10 years on, fintech hasn’t really delivered
Especially with all the recent Silicon Valley controversies, there have been a lot of people taking stock of the startup world – writes Viktor Nebehaj, Co-founder and CMO of Freetrade.
Now ten years after the financial crisis (which arguably built the playing field for fintech), I thought it’d be interesting to do the same thing for fintech.
So in the last ten years, what has fintech brought us?
(Almost) your whole financial life on your phone
You can now track spending, exchange currencies and save money in smooth, well-designed apps. We’re empowered to control our finances like never before. And it’s actually even fun to do so.
The only big piece left is truly high quality public markets investing, at least in Europe (coming soon!)
Open banking has been a major coup for fintech challengers, opening up financial data, APIs and systems to collaborators and competition. It’s also a symbolic win — a watershed of legislative support for financial innovators over the old guard.
New asset classes for everyday investors
We now have much smoother access to alternative asset classes: startups, property, business loans. Of course, some of those asset classes might not always work out for investors, but informed diversity is not a bad thing.
One of the original mission statements of consumer fintech was bringing the intuitive, customer-friendly builds of tech firms to managing money. Basically: why can’t a bank build experiences like Google?
‘We’re empowered to control our finances like never before’
We’re now reaching that level. The engineering and design cultures in fintech have matured incredibly. Best in class fintech products stand up well to any consumer apps around.
There’s a growing crop of talent who unite amazing consumer-centric creativity with high level understanding of the particular demands of financial services.
Missing business models
I’m going to start a new fintech app called ‘Tenner’ — users sign up and every month we give them a free £10 note.
We’ll make money through our premium tier ‘Tenner Premium’ which costs £10/month. Premium customers get £20 a month.
So yep. There are few profitable fintechs and many that have no really credible plans on how to get there. Despite the promises of tech-led savings and zero marketing cost, most financial startups seem to be burning money.
The ‘grow big, lose money’ approach has been legitimised by Amazon, which defied years of investor scepticism over big losses.
But the model of an online shop isn’t inherently unprofitable. Amazon didn’t have to rewrite the laws of economics to start making money (cough, Uber).
‘a new fintech app called ‘Tenner’ — users sign up and every month we give them a free £10 note’
The most popular fintech firms are the challenger banks built around current accounts.
Great! God knows retail banking needs reform, badly; but current accounts are loss-leaders. Even for traditional banks who have no compunction about selling in scammy products or surprising you with your overdraft.
Sure, challengers can dispense with the big cost base of an old-style bank, but still current accounts just don’t make money (and that goes double for pre-paid cards).
OK, what about lending? That’s the most basic revenue stream for a bank.
Well, most of your millennial customers are debt allergic in the first place. And since you’ve promised that you won’t screw them like the big banks, you can’t be manipulative about applying it.
Mortgages and other large value loans might work but the leading challenger banks seem wary of entering the space independently. Instead, the plan is to delegate these functions to marketplaces.
The marketplace model sounds great, until you realise that it means fintech companies with punishingly small margins listed by fintechs with punishingly small margins. Apart from this, it’s also not a particularly great model for consumers.
Until they’re developed into huge, diverse products, any individual marketplace will be at best limited, at worst a non-choice biased towards a preferred partner.
There’s already a huge, non-biased financial marketplace: the App Store.
Finally we have the freemium model; the freemium model (basic service for free with paid premium tier/services) can work, if the core business isn’t massively loss-making in the first place.
There are amazing product and service innovations coming out of fintechs right now, but there just isn’t the same level of innovation in the business model. Yet. I’ll keep the faith.
Anyone up for a robo-advisor that invests 50p in a leveraged ETF every time you buy a yogurt? A chatbot that tells you the interbank rate every time you look at a location on Tripadvisor?
A card that assigns all your other cards a musical note and lets you play them like a keyboard?
The last couple of years have seen plenty of takedowns and exposes of crummy tech startup cultures. This can be even worse in fintech.
Well, imagine combining the aggression, cynicism and work values of old-world finance with the chaos, hubris and pressure of startups.
Basically: New culture problems of startups + old culture problems of financial services = fintech firms have potential for really bad culture
‘combining the aggression, cynicism and work values of old-world finance with the chaos, hubris and pressure of startups’
Ironically, while a lot of fintechs were set up to change the stale, cynical culture around banking, that mission seems to be drifting.
To be fair, some firms are really getting it right: screening out the old-school banker mentality and working hard to limit the pitfalls of startup life.
But others are getting a big pass on effectively culture cloning the worst parts of investment banks with the juicy addition of the stereotypical startup awfulness.
Why’s this the case?
A lot of the talent coming into fintech is coming from old school finance; to an extent, that’s a good and necessary thing.
There are lots who really want to build a new kind of financial industry. There are some cynical dudes who just want to cash in on a fast-growing market. And there are some veterans who have great intentions but don’t quite know how to operate outside the old paradigm.
The problem is cynical dudes who want to make money tend to be highly motivated and very good at raising money (especially from the wealthy old guard).
Lack of customer-centricity
This is kind of an output of culture, but it’s worth pulling out; again there’s the irony that one of fintech’s big idea was replacing banks’ traditionally awful customer service but here we are.
Growth has become the universal barometer of success, not just for fintech but for all startups; but unmanaged, unsustainable growth means poor customer service either through understaffing or lack of process/focus.
If customer ops is bad for a photo app, it doesn’t matter that much.
But when you’re managing people’s money, chaotic, understaffed or just plain bad customer service gets much more serious.
It seems like I’ve talked through the bad a whole lot more than the good! I hope it doesn’t seem like relentless negativity. The truth is this industry-wide effort is so important, so meaningful that we owe it to be constantly self-reflective and self-critical. We should celebrate the wins, but we need to care about our flaws.
It’ll be terrible to go through 10 years of innovation and legitimisation just to have the same bunch of suits in charge — albeit offering better products.
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