I recently gave a speech where the title was FinTech or TechFin? Everyone had been given a copy of my book Digital Human, and the speech was transcribed. Here it is:
FinTech or TechFin?
Thank you for inviting me to join you here. It is a great honour.
I’m a technologist and spent all my career life looking at how technology might change the future of finance and financial services. When looking to the future, it is determined by four forces of change: political, economic, social and technology change.
For me, technology is the core driver change, but this does not belittle the others. All of them impact financial markets and businesses equally and I’m sure you would agree that these changes have become particularly frenetic in the last decade. This is part inspired by the global financial crisis, but equally enabled by the technology structures that we have today.
Cloud computing, artificial intelligence, the mobile phone network and open banking which incorporates application program interfaces (APIs), which provide plug-and-play code that can be taken and dropped from any provider to any other service that you want to use.
These technologies have transformed the landscape of the world in the last decade, and are now massively changing banking as finance and technology becomes integrated. Today, we call this FinTech and FinTech has grown from nothing to a market receiving over $110 billion of investment in start-up firms last year.
The first time that I encountered FinTech was over a decade ago in a meeting in London, where someone had the idea of launching a business that they called ‘an eBay for money’. Their idea was that you could have people who have money connected to people that need money through a platform and an algorithm. That company is called Zopa.
In the past fifteen years, Zopa has done pretty well in the UK, as have many other peer-to-peer lenders and FinTech start-ups. For example, 36% of all new personal loans were originated by FinTech companies in the United States in 2017, according to Bloomberg, compared to just 1% in 2010. That’s the reason why you can see the integration of finance and technology is such a hot market space.
Last year $111.8 billion was invested in FinTech companies globally according to KPMG, which is more than double the figure of the year before. That covers peer-to-peer payments and lending, but it also covers a lot more from everything to do with robo-advice through to artificial intelligence through to cryptocurrencies through to blockchain distributed ledger technology. There are thousands of things happening in each of these areas and I claim that, faced with these changes, the business model of the banking industry is completely broken.
I know a lot of banking people disagree with me, but digital is revolutionising planet earth and that’s what the mobile financial inclusion discussion explored in depth in Digital Human illustrates and exemplifies.
Equally, when I produced Digital Bank a few years ago, my key theme was that the business model of banking is designed for the physical distribution of paper in a localised network through buildings and humans. We then implemented technology to cement that structure in place. Now, we need to rip that structure apart because what we are dealing with today is the digital distribution of data through software and servers on a global network. The latter is a radically different model for business and particularly for financial services.
Financial services hasn’t been impacted by this change much so far, when compared with the changes we have seen in entertainment, consumption, media, books and other markets. This is purely because it has taken a long time to get to where we are. I’ve been working on this for a long time. In fact, it’s only in the last decade that it’s really started to hit the road.
You can see it hit the road in the valuations and the vision and rapid expansion of these new start-up companies like PayPal, which is one of the oldest FinTech firms around. Like Ant Financial, which makes up a case study that is a third of the book Digital Human.
However, if I had to pick one standout start-up, it would be Stripe. Stripe is my favourite FinTech start-up and is also one of the biggest FinTech unicorns – firms with over $1 billion valuation – out there.
If you don’t know what Stripe does, they were launched in 2011 with seven lines of code that enables any merchant to set up checkout online fast and easy. It’s plug-and-play code. An API. The merchant can just drop the code in there, and it’s easy. That’s why the Ubers, Airbnbs and Indiegogos of this world are all using Stripe, because it’s incredibly easy to just drop that code in and then you can take and make payments.
It’s so simple that after five years, in October 2016 when these figures were released, they had a $9.2 billion valuation, with just 400 staff.
Another reason they are one of my favourite FinTech start-ups, is that they were started by Patrick and John Collison, two brothers from Ireland. When they launched the idea for this business back in 2010, they were just 21 and 19 years old. And here is a key point about how the world has changed with digitalisation, because FinTech has created an equal relationship between parents and children. The children know how to code, and have the vision to create a whole new way of thinking about money using that code.
A great example of this is Vitalik Buterin, who is the developer who founded Ethereum. Ethereum is a distributed ledger services that is also call smart contracts on blockchains. If I explain it, it gets into a whole complex discussion, so I won’t to go there except to say that his idea has become the backbone of how corporations, governments and businesses are creating next generation infrastructures. In other words, Vitalik’s code might become the backbone of our world tomorrow and be as fundamental as the creation of the internet itself.
