Fintech Thoughts

Many years ago, I was working for a large Canadian bank, managing two very different development teams — one using C++ to build a derivatives trading system, and one of Cobol programmers maintaining the bank General Ledger application. While the culture clash was obvious to any observer, nothing reflected it better than the big poster displayed in the Cobol team lead cubicle: “this too shall pass”.  He was talking of course about the excitement in the bank with using object-oriented programming and modern development methods. The Cobol team lead was fine with 20 years old technology and systems. (Also, have you met the IT “professional” that defines himself as “SQL Server 2008 R2 specialist” and expects to retire doing just that?)

Today’s question for me: Is “fintech” a fad, will it be replaced by the next buzzword du jour?

To try to clarify, the made-up-word “fintech” has been used to classify the impact of modern technology on financial services — mobile, location, video, social, “big data”, bitcoin. We know that modern banking can not function without computers and communication technology, and as far as I know banks have been using “fintech” for the past 40 years or so (see above — even Cobol was once fintech). As late as last year, in a bank strategy meeting that I attended, colleagues from the business side where trying to argue that they can devise a strategy without the IT team — and I suggested they involve the “paper ledger team” in that case. The point being that IT has drastically transformed banking, and it has been doing it for a while.

What is special today however is that new(ish) tech in financial services is both creating a revolution in the type of products and services being offered to customers, and also a dramatic reduction in time-to-market and cost. There are now a couple of thousand fintech companies around the world, and the VC community has taken notice, from the creation of dedicated fintech funds several years ago, to the pivoting of large established funds who have recently (2014) discovered that fintech is both cool and booming. And many accelerators and incubators, with more being announced monthly…

When I look at fintech startups, I classify them as either competing with banks, or selling to/partnering with banks. I have written about this elsewhere on my blog — in summary I believe that there is only a small chance that incumbent banks, as a category, will all play dumb and allow startups to take over. Many more startups will succeed by selling to, or partnering with banks — and in the process offer added value to customers. A few will invent new categories and/or products, and may be successful on their own before being acquired by banks…

Which brings me to the biggest problem that I see in fintech — new tech adoption. This is the one that still has the potential to severely impact the overall revamping of the financial services industry through modern technologies. Some (very few) banks have started the process of systematically evaluating new tech from startups and and taking the necessary steps to move it to pilots and, eventually, production systems. However, too many do “technology research” by attending Finovate and reading blogs, and not take any steps to move to internal pilots. Others are hitting the wall when trying to move successful pilots to production — I have a large personal collection of bruises from that experience… And others have the hubris of trying to “innovate internally”, hiring dev teams and thinking that a a startup environment can be replicated inside a large corporation a.k.a. Bank. A large body of research on “open innovation” should tell them that this is not a productive path, if the empirical thought that “not all smart people work for us” would not be self evident.

So what can be done? In my opinion, the path is to invest in fintech startups, and let the 2000 and growing number of them compete with banks, partner with banks, and build solutions that customers will use. We have over 50 examples so far of how to succeed, and I am convinced that the creativity and the hard work of start-up teams can leverage the accelerating advances in technology to radically rethink financial services. “Bank 5.0” has not been founded yet.