Fintech Eating Our World

In the early 2000s, people thought of technology as its own industry. There was healthcare, industrials, finance, and… technology. Technology was separate, unique and altogether foreign to the others. It was the domain of innovators that made operating systems like Microsoft and search engines like Google.

Everything has changed. Instead of being viewed as a distinct vertical, today every company is a technology company.Perhaps most aptly, Marc Andreessen captures the current zeitgeist “Software is eating the world”.

A similar dynamic is playing out in financial services, which used to be an entirely distinct vertical – the domain of banks, payment processors and insurance companies. Through innovation led by fintechs, the financial services industry is poised to become a horizontal as well, and permeate across the fractured silos of the economy. This is manifesting itself in many ways.

Non-financial companies offer financial products - Non-financial firms – from ecommerce distributors to healthcare providers – have myriad unique assets, notably a large customer base, unique insights, and crucially, trusted relationships. Capitalizing on these, non-financial companies can offer financial products and services to their customers. The sum is often larger than its parts. 

Marketplaces have a unique view on credit worthiness and an enduring customer relationship - allowing them to support their best customers, at affordable cost of acquisition. Alibaba for example has been growing its lending book through its payment affiliate Ant Financial (and recent news documented the quiet ascendency of Jack Ma’s newest $290 billion lending machine). In the U.S., Amazon and Shopify are both becoming key lenders to their supply chains.

The venture capital firm, NFX, characterized the dynamic aptly, arguing Fintech enable marketplaces - will unlock tremendous value: “By adding innovative financial services, marketplace startups can reduce the friction involved in (especially high-value) transactions for purchasers, and can improve incentive alignment amongst all parties with the removal of financial intermediaries between sellers and buyers.”

This story of course is not unique to marketplaces. For example, Homelight partners with real estate agents, and can offer end customers their own title product (and recently mortgages as well). Already fitness trackers can be used to access lower cost health insurance. It certainly is not a stretch to expect a cross-sell opportunity from Apple Healthkit or Strava's best customers for a wide range of health or life insurance products.

Fintechs have an important role to play. For many, products will be partnerships or white label. Companies like Affirm, Bread or Fundbox are partnering with merchants to offer end customers or businesses credit for their services. Companies like SynapseFI and other banking-as-a-service players are lowering the friction further. The same is happening across insurance and payments.

Embedded financial services are key product drivers - Sometimes this goes further. A financial product or service may not be a distinct offering, but rather a key feature that unlocks a product or service.

In the early days of car sharing marketplaces, insurance was a key feature that unlocked the product. Without it, neither renters nor owners were assured they were covered. Similarly, Airbnb's $1 million host liability coverage is arguably a critical feature of its marketplace – and a key driver for many hosts to use the platform.

This extends to other industries. In education for instance, the income sharing financing agreement - which bundles credit with a revenue share model – can be embedded into the product package to unlock scale. Coding schools like Lambda offers free tuition to students, but get paid back when students get hired – thus deeply aligning incentives. African leadership University similarly offers ISAs as a feature of the product to increase access. Already many universities are experimenting with the model. 

Embedding complex financial instruments as part of the feature set will only accelerate, with the rise of technologies like artificial intelligence. For example, as cars become driverless, many believe the insurance will no longer be a financial product that users purchase. Rather, it may be a warranty offered by the software provider of the car manufacturer. Startups like Trov - have already demonstrated it is viable to break insurance into bite-size per-use transactions – imagine if this standard offering from companies for every product?

Financial products are poised to create entirely new industries - Globally, nearly half the planet is unbanked or underbanked. Financial innovations like mobile banking are including people into the formal financial system, often for the first time. Today, there are over 250 mobile money deployments across the emerging markets.

These models are unlocking the creation of entirely new products and services. For instance, companies like Zola Electric and M-Kopa offer home solar systems to offgrid families in Sub Saharan Africa. An outright purchase is beyond the financial means of most of their customers. Yet, on a daily or monthly basis, their customers spend more for kerosene to light their homes. Two parallel fintech innovations unlocked the market. The first, is that these energy innovators bundle credit into the product or service – essentially a digital microfinance loan collateralized by the energy system. The second is digital payments: through mobile banking, providers can efficiently collect small daily/weekly/monthly payments digitally. Without it, cash collection would render the models uneconomical.

In this way, fintech innovation has catalyzed a new industry. Energy is not alone. Mobile banking is a key enabler for vaious new models across education, water and sanitization, and many more surely to come.

What’s Next? - These are still early days. The scifi writer Frederik Pohl once said: “A good science fiction story should be able to predict not the automobile but the traffic jam.” The deeper question here is what the traffic jam will be.

If financing is embedded everywhere, how does this change where deposits are held, how salaries get paid, and where asset recourse lies? How asset ownership change? How property rights get modified for this new reality?

In future posts I will explore some of these areas in more detail. But for the moment, I leave you with one question: how else is fintech eating the world?