehistory.

Fraud prevention relies on a different category of AI models than transformers and GANs. The state of the art in Fintech feels like it is mainly classifiers and regression (still very powerful). There could be any number of architectures that are at different stages of R&D, ready to be unleashed on the world.

Again, this is Year Zero.

Year Zero of the post SVB bank run world

We are living through the aftershocks of the SVB bank run, but it appears that things may begin to settle down.

Despite this, people and businesses are shaken to their core. Their fundamental understanding of their relationship with the safety of their money, in the safest and boringest places, has been disrupted. This is Year Zero of the mainstream, and not just crypto enthusiasts, questioning: “What is money?” This long term change in people's confidence will transform finance and technology.

Regulation will come. While it’s hard to speculate on what it will look, it will certainly also change the fundamental relationship that banks have with their profits. That will cause the banking layer to adapt, to de-risk, and ultimately to change. Whenever that happens, new opportunities can open up.

Btw, two tangential thoughts on crypto. First, this actually does feel like a moment when a crypto future is a reasonable answer. Second, anyone who is building a crypto startup in 2023, is probably a more serious contender than previous generations.

Conclusion

Over the last decade, Fintech has been less “Fin” and more “Tech”. Considering the above, it was probably because of the zero interest rate environment. The risk free rate was zero, and so the finance side of Fintech was like vapor that did not matter.

At this point in time, I’m struggling for something to latch on to besides the feeling in my gut that the future is on a very different curve than what came before. As an operator and investor, my inclination is to study, to ask questions, and to learn.