Is Fintech full of froth?

This article originally appeared in The Business Times.


What really is FinTech

‘FinTech’ or Financial Technology, as is the full form, has been one of the hottest buzzwords in the technology world in the last couple of years. Although there are numerous definitions for FinTech, in my own and simple terms, it is the entire space of technology that can enable / facilitate financial transactions.


As is evident from the above 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.), compliance and KYC, 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 then relatively easy to understand the reasons for this buzz. In my opinion, the high levels of interest emanate due to the following reason:


  • The BFSI (Banking and Financial Services 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 existential and not discretionary. The recent acknowledgement by one of the global banks regarding the state of their technology leading to mishaps is a not an exception. And since this sector contributes the highest revenue (in many cases > 25%) for most IT companies, it was only natural that there be a spotlight on this space.

  • The internet has made possible large scale disintermediation, improvement in efficiencies, reduction of information asymmetries resulting into 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 on overseas on a credit card OR changed money with a money changer (where charges sometimes go up to 10%) will vouch for the experience. I recently ended up paying over 10% 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 with 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. Having said that, there are also some genuine inefficiencies in the financial services system.


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


  • 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 simplistic example would be - 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 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. And 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.

  • Valuations – 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 centers for financial services and the regional / global headquarters for many firms, the interest in FinTech is only logical. It is of course immensely supported by the government and Monetary Authority of Singapore initiatives to develop it into a key global FinTech hub.


Having had the business aspect ownership of several technology platforms through a long banking career, my own interest in FinTech is somewhat to be expected. The fact that this exposure was across a wide range of businesses, including some complex ones, has given me a reasonably understanding of a wide range of products and services. This was further augmented by a recent strategy study for a large FinTech organization and my own deep interest in technology per say. (I call myself an ‘app junkie’).


Since payments is a very significant space in FinTech, I must also highlight that in one of my professional assignments, I along with a young enthusiastic management graduate had undertaken 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 in-sourced into the institution. This involved the deep analysis and unravelling of a few hundred pages of an operations manual that was provided by one of the payment processing network organizations.


I mention all of the above to establish that I do possess some credentials to ask some of the questions that I did end 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 age average 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 and made me ponder about the entrepreneurial vigor that did not exist in my 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 that they were looking to fulfill their passion.


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 ‘Block chain’ and how their business model was built on this new technology which shall revolutionize the financial system. Another term that crept up in some presentations was that of the cryptocurrency – the ‘Bitcoin’. Since these were short and basically introductory gatherings, it was decided that I shall meet some of these FinTech startups at a later date.


And since then, I have been reading about the Block chain and interacting with a few of them. It was then that the excitement that had got infused in me, started waning a little bit. On the basis of the answers to my questions, I developed the following impressions. Caveat Emptor – they are not across 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 realized that the entire business proposition seemed to get challenged.

  • The use of technologies like ‘Block chain’ 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 deep enough. In a particular case where there was a large US based established player, upon asking ‘what if that player was to make an Asian entry’, the answer that 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 millions.

  • In many cases the pitch deck was the only document and could not be supported with a 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 the urge to solve a significant business problem.


As I have mentioned earlier, this is not a generic observation true for 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. And hence with all humility, my advice to startups and entrepreneurs:

  • Solve for the following questions and create a document to get clarity for yourself

  1. Who will buy my product / service?

  2. Why should they buy?

  3. How much would they be prepared to pay?

  4. Is there a substitute to my service? If yes, what if they enter my target market?

  5. 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 practitioner/s who 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, however 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 questions always narrow down to the core question – will and why should somebody pay for my product / service? 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 but there may be some of it and as a stakeholder it is best avoided at an early stage!

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