Blog by Feargal O’Sullivan, Chief Executive Officer, USAM Group (An EACC NY Member company)
Banks and Brokerages talk a lot about all the new technology they’re working on, but in many ways, they seem to be actually holding change back, not ushering it in. FinTech is supposed to be changing the world of finance, so why do we still get checks, and why do they still take three days to clear? Financial Services was one of the first industries to embrace, and benefit from, the use of computers; even before the Internet and mobile phones, it radically changed our lives. Modern credit cards couldn’t have happened without the Mainframe computer and we rely on credit cards more than ever today. The fact is that for many years now, the unique service that banks offer has been nothing more than the sum of their technology systems and the networks linking them together.
Over time, this industry continued to lead the world in showing what could be done with computers. My first ‘serious’ use of the Internet was online banking in the mid-1990s. You could place stock trades online before you could buy a book on Amazon. All the way up until 2010, trading firms were pushing Intel and Cisco to squeeze more and more performance from their servers and networks so that their custom-developed applications could trade more, and trade faster.
Meanwhile, the Internet enabled a wave of innovation as revolutionary as the steam engine and very quickly almost every other industry caught-up with, and ultimately surpassed, Financial Services. Amazon pushed cloud computing; Google pushed Big Data analytics; Apple pushed user-friendly interfaces, etc.
I see three reasons why innovation in Financial Services has stalled:
Legacy Systems: banks and brokerages still rely heavily on Mainframes to keep track of our money. With their guaranteed transaction capabilities and extreme reliability, Mainframes are still central to money storage and transfer. Unfortunately, they are expensive, inflexible, and batch oriented – in short, they aren’t suited to the instantaneous world our beloved Millennials expect in everything these days. But let’s face it, would you like your bank to risk losing your savings in a hacked blockchain incident (see Ethereum Classic)? I know I wouldn’t!
Regulation: it’s polite to say that Wall Street took financial product innovation too far in the lead up to the Great Recession. In fact, the regulation/deregulation pendulum had swung so far into the deregulation side it had gone off the scale; it was to be expected that the pendulum would swing back, and so it has. For the past 5-years, regulatory compliance has been the biggest growth sector in this industry, and the current lack of political certainty is further postponing any innovative breakthroughs.
Oligopoly: one of the perverse side-effects of the increased regulation is that it is more expensive than ever to enter this industry… and that suits the existing firms perfectly. There’s less need to innovate since government regulation is now a de facto buffer against start-ups changing everything the way Internet firms did in other industries. Furthermore, less competition in finance, means less competition in technology vendors serving the industry because any vendors that hits critical mass, can end-up owning their particular spot (e.g. the Bloomberg Professional desktop).
Despite that bad news, or maybe because of it, it seems clear that something is bound to change and it will probably be big. So, here are my thoughts on what innovative start-ups can do in order to break-through and be successful:
Work with the banks, not against them (if you can):
Unless your company already has access to the Federal Discount Window, you can pretty much assume a mountain of legal and regulatory work before you will be authorized to handle money in a meaningful way (and don’t assume your cool blockchain idea won’t ultimately be corralled by the world’s taxing authorities – even Donald Trump pays some taxes). Worse, if you do try to comply with all those regulations, you might find that your idea won’t work anymore. Meanwhile, if you happen to invent a revolutionary way to smooth the flow of money, or increase access to capital, you can expect massive push-back from the existing firms (and people who work there) that see their empires at risk. Finally, in all likelihood you’ll need them to cooperate with you so your idea can reach its intended audience, therefore be prepared to include them in your plan… and the upside if you succeed i.e. ownership.
Manage your money to extend your runway:
Most founders are optimists but they eventually find out that their idea takes longer, and costs more, than they originally planned for (you probably wouldn’t start the firm if you really knew what it was going to take). Changing an age-old industry like finance is going to take even longer. About the only thing that is fully in your control is your overhead, so manage it carefully to extend how long you have before hitting the bigtime.
Be crystal clear on your core value proposition:
You only get one chance to make a first impression, and you’ll be lucky to get even a handful of chances to make any impression on the banks. Most banks are full of “the smartest people in the world”. They take meetings so they can see what you’ve got and then tell you how far ahead they already are. You must be able to perfectly articulate the challenge your clients are facing, how you address it, and what the benefits of your approach are, before you take any important meetings.
And always remember: if it was easy… everyone would be doing it!
The views expressed in this article are those of the author alone