Vitalik Buterin was 19 years old when he started that idea.
That’s how fundamental this is. Kids who can code are dramatically changing our market … but they don’t understand our market. They don’t understand why we are regulated the way we are regulated. They don’t understand how we got to where we got to.
This is why I see FinTech as a parent-child relationship. The Fin needs to act as the parent that mentors and nurtures the child, which is the Tech, and that is exactly what is happening today. A lot of banks are starting to collaborate and work with the FinTech start-up community, including the Stripes of this world.
However, the most telling figures here are when you analyse the changes in the big banks. One of the biggest and most admired banks in the world is JP Morgan Chase, with a valuation of $245 billion in 2016. That means each employee is generating just under a million dollars of value. Compare this with Stripe, which generates $22 million of value per employee and you see a chasm of difference. A five-year-old child called Stripe is generating twenty-two times more value when compared with its 220-year-old parent.
I get fed up with people saying banks are dumb and stupid however. They think banks are not able to change and yet there are some banks that are changing well. I’m talking to banks that are doing digital transformation well, and there is a frustration that banks are not valued in the same way that technology companies are. There’s a distortion here between the investor analysis of the long-term potential for an Amazon or Stripe when compared to a traditional firm like a JP Morgan or Barclays Bank. In some ways they are undervalued but, even more telling, is analysing and studying how they are changing.
For example, in just two years, Stripe gets a new funding round and comes out with a new valuation of $20 billion. It is now a seven-year-old company with a thousand staff. They are still doing pretty well. They’ve gone global. They are expanding heavily into Asia.
What interested me more here however was the line underneath. JP Morgan Chase. This big global behemoth had reduced staff numbers by a third in two years whilst increasing value by a half. It’s a bank where employee value has doubled in two years.
This is why we are living in such interesting times, because we are living in a world where FinTech is making banks do what they’ve always done cheaper and faster and better with technology. If banks understand that then they will collaborate and partner and invest and mentor these thousands of new companies. This is why these start-up firms are getting billions of dollars in investment from these banks, so that they can be part of their marketplace, part of their community and, for the banks, it enables them to bring those start-up firms capabilities to their customers.
A customer – whether an institutional investor, a corporate client or a general retail customer, personal customer – doesn’t want to go and look at a thousand FinTech start-ups and work out can I trust them? Where have they come from? They’ve got no brand. They’ve got no history. Why would I want to use then?
I would much rather that my bank does the due diligence and starts to curate them and bring them into their ecosystem and work with them. The few banks that get this and that are doing it are all sharing a radically different mind-set. They have a completely different culture and a radically changed organisation structure. They’ve flattened their organisations; they are very open; they want to partner and communicate; they have rapid cycle decision making; and, overall, a completely different business model to traditional banks.
You can get decisions from some of these banks within 24 hours on fundamental change, which I’ve never heard of before because a lot of people say to me that it takes about 24 months to get a decision from most banks, not 24 hours.
So, there’s a big difference taking place in the mind-set, the culture, the structure, the products and the services of the banks that understand digital transformation. It is not doing what they’ve always done cheaper, faster and better with technology, but doing new things in a new way with technology.
That brings me back to the title of this session what asks that question whether it is FinTech or TechFin. Does the child have to lead the parent to the future? Should we put the technology first and let the finance follow?
This is where lessons are learned looking at new economies that had no historical infrastructure. I call America and Europe legacy economies for this reason. All of the infrastructure that underpins these economies were developed and implemented in the last century. New countries and new regions are implementing technology in this century, and leapfrogging Europe and America.
We see this in India, China, across Asia, Africa and South America. These countries started their infrastructure projects in the internet age, rather than the mainframe age, and they are turbo-charging their economies as a result.
I learned this when I visited with Ant Financial in Hangzhou, China. Ant Financial does not like the word FinTech, because they think it puts the Fin first and the Tech follows. They think the Tech should go first, and it should be called TechFin.
When I launched Digital Human a few months ago in Europe, the launch event was hosted by Barclays Bank. We had a panel with the Chief Executive of Barclays UK, Ashok Vaswani, along with Li Wang, who was then the head of Alipay Europe. In the middle of the discussion, Li Wang turned to me and said the average Alibaba employee generates $16 million of revenue a year. Ashok’s face dropped, because the average Barclays employee generates about $400,000 of revenue a year.
