9 ms·

FinTech is the worst

81 points by jackgavigan 11y ago

cm2187 11y ago
And the elephant in the room is regulations. You end up hiring a dozen people just to read the draft regulations coming every week, you need to set up processes, controls, compliance depts. And before you know it you became a bureaucratic bank.
- baus 11y ago
  In another life I built an entire product for the sole purpose of helping companies meet their regulatory requirements for marketing their products to other people who worked in finance. I had many a meeting with compliance officers. It was ludicrous.
- jamescrowley 11y ago
  Speaking as a fintech startup in the compliance space... Complex regulations are an opportunity too!
- pbreit 11y ago
  The advantage of being a startup is that you can fly under the radar while you're pursuing all that stuff.
ryporter 11y ago
While FinTech does face headwinds, it's not as bad as the author claims. Taking the points in turn: 1. "FinTech businesses don’t scale quickly." Online lending platforms can actually scale rather quickly. According to SoFi's CEO, "In 2012, SoFi funded about $90 million of loans. These days, it originates more than $1 billion a month". [1] While that is indeed still small relative to size of the market, that's more of a reflection of how huge the market is. 2. "It’s really easy to get fooled by early adopters." True in any space. 3. "FinTech is not an acquisitive space." This is a good point. 4. "The sale cycles are really long." If you're selling into an enterprise, then sales cycles are always long. 5. "Customer acquisition is hard to hack." Compared to a social network, yes, but social networks are singularly conducive to viral growth. It is possible to achieve viral growth (e.g., PayPal). [1] http://www.sfgate.com/business/article/Online-lender-SoFi-starts-hedge-fund-to-invest-in-6885222.php http://www.sfgate.com/business/article/Online-lender-SoFi-st...
- quanticle 11y ago
  >If you're selling into an enterprise, then sales cycles are always long. The point OP is trying to make is that in financials even selling to consumers has a really long sales cycle, since people are understandably leery about just handing over their finances to a random startup that didn't even exist a couple of years ago.
barrkel 11y ago
B2C/C2C fintech, perhaps. But it's not the only model, and TBH, selling financial services to consumers is difficult - the risks of getting a startup involved in your financials aren't trivially dismissed. Selling tech, particularly SaaS, into finance is a different story. Most organizations are large and scelerotic, developers are heavily laden with security controls, and smart devs are uninterested in the more boring plumbing, where you're a cost centre and aren't getting a decent slice from the bonus pool. Historically a lot of financial software has been consultancy-ware sold directly to management, or poorly implemented internal systems with long turnaround times. The industry is ripe for more cloud-oriented software with lower onboarding times and less gating by internal IT. The primary challenge is convincing people that their data is safe with you, and that the service can be continued even if you go away (so, source escrow). (I work in this space - send me an email at barry@du.co if you're interested in joining a growing startup in London. Stack includes C++/Java/Ruby/JS and more.)
- shubhamjain 11y ago
  > The primary challenge is convincing people that their data is safe with you, and that the service can be continued even if you go away Isn't it possible to sell self-hosted software like AeroFS does?
  - barrkel 11y ago
    It's possible, but it's a different business model. For a complex multi-tier application, it wouldn't just be an executable; it would be a set of machines that all need to be on the same version, configured correctly with appropriate firewall rules etc. Who would manage it? Would it reach out and grab updates, or would the you reach in and upgrade it remotely? Would IT want to get involved? Are you responsible for training them? For fixing things when they mess it up? There's loads of pain in this direction. It's best avoided if the application is in any way complex, and particularly if it has a rapid upgrade cycle (we roll out upgrades every 2 to 4 weeks or so).
- wolframhempel 11y ago
  Very much agree with your point. Especially larger banks often accumulate a process overhead for in-house development that makes even very high margin products attractive. The tricky thing is SaaS though. For both regulatory and mindset reasons it's next to impossible for most financial organisations to have their data leave their premises.
flerchin 11y ago
FFS. It's the worst because it parasitically drains the market while adding exactly zero economic value.
- eggy 11y ago
  'it' being Fintech? Which type of Fintech product do you think does what you state?
  - collyw 11y ago
    High frequency trading would be one for me.
    - tome 11y ago
      If high frequency traders add zero value then why do counterparties enter into trades with them?
      - collyw 11y ago
        So can you explain the economic value that HFT creates, with some evidence rather than just rhetoric?
        consz 11y ago
        Isn't the fact that people trade against their quotes sufficient evidence? After all, if someone besides the HFT had a better quote (e.g. better price), people would trade against that instead of the HFT's quote.
        ricardobeat 11y ago
        No. Not unless they become high-frequency traders themselves. HFT will always win the trade since they can instantly offer a 1 cent lower price.
akhatri_aus 11y ago
I personally think FinTech is the the best. The examples mentioned are focused on a specific sector of the market where there are players to compare against for similar products or products that at the end of the day, do the same thing. A disruptive business has its own market that can't be compared against another before it such as Bloomberg. The examples offered are just variations of existing business models and are bad examples of the potential of FinTech businesses. Even with the businesses mentioned it ought to be mentioned about the ROI. The operating costs of Merrill can't even remotely be compared to the upstarts. There are a couple of really good examples such as TransferWise, CrowdCube, Bloomberg, Square, Stripe, Xero, MPESA and loads more that are at the top of their categories either immediately or in terms of growth. Fintech businesses do scale quickly, very quickly. Most of the examples I've given have done this already. MPESA transacts in multiples more than the entire banking system itself in Kenya.
