Our banking and payments systems underpin virtually every other entrepreneurial activity. We all are out there trying to make, grow and spend money. That being said, instead of having led and enabled the innovations we see in other sectors, to a large degree banking has only begrudgingly followed along behind the new order of things in an increasongly tech-led world.
I was very grateful to be invited to attend Money2020 in Las Vegas at the end of October. In under 5 years this conference has become quite simply enormous. There were over 10,000 attendees, 3,000 companies from 75 countries and over 1,000 CEOs in attendance. The CEO of NASDAQ noted that CEOs of firms worth over $1.3tr were in attendance, and the conference was the venue for the closing NASDAQ bell-a conference that spread across multiple floors in a Las Vegas conference venue that must seem implausibly large when empty.
There are undoubtedly a large number of mid-sized firms there, but my attention got stuck on the startups and the behemoths. They seem such unlikely bedfellows. Seeing pictures of bearded entrepreneurs on 40ft screens in a room filled with execs from AmEx, MasterCard, JP Morgan and Deutsche Bank was a trip. And while Jack Dorsey is generally mentioned these days due to being back at the helm of Twitter, he is CEO of Square too. So my notes and reflections will trend towards the extreme ends of the conference attendees, but I believe the points are fairly universal.
1. Forget Bitcoin, you need to understand what the blockchain is
If you are late to the party, then the blockchain is a byproduct of Bitcoin developments that is seen as having huge value across Financial Services. Personally I am waiting for Michael Lewis or someone equally gifted to fully explain this in layman's terms. By moving away from single centralized databases of ledgers, this is seen as driving down costs for a range of pieces of our global and archaic financial services framework.
An early usage promised pretty soon shall come at NASDAQ, with their Linq Platform which shall use blockchain technology in managing the trading and share registers of private companies listed on the NASDAQ Private Market. THe amazing data point was that clearing would be 20 minutes, versus 3 days or more for all public share exchanges.
Given the huge number of new debt and equity crowdfunding startups, expect to see many of these leverage blockchain to help with similar complex and costly processes.
2. Big banks still are not aligned with their customers, but new market entrants are-and are winning market share
I'm pretty vocal on my assertion that there are so many agency issues in large financial institutions that make it really hard for them to compete against new players. When you have swathes of middle managers programmed to think and make money one way (dinging their customers with whom they are supposed to have a long term relationship built on trust), it is hard for even the most visionary CEOs and CTOs to make inroads on changing business models. Taking risks and affecting short term revenue sources in a world obsessed with quarterly numbers makes tampering with legacy business models pretty hard if not impossible.
I'm not here to solve that dilemma-but what I heard time and again was big bank executives claiming that things are different even as we all continue to experience the same bad practices across the retail and corporate banking space that allowed the FinTech innovation boom to occur in the first place.
As long as we have excessive real estate portfolios, tellers, wire fees, paper checks (they disappeared in Europe fiveyears ago), ATM fees and a lack of progress in enabling real time and free movements in money, I think the large bank execs would do well to stay quiet on their alignment. Banks are supposed to (in my mind) make money by establishing mutually beneficial long term relationships with personal and corporate clients, and leveraging these deposit bases and their access to cheap capital to deliver returns.
Thankfully a new wave of banks and financial advisors, including Simple, Aspiration, Betterment and Personal Capital are forcing their hands, by offering tailored services, transparency, and an educational imperative that leaves users feeling less like they are being used as a cash machine for their banks.
We also have a deluge of peer to peer lenders popping up everywhere, and the success of many of these points to the disconnect between your old bank manager and his client. Someone else runs the risk numbers at the bank. The new players seem to understand risk and reward better, price it more keenly, and are opening up new channels for businesses to grow.
3. Consumers and business are excited by and adopting innovations in FinTech
I heard a range of reimagined financial products described with passion at Money2020. There were a range of product presentations-15-minute pitches to rooms filled with VC and PE partners and large corporates. In areas such as fine dining (Velocity), debt collection (PaySwag), share gifting (Sparkgift) and personal financial management (Simple) I got excited about FinTech services that have clear value propositions, happy paying customers, and are challenging incumbents to do better.
I came away imagining a time when all my financial transactions can happen through a simpler and more transparent architecture than we have today. True budgeting tools that push people to make sensible medium and long term financial decisions, improvements to the critical financial education they need and universal access to the appropriate financial products for purposes will hopefully arrive and be adopted in the mass market in the coming five years.
4. Big banks know they must adapt or die
It was really positive to see that a range of global banks understand that they are looking to partner and encourage innovation through incubators and similar tactics that allow entrepreneurs to tackle problems without needing to align with current bank economic situations. That is a real and positive hedge for large institutions frightened of their Polaroid moment coming. Having meaningful budgets to use beyond evolving core systems is critical for this to succeed.
We heard from Lloyds, Citi and Deutsche among other big banks, and their actions and the types of people leading these initiatives convinced me they are at least looking for new ways to work with their customers.
5. We are still not ready for ApplePay
One of the few sour notes of the conference were references made to the launch of ApplePay 12 months ago, and its failure to make a meaningful dent in how we behave. With cards offering rewards, and consumers not sure where it is accepted it has clearly been a struggle for acceptance.
6. Businesses are confused by the depth of different payment processors
I can't get my head around why the world needs so many different payment processing middlemen. Now we have further innovation with firms looking to allow people to transact directly without needing to go through intermediaries. But for now, as exciting as that is for those tired with the high levies on card transactions, it has made the market even more fragmented and confusing.
Square, Stripe and Paypal seem to be duking it out for honors in their respective niches, but there are a huge volume of others desperate to get their little slice of every card or non-card transaction. Many are focused on specific channels-retail or online, in an attempt to differentiate. It is hard to see them all becoming meaningful players in the space. Hopefully the one positive is that fees and rates will drop for all, improving the margins for the world's risk-taking small business entrepreneurs.
We generally don't get too excited about banks and banking, but they are critical to our economies, and allowing other businesses to connect and transact with each other and customers. We've accepted lower standards around our money than we do many other things in our life which are arguably way less important. It is great to see that the great catch up is happening, and is being led by some capable and exciting leaders.