Why the Third Wave of Fintech is fundamentally different

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Copyright Daily Fintech Advisers Ltd.

My career began in the middle of Wave 1. It is hard to see this as exciting and disruptive today, but it was at the time. We were replacing paper process with computerised processes and the payoff was huge. The business model was KISS – develop software and license it to banks. All the risk/reward went to banks. There was not much VC in those days, so we bootstrapped from customer revenues.

Wave 2 is what became known as Emergent Fintech (to differentiate it from Traditional Fintech = Wave 1). Wave 2 leveraged the SMAC technologies (Social Mobile Analytics Cloud) that had reached mainstream adoption. Startups beat incumbents by creating better User Experience (UX). It was only a question of time before incumbents caught up by creating better UX. During the time when incumbents were playing catchup, some Fintech startups got to critical mass and network effects and so become long term winners. However, many Emergent Fintech startups do not have any major moat against incumbents and so will fail to meet the growth expectations sold to early investors.

2014 is the watershed year.

2014 was the year of the Lending Club IPO which was high water mark of Wave 2 and b) 2014 was when Ethereum was born, and Ethereum is a big enabler of Wave 3.

Incumbents could easily coopt Wave 2 ventures, but cannot control Wave 3.

Wave 2 was an era of pugnacious public talk, but with private negotiations around partnership and collaboration. Banks needed startups and vice versa. Wave 3 is harder for incumbents to control. Wave 3 is not being financed by incumbent VCs and this wave of ventures need less capital, because they  don’t need to buy giant server farms in order to scale (the user’s machines are the servers).  There is still a lot of opportunity for incumbents to add value, but incumbents do not control the pace of change.

A lot of the activity around “enterprise blockchain” is an attempt by incumbents to get back to the “good old days” of Wave 1 when they controlled the pace of change. As Andreas Antonopolous points out, many conversations with Banks start with “we are not interested in Bitcoin, more in the underlying Blockchain technology”. Then when Blockchain technology becomes divided into permissioned and permissionless, the conversation shifts to ““we are not interested in Blockchain, more in the underlying Distributed Ledger Technology (DLT)”. At that point they take a call from their favoured enterprise software vendor about their latest version with its DLT features. This would be like Kodak upgrading their ERP system to deal with the disruption from digital photography.

The ICO innovation enables customers who are also investors. That is a “back to the future” world. It is like Wave 1 when we financed from customer revenue. This puts entrepreneurs fully in control. The incumbent can no longer call a VC and say “we would like to buy Company X in your portfolio”.

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Bernard Lunn is a Fintech deal-maker, author, investor and thought-leader. 

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