Fintech The Disruption of Your Money

Uncategorized Jun 01, 2019

Fintech (technology supporting financial services) remains a popular area for startup activity and funding. The areas encompassed by fintech include wealth management, insurance, lending, mortgages, real estate, money transfers and remittances, capital markets, payments and billing, personal finance, reg tech and cryptocurrencies. While the hot area(s) of investment in fintech shift back and forth, the enthusiasm for fintech deals and funding continues to grow. The disruption of your money has begun! 

Financial services incumbents are a natural target for disruption by changing technology and new business models. This industry is encumbered by numerous stale business models and practices that make the individual consumer cry out “There has got to be a better way!”


After a career in financial services, my personal experience may offer insight as to why innovation by financial incumbents occurs slowly:

  • Culture: Large incumbent financial services firms like to think of themselves as “fast followers”. This characterization creates an industry wide culture that rewards an aversion to unnecessary change—the understanding is that you keep your job (and income) if you avoid the big mistake. This approach is permissible as long as product innovation within the financial services industry comes from expected players, is incremental in nature and focuses on new product features that are easy for others to quickly copy. After all, a popular new mutual fund discipline or annuity payout method is never unique in the market for very long. 

Thus, “fast follower” companies have the luxury of sitting back and watching innovation by others, monitoring to see if the new product or feature sticks and then quickly copying those innovations that succeed. There is little reward for sticking one’s neck out in front of everyone else by being first with a ‘Big New Idea’. 

  • Technology: Financial service firms look at technology in much the same manner as they do product innovation: The safe and high reward path is, at best, taking the “fast follower” approach. Here’s the main reason: Financial service firms have historically benefitted from increasing margins at scale. For example, the additional resources required to support a $500 million mutual fund vs a $5 billion mutual fund are quite small compared to the 10X increase in income. The result is a culture of aversion to unnecessary change that also applies to technology. Given increasing margins at scale, companies believe their resources are best directed at growth-oriented marketing and sales initiatives, thereby creating commensurately higher margins than to spend resources on technology than may slightly lower costs. The result is that financial services firms take a “We’ll do it when everyone else does” mentality towards new technology. 
  • Regulatory Pressure: Make no mistake about it, the regulatory and compliance pressures faced by financial services firms are often overwhelming. In addition, the strict requirements from many regulatory directives are often ambiguous and firms are left guessing as to a new regulation’s required actions and supporting documentation. In addition, the presence of ‘good intent’ (that is, I was not aware of the deficiency) and the ambiguity of their own regulations is sometimes ignored by a regulator on a hunt to identify and punish an actual or perceived deficiency or wrongdoing.

All in all, the combination of easy-to-copy innovation, higher margins at scale and an often ambiguous and unforgiving regulatory climate combine to create a culture that encourages an aversion to meaningful change, the adoption of a “fast follower” approach and places a low premium on meaningful innovation. As a result, financial services incumbents generally gather into a herd when confronted by innovative ideas. The most important question becomes: “Who else is doing this?” as I do not want to be first. 

Meanwhile, despite the ambivalence of the incumbent financial services firms, enormous investments are occurring in potentially disruptive fintech opportunities. This phenomenon is occurring across the globe as total global fintech investment has grown over the past five years: 

                                                                        Global Fintech Funding                    Global Fintech Deals

                2014                                                               $8.3 BB                                                 885

                2016                                                             $19.3 BB                                              1,254

                2018                                                             $39.6 BB                                              1,707

               Source: CB Insights 

In addition, many new fintech firms are gaining sufficient traction such that funding mega-rounds of $100 MM or larger are becoming more common, and especially in North America and Asia:                                                                                         Global Total               North America                       Asia

2014                                                                    10                                                    5                                2

2016                                                                    18                                                    8                             10

2018                                                                    52                                                 25                              18

               Source: CBInsights 

Lastly, there are now 39 fintech unicorns (with a private market valuation of $1 BB or greater) valued at a total of $147.4 BB (excluding Alibaba’s Ant Financial, whose 2018 $14 BB funding round occurred at a $150 BB valuation.) 16 of these 39 unicorns reached their $1 BB valuation for the first time in 2018. Furthermore, over the past several years, public fintech companies (such as PayPal and Square) have outperformed the large incumbent financial institutions (such as JPMorgan Chase and Bank of America) and the S&P 500. 

