That begs the obvious question - what is fueling this growth and success? In many ways, it's a perfect storm - a confluence of factors that merge together to create a powerful front sweeping through financial services. Here are the nine key factors fueling this Fintech storm:
1. Stable, predictable business models
Whether it’s term credit, interchange and other payment fees, transaction fees or fees on AUM and float, or SaaS subscription revenue, business models in Fintech are very clear, stable and predictable. And nothing attracts investment capital like predictable yet high growth businesses.
2. New technology
From micro-sized card readers, block chain technology, and distributed smart ledgers, to advanced machine learning software, new technologies are coming at a rapid pace in Fintech, while traditional financial services firms are still wrestling with such staid concepts as cloud computing and mobile.
3. Big data and the cloud
The ideal banking relationship was forever captured in "It’s a Wonderful Life." Unfortunately, no baby boomer or Gen X banking customer has ever known such a personal, respect-based, 1:1 relationship with their bank. Ironically, the Internet and advanced analytics have made it possible to know a customer better that even Jimmy Stewart's character. In fact, millennials don't just expect personalization, they demand it. A great example of this is Earnest, a next gen online financial firm who has a remarkable net promoter score, because they leverage data to know their customers and treat them like personal acquaintances.
4. Very low customer acquisition costs
New Fintech entrants are omni-channel from the start, able to leverage all the latest and greatest quantitative and digital marketing tools, combined with low friction landing and on-boarding sites, often free of heavy expensive regulation. Consumer-facing Fintech companies are seeing acquisition costs 1/100th that of community banks or national bank branches.
5. Very low cost to deliver exceptional service
Much like acquisition costs, servicing costs in Fintech companies are also dramatically reduced while usually (and ironically) providing significantly better service. Most are fully automated or use human-in-the-loop computing, versus huge call centers with massive investments in archaic technologies. And when a customer does need help, the Fintech company knows far more about who you are and what your problem most likely is than the best automated traditional financial institution.
6. Scale happens fast
Especially in the consumer touching parts of financial services, Fintech companies are some of the fastest growing companies in tech. It's a highly tech-leveraged business that emphasizes smart automation, big data, and machine learning, over human-driven processes – the same model that other legendary, rapidly scaling companies like Uber, AirBnB, Paypal, Amazon, etc. employ.
7. Gen Y
2008 and the Lehmann asteroid strike soured an entire generation just entering their employment years on the financial services sector, often bitterly. For an industry so based on trust, that event destroyed that trust with a significant segment of the adult population. Also, a meaningful portion of service economy workers are millennials, followed by immigrants and minorities, most of whom operate on a primarily cash-basis, creating a large un/under-banked population with significant and desirable economic clout. And of course this generation embodies "digital native;" they wouldn't dream of walking into a bank or a Comcast service location to deposit a check or pay a bill - that's what their phone is for!
8. Regulation
Generally speaking, regulation can put a damper on growth and capital available for innovation. Regulations are usually created to control and protect, to slow things down. In a perverse way, regulation has actually caused a huge acceleration in Fintech innovation, only not so much to the benefit of the incumbents. Regulation has slowed and hampered the large financial services firms who are the focus of regulation, and in many categories such as small business credit, consumer finance, and payments, regulation has closed off huge previously-served markets. And no large market is going to go unserved for long. It has thrown open the door to huge markets for fast, nimble, tech-first startups.
9. The empowerment of small business
Small businesses are operating in a golden era. A two person company can have the supply chain sophistication of a Global 500, thanks to Alibaba and others. They can market and fulfill globally like a Fortune 500 company with a stable of Madison Avenue ad agencies, with the likes of Google, Yelp, eBay, Amazon, etc. They can process payments like a 1,000 store mega-chain thanks to Square and Stripe.
It's no wonder that these small businesses expect banking and financial services to match. Yet, not only are traditional financial services firms ill equipped to provide scalable services to small businesses, but post-2008, regulations have made it unprofitable to provide many of the services small business want and need.
Another recent Jamie Dimon quote that may sum it all up best, "Silicon Valley is good at getting rid of pain points," Dimon said, "Banks are good at creating them. In a capitalist society, you better be looking for ways to do things better, faster, and cheaper."
