What's Not Going to Change?
A few predictions to help guide the next decade of fintech growth.
Editor’s note — this is the final Fintech Takes post of 2021! Thank you for reading, sharing, and contributing to this newsletter. It’s a labor of love and I couldn’t do it without you. We’ll be back with more takes in January, but until then Happy Holidays!
Why do we like predictions?
I mean, I know why I like them and why other folks like me — analysts, journalists, and self-appointed thought leaders — like them. They perform. People love reading predictions pieces.1
But why? What value do they provide to readers?
I think the value of predictions about the future, when they’re done thoughtfully and with some humility, is that they help create conviction.
For anyone building something new, conviction is important. Founding a company or building a new product or service is basically a bet that you know what people are going to need. It’s a bet on the future and how closely your vision of the future will align with reality. The more conviction you have in how the future will play out, the bigger the wager you can make.2
Of course, those wagers only pay off if the underlying bet on the future is right. And waiting to see if you’re going to be right (as the rest of the world forcefully pushes back) can be excruciating, as this scene from The Big Short entertainingly illustrates:
So, how do you build (and sustain) conviction?
Predicting the Future
There are two basic approaches to predicting the future.
The first (and most common) approach is to predict what will change.
There are lots of frameworks for doing this. A favorite of mine is Daniel Burrus’s Hard Trend Methodology, which forces you to separate your ideas of what will change in the future into hard trends and soft trends. Hard trends are future certainties, things that will happen whether we want them to or not. Common areas where hard trends are found include demographics (all Baby Boomers will eventually retire) and technology (Moore's law). Soft trends, by contrast, are things that may happen. Common examples tend to revolve around predictions of consumer behaviors and preferences, which are wrong all the time (consumers are weird!)
Unsurprisingly, technology companies tend to be very good at building conviction around hard technology trends. Not all bets made on the ever-advancing progress of technology pay off3, but many of them do. A good example is Netflix.
Despite it’s roots in the DVD business, the long-term plan for Netflix was always to stream movies over the internet. This was Reed Hastings’ vision from the start. And the conviction driving that vision came from an easily-understood and calculated hard trend:
The name Netflix itself always held the promise of movies delivered over the Internet. The problem … was that back then they couldn’t stream movies over 56K modems.
But there was Moore’s Law and improvements in bandwidth which could be plotted, and that is exactly what Hastings did. “We took out our spreadsheets and we figured we’d get 14 megabits/sec to the home by 2012, which turns out is about what we will get.” So what does his spreadsheet tell him about the next ten years? “If you drag it out to 2021, we will all have a gigabit to the home.”
In financial services, the emergence of digital-only neobanks over the last 20 years or so was based on conviction in a similar hard trend, as Brett King, Founder of Moven, explained to me:
In 2005, I was commissioned by HSBC to do a 20-year outlook on how digital technologies were going to disrupt their business. And the key thing was the network effect — understanding that this technology enabled you to change things quite quickly, but bankers expected customers’ behavior to be very sticky and not change.
For example, the branch. My assessment, back in 2005, was that by 2008 internet activity would overtake the branch, particularly from a transactional perspective, and then by 2015 mobile would overtake both the branch and the internet. At the time, this prediction was treated mostly with disbelief and it wasn't really until 2013 or 2014 that the numbers started to show that it was really happening.
A second, less common approach to predicting the future is to predict what won’t change.
This approach isn’t a particularly good fit within the current tech startup zeitgeist. Founders are supposed to have a bold vision of a completely different future and a relentless drive to create that future, even (especially?) if it requires bending reality to their wills. That’s the behavior we tend to mythologize.
Building a business based on rather mundane predictions of what won’t change in the future feels, by contrast, kinda uninspiring.
And yet, it’s a strategy that Jeff Bezos (one of the most disruptive entrepreneurs in history) recommends:
I very frequently get the question: "What's going to change in the next 10 years?" And that is a very interesting question; it's a very common one. I almost never get the question: "What's not going to change in the next 10 years?" And I submit to you that that second question is actually the more important of the two -- because you can build a business strategy around the things that are stable in time. ... [I]n our retail business, we know that customers want low prices, and I know that's going to be true 10 years from now. They want fast delivery; they want vast selection.