So, where is all this excitement focused on? Here are ten emerging trends in fintech: 

#1 The Battle For Deposits

Fintech firms are becoming more aggressive as they expand beyond their initial lines of business and begin chasing consumer deposits. Banking-as-a-service is emerging as a new product to help fintech companies capture deposits, as Green Dot and Cambr provide mobile banking capabilities to hundreds of firms. The end game is to capture the client’s paycheck, which opens dozens of service-providing and revenue-generating possibilities for these fintech firms (while incumbent banks are hamstrung by the Durbin Amendment mandating low fee charges to consumers on debit cards). 

#2 Fintechs Morph Into Platforms.

The initial use case for many fintechs is now morphing into a wide-ranging platform of financial services. Robo-advisor Wealthfront is now entering college savings, lending and real estate. Robinhood stumbled badly in their attempt to offer high interest checking and savings accounts but is adding cryptocurrencies to its free trading platform. Cryptocurrency platform Coinbase is adding institutional investing, index investing and wealth management to its services. It appears that fintech firms are concluding deposits, platforms and data are the new gold. 

#3 Southeast Asia is a Fintech Hotbed

Southeast Asia’s combination of an emerging middle class, high Internet access and increased smartphone ownership creates a fertile environment for new fintech platforms to emerge. Thailand, Vietnam, Indonesia, Malaysia and the Philippines now host startups in financial services, digital wallets, e-commerce and remittances. Alibaba’s Ant Financial and the ride hailing apps (after acquiring mobile payments apps) are active in all these countries. Singapore-based Grab is moving past ride-hailing transport services and food delivery to add a payments ecosystem, even as it begins to offer financial services to its driver, agent, and merchant community. Indonesia-based Go-jek is moving past ride hailing to become a payment hub through its Go-Pay app. These moves mimic how AliPay and WeChat have transformed China by becoming an online community of services far beyond their initial payments and messaging services.

 #4 Unbundling the Paycheck

An early wave of fintechs provided a direct to consumer path through startups like Lending Club (personal and auto loans), SoFi (student debt) and GreenSky (home equity and renovation). However, new startups scrape off a piece of the paycheck to fund a wide array of services, including Alice (pre-tax spending), Even (earned-income advance), Goodly (student loan payoff) and Honey Bee (emergency funds). Meanwhile, Gusto and Earnin allow employees to access earned income ahead of their payday. 

#5 Amazon Lurks at The Edge

Amazon is always looking for industries where they can remove margins and make money on data and convenience. The e-commerce giant now offers bank-like services that just fall short of becoming a bank, including Amazon Pay, Amazon Allowance, Amazon Go, Amazon Protect, Amazon Lending, Amazon Reload and Amazon Recharge. At this point, Amazon is not yet in frontal assault mode on financial services. However, once Amazon figures out their strategy, they can acquire or charter a bank and create significant disruption by leveraging their community of 310 million e-commerce users, 100 million Amazon Prime members and 1 million small business sellers. 

#6 Democratization of Investments

The mutual fund was an early way of democratizing investments, as an investor could buy into a diversified mutual fund at an investment far below that of a portfolio of individual stocks. This was followed by mutual fund platforms that allowed easy buying and selling of mutual funds without contacting the individual mutual fund companies. Now, the trend towards democratizing investments continues, as micro-investment platforms (allowing small investments) emerge in new asset classes like music (Royalty Exchange) and art (Masterworks).  