This is the huge gap that separates the Tech and the Fin, and it’s illustrated really well by Alipay. The reason I chose them as the case study for the book is because of a wide range of factors. It starts with mobile payments in China, which has just leapfrogged the world.
According to the People’s Bank of China, last year saw $41.3 trillion spent by Chinese consumers on their mobile apps, of which 54% is with Alipay and 38% is with WeChat Pay. The difference between Alipay and WeChat Pay, and the reason why I chose Alipay and not WeChat Pay, is because WeChat Pay is domestic China focused whilst Alipay is global. If you don’t think it’s global, just go and look around the airports and the shops and you’ll see their signs everywhere. They are accepted everywhere for Chinese tourists and, as I’ve learned through a few experiences, it wouldn’t surprise me if they were accepted for European and American tourists in the future. There are some active start-ups in Europe, like ePassi in Finland, who are already working on that idea, to enable all of us to use QR code payments at Alipay terminals if we want to.
Another startling illumination from Ant Financial was when I was talking with the head of systems architecture. By way of background, Ant Financial runs and operates the payments system, Alipay. Alipay started in 2003 as the payment service for Alibaba, which is the biggest commercial platform in China. Now they’ve been separated because of the regulatory requirements of the Chinese government, and the company had a valuation of $150 billion last year. They are probably worth a lot more now and, if they were a bank, they would be the tenth largest bank in the world by value. But they are a technology company, they are not a bank.
As an example of being a technology company, the head of systems architecture said to me that he’d just come back to China from Microsoft in Seattle to head up the development of Alipay’s fifth generation systems. I asked what he meant by the fifth generation systems development, as Alipay was only a fourteen year old company at the time. He said that the first generation system was purely an escrow service for taking payments. The second was to scale, and used Oracle and Microsoft platforms. Then they found that Oracle and Microsoft could not scale enough to keep up with their business needs, so they developed their own cloud-based services to handle the scale they needed, as well as creating their own database structures. The fourth generation was to have better fraud and risk management for the scale and volume of transactions they were taking, and used artificial intelligence to manage the processes in real-time. Finally, the fifth generation is to get to the point where two billion users can make a million transactions a second.
I’m just thinking through those numbers and realised that they are throwing away their systems every three or four years. When did your bank last throw away your core systems and redevelop them from scratch?
They are also developing scale that is monstrous. Two billion people making a million transactions a second. Wow! Visa globally processes around 2,000 transactions a second on average so a million transactions a second with AI for fraud and risk built-in is phenomenal.
Perhaps the best illustration of what they are doing is on Singles Day. Singles Day takes place every year on 11th November and, like Black Friday and Cyber Monday, is an invented day for online shopping in China. If you’re single, buy yourself a present and save a fortune.
On 11th of November 2018, they processed over $30 billion of sales for Alibaba in just 24 hours. The previous year it was $24.8 billion, so it’s gone up by about a quarter. But I have the numbers in 2017, which I used to proudly present on stage, that they processed $1 billion of sales in the first five minutes. In 2018, they processed a billion dollars of sales in just over one minute. They processed $10 billion of sales in just five minutes. Even more amazing is the logistical feat, which is that all of those sales were delivered within four days for 97% of the orders.
This is what technology does when you start with zero infrastructure. When we deal with legacy, as with most of Europe and America, much of what we do is try to bastardize old systems and structures and make them work with new technologies. It is like trying to bang a round peg into a square hole. It just fails. It’s not going to work.
When you have the Southern Hemisphere, China and India doing phenomenal change with new technologies, then that becomes really exciting. We can learn a lot from these countries. Using TechFin rather than FinTech, they’ve completely dropped the idea of annuity products for example. The only reason why we have annual insurance policy, annual percentage rates and annual loans is because the old physical structures of distribution meant that we couldn’t justify the cost of doing these products and services on a more frequent basis.
Using Ant Financial and Alipay, Alibaba provides merchants on their Taobao platform, which is like eBay in China, loans of seconds, for minutes, hours. You don’t have to have years. There are some merchants on Taobao that take out over 3,000 loans a year, ranging from $5 to $5,000 in value, because they can.
The only reason why we insure on annual basis is for the same reason and yet there is a FinTech start-up company called Trov, who are partnering with AXA in Europe to provides insurance on-the-go. It’s Insurance-as-a-Service. You just pay as you need it. If I’m going out for the next eight hours with an iPhone and an Apple Mac, I just want to insure it for the next eight hours. I don’t want an annual policy.
