Which fintechs are DeLoreans and which are Toyotas?

Henry Ford, founder of the eponymous global car brand, famously dismissed market research with the observation “if I had asked people what they wanted, they would have said faster horses".

" Economies don't just want faster horses, they want cars."
Andrew Cornell, Managing Editor BlueNotes

Not only is that a salutary observation for marketers - and those in the analytics business who believe sophisticated analysis of past data is sufficient to predict the future - it is too for those betting on the next post-industrial revolution.

Take financial technology, 'fintech'. So much investment is being tipped into this sector many regard the asset class as in bubble territory.

Yet just as the mass production of automobiles pioneered by Ford changed the way we live – cities, for one, would look vastly different if not for the car – so too will advances in fintech revolutionise the plumbing of economies.

And just as horse riding persists only as sport and hobby, so too core vehicles of commerce today will be reduced to curiosities and pastimes like coin collecting.

In a recent column, the astute Financial Times economist Martin Wolf asked if fintech would revolutionise banking. His answer? “Please".

Wolf ran through why a fintech revolution makes sense: “Consider (the financial system's) three essential functions: payment; intermediation between savings and investment; and insurance. All these activities are information-intensive."

All, potentially, can be done more efficiently by emerging technology (and Wolf argues with more integrity).

He cites Andrew Haldane of the Bank of England noting “astonishingly, the unit cost of US financial intermediation seems to be unchanged over a century. Moreover, income from finance simply rises and falls with the value of assets. That suggests a huge amount of rent-extraction".

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Source: Bank of England

Economies don't just want faster horses, they want cars. For example, with real time payments, the industries of clearing, authorising and settling transactions between two parties who don't know or trust one another, industries currently sitting in the banking system, might just disappear.

So too, conceivably, might peer-to-peer platforms reduce the role of banks in bringing borrowers and savers together. Although, and Wolf doesn't delve into this, banks also undertake what is called “maturity transformation" where the pooled savings of many are held on the promise of short-term access but lent to others on the promise of long term credit.

That conversion of short term deposits to long term loans is a vital component of modern economies which allows individuals, corporations and governments to fund assets like houses and infrastructure which can't typically be funded out of savings.

Wolf, Haldane and others are almost certainly right. We are on the brink of an industrial revolution in finance.

But crucially there are two realms at play here: yes, the system as a whole will be fundamentally reshaped by fintech. But not all, indeed the vast majority, of fintech plays won't enjoy the spoils. Most will fail.

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Source: Maksim Toome /

To return to the auto industry, yes Ford is now a global giant (although it nearly failed earlier this century). But what about DeLorean? Or Tucker? Or the hundreds of other car companies no one remembers. Those two cult brands boasted technology and design which were revolutionary but they still failed.

Gone, at least to all intents and purposes, are storied names like Lotus, Triumph, Jensen, Saab. Others, like Ferrari, Lamborghini, Rolls Royce, Mini are today part of global conglomerates.

The auto industry is just one example. 'Platform' models like AirBnB – an accommodation company which owns no property – and Uber – a transportation company which owns no vehicles – are other potential models of the future.

Haldane notes both are not just intermediaries for business in that they bring buyers and sellers together but the equivalent of banks in that they are trust centres, intermediating between parties who don't know one another. But they do this utilising the same platform to bring together consumer and vendor rankings.

Ironically another massive model for disruption Haldane mentions is the driverless car. Car ownership is a classic example of capacity redundancy: most cars spend the vast amount of their time parked. Driverless cars, while highly efficient for society, may well be a huge 'sell' signal for the traditional car industry.

Just like horse riding, in the future driver cars may only be used in sport or by hobbyists.

So the financial revolution is upon us. Who will be the next Ford or the next Tucker?

History tells us success doesn't hinge on merit. Tucker produced a very advanced car but was squeezed out by the incumbent players. Yet some of its innovations, like rear engines, shatter proof glass and robust chasses, anticipated the future of car design.

Almost certainly this is what we will see with fintech. Some firms will irrevocably change the system but fail themselves. Some will be absorbed into the incumbent players. Some will indeed become major industry giants – just like Toyota today.

Where finance is different however is the financial system's integrity is crucial to the health of society. The failure of even a giant of the auto industry would not have caused the problems the collapse of Lehman Brothers did.

Regulation, supervision, government involvement, the role of the financial system ensures these will play a major role in the creative destruction of the industrial revolution in financial services. (And in the process spur growth in a sub-industry, regulatory technology or 'regtech'.)

Indeed Tucker also ran into this issue: it's unique 'Cyclops' third headlight which swivelled with the car's steering to better illuminate the road ahead was illegal in a number of states where cars were only allowed two headlights.

In its Future of Financial Services series, the World Economic Forum forecasts this sort of evolution, a constant interplay between incumbents, rival industries and start-ups. “Not all innovations introduced by new entrants are existential threats to traditional financial institutions," the WEF series argues.

“Many are too geared towards a specific niche to be anything of the kind. Furthermore, incumbents realise that new entrants already have strong incentives to innovate and that the benefits of innovations often stretch far beyond the company responsible for them."

Which is little help in sorting out which fintech investments to bet on.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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