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Is fintech just full of froth?

Stakeholders beware: many startup founders don't seem to grasp the underlying business proposition fully.

With S'pore a global financial hub, it's only logical that interest in fintech would be growing quickly here.

FINTECH - short for financial technology - has been one of the hottest buzz- words in the technology world in the last couple of years. Although there are numerous definitions of it, I call it simply the entire space of technology that can enable and facilitate financial transactions.

As such, it is an extremely vast space which could include all financial transactions including trade, loans, banking accounts, payments and transfers of all types (international, domestic, credit cards, etc), accounting, investment advisory, capital markets, risk management, wealth management, and many more.

When conceived in terms of users, it can be technology used by central and commercial banks, financial services institutions, fund managers, corporations, individuals and others.

Why is there so much interest in fintech?

Once the entire scope of fintech is understood, it is relatively easy to understand the reasons for the buzz. In my opinion, the high levels of interest are due to the following :

  • The BFSI (banking, financial services and insurance) vertical has always been a prolific spender on technology. Due to the numbers of transactions, risks in case of non-performance, diversity and complexity in transactions, technology has become the key enabler in driving growth, generating efficiency, launch of new products and compliance. For this segment, spends on fintech are mandatory, not discretionary. The recent acknowledgement by a global bank regarding the state of its technology leading to mishaps is not an exception. And since this sector contributes the highest revenue (in many cases, more than 25 per cent) for most IT companies, it is only natural that there be a spotlight on this space.
  • The Internet has made possible large-scale disintermediation, improvement in efficiencies, and reduction of information asymmetries, resulting in reduction in cost structures. Conventionally, financial transactions have been perceived to be translucent at best and possess significant inefficiencies in cost and delivery parameters.

Anybody who has made an international money transfer or spent money overseas on a credit card or changed money with a money changer (where charges sometimes go up to 10 per cent) will vouch for the experience. I recently ended up paying over 10 per cent on an overseas credit card expense. Other examples of this perceived inefficiency include the difference between the rates for deposit and loans.

I have consciously used the word "perceived" as, undoubtedly, much of this inefficiency is a perception due to the lack of awareness among the users of services about the risks that the financial services institutions isolate the clients from (a classic case is the currency market volatility) and the costs of statutory requirements they are required to comply with. That said, there are also some genuine inefficiencies in the financial services system.

The much-publicised excesses of some banks and bankers have led to the popular sport of "bank and banker bashing", which has in an oblique sense also been responsible for the growth of fintech, in not all areas but some.

  • Avenues to meet genuine customer needs. Some information asymmetries that gave rise to many business opportunities exist no more and hence many customer needs which existed due to paucity of information can now be serviced. A simple example: an entity which needs to borrow money for a fixed period of time should be able to directly borrow money from another entity which has a surplus and is looking to lend. Before the Internet, this transaction could happen only to a limited extent as the borrower and the seller could not track each other. Hence they had to use the services of an intermediary like a bank, a broker or another financial services entity. But several of them can now connect directly with lenders and that has given rise to the entire P2P crowdfunding space.
  • As in many other areas, entrepreneurs see this as a great valuation opportunity given the likes of Lending Club and PayPal, etc, which are companies which have existed for less than a decade and are worth several billion dollars.

Experience in interacting with fintech entrepreneurs

Given that Singapore has become one of the most important global centres for financial services and the regional/global headquarters for many firms, the interest in fintech is only logical. It is, of course, strongly supported by the government and Monetary Authority of Singapore (MAS) initiatives to develop it into a key global fintech hub.

My own interest in fintech stems from my having owned several technology platforms in a long banking career. The fact that this exposure was across a wide range of businesses, including some complex ones, has given me a reasonably good understanding of a wide range of products and services. This was further augmented by a recent strategy study for a large fintech organisation and my own deep interest in technology per se. (I call myself an "app junkie".)

Since payments are a very significant space in fintech, I must also highlight that in one of my professional assignments, I undertook (with an enthusiastic young management graduate) the study of the end-to-end value chain in a cross-border credit card transaction. The objective was to identify some revenue streams which could be insourced into the institution. This involved the analysis and unravelling of a few hundred pages of an operations manual provided by one of the payment-processing network organisations.

