I had a chance to meet Mike Laven, CEO of Currencycloud over lunch in London, and then follow up by phone on how the Fintech market has evolved in major money centers around the world.
Mike, you have had a bird's eye view of the Fintech market, even before the term was coined, at Currencycloud and in previous leadership roles at Infinity Financial Technology, Cohera, Coronet and Traiana. Summarize if you can the trends you have seen.
Currencycloud is a venture backed company that provides embedded international payments for many Fintech firms, neo/mobile bank and payment firms. We now effect well over $1B a month in payments. We got our first major funding in 2012 and then we were off and running.
I divide the Fintech world into two buckets: digitally native finance, and digitally transforming finance. For the first five or six years of the company, we almost exclusively sold to digitally native Fintech companies. These firms didn't come out of existing banks or existing large corporations but usually from technologists trying to solve a personal or business problem. Fintech arose from meeting a customer requirement and an old, inefficient, almost customer hostile banking system. Nobody loves their bank and the quality of services. Banks believed they had a lock on their consumer and corporate customer, and so felt no pressure to change and evolve. So Fintech companies set out first to meet Millennial digital demand, for digitally native consumers, and then have created a whole new ease of use in financial services. Those services, even when they don’t attract enough customers to scale set the standard for the traditional providers. So Fintech has massively punched above its weight in setting a standard for the industry. Digital consumers have set the standard which will filter upwards into all of finance. So yes—in finance customer requirements fueled by massive amounts of venture capital are driving industry transformation.
The early stages of Fintech were very much like other Internet-related areas. Firms like ourselves and start-up automating lending, people, car loans, insurance, small business loans, wealth management, trade finance. Each picks off some feature and optimizes the hell out of it, focuses only on that, making a category killer. They were pure startups. They took for granted that services would be delivered to millennials on a mobile phone and by-passed the out-dated physical bank branch system. Fintech is breaking up that massive bank platform into a series of optimized pieces. The optimized pieces are great for the early adopters but most people and businesses don't want to go to ten places to get their services. So the question is “who will provide the point of integration to provide all of these new optimized digital services. Will it be the banks who already have the customers but need the technology, or the Fintechs who have the innovation but need the customers". The Fintech companies and digitally native banks are built on a totally new banking stack, on a cloud-delivered, agile developed, next-generation banking stack. But then those firms don't have a lot of customers compared to the large established banks.
In Europe, there's Revolut, Starling, Monzo, N26 and other Neo Banks who are starting with debit cards on which you can hold a balance and then layering in budgeting, insurance, travel, and a whole series of other banking services. These banks provide a whole new level of user experience. There's a whole series of consumer-oriented, digitally native, financial service firms. You don't see them as much in the U.S. because of the regulatory issue but, basically, they start out mobile, and generally they start out targeting millennials.
So talk about the incumbent global banks and their strengths and weaknesses in a changing world.
I've always been a believer that the big banks always win because of their ability to make a billion-dollar investment, their ability to shoulder risk, and their huge balance sheets but they'll just be late to the party. Those banks still have the bulk of consumers. Europe has this very active challenger bank segment, but it's still the early days for Fintech and the bet is that as millennial consumers grow up they won’t return to banks they’ll stay with their apps, and that the bank culture will not be able to deliver.
The established banks still have the customers and cost of customer acquisition is very high and requires off-line marketing which we see all over the London metro system and TV ads. Pulling people away, even for a better service is complicated and expensive. So to me the jury is still out—there will be few Fintech winners, but as you need massive scale and the banks have a lock on users, I wouldn’t bet against the big banks yet. A few Neo banks will make it-but not all.
In our world of moving money around the world, the banks, the big banks who do payments -- and that would be like JP Morgan ,Citi, Barclays, BNP and others -- service their large customers very well. Banking and finance are conservative and highly regulated industries, so their technical transformation to modern, user friendly, mobile oriented industries has come late in the internet revolution of turning all kinds of commerce on its head. Also, some of them looked at emerging Fintech and thought, "We have the customers. Our customers aren't going anywhere. These are small startups. Nothing to worry about."
The difficulty that the larger banks have is they're still running these big, on-premise systems. The systems work. But if you want to offer flexible, mobile services that are delivered to the next generation of customers then, ultimately, you have to make changes to your core banking system or else you have to build a new platform.
The firms who are really clever actually know that they can't touch their core banking system without spending hundreds of millions of dollars. What they're doing is building an alternative platform to start the delivery of services and then hope they'll bring the platforms together later.
We know from back in the old days of ERP, when you switch technology, when you switch from mainframe computers to minicomputers and minicomputers to desktop computers and from desktop computers to mobiles from mobiles to streaming that new entrants come in with new technology and the old guys just watch and eventually have to catch up or die. What you're seeing now is banks trying to catch up in what I call digital transformation. Right now, the banks' advantage is that they provide all of those services through one single point of contact, but the individual services will be sub-optimal, over-priced, not transparent, hard to use, bad user experience … all the things we’ve come to expect in the digital age.
