25 April 2017


Duena Blomstrom, FinTech speaker and creator of Emotional Banking, wants us to understand that FinTech is not just about the disruptors, but actually all of the financial players. This short essay classifies the FinTech ecosystem in more detail and provides a basic guide to the disruption process. Note that some of what I say below is inevitably biased by my decades of designing, building, and managing OldTech.

We can divide companies that use or provide financial technology into 4 groups:

  • OldTech describes the incumbents, primarily existing investment, corporate and retail banks along with insurance companies. They’re typically large, relatively slow-moving, and very profitable entities. And burdened by regulators, legacy IT systems, large branch networks, and the perceived need to protect existing businesses.
  • BigTech refers to the big technology companies such as Google, Amazon, Apple, Facebook, Microsoft, Alibaba, and Tencent. No finance participant really wants to go head-to-head with one of these goliaths.
  • InfraTech is for the companies that provide much of the current technology infrastructure such as exchanges, brokers, payment systems, data utilities, trade repositories, etc.
  • DisruptTech is the group that most people refer to when they use the term “FinTech”. It consists primarily of start-ups that aim to democratise and disintermediate specific financial products and services, often focusing on a better customer experience.

Marc Andreessen, Co-Founder of the first Web browser, was very persuasive in his 2011 essay on why software is eating the world. Finance is clearly one of the industries most vulnerable to disruption by software because its products and services are made of information rather than tangible goods. When you throw in the fact that many financial products and services are very profitable, you can see why this particular market is ripe for disruption.

There are at least 3 major forms of technological disruption, each of which involves creating fundamental value for financial customers:

  • Cost - providing services cheaper than the incumbents. This isn’t just a quantitative form of value - if you can provide a service that was previously too expensive for the majority of customers, you’re democratising the market. For example, providing wealth advice and asset management via robo-advisers.
  • Experience - many of the incumbents have historically downgraded the customer experience, focusing primarily on internal productivity, convenience, and a strange form of branding. They think like …well… banks rather than thinking like experience and service companies. As Neal Stephenson said in his essay “In the Beginning was the Command Line”, Disney does mediated experiences better than anyone. If it understood financial operating models and why people use the banks, it could crush Wells Fargo in a couple of years.
  • Platform - this is primarily about disintermediation. For example, a bank takes in short-term liabilities such as deposits and turns them into long-term assets such as mortgages, often borrowing heavily in the process. So it acts as a middleman, moving excess value held by one group to another group that’s seeking value. Start-ups like Lending Club match borrowers and savers directly. In doing this they can avoid major risks such as mismatched maturities between assets and liabilities. In addition, aggressive start-ups like lending platform WeLab are building tools such as zero-fraud risk management based on big data analytics. Modern algorithms combined with large amounts of data are provably better than the current combination of primitive algorithms, limited data, and prejudiced humans.

The most immediate danger for the incumbents is that BigTech and DisruptTech will unbundle financial services and cherry-pick the high-margin ones. This will leave OldTech with the low-margin commoditised products and services. It will also likely reduce the overall profits of the finance market - which should be good news for society.

Of course, OldTech isn’t waiting passively to be commoditised and ejected from the finance driving seat. It’s fighting back with a combination of strategies:

  • Build - within the toiling armies of banking and insurance worker ants there are some clever and innovative people. Occasionally they manage to break through the overarching culture and produce very interesting ideas and innovations. Unfortunately when you combine regulatory pressure, the limitations of legacy systems, and the difficulties of significant cultural change, then a build strategy is not realistic for most banks.
  • Buy - this can be divided into two parts: buying DisruptTech companies, or buying and integrating DisruptTech products. Most DisruptTech companies come at a high premium once their concepts are proven. But buying and then integrating DisruptTech products into existing technology stacks can be a very useful approach. The customers get the benefit of new technology running alongside reliable legacy technology.
  • Partner - many OldTech companies have chosen to partner by investing money and development resources into promising DisruptTech companies, after the important step of validating their innovation and ensuring that it’s relevant. By helping these companies bring their products to market, OldTech companies can ride the wave of financial innovation.

I’ll leave you with one final thought: how long until the Uber of finance appears, and what would it look like?