Inthenameofmine 11y ago
"FinTech is not an acquisition space" might be the only universally true point here. At Bitsapphire.com we talk with tons of Fintech founders every month. Exit strategy is the Nr. 1 problem for almost all of them except B2B SaaS Fintech companies. B2B SaaS Fintech us a while other ballgame. SaaS in general is difficult to exit because you can easily increase your valuation with a few more users. If you get financial.institutions to use your SaaS product you have a long term goldmine. Obviously the sales cycle is horrendous though.
omarish 11y ago
For each point there is a counter-point about why it's a good place to invest: FinTech businesses don’t scale quickly. => it takes a long time to build a business, but once you're there it's harder to get usurped by new upstarts. It’s really easy to get fooled by early adopters => this can be said about any market, not just fintech. FinTech is not an acquisitive space. => yeah, you build long-term equity value in the companies you think are going to be successful and big wins. The sale cycles are really long. => this is endemic to the entire finance & banking space itself; not just fintech. That also means once you're in, you're in for a while. Customer acquisition is hard to hack. => moat, and this can be said about any space.
manishsharan 11y ago
Lots of fintech entrepreneurs I have spoken seem to disregard threats to their model by their biggest competitor: banks. Banks are your biggest and smartest competitor. And they are not as bureaucratic as you may have been led to believe. They pay top dollars for engineering and marketing talent and they have a ton of money and patience. So unless you have a strategy to deal with banks, you are toast.
- p4wnc6 11y ago
  It's well-known that banks do not pay top dollar for engineering or IT talent. Further, for the less-than-top-dollar pay, you often work in horrible conditions. It's loud, relentlessly interactive even if your job function has nothing to do with intraday banking activities. Banks are notorious for using legacy technology, having arcane legal restrictions (e.g. you can't use an open source project without weeks worth of approvals and paperwork), virtually never pay down technical debt, have an unholy mixture of off-site consulting teams with too many cooks in the kitchen, and require you to work an unreasonable number of hours purely for the sake of appearing, visually, to do a lot of work. I am not in the fin tech space, but if I was, banks would not be a serious worry. When large banks "mobilize" to compete with faster moving start-ups it is a hilarious failure, like when a cat is trying to take off a cat Halloween costume.
  - kafkaesq 11y ago
    It's well-known that banks do not pay top dollar for engineering or IT talent. Doesn't jibe with my observation -- my sense is that (upper-tier) banks do pay significantly higher than tech startups (leaving aside equity, of course), on average. And offer a lot more security, if you can stick it out. Again, on average -- for average-schmoe Java/C++/what-have-you devs. You're definitely right about the horrible technology and working conditions, though. That's why the banks know that have to dangle above-average salaries for all kinds of humdrum role descriptions -- deep down inside, they know that to a large extent, they're paying people for being willing to hold their nose, day in, day out, year after year. And of course for the willingness to pee in a cup, because someone told you to.
markbnj 11y ago
Having done an e-banking startup in the mid-90's I agree generally with every point the author makes. The reason people continue to go after the space is that it's a very rich one.
vegabook 11y ago
Here is a revealing fact. Trading in FX has been electronic since well before the age of the internet, with EBS being setup to compete with Reuters as early as 1990. Still, as soon as transactions are bigger than some small nominal amount (say, 5m USD notional), inevitably, they're transacted human to human, to this day. Sure, many transactions in total size are larger than that, done in smaller electronic chunks, but as soon as there is a real, single-flow risk, many humans simply like to deal with another human. Twenty five years later. The facts is that, when you're risking large amounts of money, and I have been a portfolio manager and self-analysed why, despite being a techie, I was uncomfortable putting large risks through a machine, the fact is that you want re-assurance. You want a person to guide you through the risks, or at the very least, you want to be able to reward a real person with your flow, buy their loyalty, so that in future they will help you with new, nascent risks, that you might not be aware of (the salesman-PM bond). Fintech in too many cases assumes that transactions are simply a dry exchange. Where it fails every time is in acknowledging the rich set of emotions that accompany any transaction beyond a certain threshold size, and which only another human can understand/acknowledge/address. I have not been surprised, because of the above, about how many fintech companies are failing.
- ellius 11y ago
  Matt Levine at Bloomberg summed this up well: "It's not enough to get your machines to agree. You have to agree on what your machines should agree about." You're exactly right. People forget money is a contract business for a reason. Even if it were feasible to remove government regulation, the enormous complexity of financial needs and marketplaces would require a huge amount of human oversight. When things go right, transactions are simple. The problem is they frequently go wrong, sometimes in unanticipated ways where liability gets fuzzy.

