There are 7 boxcars on the Fintech Freight Train. You need to decide which car you want to jump on.
The engine of the train that is pulling all the cars is the technology that emerged around 1994 when the Netscape browser launched and turned the Internet into a platform for media, communication and shopping. That was 23 years ago. Let’s call that the “content exchange Internet”. That is the engine pulling all the boxcars. It is a steam train compared to what is coming next.
At some point in the not too distant future, the steam train will become a bullet train. This is when the technology that emerged around 2009, Bitcoin & Blockchain, turns the Internet into a value exchange platform. When that happens all those boxcars get replaced – today’s disrupters will be disrupted along with the incumbents. In two years, Bitcoin will be 10 years old. In comparison, the content exchange Internet was in a deep slump after about 10 years (cast your mind back to around 2004 when conventional wisdom was that the Internet was over and Facebook was just getting started). Let’s call this new engine the “value exchange Internet”.
Both engines – the content exchange Internet and the value exchange Internet – are available to all. It is like open source. You can understand it and use it but you cannot own it.
The train is already moving. Deciding which car you want to jump on depends on how fast you can run. The ones at the back are the easiest to jump on and the ones at the front are the hardest.
The cars at the front are markets that are already fairly mature. These are Red Ocean Markets, with lots of sharks circling and blood in the water – sorry about mixing my metaphors. Even in these there are niche opportunities – bolt on acquisitions in i-banker speak. But you won’t be able to create a new platform company. In these leading cars we read about consolidation M&A and about public companies and their quarterly reports and about big, high profile failures. It is a game with a few really, really big winners and an awful lot of losers.
It is easier for a new team to jump into the cars at the back.
The 7 boxcars – looking from the front are:
- Wealth Management
- Consumer Banking
- Small Business Finance
- Corporate Banking
Boxcar 1: Payments.
Payments is the boulevard of broken dreams.
You can see why entrepreneurs dream about this market – it is massive. According to Boston Consulting Group:
“In 2013, payments businesses generated $425 billion in transaction revenues, $336 billion in account-related revenues, and $248 billion in net interest income and penalty fees related to credit cards.”
Yet dreams of disrupting the current payment rails are regularly dashed against the rocks of reality.
The payments market has already seen some big blowups. Lots of little young ventures fail. That is the norm. It is more significant when a venture fails having taken in a lot of cash. Two of the biggest ones in Fintech – Powa and Monitise – are both payments ventures.
Two new Payments companies have emerged post Internet, got to scale and gone public – PayPal and Square and it looks like Stripe will soon be another public market comparable. Meanwhile the stock market continues to value Visa and Mastercard very highly; investors are voting with their wallets that credit cards won’t be disrupted any time soon. One successful formula is to add value within the existing credit card rails for a big pain point; Adyen is an example.
A few highly valued ventures such as Transferwise, WorldRemit and Ripple are battling it out in the cross border arena. Alibaba buying Moneygram was a big cat landing among the consumer cross border pigeons.
At the high value end of payments – corporates and capital markets – the big elephant, SWIFT, is pretty focused on not being disrupted and is working with the new bullet train Blockchain engine.
Companies like Klarna are creating value around the mobile payments pain points.
So there are pockets of opportunity in payments, but you will face huge, well-funded, agile and determined competition. The good news is that payments innovation enables lots of other innovation. When payments are 10x cheaper and faster, lots of value add innovation becomes possible. You may not be a payments venture, but you will almost certainly use payments innovation.
It is possible that mass adoption of mobile wallets (with wallets that can hold both digital Fiat and Bitcoin) will change the Payments game. However, that is speculating on mass adoption and when mass adoption does happen, it will also be a game for big players. One market where we can see this is India, where Snapdeal looks like it is getting crushed and Paytm looks like it is crushing it. We view e-commerce and sharing economy as a payments business with some content (Alibaba and Uber seems to agree judging by their actions).
Unless you have easy access to a billion or more dollars and a disruptive proposition that meets a big need today, you may want to let this boxcar pass go past and look at the next one.
Boxcar 2: Lending
Like Payments, Lending is a massive market. Banks make money by lending and Banks are big (said Captain Obvious).
The first real account innovation since modern banking started hundreds of years ago, is the Lending Account from Market Places like Lending Club, Prosper, Funding Circle and Lufax. As we don’t know whether to call this market P2P Lending or AltFi or Market Place Lending we refer to it simply as Lending.
It is unlikely that we will see any new entrants in the core matching functions of a Lending Market. This is a 4 horse race – Lending Club, Prosper, Funding Circle and Lufax. In this post we look at what happens after Market Place Lending goes mainstream – what innovation is coming down the pike. Innovation is needed because the way that Market Place Lenders find borrowers is remarkably old-fashioned. There is a lot of direct mail and search engine marketing to find consumers who want to refinance expensive credit card debt. That is valuable but hardly innovative or disruptive.