#7 Real Estate Enters the Digital Age

Fintech is now heavily involved in real estate through startups offering cloud-based platforms including listing, settlement, energy management, mortgages, analytics and title services. New business models, through startups like Ribbon and Flyhomes enable ways to make all-cash offers on homes along with guaranteed sales while startups like Verbhouse and Divvy provide rent-to-own paths to home ownership. 

#8 Technology as a Distribution Channel

Blackrock, the world’s largest asset manager with $6.3 TR in asset under management (AUM) and Microsoft (the world’s 1st or 2nd most valuable firm, depending on the day) with their Azure Cloud service and 135 MM Office365 users, announced an initiative to create “guaranteed Income” for retail investors. This ambitious announcement belies the fact that, today, neither BlackRock nor Microsoft can provide a penny of guaranteed income to anyone. Guaranteed income requires an insurance company and neither firm is an insurance company. Still, there is something promising in this strategy as BlackRock looks to market its iShares ETFs in retirement accounts using Microsoft’s Cloud, Office 365 and Windows products as a distribution channel. As this technology-based distribution platform begins to reach out to consumers, every insurance company in the world will beat a path to BlackRock and Microsoft to become an annuitization provider to this product. Other firms with major consumer reach such Google with Chrome and Android, Apple with Safari and iOS and Facebook (already rumored to have a cryptocurrency initiative underway) with 2.3 billion global users may follow. Today, a dozen or so Chinese firms (Tencent, Alibaba, Didi Chuxing) with 500 million to one billion users already implement some version of this strategy. 

#9 The Incumbents Focus on Mobile and AI

Banks sometimes mimic the startups. For example, Goldman Sachs’ Marcus platform provides no-fee loans ranging from $3,500 to $40,000 loans to individuals. Bank of America is offering free equity trades (like Robinhood) to its best customers. Still, most banks are content to improve efficiency by expanding their mobile offerings and through Artificial Intelligence (AI) initiatives like introducing chatbots for customer service and in streamlining loan processing. We have not seen a wave of acquisitions of fintech startups by the major banks as regulatory, cultural and legacy technology issues appear to keep the banks on the sidelines. Still, inevitably, we can expect to see a wave of acquisitions by financial incumbents as their own R&D efforts become increasingly marginal in impact. 

#10 Cryptocurrency’s Business Model Needs Repair

The Bitcoin bubble popped as the price of Bitcoin dropped from a December 2017 high of $19,783 to below $3,500 in 2019. Meanwhile, cryptocurrencies are still searching for their “killer use case.” Foreign remittances, so far, appear to be the strongest candidate, but adoption has a way to go. Further, JPMorgan recently concluded that the average cost of mining a single bitcoin is now $4060 (versus a current average bitcoin value of around $3,600) while the energy consumption of the global bitcoin mining industry now equals that of Ireland. A lower-energy use alternative is a proof-of-stake mining model that requires miners to (essentially) buy a mining franchise and have this purchase price held as a way of reinforcing good behavior. Another approach is stablecoins, whereby the cryptocurrency value is pegged to assets such as the U.S. Dollar or gold. Issuers of stablecoins must hold reserves to back their coins, but then stablecoin issuers begins to look like banks. Stay tuned to see how these problems get fixed! 

Gradually, Then Suddenly

The investment community keeps betting ever-increasing dollars that these new fintech firms will find their place in the new financial service ecosystem. The reason may be that technology and business model disruption will occur gradually, and then suddenly, as it has in many other areas. This “gradually, then suddenly” experience reflects the impact of new competitors coming from unexpected directions into a market. At that point, a “fast follow” strategy falls apart as the incumbents are culturally and technically ill-equipped to respond effectively to the nature and extent of the disruption. 

In the end, will the tech giants and the new fintechs team up to create a new financial service ecosystem, or will the incumbents and startups join together via partnerships or acquisitions or, lastly, will the new startups emerge victorious? As this activity plays out on a global scale, new combinations of financial services incumbents, tech giants and fintech startups are shaking up financial services and the disruption of your money is just beginning.


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