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Fintech at the Edge of Tomorrow
By Lex Sokolin, Futurist And Fintech Entrepreneur, Autonomous Research
Mental Model of Digitization
To understand the macro trends of the space, it is essential to start from the beginning. Finance may appear complicated and multi-dimensional, but like any industry, it can be broken down to the basics. In the back of the industry are factories that manufacture financial products. You can think of these as the capital and human judgment required to underwrite loans, select investments, build asset allocations, or issue insurance. The manufacturing of a financial product is the heart of Finance.
In the front of the house, there are “stores” that sell and distribute these products. They take the form of bank branches, financial advisors, or insurance sales associates. Any time a prospect sees an advertisement on the television or launches a bank's mobile app, they are interacting with the storefront of a finance firm. Lastly, the middle office connects the front and back through workflows. Generally speaking, this includes account opening, money movement, risk management functions, compliance, and a variety of other industry-specific operating procedures.
Digitization is happening across each of these functional layers, and within each product vertical. Robo-advisors digitize the storefront of wealth management, and neobanks do the same for banking. Venmo is the storefront for payments. At the back-end, quantamental investment funds and AI-led digital lenders create new products. Regulation technology and robotic process automation make the value chain more efficient overall. For better or worse, unlike the pure tech industry, finance is not an attention aggregator but remains a product-first industry.
Evolution of Fintech Champions
To understand today’s Fintech champions, let’s go to the venture capitalists that fund financial services innovation.
Frontier technologies like blockchain, artificial intelligence, and mixed commerce are transforming the financial services sector into software
A mere decade ago, venture funding was a much smaller portion of overall value creation in the economy. If companies wanted to get liquidity and funding, they would go public on the stock market. Today, many more firms are choosing to stay private longer, with ballooning valuations. Second, the proportion of venture funding dedicated to financial services companies was less than 5% at that time. Consider that in most developed countries, the finance sector is 10-20% of Gross Domestic Product, and similarly, public finance companies are around 15% of the stock market by capitalization. Therefore the story of the last decade is the rush of venture capital to solve this disequilibrium. Today, venture funding dedicated to Fintech has reached over 17% of total annual investment. That is a miraculous re-balancing of priorities.
As a result, vertical brand champions have been built across various products. From digital lending (e.g., SoFi) to money movement (e.g., Revolut) to investing (e.g., Betterment) to insurance (e.g., Lemonade), highly funded consumer-facing companies have been created to own the customer. Unfortunately for many, their focus on underserved populations led them to build unprofitable business models. Each customer costs more to acquire than the amount of revenue they generate over a customer lifetime. As a result, these firms are now rushing to re-bundle products, such that each one offers the full suite of financial products. In turn, this has led to a price collapse in asset allocations, fund manufacturing, foreign exchange, and brokerage. Just like the 50% decline in music industry revenues, the Fintech themes are pushing prices down due to both efficiency and the need for customer acquisition.
Emerging Frontier and Global Dynamics
Of course, B2C digital storefronts are not the only innovation available. Let’s look at artificial intelligence, blockchain, and mixed reality. For AI, the move of financial services to the cloud has allowed firms to unlock their data from legacy, disconnected systems and move it to real-time, API-integrated platforms. The result is the automation of human judgment at scale across financial use cases. Chatbots and voice interfaces can services customers, with some human help of course. Fraud detections machines can sit on millions of daily payments, and correlate and weed out suspicious outcomes. Machine learning can even augment the manufacturing process, and allow underwriters to minimize losses and traders to improve performance.
Blockchain and crypto vectors are similarly improving the operations of finance firms. Shared, mutualized infrastructure for money movement, settlement, and ownership is being built both by private enterprise consortia like Hyperledger and on public chains like Ethereum. Historically, financial firms thought their data and back offices to be a competitive advantage. Today, these are commodities that will be open-sourced, abstracted, and run at the lowest possible cost. Digital Assets are starting to emerge as a new investable asset class, allowing the distribution of tokenized venture equity, commodities and real estate to many more types of investors.
Finally, commerce itself is being transformed by new technologies. Just as cash shifted to digital rails, and shopping moved from brick-and-mortar to web and mobile locations, virtual and augmented reality will impact what human being buy and how they do it. Already, Alibaba and Amazon are pioneering solutions that digitize physical inventory, allow for payments with computer vision, and let shoppers preview purchases on their phones through mixed reality. New payments companies will sprout to enable these developments with the digitalization of the physical world.
The Fintech world is not standing still. Global competition for talent, regulatory arbitrage, and integration with other industries make this industry one of the most exciting of the 21st century. Asia, the US, Europe, and other jurisdictions have different approaches to fostering innovation, which will yield divergent outcomes. It is a grand experiment that will redefine the lives of billions across the world.