I journeyed into the heart of FinTech and Here is What I Learned — Part 1
Why are some dinosaurs, like the journalism industry, going extinct but the banking industry is just now, in 2019, focussing on a technical revolution? What are the landscapes, opportunities, and challenges in the FinTech sector? Since the start of the year, I’ve met with marketing professionals, VCs and executives to answer these questions. I’ve interviewed for roles at FinTech companies and attended meetups. This week, on the blog, I’m sharing an introduction to the industry and an overview of what makes FinTech unique from a technology-adoption perspective.
FinTech — that’s FIN like dolphin 🐬 not FINE like wine 🍷 — is the part of the startup world that makes software products and apps for the financial services industry. It’s one of the main industries that Silicon Alley in New York serves along with media and business services. Obviously, New York City is a major center for US banking and finance and — like mushrooms after a rainstorm — there are FinTech’s popping up all over to serve individual and institutional investors in new ways.
The financial industry has always been a sort of shadowy figure in my life, mostly circumscribed by my experience with the 2008 financial meltdown, the 1987 movie Wall Street and the finance bros in nice suites who occasionally wander into the East Village to drink. But, I have a passion for personal finance and investing, and I am a data nerd. So, now that I live in New York, FinTech seems ripe for a top-notch product marketing consultant such as myself.
FinTech is made up of a legacy industry newly preoccupied with technical transformation, and is relatively late to the digital transformation game. After all, even the taxi industry has been “disrupted.” But, this means we have a fascinating front row seat at a legacy industry on the verge of technical transformation. Perhaps.
First of all, the finance industry is flush with money. Finance, insurance, and real estate combined make up a fifth of the US Economy. In 2017, the American banking system was worth 17.4 trillion dollars. A trillion is a million million — that’s 12 zeros.
Putting it another way, the financial industry has fantastic margins. That’s MBA speak for making huge profits from the products and services they sell. As a result, in FinTech, technology is a vitamin and not a remedy. In other words, technology can make the financial services industry better, but they are already doing pretty darn well. So, this explains, in part, why financial services has been slow to adopt new technologies.
Second, industry leaders may fear disruption and feel threatened by technology. Take, for example, consumers’ shift from relatively expensive managed investment funds — where highly-paid managers handpicked securities to invest in — to electronically traded funds (ETFs) where the algorithm does it for you. ETFs are cheap and easy to use, and they cut out the financial advisor middleman/woman. In this case, technology was great for the consumer, but not so great for the industry.
Third, the financial services industry is heavily regulated by the government. Compliance, privacy and security are major concerns. After all, finance is one of those sectors that matter deeply to individuals’ welfare, like healthcare. For instance, financial information is similar to health information because people and companies make important decisions in their lives based on the data they have about their financial situation. Gaining and keeping consumer trust is critical. In fact, one FinTech company, OpenFin has the tagline which articulates the unique needs of FinTech: “move fast and don’t break things.”
What even is finance?
According to the government, the financial services industry includes the following types of businesses:
- Banking — includes both consumer banks, like Bank of America or Wells Fargo, and Investment Banks like Goldman Sachs
- Asset Management
- Venture Capital — or VC as they say in Silicon Valley
- Private Equity — Called PE by people who think they are fancy
FinTech intersects with these traditional businesses in a variety of ways. So, the first confusing thing is that some FinTech players are trying to serve the existing industry, like services that provide data for banks, but FinTech also includes others trying to undermine the existing industry, like cryptocurrencies or companies trying to replace ACH with real-time digital transactions.
The next complication with FinTech is the range of technologies. There are many different tools and use-cases thrown into the FinTech bucket. This includes B2B and B2C products, developer tools and middle layers and new technologies, like blockchain. If that’s not enough, financial services are complex and money can be a fraught subject.
But, in general, most FinTechs create products and services that enable companies and consumers to create efficiencies rather than creating new tools from scratch — although, there are a few new tools, too.
Who is at the party?
Here’s a quick round-up of what you can expect to find at a FinTech meetup in New York.
- Operating systems and developer tools
- Developer shops and agencies that build financial tools and applications
- Many different financial products: investment, consumer banking and credit and lending, financial products like
- Apps Acorns and Stash more in line with consumer
- Startups that originate loans like Climb and Better
- Business enablement — billing or whatever
- Personal finance
- Blockchain and cryptocurrencies
- All the companies that deal with delivering data, analytics, and visualizations
- Giant companies with enterprise technology products that sort of relate to finance through data (Bloomberg)
- Financial news and media (also Bloomberg)
- Security managers that use the tools from Investment Banks, banks that serve businesses and individuals, funds (mutual funds, retirement funds, family offices)
One way to slice it is to think about FinTechs that service traditional banks versus startups that compete with banks. Another way to think about the industry is there are FinTechs that sell products from the bottom of the technology stack all the way up to the applications consumers use on their iPhones to save $0.45 cents after swiping their card at Starbucks.
Have your eyes rolled to the back of your head yet? Many people — like software developers — who are excited by the casual, hack it, geekdom of startups might be put off by the staid corporate cultures often found in the banking industry.
Generally, the tech and startup community in New York is much much smaller than in Silicon Valley. The talent pool is smaller, but there are professionals from other industries like finance and media flooding into “sexy” startup roles, which have social cache. What this looks like on the ground is that people at FinTech meetups wear suits and ties; there are no hoodies here.
In my next post, I’ll explain the market trends that shape FinTech. Follow me on Medium or LinkedIn and post your FinTech questions, below.