It's impossible to imagine a future 10 years from now where a customer comes up and says, "Jeff, I love Amazon; I just wish the prices were a little higher." "I love Amazon; I just wish you'd deliver a little more slowly." Impossible.
And so the effort we put into those things, spinning those things up, we know the energy we put into it today will still be paying off dividends for our customers 10 years from now. When you have something that you know is true, even over the long term, you can afford to put a lot of energy into it.
Now, of course, Jeff Bezos founded Amazon based on a prediction of what would change in the future; a hard trend — the growth of the internet will enable individual companies to aggregate customer demand at an unprecedented scale and level of efficiency.
However, he built Amazon into what it is today through a series of big bets based on what he thought wouldn’t change, namely consumers’ desire for low prices, immense selection, and fast delivery.
This dichotomy — a bold founding insight into what will change and a series of mundane company-building insights into what won’t change — is a characteristic of some of the world’s most successful companies.
Let’s return to Netflix. Reed Hastings co-founded the company based on a vision of consumers streaming entertainment over the internet, a technology-enabled future that was hard to imagine in 1997. And yet, he (and, more recently, his Co-CEO and Chief Content Office Ted Sarandos) have built Netflix into the behemoth that is today by making big bets on what won’t change.
One such bet is that consumers want to watch movies and television created by the most talented and creative actors, directors, and producers. This is not a bold or novel insight. It’s obvious. HBO (among others) has pursued a content-above-all-else strategy for decades. However, Netflix’s conviction that this won’t change, that attracting great content creators to make original content that large numbers of people want to watch (and lavish with awards) will remain important is what has motivated the company to increase its spending on original content from $2.4 billion in 2013 to an estimated $19 billion in 2021.4 It is the conviction that drives the company’s overall strategy (as articulated by Ted Sarandos) — “to become HBO faster than HBO can become us.”
What Won’t Change in Financial Services?
In the financial services industry, I think we’ve gotten pretty good at cultivating insights into what will change. If you have an idea for how banking will change in the future and if you can foster sufficient conviction in that idea from the broader fintech ecosystem5, you can write your own ticket these days.6
The part we’re still not great at, in my opinion, is identifying and making significant investments in the things that won’t change.
So I thought it would be helpful, as we head into the new year, to provide my answer to the question — what won’t change in financial services in the next 10 years?
It's impossible to imagine a future 10 years from now where: customers tell us that they want more steps between the thing they are trying to do and the financial product or service they need in order to do it.
This has obviously been the founding insight driving the success of many fintech companies over the past 20 years. It’s also the animating conviction behind banks’ frantic digital transformation initiatives.
However, banks or fintech companies that rest on their laurels in this area are destined for trouble. The reality is that while conducting banking activities in a smartphone app is more convenient than going into a branch, it’s still an extra (and unwanted) step for most customers most of the time.
The next frontier for convenience in financial services is embedded finance — placing the necessary financial activities within the context of the non-finance activity that the customer is trying to complete. Auto lending was early to this frontier and BNPL is the current instantiation of it. I expect many more examples of it in the future.
It's impossible to imagine a future 10 years from now where: customers won’t want to have the option to quickly interact with an expert to answer their questions or help them solve a problem relating to their money.
Banks are ahead of the curve here, from a resources perspective. However, banks also continue to mistake customers’ desire for responsive customer service with the manner in which that customer service is delivered. Branches ≠ Better Service
Fintech companies generally prefer to avoid the cost of staffing a world-class customer service center, instead relying on self-service tools (bots, FAQs, etc.) and minimally-staffed chat and email solutions. This generally proves to be untenable as these companies scale up and are forced to add more expansive customer service operations, as Robinhood7 and Coinbase8 recently did.
When it comes to money, the reality is that customers will always want to have the option to interact, in some way, with someone who can quickly help them when they have a problem. The stakes are just too high in financial services for anything else to be acceptable. Consequently, fintech companies should make bigger bets on customer service at earlier stages of growth.
It's impossible to imagine a future 10 years from now where: customers keep their money with a company that they don’t trust.
