As this evolution in disruption plays out, the CB Insights conference pulled out 10 broad themes:
- The battle for deposits
- Fintech firms up focus on regulatory compliance
- Southeast Asia sees hotbed of fintech activity
- The next Ant Financial and WeChat Pay
- Unbundling the pay check
- New investment platforms and asset classes
- Fintech meets real estate
- Rise of impact fintech
- Lack of fintech mergers and acquisitions by banks continues
- No-go for fintech IPOs
There’s been muggings by reality on multiple fronts as fintechs have normalised.
Returns and hope
Digital banking scrutineer Chris Skinner noted recently: “I hear two regular laments from bank CEOs. First, why aren’t we valued like fintechs? And second, why aren’t fintechs regulated like us?”
Skinner makes the important point “the banking sector is measured by real returns whilst the start-ups are measured by hope”.
“Banks have shareholder return, return on equity, return on investment and so on and so forth. Real measures against real results. A start-up has a million customers, some of whom are active. It’s all about how you dress it up.”
Quite. As returns become more predictable, investors become more precise in valuations. But they are willing to bet high on potential – oil exploration follows the same pattern from wildcat to producer.
Skinner cites the Goldman Sachs experience:
As Goldman Sachs CEO David Solomon put it, the bank is “getting absolutely no credit from anybody else in the investing community” on the firm’s digital banking efforts. Monzo gets two million customers in the UK and gains a $A1.3 billion valuation; Goldman Sachs launch Marcus, get four million customers, $A1 billion in deposits a month, launch a credit card with Apple, and its share price falls almost 20 per cent. As Solomon states it: “If we were out in Silicon Valley and made 20 per cent of the progress that we’ve made, we would get a lot of credit and people would be throwing money at us to own a piece of this business. But nestled inside little old Goldman Sachs, we’re just going to have to prove it over time.”
On regulation, the simple answer is if a fintech becomes significant it will be more regulated.
Buy now, pay later schemes are already on the regulatory agenda and, in all likelihood, will be more heavily regulated if they become significant in a systemic sense.
Skinner dissects this nicely, apropos a lament from Bank of America:
“You’re not a technology company wrapped around a bank; you’re a bank wrapped around technology… And that’s why the regulator and shareholder view you differently. Regulators and shareholders look at banks as depository firms under Basel regulations dealing with capital and risk, and using technology to manage those issues. It’s nothing to do with innovation, vision, disruption, change. It’s all about stability, resilience, reliability and security. If it did cause change and risk, then the investors and regulators would come down hard.”
There is massive change and disruption taking place in financial services and fintechs are one of the climate change forces at work. But they’re CO2, not a meteor. The world will have to adapt.
And the incumbents are not standing still.
American data analytics and risk assessment firm Verisk Analytics recently argued global payments are moving away from the infrastructure which has prevailed for the last half a century or so, whether that be payment schemes like Visa, MasterCard or American Express or wholesale payments like those managed by Swift.
“American Express has now put its weight behind a new Pay-by-Bank service in Britain, a development which comes in the wake of both Mastercard and Visa's enthusiasm, as demonstrated through investments and partnerships in recent years, for alternative networks from instant payments to cryptocurrencies,” Verisk reported.
“Mastercard announced a “Request to Pay” solution, also in the UK, that works with either real-time payments or cards. One thing is for sure: as long as the global networks can afford to fund these platform-hedging tactics, the possibilities for any disintermediation of their core proposition should decline.”
Verisk’s conclusion is “the brand trumps the infrastructure”. Funnily enough, back in 1996 the theme of Visa’s annual board meeting was “Valued Partners, Valued Brand” and then chief executive Ed Jensen argued if he was forced to choose between the brand “Visa” and Visa’s global payment authorisation infrastructure he would take the brand.
It’s that brand value that incumbents have and must preserve – which will involve partnerships with other firms and start-ups. It’s that brand value disruptors are yet to build.
As Jensen said more than two decades ago "to consumers the brand 'works' because it is a trusted third party and universally accepted”.
Andrew Cornell is Managing Editor of bluenotes