• Tim Alvner, CFO at Kuchi Inc


• 17.05.2016 12:45 pm
Fintech

I am honored to have been invited to speak at a panel during Innovfest unBoundin Singapore regarding trends in fintech globally. On top of this Kuchi and our coming product HiHedge has been granted exhibition space at Marina Bay Sands for the duration of the conference! This is pretty awesome, and I like the topic so here will deal in greater detail with the speech topics I’ll bring up at Innovfest! Let’s dig in!

The state of, and differences between fintech in the US, Europe and Asia?

Fintech is booming, and Asia is powering up a sprint on the leader, the US. With US$4.5 billion raised in 2015 in Asian investments, out of US$19.1 billion globally, Asia is betting hard on this. Especially when comparing the growth rates – near tripling in Asia - it is aggressive even in a market growing at 60% globally from 2014.

The United States is leading the game – not just in terms of size of funding. They have an advantage in the maturity of the sector, and also in terms of their diversity and type of business/consumer problems that they are solving. The US has over the last few decades had a much stronger financial sector (Hello Wall St.!) and consulting-, legal-, and operational service sectors of which the financial sector has been one of the top clients. There is simply such a strong breath of talent, people with enough money to be able to bootstrap (go without external funding), and entrepreneurial culture in the US that enables a strong fintech startup ecosystem to grow. On top of this the size of the ecosystem does two things: 1) it allows people to specialize, which makes it more likely that you can start a company and run it successfully in a niche, and 2) it creates a breadth of connections and clients which are all available immediately to the new firm.

In terms of the specifics of the market, you simply have a stronger B2B story in US fintech. This is mostly because the entrepreneurs there can draw on actual experience of working inside a financial institution or a company servicing them. Blockchain / distributed ledger innovation is being driven by the same forces. Blythe Masters’s Digital Asset Holdings is one of the best examples of the nexus of payment technology going all the way to operations in the back office of banks and stock exchanges! Several other companies are attacking all B2B offerings between and on the side.

Europe is much, much narrower in terms of fintech. Largely, one can say that fintech in Europe is very, very focused on payments and payments-related issues (authentication, processing, management and aggregation). Germany does however have an added focus on banking (lending, digital banking access) and London is starting to see an asset management sector slowly pop up.

To a large extent, the payments focus I think is due to having a single market with in some ways different banking and payment systems, and less of a deep and wide pool financial industry talent to feed off of. Although sounding sad, it does bring Europe a focus and solutions that I can foresee will be very important in building broad financial inclusion.

Broad financial inclusion however, is Asia’s Tour de Force.  Giving access to the unbanked. Finding out how to score credit for thin-file clients. Offering SMEs free B2B tools to run their businesses more effectively. And that’s just in the accelerator I am in! (Shoutout to Cefy and Banhji.) Huge new demographics will be coming into the financial system and will need services that banks are not operationally set to deal with. This is most likely to play out in the B2C space where Asian entrepreneurs have deep experience of the actual end-user problem.

Couple this with Asia’s affinity for- and success with platform companies and you have an incredible mixture. Investment services on your chat app? Tencent’s WeChat does that at a time when Facebook is asking itself if chat-based commerce makes sense! Immediate payments in-app? Welcome to… well pretty much every Asian chat app. You’re a business and need financing? Were you using Alibaba in the last few years? Chances are that their big investment in Ant Financial gives them an opportunity to offer you a loan based on your Alibaba activity!

If you're innovating on a platform, the world can be yours! That applies to fintech and elsewhere, but fintech is simply so hot now.

So where is the global fintech space going?

I think the market will play out differently in different parts of the world because it’s being led by vastly different players!

The US and Europe is led by the specialists, all essentially trying to do the services that financial institutions need (or some of their internal functions) but better. Better in this case means more efficient. Better in this case means lower cost. It's good enough to make everyone happy.

In Asia, financial entrepreneurship is largely about doing things differently. Use different solutions altogether and run them on a platform / app instead of jacking in to a chain of financial operations that is inefficient. But Asia is also largely in that stage of growth where large conglomerates can exist, and – by power of brute force, market recognition, management experience and money – are able to simply bring in talent in any field and have a competitive advantage. (This happened in the US with GM, Ford, Motorola, and large parts of Europe’s industrial titans too a few decades ago. Japan’s companies are largely still looking like this.) The execution of specialized tasks and need for deep niche understanding is simply not high enough in these new markets where there are few competitors.

Asian platforms have all the width and reach you’ll need as an innovator, and they will be your most logical partner. Platforms are also the biggest competitors for incumbents since they can incorporate both scale and speed. If you're a financial institution you shouldn’t be afraid of opening your e27, TechinAsia, TechCrunch or Wired for fear of seeing the competition. You should be petrified by the Asian companies that Bloomberg and Reuters cover! These are companies like Snapdeal & Flipcart in India; Baidu, Alibaba & Tencent (BAT to China-watchers) in China; and Rakuten, DeNA and LINE Corp. from Japan. These players already have reach, payments, data analytics, and a plug-and-play style platform ecosystem. As a startup, why work to build any of that instead of putting 100% focus in innovative, problem solving products and services?

Musings on Machine Learning in finance:

Machine learning will probably make high-paid, routine work obsolete. Unless customization is of the essence, and public data is scarce, large swathes of the time-consuming parts of investment banking, consulting, and accounting will go out the window. Get ready to figure out how you survive in this world, either by building experience or scale. Imagine a machine-learning algorithm going through all of PwC’s consulting database? All their accounting audit documentation? All of Goldman Sachs’s primary market deals database? The end-job still requires strong sales and deep understanding of the client that a human will still need to perform, but all the man-days spent crawling through and filing documentation are numbered.

Will banks face an Uber Moment?

No. If that happens that will be named whatever the name of the company is that disrupts them! Let’s compare use cases:

1. A guy hails a cab on the street. Problem: get from point A to B where B is close to A, in a short time. Possibly also that the person cannot drive or needs to do something else in the meantime. Possible to solve with drivers. The incentives (for the two-sided market place) and regulation are tricky, but providing the service is easy. Duplicate for the use-case being checking in at a hotel. (Person needs space for 1 night, figure out incentives for people with spare rooms, circumvent regulation, and go.)
2. Someone posts a classified in a paper. Problem: Buyers and sellers, employers and employees, potential friends, romantic partners, etc. can’t find each other. Possible to solve with online bulletin boards that include profiles. A weekend of coding and problem solved. Add people wanting to advertise to those users and you have a business!
3. A professional walks into a bank. Problem: Well you can't make a simple problem statement. Which in a million of the problems a bank can solve is this client interested in? Solving any of the problems probably requires the integration and cooperation of several internal bank departments.

Innovation in banking will happen at the level of the B2B providers to the financial institutions, or potentially in individual bank units. It will be death by a thousand cuts if banks aren’t quick to buy up the innovators before they go to platforms. There will not be one Uber Moment, simply because banking is integrated and complex. Banks have a choice now of whether they want to be Android and provide a platform that works for both producers and end-users, or if they are content being like print newspapers and complaining about innovation being too fast for them.

Let's see what some of the Asian financial centers, like Tokyo, Mumbai, Shanghai, Hong Kong and Singapore can cook up in terms of driving fintech innovation!