81 points by jackgavigan 11y ago

And the elephant in the room is regulations. You end up hiring a dozen people just to read the draft regulations coming every week, you need to set up processes, controls, compliance depts. And before you know it you became a bureaucratic bank.

baus 11y ago
In another life I built an entire product for the sole purpose of helping companies meet their regulatory requirements for marketing their products to other people who worked in finance. I had many a meeting with compliance officers. It was ludicrous.
jamescrowley 11y ago
Speaking as a fintech startup in the compliance space... Complex regulations are an opportunity too!
pbreit 11y ago
The advantage of being a startup is that you can fly under the radar while you're pursuing all that stuff.

ryporter 11y ago

While FinTech does face headwinds, it's not as bad as the author claims. Taking the points in turn: 1. "FinTech businesses don’t scale quickly." Online lending platforms can actually scale rather quickly. According to SoFi's CEO, "In 2012, SoFi funded about $90 million of loans. These days, it originates more than $1 billion a month". [1] While that is indeed still small relative to size of the market, that's more of a reflection of how huge the market is. 2. "It’s really easy to get fooled by early adopters." True in any space. 3. "FinTech is not an acquisitive space." This is a good point. 4. "The sale cycles are really long." If you're selling into an enterprise, then sales cycles are always long. 5. "Customer acquisition is hard to hack." Compared to a social network, yes, but social networks are singularly conducive to viral growth. It is possible to achieve viral growth (e.g., PayPal). [1] http://www.sfgate.com/business/article/Online-lender-SoFi-starts-hedge-fund-to-invest-in-6885222.php http://www.sfgate.com/business/article/Online-lender-SoFi-st...

quanticle 11y ago
>If you're selling into an enterprise, then sales cycles are always long. The point OP is trying to make is that in financials even selling to consumers has a really long sales cycle, since people are understandably leery about just handing over their finances to a random startup that didn't even exist a couple of years ago.

