Fintech as a label is becoming increasingly problematic. As humans, we are conditioned to strive towards restoring comfort and safety. One of the obvious outcomes of this is that we react to change by trying to assign new things a specific, known label in order to describe the phenomenon. In that way, we find comfort and a way to manage this ‘newness’.
As a trope to define, bracket and consolidate sets of phenomena, fintech is leading people down cognitive paths that, while comforting to the user, are open to misinterpretation and misunderstanding.
People talk about fintech as if it were something brand new. Very cool. Different. Specific. But if we go back to basics, there is no financial services institution, no matter how you define what they do, that isn’t in the business of fintech. The fact of the matter is that the entire management of whatever each financial services institution provides is done so by the means of technology: trading, transactions, reporting. Of course, paper still exists, primarily in the back office, and physical assets do move, but only very occasionally.
Innovation in financial technology
When we talk of fintech, we mean innovation in financial technology. If we agree with that notion, then we will have moved a very long way away from confusing ourselves and can focus on the three aspects of innovation.
One is innovation in the technology itself. You could be talking about blockchain as an example of the emergence of a set of capabilities that didn’t exist in the past. Two is product innovation, delivering a product or service in a way that didn’t previously exist thanks to technology that you currently have at your disposal. The third is business model innovation. This can be as simple as a startup that creates an offering for travellers to access multiple currencies in frictionless and cheap way. Revolut is the example we all tend to cite, but there are many others. They do it at a profit margin, but it’s fractional compared with the profit margin traditional providers would consider normal, so their innovation is in their business model and how they monetise that relationship.
Why is this important? Because, if you’re the incumbent, their innovation is not for you: you can buy them, or you can emulate them, but you don’t solve your problem. That in many ways is the crux of the matter. We started talking about fintech to define something that’s not what we currently do within the big financial services institutions. It’s not necessarily the best name for it, but actually it identifies that there is a trend that needs a name. Could it have a better name? Absolutely. Will we live with it? Sure. Or will we?
You say potato …
Fintech as a name works. We mostly know what we mean when we use it. Yet, it’s also highly problematic because often it means none of the above. It just means startups in FS.
If you take all innovation, and all technology serving financial services, and bucket it in the very specific shape that looks like a startup (as many do when they reference “fintech”), it’s a misleading thought process. There’s plenty of innovation coming from larger firms, too.
So this technology-powered innovation cannot solely mean startups, but it also can’t be a byword for new technology either. This is because a lot of the startups that are doing very clever things in the FS space, and are creating sticky revenue, are not using emergent technology to do it. They’re using tried and tested technology, but are innovating through the business model or user experience.
With such a confused term, you invariably end up in the conversations I’ve had recently with a number of senior execs, where you can’t settle on anything, because they meander between talking about startups, emergent technology, or both. A large percentage of decision-makers talk of fintech and startups interchangeably. They then consign it to the space of R&D and observation, or potential portfolio-diversifying investments, all of which are hugely worthwhile.
However, it misses the fact that most of the conversation actually needs to be about the game-changers for the business model innovation, the monetisation of relationships, the heart of the business. There are also the shifting expectations of clients, the shifting value assessments of clients and their willingness to pay X or Y, interactions, and most importantly, the configuration of the value chain.
With more and more things not being needed because of technology, and more and more things not being deemed valuable because of technology, and more and more things being possible thanks to technology, looking at that technology alone is really missing a trick.
It could be that the companies that have the biggest impact in making that change happen are the ones that don’t survive. So investing or observing fintech isn’t necessarily going to give you the information or the success you expect.
If you choose to use the term “fintech” to just mean startups or emergent technology, you’re not incorrect, but you have limited yourself to a very, very small fraction of what you should be looking at.
So what’s in a name? Absolutely everything.
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