Fintech is a highly regulated market with sleepy incumbents, perhaps because inefficiencies persist longer than in other verticals. This condition does not suit accelerated returns and that doesn’t equate to change in capital markets. Specifically, democratization of data has lowered the barriers to entry in order to compete.
That’s not to say that just anyone can succeed in fintech. It’s a complex space for founders, investors and consumers alike. But I believe it is also one rife with opportunities if you know what to look for. To that end, I’ve made a handful of investments in fintech via my own investment platform, C2 Ventures.
I think winning in fintech boils down to understanding the shifting dynamics of financial services in a time when providing an excellent, high-integrity consumer experience is everything.
Millennial money matters
The millennial generation is less connected to the idea of centralized banking and more willing to conduct their finances through computers and smartphones. There is also an emphasis among millennials on design, a non-incumbent competitive advantage that’s somewhat esoteric. Rapidly changing interfaces (e.g. voice) create new demands seized-upon by fintech startups that move at a rapid pace.
This is challenging for many investors for whom regulatory barriers still create a moat around start-ups, despite the much-hyped promise of an ability to move past the seed stage and scale. That’s the pessimistic view of investing in fintech. Kind of ugly and not my own POV.
Allow me to present that here:
Opportunity is beating the door down
Goldman Sachs estimates the technological disruption of financial services is a $4.7 trillion opportunity. Access to financial services is a critical element of upward mobility and 20% of U.S. households have inadequate access, i.e they are under-banked. An odd concept perhaps, but consider these two points:
- Nearly 100mm U.S. consumers lack access to credit at affordable interest rates and nearly half of the U.S population do not have as much as $400 in savings to cover an emergency expense; and
- Incumbent financial institutions are bloated because they have been built around brick and mortar retail locations, outdated IT systems and cultures that forestall innovation. They rely on hidden fees, opaque pricing, fine print and complicated products.
Despite these inconvenient truths, a new breed of lean startups has emerged that leverage mobile technology, machine learning, and blockchain, and that have a massive technology advantage because - big surprise - conventional financial institutions move too slow. Progressive investors, like the folks at Story Ventures, have seized on the opportunity and are aggressively pursuing deals with the new breed of fintech.
One of C2 Venture’s own investments - a stealth mode company that will make a funding announcement this spring - is using machine learning and mobile technology to disrupt consumer credit, pioneer cash flow underwriting, and introduce technology that isn’t reliant on largely inaccurate credit bureau data. Matt Harris and the team at Bloom Credit personify the same kind of market insight. These innovators are on the edge of what finance can and will be. But the view isn’t for everyone and change comes fast.
The entire fintech shift in 3 paragraphs
From the end of World War II until around the year 2000, financial relationships were people driven. When we had financial matters to attend to, we went to the bank down the street and talked to Sam, or Pam, because we knew them and they knew us. They knew when we were thinking about buying a house, or getting ready for retirement, and they could help. An all-in-one platform before its time, to steal a more modern phrase.
Then 2001 rolls around. That was the first time you could use a phone (a Symbian build, to be precise) to move money between accounts, or buy stock. From this point forward, the banking relationship started to become disjointed just by the number of financial companies advertising to consumers at-scale. Flash forward seemingly 10 minutes, and the moment I want a credit card, I can go get one instantly online. Sam and Pam started getting lonely and old school banking technology just couldn’t keep up. Why?
Traditional financial institutions were built to use people as the lever and technology as a service component. So, as things have progressed, they began to lose customers. The result is that the same banks that used to understood us started closing, rapidly. Traditional financial services become ill-equipped to service consumers in the full context of their lives. That lack of context led to fewer services and consumers become numbers, not people. As a consequence, the financial services industry left the majority of us behind. Everyone shifted to serve those who were the most obvious to serve. Personal wealth stagnated and the number of people who felt alienated grew.
But there is yet hope
In the same way that consumer app products have evolved to service consumers on-demand and in the context of their lives, modern fintech startups have returned to the dictum of putting consumer relationships first. The technology behind it all is simply a tool to service a new kind of consumer still on the way to that new home, or their retirement, just on a different path than Sam and Pam could foresee or respond to.
The new breed of financial companies use technology to identify the blockers in a consumer's financial life cycle. They break down barriers to provide the good service we still crave from reputable lenders and demystify the banker’s code, making it simple for us to get what we need to be successful -- it's a modern solution to meet an evolving universal need.
That’s why I’m investing in fintech. Are you in?