“Everyone is trying to be the Amazon of fintech.” The proverbial land-grab for customers, partners, eyeballs and pocketbooks is occurring across the financial technology ecosystem, from P2P lending to investment banking. Some firms certainly have major competitive advantages in their marketing strategy and product offerings, but the reality is that most of the firms in the industry vying for the spot of “top dog” will be obliterated by companies with better tech, better reach and better capitalization.
If Amazon’s distribution is sophisticated enough to ship you books or groceries by drone, why can’t the financial services sector figure out a way to automate processes that already involve binary code? Such rhetoric may sound somewhat obvious, but due to regulatory and cost hurdles many of the advances occurring in fintech today are extremely overdue. Luckily some of the best and brightest in the field are working to solve both the simple and complex and automate processes in everything from bitcoin transactions to multi-million dollar securities deals.
The imminent creative destruction that is pending in the industry is likely to touch nearly every segment of financial services. As it does, we are likely to see collateral job damage across the financial sector. Those that are able to position themselves in such a way so as to avoid the axe may survive, but the machines are coming. Some very smart people are worse than contrarian on this topic.
Achieving Scale & Finding a Beachhead
One of the ways in which Amazon was able to win was through advancing quickly down the learning curve. Amazon CEO, Jeff Bezos, was strategic in targeting books as his initial beachhead into e-commerce. Books held more SKUs than any other product category in any other retail industry. By establishing an online bookstore first, the company was not only able to achieve rapid scale with a very ubiquitous product but it also gave management the ability to learn a core competency that later allow them to easily enter many other markets.
Yes, Amazon achieved scale, but the company’s strategy allowed them to do much more. Their beachhead products and industry were so broad, they learned quickly how to deal with millions of transactions in a streamlined way. Remember, they did this on a day when the current e-commerce tools available to online shop owners were non-existent.
But fintech is a different beast. Unlike an online bookstore online lending and securities dealing includes other elements including compliance and filtering for deal quality. In the world of securities dealing achieving scale is difficult to do without dipping into the gutter. In other words, a chicken-and-egg conundrum exists for scaling private securities transactions. In order to reach significant scale in exposure, the quality threshold is often breached—quality is sacrificed for deal quantity.
In today’s world, most platforms are either too niche oriented in order to reach quantity or they try too desperately to be all things to all people. They lack a true beachhead. Like Amazon, these players need their proverbial “book” market to establish a source of regular cash flows that can be used to further build out a product or platform. Traction before totalitarianism is key.
Complexity & Compliance
The ecosystem of financial technology is inherently complex, particularly in areas of corporate finance. This complexity is further exacerbated by layering on compliance issues. In fact, some fintech products are solely geared toward maintaining a compliant environment. However, where there are pain and complexity, there is an opportunity for disruptive technology.
Disruption is occurring all over the fintech ecosystem. There should be some major writing on the wall for many industries about to be obliterated by the likes of robotics and blockchain (i.e. financial advisors and transfer agents to be more precise). While there are areas that require people-to-people interaction and some serious bedside manner (like corporate M&A and other capital transactions), the reality is that most processes and procedures can easily be automated away. Growth will come as we continue to take high-cost heavy lifting away from people, replacing it with the tools necessary to make faster, more efficient finance.
Growing into the Amazon of fintech is not likely to occur overnight. Industry growing pains and individual company collateral damage still need to occur. In addition, the industry itself is so vast and the service offerings so different that the path to a catchall fintech company (similar to Amazon in e-commerce and cloud) would not likely occur until after industry maturation, consolidation, including a great deal of industry mergers and acquisitions. However, a conglomerate with such disparate technology in such varied niches in fintech would be unwieldy at best. I imagine those that will survive the current fray as successful companies would be advised to keep their heads down and stay in their lane. Until we grow up a bit, focus will be the name of the game.
Nate Nead is an investment banker focused on mergers and acquisitions for middle market companies. He helps companies raise capital, acquire, grow and ultimately sell for the highest price possible. He resides in Seattle, Washington. This does not represent an offer to buy or sell any securities.