In this world of choice that emerges from the integration of new technology models and old financial models, we see hybrid systems emerging that bring together the best-of-the-best. A great example was announced today, as Metro Bank and Zopa join forces. The deal allows deposits from Metro Bank retail customers to use P2P lending as an asset class for their deposits, with the expectation that this will provide higher returns on their savings. It’s an innovative deal in that P2P lending surely cannibalises that other asset class: credit. But it’s all about choice and if customers know that they can place money in Zopa, then why not allow them to do so through the intermediation of the bank to assure its viability?
This is where it gets interesting as I’ve seen innovative deals like this before. Fidor Bank (Germany) has been offering Smava’s P2P lending for some time through its operations whilst Caja Navarro (Spain), a non-profitable foundation, offered its own version of P2P some years ago. They called this Civic Banking and gave every customer the right to know the profit they made from each transaction and account. Through Civic Banking you could also invest in friends and family businesses and loan requests, with the bank ensuring the loan was repaid.
This is the point I am making when talking about aggregating the customer experience. If a customer has so much choice these days, do they really want to be opening accounts here there and everywhere with eToro, Circle, PayPal, Zopa, Friendsurance etc, or do they want to have an aggregator on top? I think the new emergent form of retail bank will be that aggregator. Like a Trip Advisor for travel, we will see front-end services that integrate many back end providers for finance. Some may say that this is just what the comparison websites do, but the comparison websites are not integrating and aggregating. They are just providing a rate choice and then you have to jump out to the provider’s own website to complete the transaction.
What I mean by the new component-based bank is that they will find the best providers of alternative finance and offer these services through their own portfolio of access. A one-time sign-on to get access to choice all in one window. That’s what Fidor are offering and, through the deal between Metro and Zopa, it’s another step in the right direction.
Meanwhile, a rock to throw.
I was pretty surprised to read these two headlines side-by-side the other day:
The reason I was surprised is that SMEs (Small to Medium Enterprises) are being commonly rejected for credit by banks, because they don’t meet their risk criteria. They are too small, too young, too untested, too unproven, too risky to lend to. So banks are recommending they go to Funding Circle and similar alternative finance houses. These alternative finance houses (AFH’s) opened a lifeline for businesses in the UK in the last year. For example, here’s Funding Circle’s homepage today:
And 13 months ago (yes, this was 20 April 2014):
Note the statistics: £225 million of lending enabled by Funding Circle a year ago climbing to £625 million today. A tripling in enabled funding in just over a year.
Meanwhile, the number of businesses borrowing through Funding Circle has almost doubled in that time, as has the awareness of this alternative financing marketplace. A lot of the funding of Lending Club comes from the UK Government, and it’s interesting to note that almost 98% of P2P Lending funds in the USA come from institutional investors.
So you have two key things happening here. First, the large banks are turning small businesses away to AFHs whilst de-risking their own portfolios by funding the AFHs. So the AFH becomes the risk manager.
That’s all well and good, but then take the other headline: SMEs stung by £425 million in hidden fees. This is where the Christensen disruptive innovation does start to hit as the AFH market looks like nothing today but, when I attended an Alternative Financing conference the other day, they didn’t call it alternative finance (which was a bit strange, as that was the name of the conference). They called it narrow banking. Narrow banking takes a part of the bank – a component – and squeezes that component to make it as efficient as can be for the process of its usage.
Here, in lending, it is a narrow bank focus on SME and consumer credit. A Funding Circle or Zopa squeeze the process of getting funds to those who need them to the max. And their customers love it. 77% of Funding Circle users say that after their first loan, they would return to Funding Circle first next time, rather than a bank.
So, on the one hand, banks are de-risking their credit portfolios by both funding narrow banks and encouraging their higher risk customers to use them. On the other, they are stinging their higher risk customers – small business customers – with higher hidden fees. And, on the third hand (yes, doing well here with my artificial limbs business), their customers now love their narrow bank and would not return to their old bank in the future.
That’s a broken model if you ask me. Broke for the bank that is, unless it really does not want any SME or consumer credit market operations in the future.
What banks should be doing is the Metro, Fidor and Caja Navarra approach of integrating the narrow bank offers into their customer aggregated experience. Instead, what RBS and Santander who partner with Funding Circle appear to be doing is saying that we would rather offload you to the narrow bank, than keep you with our bank.
That may be just my misperception, but it’s one that sits uncomfortably if true.
