By Bernard Lunn
Jokes about evil bankers got a new lease of life after the financial crisis. Bankers were evil and old and tech startups were good and young. PR milked this for all it was worth.
However when big money rushes in to Fintech, it is worth paying attention to the reality below the hype.
The act of founding a startup is fundamentally a creative act. A founder is like a painter standing in front of a blank canvas. You have to be idealistic (in the non-moral sense). You have to imagine/ideate a new world (where the puck is headed to) and how your venture can add value in that new world.
For some entrepreneurs there is also a moral dimension. The desire to change the world for the better does animate many entrepreneurs. This is often the desire that gets extraordinary amounts of energy and commitment from the founding team. Most people are not purely economic animals at heart. Once the basic layers of Maslow’s hierarchy of needs are taken care of, most people aspire to something more
Humans have a moral dimension. Corporations do not have a moral dimension.
Nor should they. I put my money with a bank/fund because I want the bank/fund to keep it safe and make a return. Same thing with investing in a public company or via a PE Fund into a Fintech venture. Unless I specifically exclude what I find abhorrent (e.g war profiteering) or decide to invest for social impact, I am not giving the bank/fund a moral mandate; I simply want the bank/fund to make money for me.
Many of the Fintech ventures that are hitting headlines today were conceived in the wake of the Global Financial Crisis that hit in September 2008. At the time, I heard a wise person proclaim:
“This debt crisis wave is huge but the tech wave that is following will be much bigger”.
A few years later we witnessed the rage of people expressed in the 99% movement. What I noted at the time was how tech savvy many of revolutionaries in Zucotti Park were. Some of that energy has gone into Fintech startups. It was a short subway ride from Zucotti Park to Union Square (to see Union Square Ventures).
The mantra was “don’t get mad, get even”. That animated the founder of Lending Club and many others.
However there is so much money to be made by the startups jumping into the void left by the banks. So big money is rushing in. We are now in the scale phase in many markets and the Fintech startups funded by big capital are no more inherently good or evil than the banks.
For example, a Wonga loan is no better or worse than overdraft fees from a Bank. The reality is that short-term lending to the imprudent (at the personal, company or sovereign level) has to use very high % interest rates to compensate for the risk.
There are startups that aim to “help those who help themselves” by making it easier to “save for a rainy day”, such as:
In the developing world we see services like Zidisha, which combine the philanthropic (people with money willing to loan money on easy terms to poor people) with Peer to Peer (poor people lending to other poor people or borrowing from other poor people).
One can imagine a genuinely Peer to Peer way of doing Pay Day Lending. Joe who gets paid on Friday lends money to Fred who gets paid on Monday so that Fred can have a good weekend.
The problem is that I cannot imagine any VC salivating over a business such as that. It would have to be a utility and we all “know” that utilities are low margin businesses that have no value.
Tell that to the founder of Craigslist. He runs a utility and it is very profitable. In digital economics, utility has a totally different meaning. Google and Facebook are utilities.
This is where it gets interesting because redecentralization platforms move us from “Don’t be evil” to “cannot be evil”.
The Google founders writing Don’t be evil into their mission has been mocked, but it does at least offer an intent and a benchmark against which the founders invite to be judged. However “cannot be evil” is quite different. If the code in a DAO (Distributed Autonomous Organization) does not allow more than 10bp interest over some benchmark rate, it simply can never be more than that.
Few VC would fund a venture with only a 10bp spread. There can be no Board Meeting to raise it to 15bp. However VC may not need to fund these new ultra cheap financial utilities. A DAO will be incredibly cheap to set up and run – write some code on Ethereum and deploy to a cloud that does not cost you anything. Users will pay transaction costs (“Gas” in Ethereum parlance).
Of course we are still in the really, really early days of Ethereum (about Home Brew Club days in the PC wave or pre Netscape in Internet wave). However I do believe that redecentralizaion platforms such as Ethereum will be a big part of Fintech 2.0.
If the much hyped Fintech revolution has any value (I think it does but am happy with the label of “least hysterical” commenter on Fintech) then it will be in decimating the cost of finance. Decimate means 10x less than now. Or to put it in numbers, a $1 fee will become a $0.10 fee. Volumes will then probably go up 10x so all is good for those on the right side of the wave.
Despite all the hype, I think we are now only in Fintech 1.0 and we can only see a few wild experiments that we can label Fintech 2.0 that will truly make a difference to billions of people.
Nice can be anything. It can be grand scale impact for the Underbanked. Or it can be as simple as doing good quality work and being a good place to work and being reasonable with contractors.
We hope you have all been nice, whether you are a Fintecher or a Banker, and that Santa delivers something lovely on Friday.
Daily Fintech Advisers provide strategic consulting to organizations with business and investment interests in Fintech.