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#FTW16: “Fintech is waiting for its Gmail, not its Uber, moment”

Jon Bradford co-founded startup info network F6S and leading news site He’s now on the board of co-working provider Central Working and will be opening its new campus, the Bradfield Centre in Cambridge, next year

Over the last five years, there has been a massive explosion in global fintech investment activity – rising from $1.8 billion in 2010 to $22.3 billion in 2015, according to CB Insights.

And while no one in the financial services industry disputes the massive opportunity that exists in fintech, there are those who question the form and timing around this revolution (or what might today be called, simply, an evolution).

Fintech is financial technology that uses software to either disrupt or transform financial services businesses, typically packaged as a tech startup company.

Fintech startups have many similarities to those other technology-driven businesses that have successfully launched over the last few years, and because of this, they have attracted a substantial number of investors with a very bullish view of this opportunity.

In the cold light of day though, it’s my belief that both investors and entrepreneurs have massively underestimated the challenges associated with fintech.

Minimum or viable product?

In 2011, Eric Ries launched a thousand startups with his book The Lean Startup, which emphasises things like the ‘Minimum Viable Product’ model.

Unfortunately too many entrepreneurs focused on ‘Minimum’, rather than ‘Viable’, and when it comes to a fintech MVP, that lax view on viability is a death sentence.

Simply put, when it comes to people’s money (and health), startups can’t get away with the argument that “it works 99 times out of 100”.

Because of these higher expectations, along with stringent regulations and compliance rules, fintech startups see challenges not faced by the typical startup.

Even though the Financial Conduct Authority (FCA) has been applauded for its bold and imaginative approach, and its willingness to co-operate with the industry, the long shadow of the banking collapse in 2008 is never far away.

Unfortunately, many fintech startups drastically underestimate the time and effort that getting compliant requires, and before they know it, they’ve added a year to the startup lifecycle before their idea has seen the light of day.

And, even when a startup finally has a product ready to launch, the uphill battle is by no means over – particularly for those that have adopted a direct-to-consumer approach.

Challenging unit economics

By choosing not to sell to the large and slow-moving incumbents, these startups have taken on the massively challenging unit economics inherent with startup banking.

Unlike the average high street bank, startups do not have deep pockets or the ability to cross subsidise, and therefore are essentially competing on service against a free account from a traditional bank.

Not only that, the traditional banks can offer perks such as a ‘free £100 when you join’ and still make a healthy profit across a broad spectrum of services – particularly via the lucrative mortgage market.

This all adds up to a significant disadvantage for young fintechs.

Beyond making the unit economics work, another pretty imposing barrier exists for these startups – trust. Unlike many other apps that can be downloaded and used without significant consequence, switching banks still needs an implicit level of trust – hence why many startup banks must target the ‘under banked’ who have no choice but to try alternatives.

There is also the issue of customer inertia. There are those who have argued that banking is still waiting for its ‘Uber’ moment, but this is simply the wrong analogy.

Substituting a taxi for an Uber requires much less effort, risk and long-term consequence than substituting one’s financial institution for a young upstart.

Waiting for the Gmail of fintech

Probably more applicable analogy is that of Gmail, which launched on 1 April 2004. It looked the same as many of the other services that existed at the time – Hotmail, Yahoo and AOL – but simplifying the interface, adding search, having a 1Gb capacity and a great spam filter was transformational.

Even with these significant advantages, it still took over eight years before Gmail overtook Hotmail to become the largest email provider. Changing your primary email is not a decision lightly made, much like changing banking institutions.

All of the above adds up to greater investment and time requirements than a typical startup in order for it to mature into a business that can make a healthy return for its investors – potentially more investment and time than a traditional VC fund can accommodate.

Therefore, entrepreneurs and early stage angel investors need to be prepared for a longer journey and more dilution than their colleagues in other industries.

So what does the near future of fintech actually look like?

I would argue it looks a lot like the way advertising technology looks now. Since 2000, many forecast the end of advertising agencies with the rise of adtech, however only a few startups ever managed to build sufficient critical mass to become businesses in their own right.

Many adtech startups were moderately successful and were acquired by the agencies that they originally competed with. I foresee a similar outcome to many fintech startups and the current financial service incumbents.

All this is to say that, while fintech has huge potential, it will take capital, deep industry knowledge and patience to plot a way through compliance, regulation and the deeply ingrained customer trust in the traditional bank.