So, this is where you are getting some radical rethinking of everything and the most radical rethinking of everything is coming from the Southern Hemisphere, particularly from some of the African nations, from the Philippines and Indonesia, from Columbia and Argentina.
My favourite example however is in India. This really brings home what’s happening with technology and financial inclusion. It is based upon Ant Financial’s marketplace of plug-and-play code using application program interfaces, APIs. Their marketplace has gone global, and one of their biggest users is a start-up in India called PayTM.
PayTM is a mobile wallet that’s used across all of India. I was just in Bangladesh and went to see a temple. At the temple I could give donations either in cash or by using PayTM. It’s as simple and ubiquitous as that.
PayTM has around 400 million users today whereas, just before demonetisation in November 2016, it had about 150 million. Because of this and other moves by the Indian government, the story of inclusion in India has risen dramatically and much of this is thanks to the mobile payments wallet network.
Vijay Shekhar Sharma is the founder of PayTM. He is also a fan of Jack Ma and Alibaba, and wanted to copy Alibaba and Alipay in India. He went to see Jack Ma and said can you invest in me, can I bring Alibaba to India, and he persuaded Jack Ma to invest. This is why Alibaba and Ant Financial own a substantial part of PayTM.
Core technologies behind PayTM are provided by Ant Financial through open banking, open payments, open financial services, using these technologies for PayTM to grown really quickly and scale very quickly using their cloud-based services. Ant Financial and Alipay are not just doing this in India, but also with partners in many other countries from Pakistan to the Philippines to Indonesia, Thailand and South Korea. They’ve gone global.
But a final piece of the puzzle, it is worth nothing that PayTM’s founder, Vijay Shekhar Sharma, India’s youngest multi-billionaire today, was homeless ten years ago. He had been bankrupted by his business partners and was sofa-surfing on friends couches to survive. That is what today’s digital network enables: opportunity and inclusion for everyone.
So, I guess I’m going to move towards a conclusion but, before I do, one of the last key things needs to change is the regulatory structure. One of the things I’m learning from the banks I’m talking to about doing digital is that they think the regulators are letting everyone down. According to Bank of America Merrill Lynch, the average bank in the USA deals with 128,000 regulations; the average technology company deals with 27,000.
When you have five times more regulatory overhead to deal with, it is part of the reason why we are not as efficient as we could be. It is also the reason why technology companies, BigTech and start-ups can eat our lunch, because they are not being regulated effectively. This is because they are just starting out and the regulator can only regulate what they can see. However, that’s one of the biggest areas of change in the next decade. Technology companies will face a wave of regulatory change as the regulators catch up with the issues BigTech creates. A great example is the debate about privacy and Facebook and Cambridge Analytica, but there are many others from Google’s rigged advertising to Amazon’s rigged reviews.
In conclusion, my summary would be that if you are not feeling that we are living through a revolution through digitalisation with technology, then read Digital Human and then talk to me. It is clear to me that we are going through a massive revolution of the whole of humanity with technology. It is a fundamental change to how we think, trade, transact, talk, build relationships, build structures. It demands a completely different business model from financial institutions and it’s incredibly difficult for these institutions to make this change, especially if their leaders do not understand it.
Some people would say start fresh, don’t try and change. I say you must change. Otherwise, what happens to the old institutions if you don’t change? You just leave it to rot? You just leave it to stagnate?
The way to change you can learn from the leaders like JP Morgan Chase, BBVA and ING. They’ve been doing this for a long time.
BBVA’s former Chair Francisco Gonzales was a programmer when he started his career, so he understands technology. He took over the leadership of BBVA in 1999 and his first speech was all about customers being able to access BBVA wherever they are, whenever they want, however they want, through technology. They’ve been doing this for 20 years. They really get it.
If you look at the executive leadership team at BBVA, half of the leadership team are technology people. The head of engineering, head of data, the head of customer experience, the CIO, the CEO and the Chairman all have technology backgrounds and are all on the leadership team.
Finally, if you want to take away a key message about TechFin and FinTech, just remember this. If you just try and do what you’ve always done, cheaper and faster and better with technology, you’ve taken your eye off the ball. You need to look at what could you do with the technology if you started afresh, anew and completely differently. Start with Tech and add the Fin. Let the child lead the parent to the future. Don’t tell the child it cannot be done. Let them try.