There have been a lot of AltFi Lenders that are very old fashioned at their core. They raise a credit fund and apply some Internet search and social marketing and online credit scoring algos and lend to the riskier end of the credit spectrum. They will mostly get squeezed by banks at one end and Market Place Lenders at the other end.
One company – Sofi – is using the lending account to become a major financial institution as Efi Pylarinou tells us here.
We don’t see any big new plays in AltFi until the Blockchain bullet train comes along, but we do see a lot of opportunity to create value within the ecosystem. These maybe smaller niche bolt on acquisitions for the big platforms. The opportunity created by the Lending Account is so massive. Whether these niche innovators get bought by Market Place Lenders or stay independent and partner with Market Place Lenders does not matter.
This Boxcar looks big and full of opportunity.
Boxcar 3: Wealth Management
The first phase of innovation – Robo Advisers for the Unadvised – is game over. This boxcar has left and the doors are closed. You have some big new ventures – Betterment and Wealthfront – and huge incumbents such as Vanguard, Blackrock and Charles Schwab.
That is only the first wave of innovation in Wealth Management. Every Tuesday, Efi Pylarinou uses her deep knowledge about how the global capital markets really work to look at the next wave of innovation.
We define Wealth broadly as being any amount of capital, small or large, that is allocated to financial assets (private equity, public stocks, bonds, currencies, real estate, precious metals, art etc). We include both short-term trading as well as long-term investment. Customers wanting their capital to grow can be passive (leaving it to professionals) or active (sending time to find assets to trade/invest).
Exchanges, brokers & dealers, investment banks, asset managers, private banks, retail and commercial banks, and the entire world within and behind all these front end scenes (such as research, custody & compliance); are all serving wealth creation needs of all sorts and at all levels, ranging from millennials to corporates.
Digital Wealth Management is so intrusive that in a few years we won’t be able to distinguish it from all other basic lifestyle needs. The digitization of Wealth Management affects developed societies and underserved ones.
Boxcar 4: Consumer Banking
We cover Consumer Banking every Friday.
Consumer Banking is being Unbundled today. Ventures do one job and only one job – cherry picking the parts of banking most exposed to disruption, typically in payments and lending.
In the next phase, we see Rebundling when startup banks offer the full service and compete head on with existing banks. Some are incubated within a big bank – we profiled a few leaders in our Pirates With Ties interview series. Some are venture backed and usually referred to as Challenger Banks or Neobanks. We also see innovation coming from PFM and PSD2.
We see change coming from two extremes, in both cases driven by a move to a cashless society. One extreme is wealthy and hyper efficient economies such as the Nordics and Switzerland. At the other extreme are countries such as India that are leapfrogging over credit cards and going direct from paper cash to mobile wallet cash.
Boxcar 5: Small Business Finance
This is a massive opportunity, because banks have ignored small business for so long. Small Business is like a middle child – neither the oldest (big business) nor the youngest (consumer). This illustrates the old adage that innovation comes from those who have been excluded from the old way of doing things. Small business needs the same Corporate Finance products that big business needs (such as debt, equity, payments, foreign exchange) but to serve these efficiently to millions of small businesses requires a far higher degree of automation and different business models. The models for a small business service are just as likely to come from Consumer Finance as they are from Corporate Finance.
Another reason why we see Small Business Finance as such a big window of opportunity is that globally in the digital age we are mostly entrepreneurs. The idea of a world that mainly comprised big companies with lots of employees aka consumers looks now like a construct of the post war era in America and Europe. A world with billions of entrepreneurs needs a whole lot of financing innovation – that is the big story we track every Wednesday.
Boxcar 6: Insurance
This was the market that emerged in 2015. We started tracking this market in March 2015 with the headline Not That Many InsuranceTech Startups – Yet and have been posting every Thursday on InsurTech since then. This is a market in it’s Cambrian explosion phase, with lots of early stage innovation getting funded and coming to market.
One caution for entrepreneurs is that, unlike the banks when Lending and Payments first started getting disrupted around 2009, the Insurance incumbents were hardly asleep at the switch when Insurtech started to emerge in 2015. In fact the big story here maybe Reinsurance As A Service.
Boxcar 7: Corporate Banking
This is a nascent area with very little disruption so far. Traditional services that Fintech will change include M&A, IPO, Treasury, Trade Finance, Money Markets, Credit Ratings.
To go into this nascent area you will need:
- Deep domain knowledge as these are complex functionally
- To be comfortable selling to big enterprises.
We see Corporate Banking the way we saw Insurance in March 2015, under the radar, understood by very few and about to explode.
Which Boxcars will benefit most from the new Blockchain bullet train engine?
This is where the order is quite different:
- Insurance – getting claim to cash from 4 months to days or even hours
- Wealth Management – getting asset settlement from days to minutes
- Corporate Banking – permissioned networks across multiple parties without a traditional intermediary
The other markets will have to wait until Bitcoin goes mainstream and while that is inevitable in my opinion it is not imminent and the timing is very hard to determine.
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