Why banks (and PayPal) don’t simplify

As the internet reinvents commerce on this planet, it’s interesting to see the two things that enter the innovation mix: simplicity combined with connectivity.  When you think about the Uber, Airbnb, Facebook, Google, Amazon and more, you realise that they have all simplified some complex things from sharing to finding.  Google’s home page has stayed pretty much the same since day one.

Clear, clean and simple, it’s a SEARCH engine.  It helps you find stuff.  It’s easy.

You don’t think about the complexity of the thousands of servers that are indexing everything non-stop.  That’s the complex stuff that sits behind the simple home page.  You don’t think about the connectivity needed to do this.  The fact that Google is linked into every server on the planet to index the internet.  You just assume the homepage is there and will find stuff. 

It’s all simplified through global connectivity.

The same is true with Facebook.  You share your life with your friends, from links to funny videos of cats and babies to pictures of your own cats and babies.  You don’t think about the complexity of the thousands of algorithms required to tag, link, upload, organise, store and manage all your stuff.  You just want to share stuff.  You don’t realise how Facebook is getting smarter and smarter.  You just want to connect with your friends and family.

Amazon is the same.  Again, you’re just buying things you like.  It’s simple and easy.  You don’t think about how Amazon has created a global store of everything through connectivity to every sales outlet.  You just buy things.  You don’t think about how Amazon can read your mind and predict the next things you want to buy through indexing all purchases through meta-tags.  You just enjoy the fact that it has suggested that you might want that next book by Anna North.  You just like the fact that it can read your mind and your tastes.

Uber and Airbnb are doing something different however.  Rather than simplifying how you find, share and buy things, they have simplified marketplaces.  The taxi market was fragmented and disorganised.  Uber organised it.  In this case, the simplification is through connectivity rather than complexity.  Uber’s purely connecting people with cars through an app with people who need driving.

Airbnb saw a similar opportunity to sell spare space by connecting people with rooms to people who need rooms.  It’s the P2P connectivity that provides the simplification of markets (transport, lodging), rather than purely simplifying activities (finding, sharing, buying).

Which brings us around to banking.  What activities can we simplify in banking and which marketplaces could be simplified through connectivity?

These questions have already been answered in some areas.  PayPal and Alipay simplified the activity of paying by providing a layer over the traditional complexity, called an email.  Prosper and Lending Club have simplified the credit markets by providing connectivity between those who have money and those who need it.

Paying and enabling credit are the narrow areas of finance being attacked by simplification, but what else could be flattened by connectivity.  I must admit that when I look at this chart from CB Insights (doubleclick image to see a larger version):

... it really makes me take note, as any financial activity can be levelled by technology.  Any financial activity can be simplified.  Any financial marketplace can be flattened by connectivity, peer-to-peer, person-to-person.

This is why banks must change tack, and become integrators and aggregators of components of finance.  A bank cannot compete with a specialist who is simplifying a marketplace or financial activity, because an incumbent bank's systems and structures are usually too rigid, old and inflexible to change.  That is why the new entrant simplifier can create P2P credit at less than 100 basis points differential (1% difference between their lending and savings rates) compared to a bank's 400 basis points or more.  A bank has to cover the costs of their heritage buildings, people and infrastructure.  A start-up has none of that legacy or overhead.

This is why banks need to work with the simplifiers and incorporate their best practices into their own.  This is why the likes of Moven and Fidor are being brought into bank operations as partners.   This is why the likes of Venmo and Braintree are brought by PayPal.

Any incumbent player who tries to resist the onslaught of the simplifiers is going to fail, because the simplifiers are reinventing activities and markets overnight.  My favourite current example in fact, is Venmo.

If you don’t know the story, Venmo was invented by two mates during a long weekend.   The whole story is here, but the gist of the story goes like this:

One of the weekends we were getting together to work on this idea, Iqram was visiting me in NYC and left his wallet in Philly. I covered him for the whole weekend, and he ended up writing me a check to pay me back. It was annoying for him to have to find a checkbook to do this, and annoying for me to have to go to the bank if I wanted to cash it (I never did). We thought, “Why are we still doing this? We do everything else with our phones. We should definitely be using PayPal to pay each other back. But we don’t, and none of our friends do.”  So we decided, let’s just try to solve this problem, and build a way to pay each other back that feels consistent with all of the other experiences we have in apps we use with our friends.

After four years, Venmo is now processing almost $4 billion in social payments a year and was acquired first by Braintree in 2012 (for $26 million) who were then, subsequently, acquired by PayPal.

Could PayPal invent Venmo?

Sure.

Did PayPal invest Venmo?

No way.

Why didn’t PayPal invent Venmo?

Because simplification comes from kids and complexity comes from incumbents.  The incumbents are too dogged in their own complexity to see simplicity in too many cases.   It seems strange to say that PayPal is an incumbent that cannot simplify when, just a decade ago, it was the simplifier.  This is because the start-up soon becomes the incumbent and PayPal is viewed as the legacy giant, rather than the bright young thing.  This was clearly evidenced when PayPal partnered with Samsung and were left in the cold by Apple as a result.  Why did PayPal partner with Samsung?  Because eBay said so.  If that's not a sign of a large incumbent operation, what is?

It is for these reasons that incumbents spend all their time talking about regulations, regulations, regulations, whist the Fintech start-ups talk about innovations, innovations, innovations.

The startup has the excitement of simplifying complexity; the incumbent has the weariness of dealing with complexity.

That’s why Fintech is so hot – because it’s reinventing financial activities and simplifying markets.  Watch this space for more.