[Editor’s note: This is a guest post from George Bessenyei, Director at 48 Factoring. 48 Factoring is a Silver Sponsor at LendIt USA 2016, which will take place on April 11-12, 2016, in San Francisco. At LendIt USA, George Bessenyei will speak on the panel: High Yield and Short Duration: Why Invoice Finance is Growing Fast]
In the past two years, tech entrepreneurs have succeeded in tapping into and rousing a giant industry: FinTech, a financial services sector that is becoming reputed for its credibility, efficiency, and organization. Today FinTech incorporates technological innovations that span a spectrum of fields, including financial education, retail banking, crypto-currency, and investment.
While making innovative leaps in how technology is perceived and utilized as a key element in the business world, there has been much speculation as to whether FinTech is a stable phenomenon or a passing trend. Recent IPOs—at least those not cancelled—don’t exactly ignite optimism.
So where does the industry really stand now?
Technology IS the product
The difference between a traditional financial firm and a true FinTech innovator is the latter’s focus on (and importance placed on) technology, namely software. Sure, you’d be hard-pressed to find a single oldschool bank that isn’t using at least a bit of technology to its advantage—but there is a substantial difference between an existing organization that dabbles in software versus an organization that exists to create software. It should be clear which organization logically has the upper hand in technological innovation. Typical banks are a brick-and-mortar operation supported by software; successful FinTech companies create software as their main product and build an institution around it
It doesn’t matter how big the balance sheet is of a certain institution, or how many branches that organization has. Physical assets can actually hinder or slow a company’s prospects when it seeks to transition to a more technological-oriented future. To be frank, we rarely—if ever—see a successful transition of incumbent players when disruptive technologies emerge. The same limited success ratio is apparent when such incumbents try to buy up into these technologies or try to awkwardly integrate up-and-coming technology companies into their own organizations.
The truth is, technology isn’t just a tool to make the products cheaper and better—it IS the product itself.
Gathering Clouds: The Emergence of New Cloud-Based Technologies
Paraphrasing Marc Andreessen, software is inarguably eating the finance world. Why now, though? What has changed in the last five years, making FinTech companies spring up like mushrooms after a rainshower?
Several factors are at play…
- The generational shift. New clients have appeared, with the faces of millennials. Millennials in general, growing up in a fast-paced world of constant innovation and technological breakthroughs, have become the driving force of today’s rapidly-changing industries.
- The technological developments—a less obvious but equally important factor—which enabled the birth of many current startups, including my very own: 48 Factoring Inc.
- The increasing reliability and affordability of cloud computing. As perhaps the most important technological evolution of the past three years, we’ve witnessed cutthroat competition between cloud-computing behemoths such as Amazon, Google, and Microsoft. Within a mere span of 12 months, the cost of important cloud-computing resources has dropped over 40%. Not only are these new resources significantly cheaper, however—they are also far more sophisticated and reliable. Services that were considered too sensitive to reliability (and therefore unfit for the cloud)—like VoIP (internet telephony)—can now be hosted in the cloud for nominal charges.
- Reduced cost of working with large datasets; this costs a fraction of what it used to, thanks to cloud database services.
As the cloud got more affordable and accessible, cloud-based services quickly hatched. All of them enabled the creation and growth of till-then resource-constrained startups. Setting up a company that could target hundreds of thousands of prospective clients used to require a huge amount of software and hardware investment. Today, dealing with hundreds of thousands of clients is a bare minimum requisite in most FinTech projects. This is because today’s startups can simply focus on writing their own code and use cloud-based tools to run it.
No Time Like the Present
So, picture this. In one corner, we’ve got the old firms with the fat balance sheets throwing their money at problems and expecting solutions to fall from trees. In the other corner, we’ve got a handful of FinTech startups that have no cash to waste yet that are brimming with excitement, passionate vision, and creativity. If you’ve read about the giants of success in any field, you know that almost all major companies started from scratch—often from the depths of a dim little garage. The underdog has an underestimated advantage here.
I personally believe that the root cause of the oldschool firms’ troubles is rather simple: it’s a matter of software projects being extremely difficult to scale. Starting from scratch, with a small team, and launching a by-definition complex FinTech project is easier as compared to the rewriting of a system code used for over thirty years. Startups have the natural advantage over old incumbents—as long as they understand the pitfalls of software development, and keep pushing for a reasonable development cycle.
“Never doubt that a small group of thoughtful committed citizens can change the world. Indeed, it is the only thing that ever has.” –Margaret Mead
Disruptive changes in any industry typically run a similar course. FinTech will be no different. Most analysts and observers are confused because the real revolution in the field hasn’t even begun yet—despite the few and sometimes rushed IPOs thus far. We are still in the phase where the necessary building blocks have been made and the architects of the startups are just laying the groundwork for their projects. To use a dotcom analogy, we’re at the same phase of development as when CompuServe just started offering limited internet connectivity in ’89, building on the necessary internet building blocks like TCP/IP protocol and modem technology—remember? With this projection in mind, I expect a minimum of ten years’ worth of prosperity for FinTech companies before their market matures and creates its own dominant players.
In short, there’s never been a better time for FinTech startups.
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