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Disruptive Fintech: Bits Of Destruction Hit Wall Street. July 11, 2013

Posted by Bernard Lunn in capital markets, SAAS.
Tags: , , , ,

Bits of Destruction is a phrase coined by Fred Wilson of Union Square Ventures to describe the disruption that incumbents face from digital ventures whose primary costs keep falling thanks to Moore’s Law.

Consumer finance has already seen successful ventures such as Mint. Will the same thing happen in the B2B markets for financial services aka the capital markets aka Wall Street?

At the 30,000 foot level, this seems inevitable. A financial transaction is simply matching buyers and sellers (or lenders and borrowers). The Internet is very good at that.

This “disruptive fintech” market is moving fast. Already $10 billion has been invested in disruptive fintech ventures.

Fintech (financial technology) used to mean selling financial technology to financial institutions, who used that software to provide financial services to companies and consumers: but that game is in its final innings and the winners have already been declared. The new game is providing financial services directly to companies and consumers via software-driven networks. This game is in its first innings and has decades of opportunity ahead; most of the winners have not been declared, most of them have not even started yet.

For decades, the big financial institutions ruled. They could invest in IT and their scale made them attractive vendors to the Global 2000 scale companies and they needed scale to reach consumers via physical branches. But then three things happened at the same time to disrupt this status quo:

1. The financial crisis made the big financial institutions “pull in their horns”, making them more cautious. Not only are all the usual organizational antibodies fighting to stop disruptive innovation. That is standard innovators dilemma. But the financial crisis means that even if a CEO musters the courage to fight those organizational antibodies, she will be constrained by their balance sheet, aggressive regulators and nervous investors. The absence of the big financial institutions opens a window of opportunity for other entrants.

2. It became dramatically easier to build financial technology. The combination of the cloud stack and open source software has taken a great big ax to the cost, timescale and risk of building financial technology. This is classic 10x disruption. What used to cost $10m and take 3 years now costs $1m and takes 3 months.

3. It is possible to reach customers directly online and through their smartphones. The low cost of building fintech is meaningless if the big ¬†financial institutions are still the only gateways to customers. You would then still need a lot of Rolex wearing, Beemer driving sales guys to sell to those Big Banks and that cost has not come down at all. But now that nearly 50% of the world’s 7 billion people have mobile phones that get smarter all the time, it is possible to reach consumers of financial services directly. And doing this digitally can be very cheap. Doing this well is still a mix of art and science that very few people understand, but that knowledge is propogating rapidly. The key point is that Big Banks are no longer the only way to reach consumers of financial services.

These disruptive Fintech companies all have software at their core, but they don’t look like what we think of as software companies. They don’t license software, they usually look to their market like a digital venture or a business service or a regulated financial institution.



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