All The Fintech - Oct 16th, 2017

Happy Monday! Today's newsletter is going out a bit late as I have back to back trips for work, so I've been frantically trying to catch up with emails over the weekend. In terms of article trends, this newsletter looks to be pretty heavy on payments, which might due to all the press releases being sent out before Money 20/20 next week. Apologies ahead of time for any typos as I haven't had much time to proofread before sending out!

I want to focus this week's column on fintech disruption vs partnerships through the lens of a large financial institution (warning, this is a bit long). Back in 1995, HBS professor Clayton Christensen defined disruption as:

A process whereby a smaller company with fewer resources is able to successfully challenge established incumbent businesses. Specifically, as incumbents focus on improving their products and services for their most demanding (and usually most profitable) customers, they exceed the needs of some segments and ignore the needs of others. Entrants that prove disruptive begin by successfully targeting those overlooked segments, gaining a foothold by delivering more-suitable functionality—frequently at a lower price.

Over the past few years, the concept of disruption in financial services coming from upstart fintech companies has been extremely prevalent (just google "fintech disrupt conferences" to get an idea)! And yet, post-crisis the banks have never been better as it relates to performance (with Amex and Wells being the possible exceptions recently). For example in retail banking, Chase grew their customer base in 2016 by 4% to 60MM US households, which meant they had a relationship with almost half of all households in the US. Chase was also the primary bank for more than 70% of their consumer households and nearly 50% of SMBs. Across the board, numbers are up since 2006 whether you measure by deposits market share, credit card sales, or even merchant processing volume.

There's been a marked shift over the past year in the approach that fintech companies have been taking towards banks and vice versa. Five years ago, the pitch was very much "barbarians are at the gate" for financial services and all revenue streams were going to be disrupted. Fast forward to today, and it turns out that one of the easiest ways to get to massive scale is partnering with financial institutions that already have massive scale. Banks have increasingly become more receptive to working with fintech companies in order to stay ahead of the cycle and deliver better products. As a sample case study, I've included snippets over the past 5 years on all the technology and fintech mentions from JPMorgan Chase's annual reports.

In 2012, there was zero mention of fintech and light references to new technologies. The focus for banks was complying to new regulations post crisis + fixing London Whale fallout for JPMorgan.

The speed of markets and the constant application of new technology are increasing exponentially. While this has provided some positive outcomes, including lower costs and greater ease of use, it also creates additional risks and problems – from cybersecurity to “flash crashes.”

In 2013, the emphasis was on stability, security, and scale of internal technology.

Our capabilities are extraordinary and are difficult to replicate — we can bring huge resources to bear for the benefit of our company and our clients. Our scale creates huge cost efficiencies and enables significant resources to be brought to bear for the benefit of our company. For example, in global technology, we have nearly 30,000 programmers, application developers and information technology employees who keep our 7,200 applications, 32 data centers, 58,000 servers, 300,000 desktops and global network operating smoothly for all our clients.

In 2014, the technology headline was Silicon Valley is coming and it was time for the bank to compete more head-on, particularly in lending and payments.

Silicon Valley is coming. There are hundreds of startups with a lot of brains and money working on various alternatives to traditional banking. The ones you read about most are in the lending business, whereby the firms can lend to individuals and small businesses very quickly and – these entities believe – effectively by using Big Data to enhance credit underwriting. They are very good at reducing the “pain points” in that they can make loans in minutes, which might take banks weeks. We are going to work hard to make our services as seamless and competitive as theirs. And we also are completely comfortable with partnering where it makes sense.

2015 comes with first appearance of FinTech in the annual report, as well as were four whole pages dedicated to answer "how do you view innovation, technology, and FinTech?"

If you look at the banking business over decades, it has always been a huge user of new technologies. This has been going on my entire career, though it does appear to be accelerating and coming at us from many different angles. While many FinTech firms are good at utilizing new technologies, we should recognize that they are very good at analyzing and fixing business problems and improving the customer experience (i.e., reducing pain points). You can rest assured that we continually and vigorously analyze the marketplace, including FinTech companies. We want to stay up to date and be extremely informed, and we are always looking for ways to improve what we do. We are perfectly willing to compete by building capabilities (we have large capabilities in-house) or to collaborate by partnering.

And finally in 2016, a focus on partnership and several mentions of fintech across the annual report, with even a hint at the Bill.com integration and investment that was announced this month.

We are successfully collaborating with other companies to deliver fintech solutions
Whether it is consumer payment systems (Zelle), mortgages (Roostify), auto finance (TrueCar), small business lending (OnDeck Capital) or communications systems (Symphony), we are successfully collaborating with some excellent fintech companies to dramatically improve our digital and other customer offerings. I’d like to highlight just two new exciting areas: Developer Services API store (and) Bill payment and business services - ... there are some interesting developments coming as we integrate our capabilities with those of other companies

Long story short, I expect to see a lot more FI partnerships + acquisitions over the next few years as banks become increasingly more receptive to working with fintech companies that were once deemed potentially disruptive. On the flip side, I also expect to see much more direct competition across the customer spectrum as banks seek to further diversify their sources of revenue. It's hard to disrupt a bank's line of business without full control of funds, and at the end of the day, most fintech companies have to rely on infrastructure and banking cores provided by legacy financial institutions. That being said, the pace of innovation and product development across financial services has been increasing at an exponential rate, so it might just be a matter of time (and a little bit of regulatory change) until we see a complete overhaul of the banking system.