How Traditional and Emergent Fintech could converge and change Finance



Traditional Fintech is so boring – and so profitable. The question is whether these vendors will use some of those profits to transform themselves or let nimble startups with modern technology and new business models eat their lunch. 

Two years ago, in December 2014, we took a look at the Traditional Fintech market. TL:DR Traditional Fintech was 82% of the market, much bigger than Emergent Fintech.  

Eons ago I worked in Traditional Fintech. Now I work in Emergent Fintech. So I can see that they are two sides of the same coin.

My simple definition of the difference as seen by Banks – Traditional Fintech cook your lunch (and bring you the bill) while Emergent Fintech aims to eat your lunch. A converged world will be more nuanced cooptition and revenue sharing deals around platforms and Open APIs, with shared risk & reward (i.e real partnerships).  

This post focuses on how these two worlds will converge in the future.

Many Emergent Fintech ventures went through turmoil in 2016, in a difficult funding environment, so a lot of those firms are open to partnering (or being acquired). As a few Emergent Fintech ventures achieved real success and started to challenge the banks, the banks are also more open to partnering.

This willingness of both Emergent Fintech and Banks to partner puts Traditional Fintech in a great position – unless they emulate Blockbuster and snatch defeat from the jaws of victory.

Blockbuster’s demise was not inevitable

Market share can evaporate very fast during times of disruption – ask Blockbuster, Kodak, Barnes & Nobel and many media and tech firms.

With 2020 hindsight, it was inevitable that Netflix would replace Blockbuster. The real story (as revealed in this great article in Variety) is much more interesting.

Blockbuster could have bought Netflix for $50 million (current market is over $50 billion). Reed Hastings (Netflix founder) was ready to sell, but as Variety put it:

“Blockbuster chiefs lacked the vision to see how the industry was shifting under the video rental chain’s feet”

Big bang disruption as explained by HBR

We might not pay attention when Variety writes about strategy. So listen to Harvard Business Review (HBR) describe why:

“the strategic model of disruptive innovation we’ve all become comfortable with has a blind spot. It assumes that disrupters start with a lower-priced, inferior alternative that chips away at the least profitable segments, giving an incumbent business time to start a skunkworks and develop its own next-generation products.

That advice hasn’t been much help to navigation-product makers like TomTom, Garmin, and Magellan. Free navigation apps, now preloaded on every smartphone, are not only cheaper but better than the stand-alone devices those companies sell. And thanks to the robust platform provided by the iOS and Android operating systems, navigation apps are constantly improving, with new versions distributed automatically through the cloud.

The disruption here hasn’t come from competitors in the same industry or even from companies with a remotely similar business model. Nor did the new technology enter at the bottom of a mature market and then follow a carefully planned march through larger customer segments. Users made the switch in a matter of weeks. And it wasn’t just the least profitable or “underserved” customers who were lured away. Consumers in every segment defected simultaneously—and in droves.”

What HBR describes as the first step in countering Big Bang disruption is:

“see it coming”.

That is why senior leaders in banks and insurance (along with startups and their investors) subscribe to Daily Fintech and consult with us. We help you to “see it coming”.

The “it” in the case of Traditional Fintech is how Business Process Optimization and Outsourcing is being replaced by Business Process Elimination thanks to Blockchain.

Business Process Elimination

This post explains how Blockchain will lead to Business Process Elimination thanks to the elimination of Settlement Latency. This is Big Bang Disruption. It starts with the top tier banks, not creeping up slowly from the bottom tier.

The new stack that is emerging

  • User Experience is the visible part of the offering and will be the source of real innovation and value creation. The reason they will be able to innovate so fast is that the rest of the stack gives them so much value.
  • Business As A Service is a new type of entity that is being created as we speak. They could come from a bank or an emergent Fintech or a Traditional Fintech. The key is that they do not just offer technology. Of course they do that. They also offer service delivered by humans and may also offer a regulated layer. It is a complete business service delivered to the User Experience layer via an Open API.
  • Blockchain Middleware is a nascent space where cross-cutting services dealing with concerns such as Identity or Security or Data Integrity play. This is also the realm of interoperable data standards (which are totally essential for Blockchain systems to work)
  • Blockchain Platforms really means a consensus mechanism and transactional currency that enables entities that do not trust each other to transact. The main options today are Sidechains (using Bitcoin), Etherum (Ether) and Ripple.

Cloud and open source is traditional disruption

Traditional Fintech has learned how to handle disruption from cloud and open source using what HBR calls “the strategic model of disruptive innovation we’ve all become comfortable with”. 

Cloud and open source falls into what HBR calls “lower-priced, inferior alternative that chips away at the least profitable segments”.

Cloud and open source is not the problem. Indeed, they are part of the solution.

Emergent Fintech Startups do Core Banking byepass surgery

Emergent Fintech Startups are not waiting patiently for Traditional Fintech to open their doors. They understand that Core Banking is like the heart – an essential pump. Not being confident that the pump is available to them, they are choosing byepass surgery using modern technology such as Microservices and Open APIs.

The Business As A Service opportunity

Emergent Fintech Startups would prefer to work with a well functioning heart. Traditional Fintech could serve that role.

Traditional Fintech can leverage cloud and open source to move up the value chain to Business As A Service, letting startups innovate on their platform at the User Experience. That means they can bring the massive benefits of Business Process Elimination (enabled by Blockchain) to their customers.

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Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge platform.

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