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Why is fintech cool?

… when augmenting finance is far more interesting than disrupting it

UNconventional Wisdom is a periodic guest blog where the conventional wisdom is held up for fresh inspection. If you have some "UNconventional Wisdom" to share, email scocheo@sbpub.com. UNconventional Wisdom is a periodic guest blog where the conventional wisdom is held up for fresh inspection. If you have some "UNconventional Wisdom" to share, email [email protected]

I had a realization recently: Banks have always been hot on technology and innovation.

I wrote about this on my personal blog, The Finanser, in April 2008—eight years ago—specifically concerning  the rise of innovation in banking. The context was how banks had created a new role—Chief Innovation Officer—and had pumped up the innovation ratchet massively since 2001. 

The current generation of disruptors often run banks down as hopeless dinosaurs.

Yet when I think back over my career, there’s never been a time the banking industry hasn’t been hot on tech. By way of example, a quote I often use is from Walter Wriston, former CEO of Citibank, who in the 1970s bet the bank on technology based on his belief that:

“Information about money is becoming more important than money itself.”

So tech and finance is not new at all, which makes me ask why fintech is so cool.

What makes fintech so cool?

I guess fintech became cool because we are moving from banks using proprietary tech to cut costs, build efficiency, and create straight-through processing to placing all of this on the internet.

In so doing, it is creating a challenge for banks: How to move from legacy proprietary physical structures to open internet-based digital structures.

However, it is an augmentation and refreshment of the bank, rather than a disintermediation and replacement.

This is why I continually smile when people talk about bringing down the big bad banks with technology.

I smile when they say this is disruptive, how banks are dinosaurs, and how the roof is about to cave in on their legacy systems.

I smile when people talk about Google, Apple, Facebook, and Amazon, along with Alibaba, Tencent, Baidu, and more decimating the bank system.

I heartily say, “No they’re not.”

So what’s really going on?

They are all having an impact for sure. But nothing is decimating, disrupting, or disintermediating the system. They are augmenting it.

Augmented finance is very different from disrupted finance.

Augmented finance—part of the theme of Brett King’s next book, Augmented—is all about adding to the financial system, not replacing it (although Brett doesn’t necessarily agree with that assertion). 

I make this assertion because disruption and change has been around all of my life, working in banking and technology, and today is no different.

Banks that adapt to these changes will win out and lead—and that is why banks are investing in the change. They are not ignoring it.

Ignoring technological change in a financial system based upon technology is like a mouse starving to death because someone moved their cheese.

The mouse knows that the cheese moves every day. That’s why mice always look for food everywhere. Banks know that technology changes very day, which is why they are always tracking IT.

So technologies of today are changing banks—blockchain, cloud, analytics, APIs (application program interfaces)—as well as augmenting the industry. Augmented finance is why things like bitcoin and mobile wallets get interesting, as they add a dimension to a system that could not serve the people who were historically outside the system.

For example, most Africans who have a mobile subscription are opening mobile wallets, because they didn’t have access to finance before. The big bet is that if you combine a mobile wallet with a cryptocurrency, you could create a huge opportunity for financial inclusion.

Bill Gates is taking that bet, by investing in creating a mobile financial inclusion program for Africa and other developing economies, to ensure that the 5 billion people who are unbanked or underbanked can be served by a networked financial system that is cheap and pervasive.

In other words, a new financial system that includes those who were previously too poor for the industry to serve.

Augmented finance also sees new players focusing on segments that banks underserved before, like students (SoFi) and small- and midsized businesses (Funding Circle).

The new players add to the systems, and complement it. This is also true of offering more ubiquitous points of sale (Square), checkouts (Stripe), and transactions (PayPal), all creating internet-based complementary structures on top of the historical structures (Visa, MasterCard, and American Express).

Where there is replacement of the system from proprietary to open, banks are actively engaged. IT is why so many banks are running hackathons, Open API days, startup challenges, and more.

Why would banks invest in startups if they thought the upstarts were going to bring them down? 

That would be stupid.

Industry spends much on augmentation

Banks are investing because they get early learning on the startup’s ideas; have a stake in a future business model; and, if successful, have a lead in absorbing that startup’s idea into their own operations. [Editor’s Note: Read “Wells expands the value chain” and  “Capital One's taking business into digital age”]

Therefore, being brutally honest, banks have never shirked from the technology challenge. They’ve always been up for it.

True, some banks don’t have the leadership to deal with it, which is another story. In fact, I could point to many banks that are failing to step up to the plate when it comes to transforming their operations to the internet open-sourced world of 2016.

But I would rather point to the ones who are stepping up to the plate.

Worldwide, I would cite Bank of America, Barclays, BBVA, BNP Paribas, BNY Mellon, Commonwealth Bank of Australia, Citi, Credit Suisse, Danske, Deutsche, Intesa Sanpaolo, J.P. Morgan, Nordea, Santander, and Wells Fargo to name just a few.

Funnily enough, those are the names of just a few of the banks who have joined the R3CEV consortium. And there’s the rub. Just as in the past, when technology has created challenge, banks create consortia to rise to the challenge—SWIFT, Visa, and the European Banking Authority are examples. This is no different.

So, the net-net is that fintech is cool because it is creating the internet of value, what I call the ValueWeb.

And the ValueWeb is based upon augmented finance to serve markets that were historically underserved or overlooked.

This guest blog was adapted from Chris Skinner’s Finanser blog of Feb. 25, 2016, “Augmenting finance is far more interesting than disrupting it”

Read a review, “Beyond simple disruption,” of Skinner’s forthcoming book, “ValueWeb: How Fintech Firms Are Using Bitcoin Blockchain And Mobile Technologies To Create the Internet Of Value

Chris Skinner

Chris Skinner has become known as an international independent commentator on fintech through his blog, the Finanser.com. He is the author of the bestselling book Digital Bank and its sequel ValueWeb. Both books have been reviewed on www.BankingExchange.com and a chapter excerpt of ValueWeb also appears on the site. Skinner chairs the European networking forum: the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand and has received similar honors from The Wall Street Journal and other organizations. Visit Skinner's professional website.

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