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Is Fintech really so special? Maybe … or maybe not

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So everyone’s excited about Fintech, but Fintech is nothing new.  Fintech is actually pretty old.  I could claim that if Fintech is about providing technology platforms to exchange finance, then that’s been around since banks first implemented technology platforms in the 1960s.  In fact, I do claim that banks are Fintech companies.  They are the Fintech incumbents.

The reason why we’re all excited about Fintech is because there are so many new start-up firms attacking the flawed business model of the incumbents.   The startups are starting with no technology from the last century.  They are attacking the flawed business model of the existing Fintech firms, who implemented their technologies based upon products and branch distribution networks. The new firms are built around customers using internet services on their mobile and wearable devices.

This is why we’re excited about new Fintech, as it replaces buildings and humans with software and servers.  That’s the new world of Fintech.

It goes further and deeper than this, as it means that Fintech firms can target narrow finance – the unbundling of banking – and just offer component pieces as either peer-to-peer connections, such as lending and credit and payments, or as new ways of connecting, such as buy now and pay later (Klarna) or matching payments data (TransferWise) or creating new digital exchanges on shared ledgers (Ripple).

That is why we are excited about new Fintech as it destroys the fat overhead of old Fintech.  That doesn’t mean that the old Fintech is not aware of the change.  Most incumbent banks are investing in, developing with, acquiring from or doing something with new Fintech.  The real question is how can an old Fintech bank become a new Fintech bank?  How can a bank move from a product-centric structure based upon physical distribution to a new customer-centric structure optimised for digital distribution?

This is the fundamental question for a bank, and I claim that to be fit for new Fintech structures, banks have to turn their operations on their head.  The core of the new Fintech is digital distribution, so old Fintech must get rid of their foundation based upon physical distribution.  Once committed to doing this, then the bank can start the change of architecture and organisation to become a digital platform with customer centricity, rather than a physical structure with product focus.

For many bank leaders, this is too much of a change program. It’s too radical.  It’s too hard.  For the bank leaders that feel this way, they bolt on to the bank a Head of Digital and give them the job of change.  Don’t.   A far better approach would be to launch a new bank, as delegating digital to a job is pretty much a road to ruin.  Digital should be at the core, so delegating the core future of the bank to a job is stupid.  Build a new bank.

Launch the new bank and let it grow.  Let the new bank destroy the old bank.  Let new Fintech eat the old Fintech dinosaur.  That’s far better than just trying to make the old Fintech structure look pretty.  As discussed many times, making old Fintech look pretty by sticking some nice apps on the front-end is just sticking lipstick on the pig, if the core of the bank is still rotten.

Nah.  Let the new bank destroy the old bank.  That’s the best way to deal with Fintech if you’ve not got the leadership to change the bank at its core.

But equally, whilst I post all of this hype about Fintech, we need to take a step back as it’s not all cut out to be what it seems to be.  Remember, incumbents are just as much Fintech specialists as the start-ups, but the difference is that the incumbent knows what they are talking about.

So I was very gratified to pick up an article yesterday about The Cynics Guide to FintechThe article is written by Dan Davies, someone who “spent many years as a banks and diversified financials analyst”.

Dan notes that there are at least seven business models being used by the new Fintech start-ups, not all of which are viable.  Some are just plain stupid in his view, whilst others may work if they can get things right.  The seven business models are:

  1. Thinking that a great big lump of transactions data is more valuable than it is [Dan’s Viability rating is just 1 out of 5]
  2. Reinventing past mistakes of the banking industry because you don’t know about adverse selection [Viability Rating is 2 out of 5]
  3. Assuming that the regulators will be more inclined to listen to your whining than to the incumbents’ [Viability Rating of 2 out of 5]
  4. Hoping that a load of people who actively mistrust each other will trust you instead [Viability rating 3 out of 5]
  5. Trying to use someone else’s network and only pay the marginal cost of doing so [Viability rating 4 out of 5]
  6. Giving customers a worse service for a lower price [Viability rating 5 out of 5]
  7. Getting your act together with respect to an industry standard where the industry has conspicuously failed to do so [Viability rating 5 out of 5]

As can be seen, Dan thinks only 2 of the 7 business models out there right now are truly going to work.  I don’t agree with all, but I do agree with most of what he says.

New Fintech is exciting where it can get things right.  The P2P credit model and new forms of real-time, almost free payment structures are exciting.  Getting rid of a lot of the old fat in the industry makes sense.  Destroying outdated models that take days to process across borders and cost hundreds of dollars makes sense.  But not everything makes sense.  A bit like the business models of  Kiko and Paybytouch, starting up a new business is hard.  For every Uber and Airbnb there are hundreds of BetterPlace’s and eToys.

However, the VCs are there for the Unicorns.  If they catch the next Uber or Airbnb in banking, then they win.  Meantime, the rest of us can just sit back and enjoy watching the explosions of the puffer fish.

I’ll leave the last words to Dan:

Fintech is apparently a big priority policy area for the UK government’s industrial policy, and seems to have attracted a whole load of fairly uncritical support. Actually, a lot of these businesses are based on repeating old mistakes, and the ones which aren’t seem to be based on solving problems that should never have existed if the world had a fully functional banking industry.


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Chris M Skinner

Chris Skinner is best known as an independent commentator on the financial markets through his blog,, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...

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