barrkel 11y ago

B2C/C2C fintech, perhaps. But it's not the only model, and TBH, selling financial services to consumers is difficult - the risks of getting a startup involved in your financials aren't trivially dismissed. Selling tech, particularly SaaS, into finance is a different story. Most organizations are large and scelerotic, developers are heavily laden with security controls, and smart devs are uninterested in the more boring plumbing, where you're a cost centre and aren't getting a decent slice from the bonus pool. Historically a lot of financial software has been consultancy-ware sold directly to management, or poorly implemented internal systems with long turnaround times. The industry is ripe for more cloud-oriented software with lower onboarding times and less gating by internal IT. The primary challenge is convincing people that their data is safe with you, and that the service can be continued even if you go away (so, source escrow). (I work in this space - send me an email at barry@du.co if you're interested in joining a growing startup in London. Stack includes C++/Java/Ruby/JS and more.)

shubhamjain 11y ago
> The primary challenge is convincing people that their data is safe with you, and that the service can be continued even if you go away Isn't it possible to sell self-hosted software like AeroFS does?
- barrkel 11y ago
  It's possible, but it's a different business model. For a complex multi-tier application, it wouldn't just be an executable; it would be a set of machines that all need to be on the same version, configured correctly with appropriate firewall rules etc. Who would manage it? Would it reach out and grab updates, or would the you reach in and upgrade it remotely? Would IT want to get involved? Are you responsible for training them? For fixing things when they mess it up? There's loads of pain in this direction. It's best avoided if the application is in any way complex, and particularly if it has a rapid upgrade cycle (we roll out upgrades every 2 to 4 weeks or so).
wolframhempel 11y ago
Very much agree with your point. Especially larger banks often accumulate a process overhead for in-house development that makes even very high margin products attractive. The tricky thing is SaaS though. For both regulatory and mindset reasons it's next to impossible for most financial organisations to have their data leave their premises.

flerchin 11y ago

FFS. It's the worst because it parasitically drains the market while adding exactly zero economic value.

eggy 11y ago
'it' being Fintech? Which type of Fintech product do you think does what you state?
- collyw 11y ago
  High frequency trading would be one for me.
  - tome 11y ago
    If high frequency traders add zero value then why do counterparties enter into trades with them?
    - collyw 11y ago
      So can you explain the economic value that HFT creates, with some evidence rather than just rhetoric?
      - consz 11y ago
        Isn't the fact that people trade against their quotes sufficient evidence? After all, if someone besides the HFT had a better quote (e.g. better price), people would trade against that instead of the HFT's quote.
        ricardobeat 11y ago
        No. Not unless they become high-frequency traders themselves. HFT will always win the trade since they can instantly offer a 1 cent lower price.

akhatri_aus 11y ago

I personally think FinTech is the the best. The examples mentioned are focused on a specific sector of the market where there are players to compare against for similar products or products that at the end of the day, do the same thing. A disruptive business has its own market that can't be compared against another before it such as Bloomberg. The examples offered are just variations of existing business models and are bad examples of the potential of FinTech businesses. Even with the businesses mentioned it ought to be mentioned about the ROI. The operating costs of Merrill can't even remotely be compared to the upstarts. There are a couple of really good examples such as TransferWise, CrowdCube, Bloomberg, Square, Stripe, Xero, MPESA and loads more that are at the top of their categories either immediately or in terms of growth. Fintech businesses do scale quickly, very quickly. Most of the examples I've given have done this already. MPESA transacts in multiples more than the entire banking system itself in Kenya.