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As the internet reinvents commerce on this planet, it’s interesting to see the two things that enter the innovation mix: simplicity combined with connectivity. When you think about the Uber, Airbnb, Facebook, Google, Amazon and more, you realise that they have all simplified some complex things from sharing to finding. Google’s home page has stayed pretty much the same since day one.
Clear, clean and simple, it’s a SEARCH engine. It helps you find stuff. It’s easy.
You don’t think about the complexity of the thousands of servers that are indexing everything non-stop. That’s the complex stuff that sits behind the simple home page. You don’t think about the connectivity needed to do this. The fact that Google is linked into every server on the planet to index the internet. You just assume the homepage is there and will find stuff.
It’s all simplified through global connectivity.
The same is true with Facebook. You share your life with your friends, from links to funny videos of cats and babies to pictures of your own cats and babies. You don’t think about the complexity of the thousands of algorithms required to tag, link, upload, organise, store and manage all your stuff. You just want to share stuff. You don’t realise how Facebook is getting smarter and smarter. You just want to connect with your friends and family.
Amazon is the same. Again, you’re just buying things you like. It’s simple and easy. You don’t think about how Amazon has created a global store of everything through connectivity to every sales outlet. You just buy things. You don’t think about how Amazon can read your mind and predict the next things you want to buy through indexing all purchases through meta-tags. You just enjoy the fact that it has suggested that you might want that next book by Anna North. You just like the fact that it can read your mind and your tastes.
Uber and Airbnb are doing something different however. Rather than simplifying how you find, share and buy things, they have simplified marketplaces. The taxi market was fragmented and disorganised. Uber organised it. In this case, the simplification is through connectivity rather than complexity. Uber’s purely connecting people with cars through an app with people who need driving.
Airbnb saw a similar opportunity to sell spare space by connecting people with rooms to people who need rooms. It’s the P2P connectivity that provides the simplification of markets (transport, lodging), rather than purely simplifying activities (finding, sharing, buying).
Which brings us around to banking. What activities can we simplify in banking and which marketplaces could be simplified through connectivity?
These questions have already been answered in some areas. PayPal and Alipay simplified the activity of paying by providing a layer over the traditional complexity, called an email. Prosper and Lending Club have simplified the credit markets by providing connectivity between those who have money and those who need it.
Paying and enabling credit are the narrow areas of finance being attacked by simplification, but what else could be flattened by connectivity. I must admit that when I look at this chart from CB Insights (doubleclick image to see a larger version):
It really makes me take note, as any financial activity can be levelled by technology. Any financial activity can be simplified. Any financial marketplace can be flattened by connectivity, peer-to-peer, person-to-person.
This is why banks must change tack, and become integrators and aggregators of components of finance. A bank cannot compete with a specialist who is simplifying a marketplace or financial activity. Instead, they need to work with the simplifiers and incorporate their best practices into their own. This is why the likes of Moven and Fidor are being brought into bank operations as partners. This is why the likes of Venmo and Braintree are brought by PayPal.
Any incumbent player who tries to resist the onslaught of the simplifiers is going to fail, because the simplifiers are reinventing activities and markets overnight. My favourite current example in fact, is Venmo.
If you don’t know the story, Venmo was invented by two mates during a long weekend. The whole story is here, but the gist of the story goes like this:
One of the weekends we were getting together to work on this idea, Iqram was visiting me in NYC and left his wallet in Philly. I covered him for the whole weekend, and he ended up writing me a check to pay me back. It was annoying for him to have to find a checkbook to do this, and annoying for me to have to go to the bank if I wanted to cash it (I never did). We thought, “Why are we still doing this? We do everything else with our phones. We should definitely be using PayPal to pay each other back. But we don’t, and none of our friends do.” So we decided, let’s just try to solve this problem, and build a way to pay each other back that feels consistent with all of the other experiences we have in apps we use with our friends.
Could PayPal invent Venmo?
Did PayPal invest Venmo?
Why didn’t PayPal invent Venmo?
Because simplification comes from kids and complexity comes from incumbents.
The incumbents are too dogged in their own complexity to see simplicity in too many cases. That’s why banks spend all their time talking about regulations, regulations, regulations, whist Fintech start-ups talk about innovations, innovations, innovations.
The startup has the excitement of simplifying complexity; the incumbent has the weariness of dealing with complexity.
That’s why Fintech is so hot – because it’s reinventing financial activities and simplifying markets. Watch this space for more.
