I was contemplating the state of financial technology on my way back from a Finovate conference not too long ago. The conference has come a long way since the first one I attended in the basement of a midtown Manhattan hotel circa 2007. Unfortunately, our definition of FinTech has not. As a corollary, there is equal confusion and disagreement on the capitalization of the word. At the risk of making one of my most frequent talks obsolete, I’d like to address “What is FinTech?”
An analyst, who will remain nameless because I respect his other work, recently defined FinTech as “Financial + Technology” and acted as if it was a new phenomenon. Um…OK. If I’m Fiserv, FIS, JackHenry, D+H, Bottomline Technologies, or Oracle sitting in the audience, I’d be raising my hand to say “don’t call it a comeback, we’ve been here for years.” So what does FinTech mean today vs. history and why does it matter?
A New Definition
U.S. Bank’s Chief Innovation Officer Dominic Venturo and I did a fireside chat on “Bank /FinTech Partnering” at an American Bankers Association Conference last year. In my opening comments I gave my definitions of FinTech and it appears to have resonated with both the suits (aka bankers) and jeans (techies) in the room, so here goes.
First, my definition requires the need to distinguish between the lowercase “fintech” and the uppercase “FinTech”.
The lowercase “fintech” is commonly used as code for a startup company operating in the financial technology industry segment. Yes, many of the new players taking the field heavily leverage technology but the utilization of technology in conducting financial transactions goes all the way back to marks on sticks to track trade balances. Different times, different tech.
As for the uppercase “FinTech”, consultants and investment bankers commonly use the shorthand of ticker symbols, abbreviations, and portmanteaus to conserve PowerPoint space (think Pharma, BioTech, MedServ, MedTech, FinServ, etc.). Fair enough, “FinTech” describes a (booming) industry segment, but I think it’s more than just that.
In the old days, the delivery stack starts with a customer (business or consumer), a service layer (requiring a branch visit or phone call) and an execution layer (a digital version of tally sticks tracking changes to ledgers whether that be dollars for shares, yen in one account for euros from another, or an accrued liability in exchange for some physical goods). The tech infrastructure was hard-coded to structured processes and was dependent on the service layer to execute these processes.
Unleashing the Potential of FinTech
Enter a world where the service layer is a support function rather than a dependency. When the customer, or increasingly, the customer’s technology, interacts directly with the bank’s execution infrastructure, incredible potential is unleashed. It turns out that the human service layer is great at being personable, not so good at being personalized.
Machines might not smile at you, but they do know your most frequent transactions, your preferences, and other insights tailored to your unique customer, account, and transaction data. Machines are also capable of executing granular, real time analysis to generate highly tailored product offerings. The efficiencies also open up new customer segments, and new channels and price points that simply aren’t viable when an expensive, rigid service layer sits in the middle.
Last, removing the human dependence allows transactions to be embedded in other digital processes. While I’m sick of the overused Uber/Lyft example of embedded payments, I did get yelled at by 2 different Yellow Cab drivers during Finovate when I attempted to leap out of their cabs without paying.
This is a part of what Ron Shevlin describes as the platformification of banking; the bank as a function rather than an entity.
So, beyond the name of a booming industry segment, a big part of what’s actually driving that boom is that “FinTech” — as a market opportunity that has attracted over $60 billion in investment capital over the past few years– is the disaggregation of the service layer. FinTech is the ability to execute transactions directly. The FinServ layer doesn’t go away, but it sits to the side as part of customer service rather than in the middle as part of delivery.
If you’re a lowercase fintech (startup). you need to be focused on FinTech; the cost of venture capital is too expensive to build a service layer.
In the end, it doesn’t really matter how you spell it, if JPMorgan, Goldman Sachs, and other major players are telling Wall Street they are FinTech companies, we are not just in the realm of startups anymore.
An earlier version of this post was first published on Medium