Last week, I started posting some of the material I prepared for a fintech conference held by Profit & Loss here in Shanghai at the posh Ritz-Carlton Hotel in Lujiazui, the great financial district created from nothing by the illustrious CCP according to a 1990 mandate to develop the unwashed Eastern banks of the Huangpu River into a Special Economic Zone. So far, you could say the project has kinda been a success. đ
You may find the first post in this series here: Blockchain Fintech: Disruptors or Partners?
Blockchain and cryptocurrency is a part of the vast fintech universe, but P&L editor Galen Stops is visionary enough to realize that the sector is certain to be a big part of the way forward. P&L even has a new magazine targeted toward institutional investors specifically for blockchain assets. It's called On The Block. I encourage y'all to check both of these websites out.
In preparing for the panel, the luminescent Mr. Stops asked me my thoughts on a few different questions. I'll be presenting my considerably more considered (at least compared to my verbal responses during the actual panel) answers here in a series of posts. So please hit the "Follow" button up above if you like how I answer Galen's question here today:
Question 2: Do you see fintech actually changing business models in financial markets?
For this question, Galen gave me the following context:
Everyone I speak to these days describes their business model in terms of tech firms.
- âWeâre building a platform that gives clients everything in one place - itâs like the Amazon model,â or,
- âWeâre matching up people who have excess credit with people who need it - weâre like the airbnb of credit,â or,
- âWeâre not going to charge for brokerage on the platform, weâll make all of our money selling data, like Facebook.â
That's the current fintech entrepreneurial landscape out there. There are these accepted business models that are flying around, which are basically platform business models. I really think those kind of older ideas still have a lot of potential, especially were they to be combined with a cryptoeconomic layer! đ€
Here is the rest of my answer:
The core motivation for fintech is disruption. Legacy finance systems are simply too cumbersome. Theyâre such an easy target. For example, when Alipay came along, Chinese banking systems were just screaming to be disrupted. Here's pretty much an example of what I see when I peek over the bank teller's shoulder here in China whenever I have to deal with the banks. Typically, this experience lasts at minimum one hour and averages about 2 hours of excruciatingly wasted time. I got this image from a great article at Planet Mainframe.
Seriously, that's what beautiful, simple mobile applications are competing with. Being fintech in this day and age is so easy, right!? On the technology side, even today, when I go to open up a new checking account, the antique green-screen systems strain under the weight of something as simple as inputting my name in English characters. đ±On the regulatory side, I canât tell you how much time weâve spent just trying to get all the paperwork in order so that my company can legally send money to itself, just from one subsidiary to another. Both aspects are maddening!
Pushing old antiquated systems to upgrade and modernize by introducing an element of Michael Porterâs five competitive forces, the very real threat of substitute products, is doing the global economy a great and necessary service.
Of course, when you say the words "China" and "fintech" in the same conversation, you'd be quite remiss if you did not mention Jack Ma's Alipay, which now exists under the umbrella of financial conglomerate Ant Financial. How the payment system for Alibaba's e-commerce platforms Taobao and Tmall got reorganized from its parent company is a whole nuther story, however. For now, let's just focus on the innovation side of Alipay.
Alipay was this massive new paradigm shift, a classic Chinese âleapfrogâ from doing things mostly the way they had been done since the 1960s with mountains of paperwork and hours, days, and weeks of waiting to a modern streamlined natively digital process for transferring value from one user to another. For those of you who don't live in China, using Alipay basically looks like this most of the time:
I mean it wasnât that long ago that you would be charged a pretty hefty sum in China for transferring money from an account in your own name at a bank in one city to another account, at the same bank, in a different city. Uh... But that's just how banking regulations seem to work. In China, in the US, everywhere! Banks as an industry are just slow as molasses. When Silicon Valley realized what a slow-moving target this gigantic industry was, their mouths just started watering.
We're still experiencing the impact of their attempts at revolutionizing finance today. No doubt we, as consumers, will continue to benefit for a long time to come.
That being said, I donât think weâll see something like Alipay - this comprehensive platform for nearly every kind of financial service that caters to 500 million plus users - ever again. There were just so many unique converging factors that created that product that I donât think it can be repeated.
For example, Alipay operated in a sandbox with no competitors and no regulation for years. It was only after Alipay had established itself as the de facto market leader that the Chinese government forced it to obtain the proper license, a license that had at that point never existed before.
As a result, it is my opinion that new fintech products will focus on niche solutions. For example, DarcMatter, where I currently work, simply provides a platform that offers a much more transparent and easier process for retail high net worth individuals (HNWI) to invest in great risk-adjusted products. Weâre connecting funds that are constrained by regulation to investors that would have otherwise never heard of them. Thatâs our niche.
Another great company that is in our same office space is Liqease, which is powered by the Traxia (TMT) cryptoeconomic token. All their platform business is trying to do is to make it easier for small businesses to monetize their receivables in an efficient and profitable manner. These kinds of fintech solutions are just win-win, or even win-win-win, for all parties involved. That is the point of niche business models in a nutshell.
Unlike Too Big To Fail (TBTF) banks that try to be this one-stop shop for all retail and corporate banking needs, the nimble fintech-powered alternatives are all pretty much focused on one particular vertical. Venmo, PayTM, AirPay, Square, and various crypto payment solutions like Bitpay or TenX or OmiseGo are all vying to grab market share in one sector or another of this enormous global cross-border micropayments industry.
Whatever success they achieve will lead them to leverage whatever user base they can grab to develop an ecosystem around their product, but itâs not necessarily a âwalled gardenâ as was the intention of so many of the original platform solutions that were built. This kind of niche strategy makes it easy to stay flexible and pivot to wherever opportunity arises, like in the way that Square's Cash app all of a sudden started accepting Bitcoin payments during the BTC Bull Run.
The real question is can these new players amass a large enough user base fast enough to be a real threat to well-capitalized institutions. Itâs certainly possible, but like I said in my previous answer in this series I think itâs more likely they get folded in as trusted service providers.
But you never know. Blockchain, fintech & crypto is such an incredibly fast-moving space that, just at the moment where you think you know what is going on, you lose the melody and have to tap back in on the beat.
