Finding Growth in Fintech and Payments
It is obviously true that technology has changed the supply of financial services. The rise of the internet, smartphone, cryptographic techniques and a range of other critical inventions have allowed innovation in the provision of financial services, the business models that underpin them and consumer expectations of what’s possible. So, given that there are so many points of innovation available to financial service providers aiming to disrupt the market, why are the growth outcomes for investors so variable.
When considering the potential for disruptive innovation it is important to distinguish between those things that will actively drive change in the market and those require a great deal of marketing effort and investment to gain traction. For example, there is often a view that because a service is cloud based, and therefore has a lower cost than other ways of doing the same thing, that it is inherently attractive to the consumer. However, the costs savings that cloud based technology engineering provide, do not radically shift the price of the service being provided and will not cause customers to actively embrace a new service. A fintech looking for growth, without buying market share with investors funds, must offer a product that is inherently attractive to customers. One that they are willing to pay for from day one and that they take-up easily. A slight reduction in the price of an otherwise undifferentiated service will not scale.
Without exception all internet-based success stories have offered a free service initially with the hope that it can monetise the resulting “customer” base. All too often it turns out that what investors have bought is an expensive mailing list and dreams of revenue growth. So, technology as a cost driver for change in financial services is important but it’s not going to drive consumer adoption. This is especially true in a market like the UK where most customers receive free current account banking and price competition is not a useful marketing tool.
Perhaps technology can produce new and exciting ways for customers to interact with their financial service provider. It is true that the early part of the 21st century the rise of the smartphone and associated apps the customers’ ability to self-serve on digital devices they had paid for, opened new possibilities to provide financial services and serve customers far more cost effectively. Legacy banks, dragging their legacy tech stacks and thinking behind them, couldn’t access this innovation and in that gap, disruptors entered the market with app-based banking services that transformed the landscape. Since then, fintechs have worked hard to use every available bit of data to make banking more personalised and immediate for their customers. However, legacy banks have not stood still and have embraced the technology and thinking needed to deliver equivalent services to their pre-existing customer bases and this interaction advantage has largely been taken away from the disruptors. Investments that rely on maintaining “app-advantage”, especially for stand-alone financial service offers, will become mundane quickly and fail in the market.
Technology can positively impact processes that currently hold back the growth of a financial service providers. So far fintech has focused on applying the benefits of modern technology engineering methods to address transactional activities and mundane processes that were the low hanging fruit for the disruptors. We’re now seeing attempts to deal with harder stuff that is often the primary cause of poor growth rates or caps on growth for fintechs. Although there are many examples, risk management during all aspects of the operational of a regulated business, and customer support are notable challenges. Although technology has aided advances in transactional risk management it has yet to make substantive differences to the board level experience of risk management outcomes. A regulated fintech will find that its ability to on-board customers safely and then manage their activity afterwards is no better and often worse than their long-established legacy bank competition. Technology can help and it will become more powerful but, when it does that tech will be available to the competition at the same time, and the advantage will be lost. Equally, customer service, where the traditional methods have been found wanting, especially call-centres, is a challenge for fintechs as they try and grow beyond the tech-savvy Gen X’s into the mass market. We often see growth curves that show rapid uptake in this demographic only to flatline once the proposition meets their parents. While it’s possible to build a profitable financial service business on a small customer portfolio, it’s very much harder than having an approach that addresses the entire market. Customer service remains an area where technology offers new and more effective ways to provide it but, there are limits to its usefulness. Fintechs that do not have a plan for addressing these critical growth inhibitors will struggle to achieve scale and are likely to keep needing more investment before they can move into profit.
A key area of technology benefit that is often overlooked by investors but is fundamental to success is the ability of the tech to deliver new products quickly, safely while maintaining compliance. There are many operations where the technology that supports the business was brilliant on day one but had fossilised quickly and become as cumbersome as the legacy tech that their rivals are using. FinTech’s should build systems from day one that are product led and able to deliver new functional outcomes quickly. This goes beyond being able to put out a new app screen or web page – that’s a basic ability that all players should have. It’s about delivering tech that delivers demonstrably complaint product outcomes automatically and quickly. A rapid product development process followed by 6 months of compliance testing won’t allow a fintech to zig-zig its way through the product minefield quickly enough to meet market need when it is present. Tapping into these market moments is a key source of growth.
Beyond all technology considerations the greatest challenge to fintech performance is the underlying business model that’s being pursued. It’s easy to think that a quicker, faster, prettier version of the last decades’ financial service is disruptive and will be drawn into the market at scale with little marketing cost. Taking decades-old card scheme business models and building new services on these old rails has a place in the market but the degree of innovation is very limited. There are large exploitable niches, and these have been found, but there is a limit to disruptive growth because of the dependency compliance with the necessary card scheme rules that create the integrity of the global card schemes.
Business model innovation is hard because all financial services are constrained by regulation and the infrastructure for moving money between parties in many cases. Finding new ways of generating new revenues from financial services or radically changing distribution and sales costs is fundamental to the success of any fintech aiming to grow beyond sub-scale and into profitability. The focus on embedded financial services and the rise of crypto-currency based ideas are obvious examples of this and there will be other new models that emerge over the coming years.
Steering current portfolio investments in the direction of these innovations will require new skills. The incumbent executive team, especially if they are also founders, will need to embrace the change and let go of their original vision. This can be very difficult and take too long, leaving the business stuck between its past and its future and unable to move forward. It requires vigorous intervention by investors in their investments with the expertise behind them to make the change quickly and safely.