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We think we’ve come a long way with technology, but we haven’t really. Sure we can now ping a message between a router in Hong Kong and London at the rate of 0.239 seconds speed; we can wear a watch that not only tells the time but takes photos, keeps our diary and tells us to stand up every two hours; we can store 1,000s of photos and keep a lifetime of memories on a drive that costs less than $100; we can travel around the world and back as easily as our forefathers travelled the next nearest town; and so on. But it’s nothing yet.
I realised this as I stood forlornly at Heathrow security this morning (my usual hangout area) and watched as the security guards forensically analysed the bags of many weary passengers. My first thought was how archaic a system we live in that cannot work out you’re not a terrorist. A system that requires every passenger to strip all metal items into bins, and take out their laptops and drinking water to ensure it won’t explode.
My second thought was even clearer, as the security guard came to search my bag and dragged out charger after charger, for my many battery operated gadgets. Then there were the USB Cables (about 10) to support the charging of the gadgets from the chargers. Then there were the electricity cables for the laptops I carry (one big and one small). As I looked at all these wires and cables, I’m thinking: why are we still so reliant on such old technologies.
I want to live in a world where technology is self-charging via solar panels through the air. A world where you never see this …
or this …
or this …
In fact, it fascinates me to think of where all this is going.
In a talk last year, Larry Page of Google touched on this and said that we ain’t seen nuthin’ yet.
His example was the Google deep learning project that had so far educated a computer to recognise a cat just from analysing YouTube videos. Larry talks about how Google’s Deep Mind project “ran machine learning on YouTube and it discovered cats, just by itself. Now, that’s an important concept. And we realized there’s really something here. If we can learn what cats are, that must be really important.”
Hmmm … and then you realize what Deep Mind sees as a cat.
It’s impressive, but not so impressive.
It’s impressive that we can land a space craft on an Asteroid, half a century after landing on the Moon, but we still haven’t reached Mars yet. I’m not deriding our successes so far but, when you look at the world forecast back in the 1960s, it was Star Trek and The Jetsons. Fifty years later, we don’t have space packs and still stack ourselves into tiny tins with hundreds of other steaming bodies to get to and from work.
So, when we look at this networked revolution; this digital transformation; this connected world; we can pat ourselves on the back for pushing the boundaries so far … and then wonder what will happen when we have pushed them to their conclusion.
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The Payments Innovation Jury Report sheds light on the state of the FinTech industry in 2015, from those on the inside, and dispels any hype with candid perceptions on where the biggest opportunities lie. This year’s report was sponsored by Currency Cloud, Ixaris and WorldRemit.
The Jury is comprised of 40 uniquely qualified individuals from 23 countries across six continents. Unlike many payments commentators, every Juror has been there and done it before – these are the opinions of FinTech founders and CEOs of the most successful businesses in the sector.
What’s interesting is that the area in need of most innovation, according to the jury, is the B2B space. The jury wholeheartedly agree that SMEs who require international payments technology would really benefit from disruption. However, there are well established businesses helping to provide this service, including our clients Kantox and Currency Cloud. It seems that all the right elements are there; the competition and the infrastructure, so why aren’t more FinTech startups rising to the challenge?
The jury are not enamoured with Apple Pay. While the tech giants are starting to make a play for acquisitions in the FinTech market, they are far from exciting the jury with their own innovations. The majority of the jury believe that Apple Pay is over-hyped due to the significance of the Apple brand, but ultimately it’s an unremarkable product. Saying that, the in-app functionality is impressive and most jurors had to concede as much. It’s hard to knock Apple completely, so the jury is still out on where Apple Pay will be in a few years’ time; shelved entirely or a major player.
For those of us working in FinTech, it will come as no surprise that the availability of low cost smartphones will be the single biggest enabler for driving adoption of Mobile Money. Very few Mobile Money schemes have yet to become profitable, but this could come full circle within the next couple of years. There are still billions of ‘unbanked’ people (i.e. without bank accounts) in the world, predominantly in developing economies. Of the worlds unbanked, most will own a mobile phone. The World Bank reports that Mobile Money has helped significantly to increase financial inclusion across the developing world. In Kenya more than half of adults who pay utility bills use a mobile phone to do so!
The key takeaway here, though, is that the legacy systems in Europe and America – i.e. our dilapidated banking systems – are leaving us lagging behind the developing nations of Asia and Africa. The European banking systems really are the ball and chain of the continent. It’s about time we swallowed our pride and learned something from the innovators in emerging markets.
Download the full report here.
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