In 2017, Goldman Sachs ranked 98 out of 100 in the Harris Poll’s corporate brand reputation poll, based on a survey of 23,000 U.S. consumers. That same year, Goldman Sachs announced that it had added more than $4 billion in deposits from consumers through its new retail banking arm in less than one year. This broke the brains of many fintech observers who I spoke with at the time. These observers had bought into the mistaken idea that because consumers didn’t like banks (an assertion that was, itself, questionable) they wouldn’t want to keep their money with them, if they had a different option.
This apparent contradiction revealed a deeper truth — when it comes to money, consumers want to work with companies that they trust first and with companies that they like second. It’s not only about “is this a good company?” It’s also about “will the money I’ve given this company today be there tomorrow?”9
Banks don’t have a monopoly on trust. Fintech companies have taken (and will continue to take) market share away from banks by combining superior products with appealing, trustworthy brands. However, fintech companies are fooling themselves if they believe that the concept of trust is illusory or unimportant. It is (and will continue to be) critical and investments in constructing and reinforcing a trusted brand will never be bad investments.
It's impossible to imagine a future 10 years from now where: Capital risk isn’t a significant challenge for startups and low cost of capital isn’t a significant competitive advantage for incumbents.
Most fintech companies will, eventually, get into lending because, to be blunt, that’s where the money is. However, lending is a stressful business to be in. When I spoke with the founders of Provide — a fintech company focused on lending in the healthcare space, which was acquired by Fifth Third — they shared that one of the biggest ongoing challenges in running their business was maintaining sufficient capital to keep lending.
The ideal solution to this capital risk problem is to gain access to an inexpensive and stable source of funding — consumer deposits. Doing so can have a transformational impact on the economics of the lender’s business, as the recent success of Lending Club demonstrates. In Q4 of 2019, Lending Club originated $3.1 billion in loans. In Q1 of 2020, Lending Club acquired Radius Bank, a regulated depository institution. In Q3 of 2021, Lending Club (now a regulated depository institution itself) originated $3.1 billion in loans and made $57 million more in revenue and $27 million more in net income than it had made in Q4 of 2019. 🤯
The long-term economic value of becoming a regulated depository institution is overwhelming. This will motivate fintech companies to seek bank charters earlier in their growth trajectories via acquisitions, mergers, and de novo applications.10
Banking is Good Business
It's impossible to imagine a future 10 years from now where: startups and companies outside of banking view banking as a bad business to be in.
Companies outside financial services, particularly SaaS companies, continue to discover that offering financial products and services to their customers tends to increase retention and expand profit margins. This is the central point underpinning Angela Strange’s famous thesis that Every Company Will Be a Fintech Company11, which I expect to continue playing out as she predicted.
Meanwhile, at the bottom of the stack, banks have discovered that enabling non-bank companies to offer financial products and services by acting as their regulated bank partners is also a great business to be in. According to analysis from Andreessen Horowitz, partner banks like CBW Bank and NBKC operate at profitability levels that are 2-3 times above the industry average. I expect to see more and more banks, particularly community banks, pivot to this business model or add it onto their existing ones.
And finally, of course, there’s the infrastructure that banks, fintech companies, and companies outside financial services need in order to effectively serve financial services customers. This pick and shovel business is also a great one to be in! You have BaaS platforms connecting different levels of the stack together (e.g. Bond). You have former fintech operators starting companies to build the back-office tools that they wished they’d had (e.g. Hummingbird). And you have B2C fintech companies spinning off the tech they built in house (because it didn’t exist when they needed it) and selling it to banks and other fintech companies (e.g. Avant/Amount). I expect all of these areas (and many more) to see continued growth over the next decade as the rising tide of fintech lifts all boats.
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Tap that equity.
Hometap, a home equity financing platform, raised $60 million.
Short take: Hometap invests in the future value of customers’ homes in exchange for an upfront cash payment. It’s not a loan, so there’s no interest or monthly payments. The term of the investment is ten years, after which the customer either has to buy out Hometap, sell the house, or take out a HELOC or refi their mortgage.