Inthenameofmine 11y ago

"FinTech is not an acquisition space" might be the only universally true point here. At Bitsapphire.com we talk with tons of Fintech founders every month. Exit strategy is the Nr. 1 problem for almost all of them except B2B SaaS Fintech companies. B2B SaaS Fintech us a while other ballgame. SaaS in general is difficult to exit because you can easily increase your valuation with a few more users. If you get financial.institutions to use your SaaS product you have a long term goldmine. Obviously the sales cycle is horrendous though.

omarish 11y ago

For each point there is a counter-point about why it's a good place to invest: FinTech businesses don’t scale quickly. => it takes a long time to build a business, but once you're there it's harder to get usurped by new upstarts. It’s really easy to get fooled by early adopters => this can be said about any market, not just fintech. FinTech is not an acquisitive space. => yeah, you build long-term equity value in the companies you think are going to be successful and big wins. The sale cycles are really long. => this is endemic to the entire finance & banking space itself; not just fintech. That also means once you're in, you're in for a while. Customer acquisition is hard to hack. => moat, and this can be said about any space.

manishsharan 11y ago

Lots of fintech entrepreneurs I have spoken seem to disregard threats to their model by their biggest competitor: banks. Banks are your biggest and smartest competitor. And they are not as bureaucratic as you may have been led to believe. They pay top dollars for engineering and marketing talent and they have a ton of money and patience. So unless you have a strategy to deal with banks, you are toast.

p4wnc6 11y ago
It's well-known that banks do not pay top dollar for engineering or IT talent. Further, for the less-than-top-dollar pay, you often work in horrible conditions. It's loud, relentlessly interactive even if your job function has nothing to do with intraday banking activities. Banks are notorious for using legacy technology, having arcane legal restrictions (e.g. you can't use an open source project without weeks worth of approvals and paperwork), virtually never pay down technical debt, have an unholy mixture of off-site consulting teams with too many cooks in the kitchen, and require you to work an unreasonable number of hours purely for the sake of appearing, visually, to do a lot of work. I am not in the fin tech space, but if I was, banks would not be a serious worry. When large banks "mobilize" to compete with faster moving start-ups it is a hilarious failure, like when a cat is trying to take off a cat Halloween costume.
- kafkaesq 11y ago
  It's well-known that banks do not pay top dollar for engineering or IT talent. Doesn't jibe with my observation -- my sense is that (upper-tier) banks do pay significantly higher than tech startups (leaving aside equity, of course), on average. And offer a lot more security, if you can stick it out. Again, on average -- for average-schmoe Java/C++/what-have-you devs. You're definitely right about the horrible technology and working conditions, though. That's why the banks know that have to dangle above-average salaries for all kinds of humdrum role descriptions -- deep down inside, they know that to a large extent, they're paying people for being willing to hold their nose, day in, day out, year after year. And of course for the willingness to pee in a cup, because someone told you to.

markbnj 11y ago

Having done an e-banking startup in the mid-90's I agree generally with every point the author makes. The reason people continue to go after the space is that it's a very rich one.

vegabook 11y ago

Here is a revealing fact. Trading in FX has been electronic since well before the age of the internet, with EBS being setup to compete with Reuters as early as 1990. Still, as soon as transactions are bigger than some small nominal amount (say, 5m USD notional), inevitably, they're transacted human to human, to this day. Sure, many transactions in total size are larger than that, done in smaller electronic chunks, but as soon as there is a real, single-flow risk, many humans simply like to deal with another human. Twenty five years later. The facts is that, when you're risking large amounts of money, and I have been a portfolio manager and self-analysed why, despite being a techie, I was uncomfortable putting large risks through a machine, the fact is that you want re-assurance. You want a person to guide you through the risks, or at the very least, you want to be able to reward a real person with your flow, buy their loyalty, so that in future they will help you with new, nascent risks, that you might not be aware of (the salesman-PM bond). Fintech in too many cases assumes that transactions are simply a dry exchange. Where it fails every time is in acknowledging the rich set of emotions that accompany any transaction beyond a certain threshold size, and which only another human can understand/acknowledge/address. I have not been surprised, because of the above, about how many fintech companies are failing.

ellius 11y ago
Matt Levine at Bloomberg summed this up well: "It's not enough to get your machines to agree. You have to agree on what your machines should agree about." You're exactly right. People forget money is a contract business for a reason. Even if it were feasible to remove government regulation, the enormous complexity of financial needs and marketplaces would require a huge amount of human oversight. When things go right, transactions are simple. The problem is they frequently go wrong, sometimes in unanticipated ways where liability gets fuzzy.