The difficulty for the big banks is that when they look at the assets that they lose or the transactions that they get, today it probably doesn't matter much because all of the challenger banks are serving a different demographic, which is the demographic that you need 20 years from now, not the demographic that you need today.
I once had a conversation with a Head of Payments from one of the largest US corporate banks and we talked about my targeting services to SMEs. His response was that services to firms under $1B were unprofitable, so the more I could do to take that business off their hands the better. So when the established banks looked at Fintechs initially focusing on millennial consumers and small business—they just didn’t see a threat.
The smarter guys are trying to figure out how they do their digital transformation to economically capture these markets of the future and the dumber guys say, "Okay, we're fine today," but I think they're going to wake up in ten years and all their best customers are going to be somewhere else. When I present to established banks about Fintech I usually tell them that the competition they need to worry about is not Fintech but smarter banks.
That's where I see the Fintech world now. Maybe five or six years ago, the consumer-oriented Fintech world was all about digitally native startups. Some of those firms have prospered and are scaling up and that's great. Some have fallen by the wayside. Now you're seeing less new entrants and a real sort of arms race on the part of larger banks who are very constrained because of old technology and old siloed organizations.
Where I see the challenge right now for larger banks is that you can't unlock a lot of the Fintech innovation unless you can migrate your core banking system. But migrating your core banking system is really hard and really expensive. In order to provide a whole range of digitally optimized services, either the established banks have to rebuild from scratch, or modify their brand through digital partnerships. So will the banks become the point of integration for new services, or lose their customers? I actually think, from a market-facing perspective, the big banks are not in that bad of a position. Acquiring customers is usually a longer and harder job than acquiring technology. Their big question is “How to provide a next-generation service with a last generation core banking system?” So, who will create the new integrated financial services stack. First for consumers, and then for business.
The other point, which I think is important, is Fintechs are tech heavy but asset lite, no balance sheet. In the world of financial services, the banks that have huge balance sheets that can meet regulatory requirements and have the ability to loan money from those balance sheets to corporates, they are the ones who have a huge scale advantage over Fintechs, even those with a banking license.
Fintechs like ourselves and people in other corners of our industry optimize transaction costs to near if not at zero, so you really have to scale and in the end there can not be that many players. The real profitable business that's left for the banks is loaning off the balance sheet and making money on the capital. As the Fintech world optimizes all of the transaction costs, the large banks with large balance sheets might be actually in a very, very good position because they can let Fintechs optimize all of the low margin stuff and they keep the high margin business.
European regulation, the Payment Services Directive (PSD2) is forcing the banks to open up their account information to third parties to build services on. At first, this looked like it might bring in an open banking environment. But consumers are often reluctant to switch banking providers and open banking may just allow established banks to off-load unprofitable current account services while keeping the deposits and the money making loan activities.
The reality is corporate customers are not going to go to multiple places to get finance or overdrafts, and another place to get short-term loans and another place to get a real estate loans. Corporates like to come into a single bank to get all those services.
A business wants to come to one place. So the digital transformation of corporate banking is taking longer. The challenger banks are really at the level of very small business, you know, at helping sole proprietors and small businesses, people who sort of run their business using Intuit, Sage, NetSuite, or one of those packages.
If the core accounting system is Oracle, SAP, or anything that's really substantial, the likelihood that that firm is going to end up buying lots of different little apps to run their banking is fairly low. The question then for the big banks is, as those alternative services put on cost pressure, to what degree are they going to respond. They can be slower; business banking takes a lot longer to transform than consumer banking.
Sounds like a lot of fragmentation. Do you see any consolidation anytime soon?
The way Fintech has grown up is that we’ve optimized different parts of the financial value chain: cross-border payments, wealth management, current accounts, mortgages etc.
The current issue in Fintech, is that separate optimized services are massively inconvenient for consumers and businesses. At some point, all these things have to be reintegrated and the question becomes, who will manage the point of reintegration.
Goldman’s Marcus is a good example. It starts as an innovative platform backed by the assets in Goldman Sachs with all the money they can put behind it. They can then become a platform for delivering services from other Fintechs. I think that's what you see. Santander, BBVA, Credit Agricole and other banks are going down the same path.
You'll see Fintech massively consolidate. Either a few guys will become huge because they start to go out of their niche or everything else will be delivered by the banks. Remember, this happened -- I was around for this in capital markets. Twenty years ago, when you started to get the proliferation of trading venues in equities, all sorts of new places to trade and massive price reductions in the cost of trading. Ultimately, the exchanges and the big banks consolidated everything and brought it all back. Capital markets went back to the large players with a few survivors
In Part 2 tomorrow, Mike will talk about the China influence on Fintech, Blockchain and other disruptive trends