I mention all this to establish that I do possess some credentials to ask some of the questions I ended up asking some fintech entrepreneurs whom I had the opportunity to interact with.

When I first attended a fintech event a few months back, my first impression was that I was distorting the average age in that room. Mostly, it was a group of 20-somethings, with a few like me contributing to the grey hair. It was a very high-energy and extremely invigorating atmosphere, making me wistful about the missing entrepreneurial vigour in my younger days. But given my own experience, I was able to have an informed conversation with most of the entrepreneurs (who probably saw in my grey hair the investment dollars they were seeking to fulfil their passions).

I happened to attend another event where several of these startups were making a pitch to potential investors and other stakeholders, and asked a few of them some questions which I was genuinely seeking answers to. A term I heard from several entrepreneurs was "blockchain" and how their business model was built on this new technology which aims to revolutionise the financial system. Another term that crept up in some presentations was that of the cryptocurrency Bitcoin. Since these were short and introductory gatherings, it was decided that I would meet some of these fintech startups at a later date.

Since then, I have been reading about blockchain and interacting with a few of them. It was then that the excitement started waning a little bit. On the basis of the answers to my questions, I developed the following impressions. (Caveat emptor, however; these are not common to all startups but generic impressions gained in my own interactions with a few startups.)

  • Many founders did not understand the underlying business transaction in full. They did not have anybody on board who had full knowledge of the transaction mechanics. In one case, by just asking them basic questions on the end-to-end process, I realised that the entire business proposition seemed challenged.
  • The use of technologies like blockchain and Bitcoin was not fully understood, and I did not always get a cogent explanation of the advantage that they offered for the specific business proposition. In extreme cases, it possibly was not even a potential solution.
  • The entry barriers and the competitive landscape had not been studied deeply enough. In a particular case where there was a large US-based established player, upon asking "what if that player were to make an Asian entry?", the answer I got was that "their website mentions that they have no Asia plans".
  • The valuations being sought even where there was probably just a "me too" business model (and no business) were quite steep and went into a few million dollars.
  • In many cases, the pitch deck was the only document and could not be supported with detailed process flow diagrams highlighting the solved and unsolved parts of the chain, including the challenges with the unsolved parts.
  • No detailed market surveys had been undertaken to evaluate if and how much the customers are likely to pay for such a service.
  • Some of the players came across as being in the business to ride through the valuations rather than for the urge to solve a significant business problem.

As mentioned earlier, this is not a generic observation true of all startups. Many of them are operational with revenue streams and truly solving real-life problems.

What they should be doing

I don't claim to be a technology expert, but I can claim to know a little about doing business, and financial services in particular. Hence my following advice to startups and entrepreneurs.

Answer the following questions and create a document to get clarity for yourself:

  • Who will buy my product/service?
  • Why should they buy it?
  • How much would they be prepared to pay?
  • Are there any substitutes for my service? If yes, what if they enter my target market?
  • If no, what prevents others from creating the same service?
  • Create an end-to-end process map for your business idea and solve for each micro process in detail.
  • Discuss the end-to-end process with a set of practitioners and mentors who can singly or collectively opine on each step.
  • Don't create a business for a valuation but for your passion - the valuation shall follow. In the past few months, I have had the opportunity to interact with another sports-related startup where the creation is an act of passion for the founders. They have a problem of plenty with several investors prepared to write a cheque, but they are looking for investors who share their passion.
  • Just because an investor has given you money does not necessarily mean that the business model works. There are many investors who are in a kind of scramble to participate in the fintech pie without fully comprehending the business aspects.

Essentially, in all the years of having been involved with business, I have learnt that finding solutions is all about asking the right questions. And these always narrow down to the core question: will anybody pay for my product or service, and why should they? So whether you are an entrepreneur or an investor or any other stakeholder, don't just get carried away by the tide. Ask the basic questions that you would ask of any other enterprise.

In conclusion, while fintech is certainly not all froth, there is definitely some. For a stakeholder, even this is best avoided at an early stage.

  • The writer is a former banker who now runs his own consulting firm