Who let fintech out?

By José GomesOn January 29, 2021

For one zillion dollars, the question is, who let the dogs out?

Disclaimer: First and foremost, attributing any idea here to me would be a huge stretch of the truth. I'm distilling what I've learned with the likes of Matt Levine (Money Stuff), Felix Salmon (Axios Capital), Marc Rubinstein (Net Interest), Patrick O'Shaughnessy (Invest Like the Best), a16z team (Fintech newsletter), and countless others who are kind enough to share their knowledge with the internet. What a great time to be alive.

The fintech world has been burning red hot for a couple of years and the flames don't seem to be waning anytime soon. On the background of traditional markets going ever higher up, in what has been seen as a disconnection from reality during these pandemics time, or the latest bull run on the cryptocurrency markets, there's been a constant flux of innovation and value creation by some new-ish players in the fintech market. They look poised to enter the big household names that we've come to know in the last few decades when finance took a center stage in the world and every society's public mind with the financial crisis of 2008 but for way better reasons. With these players, we naturally also find incumbents who want to avoid getting their pie pillaged by the rebels. They have risen to the challenge and strove to expand the boundaries of their activities either by coming up with opportunities on their own or by partnering up with startups. With this post, I'll try to analyze some of the ongoing trends that we've been noticing looking back to the last decades, and what the near future might look like in this little bubble.

I'll start by trying to define what I mean by fintech, as everyone seems to have their own definition inside their heads. From our trusty old friend Wikipedia, it "is the technology and innovation that aims to compete with traditional financial methods in the delivery of financial services". That sounds about right but I'm not 100% sure of the competing part. Looking at Investopedia we get "Financial technology (Fintech) is used to describe new tech that seeks to improve and automate the delivery and use of financial services". I seem to like this more, improve over compete, is right up my alley regarding the mindset in this market. However, both definitions rely on a specific term, financial services. Again from Wikipedia, "Financial services are the economic services provided by the finance industry, which encompasses a broad range of businesses that manage money, including credit unions, banks, credit-card companies, insurance companies, accountancy companies, consumer-finance companies, stock brokerages, investment funds, individual managers and some government-sponsored enterprises". Now we seem to be getting somewhere. If I had to synthesize what I mean by fintech I would look at the two key components underlying it, money and technology. If it touches money and is powered by technology then I would argue we could do worse than calling it fintech. From Shopify empowering new businesses with their e-commerce stack, exploring new avenues for revenue, to Shaq's SPAC being traded on NYSE, by high-frequency trading firms using machine-learning algorithms, we might be all talking about the same thing, one way or the other.


Definitions aside let me delve into the main topic and brush up on my futurology skills. One of the main topics since computers are a thing is the digitalization of the world and finance is no stranger to it. From leveraging computer power for an edge on the stock market to increase the efficiency of companies involved with financial services there's been a long road that brought us to today but still a longer one to be taken forward. While we have noticed banks increasing their proficiency with technology leading to better onboarding experience and better customer service we might argue that their evolution has not been fast enough. Their disruption by neobanks is a clear indicator of that, with the likes of Revolut, N26, Monzo right here in Europe as examples, leading to a scramble for updating their interaction with customers to compete with these new players. Also, many banks held a position as gatekeepers for many investment opportunities and access to the broader markets. We've seen a democratization of access to these, apparently by bypassing these institutions (even if they have a role connecting the pipes for many of these new players), and delivering a completely new experience for the customer, the most famous example being Robinhood in the United States, or Revolut's play with investing and savings. Even traditional brokerage aimed at a more professional clientele had to follow suit and enter the race to the bottom on the trading fees department following Robinhood example. I would argue that this trend is bound to continue with new players entering the market, offering deep know-how of specific niches and their needs, providing a tailored front-end and solutions specific for that segment, and taping into some kind of banking institution much like an API to serve as a back-end to making things happening. Incumbents will either need to adapt to this new role of infrastructure providers, step up their game immensely to defend their customer base against these new threats, or perish in the dust of the battlefield.

And with all this, we still didn't get down to payments which many argue is creating a shadow banking industry that should be getting some regulatory attention. We've come a long way since the initial disruption of Paypal in online payments and nowadays we have the likes of the Chinese giants, WeChat Pay and Alipay, which achieve a scale that baffles most minds and revolutionized the way hundreds of millions of people and business go around exchanging money. These players will continue their encroachment of adjacent areas and are bound to further muddle the boundaries between what we thought until now of separate financial services. One example closer to home is the evolution taken by Stripe from payment's API for programmers to an enabler of new businesses (Stripe Atlas) and provider of financing for them (Stripe Capital). The same with Shopify, from arming the rebels of retail with an e-commerce technological stack to also provide financing to them. I think we might be talking about these companies as the titans of finance in the next decades, the same way Goldman Sachs has inundated the public consciousness in the last few.

Lastly, I would also like to point out Insurtech as an area ripe for growth, with a dynamic very similar to what we're seeing with banks and neobanks. A lot of startups in the market have partnerships with incumbents to make the magic happen behind the scenes while providing an interface much cleaner and streamlined for the user, enabling better conversion rates. If I would point to one of the main pains regarding insurance is that it is a process opaque to the user, with many intermediaries. Providing clear insight into the state of the process and expedite the process by reducing feedback loops will be a key point to conquer new demographics who truly hate the status quo.

In another land, cryptocurrencies are back in fashion again. It's easy to focus on the wild swings of Bitcoin and Ethereum but the truth is there's something very interesting happening in the ecosystem. It is a known criticism that most evolution in the cryptocurrency space is some kind of relearning of principles that have been honed in the traditional financial markets, especially when we look into when something goes terribly wrong. DeFi has been steadily gaining a following since the highs of 2017 and has matured into a fertile land which also brings out corners of it still unpolished and ready to be exploited. The most recent KuCoin hack was a good example of that. At the end of the day, whether you call it innovation or reinvention, we believe it's an area bound to expand, through trial and error and constant learning. It has proven resilient to the wild speculation that surrounds it and it has attracted considerable amounts of engineering talent to work on it and that alone merits that we pay close attention. From decentralized exchanges like Uniswap to lending protocols like Compound and even derivatives like Synthetic there's probably something happening in the crypto space that you should be paying attention to, both for an exploration of financial innovation and a technical challenge that pushes the envelope of engineering and problem-solving. We can also see the impact this area has had in the world by the constant chatter we find recently about central banks and the digitization of money. It's hard for a couple of months to pass by without some news about the main central banks playing around with some project or pilot or report about some new initiative regarding blockchain or digital euro or something along those lines. I believe this cross-pollination, of crypto-space reinventing the proverbial wheel and traditional finance agents and regulators reacting to the innovation of the other side, will have a net positive effect on the world. And provide innumerable wild rides along the way.

Finally, I would like to mention another fringe topic that I believe will have a huge impact on society and further blend the edges between marketing and entertainment, the live streaming shopping experience that is being created in Asia. Dubbed "Shopatainment" recently, in an a16z article, it brings a whole new revenue source for brands and individuals powered by the ability to seamlessly blend live streaming with unique sales opportunities and real-time payments. Our old infomercials model from the 90s only on steroids and adapted to the native environment of a new generation, with a global audience to tap into.

It truly is an inglorious mission to try to write everything that's happening right now in the fintech space as the interesting topics certainly look fractal-like. In the end, much of these predictions or trends will live or die based on the execution more than on the vision. So there is plenty of room for success and even more for failure. What we can be sure of is that at the moment it is an exciting area to be working on and is gearing itself up to grow even more into the public conscience and day-to-day.

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