My concern with this model is, given the rapid appreciation we’re seeing in most real estate markets, how many customers will essentially be forced to sell their homes or take out a new loan because they can’t afford to buy out Hometap?
A massive opportunity.
Rho, a builder of SMB corporate spend, cash management, and banking solutions, raised a $75 million Series B. Also, Nearside, a small business-focused neobank (formerly known as Hatch), rebranded and raised a $58 million Series B.
Short take: At a high level, Rho and Nearside would appear to be competitors both raising Series B rounds. However, a quick look at both companies would tell you that’s not the case. Rho is focused on mid-size commercial clients that need treasury management and AP automation. Nearside is focused on providing better checking accounts to small businesses. They are, in fact, about as different as two companies in the same business can be.
This is your regular reminder — financial services for SMBs is a truly massive opportunity.
Mixing your metaphors.
Burrata, a developer of identity devtools, raised $7.75 million from investors including Stripe.
Short take: First of all, Burrata is a very good name. Crypto startups always have the best and/or most insane names. It’s great. Second, this quote from CMS Holdings (a crypto investment firm that invested in Burrata) is wonderful:
It’s unclear if the person giving this quote knows what the idiom ‘salt of the earth’ actually means, but points for being the first person in history (I’m guessing!) to combine a Biblical reference with an Arrested Development reference.
Alex Johnson is a Director of Fintech Research at Cornerstone Advisors, where he publishes commissioned research reports on fintech trends and advises both established and startup financial technology companies.
Speaking of which! My boss, Ron Shevlin, wrote an interesting piece on the five trends that banks and fintechs should pay attention to in 2022, which you should read. I also think this thread from Mark Goldberg at Index Ventures has some fascinating 2022 predictions.
There are lots of ways that conviction can impact the size of a wager. A founder might take the plunge into full-time company building faster or have more success raising larger amounts of money from investors earlier in their journey, if they have deep conviction in their vision (and can inspire it in others).
With all the talk of metaverses these days, it really feels like Google Glass just missed the boat. When it comes to hard trends, timing is critical.
Netflix is endlessly fascinating to me. I wrote a bit about its pivot to original content creation (in relation to Square’s acquisition of Tidal) here.
It’s worth scrutinizing this second part — “if you can foster sufficient conviction in that idea from the broader fintech ecosystem”. Despite all the funding flowing into fintech today, I still hear about far too many aspiring founders (particularly women, people of color, and people without prior successful exists) that still have an incredibly difficult time raising. As an industry, we need to keep focusing on this problem.
In fact, I would argue that we have a dangerous tendency in fintech to put too much stock into futuristic-sounding ideas whose time hasn’t (and may never) come. Tyler Winklevoss describing how Gemini is going to spend $400 million to build bank branches in the metaverse is the current vertex of this phenomenon.
Robinhood recently introduced the ability for a customer to get a call back from a trained agent who "provide[s] specialized support based on your issue – even if you aren't sure exactly what's wrong or what questions to ask to solve your problem,"
This change came after the family of Alex Kearns, a college student who took his own life after mistakenly believing he owed nearly $750,000 trading options on Robinhood, sued the company for wrongful death, negligent infliction of emotional distress and unfair business practices.
A quick personal anecdote about Coinbase illustrates the need. I recently tried to transfer money from my Coinbase account to my Coinbase Wallet. It didn’t show up right away so I reached out to their customer service team to find out why. I had to chat with four different agents and was repeatedly told that there was nothing they could do because the transaction was sent using a Binance-pegged token that Coinbase didn’t support and couldn’t recover. None of this turned out to be true. The transfer had simply been delayed due to KYC concerns. 🤦
I don’t feel like the DeFi ecosystem has grokked this yet. FDIC insurance is important not because of its practical utility (protecting against the actual risk of a bank run) but because of its psychological utility (I don’t have to worry about my money disappearing).
The investment in getting a bank charter goes far beyond money. I am hearing more and more stories about fintech companies leaping into bank acquisitions or de novo applications without adequate planning for how they will demonstrate rigorous compliance processes and controls to regulators, which they will insist on seeing before approving anything.
If you haven’t re-read Angela’s excellent essay for a while, may I recommend listening to an ASMR recitation of it instead?