Why the endgame for fintech isn't all rosy collaboration

Pedro Madeira
David Diaz v Humberto Soto
Expect alt fi consolidation – this is a many-horse race but they can't all be winners (Source: Getty)

In a previous article on this page, I wrote about how one of the central strategies of fintech firms is “unbundling” – tackling a specific part of financial services that is broken (such as business lending) and addressing it really well. I argued that this is a temporary measure, and once these companies are big enough, they’ll inevitably try to eat each other’s lunch.

But reading that article again, I realise that I wrote as if each individual business was engaging in single-handed combat against the financial titans in its respective field. That is misleading. It is in the collective interest of these new entrants to create an alternative financial ecosystem – not simply one that bolts on to, or partially replaces, the established financial ecosystem.

Nevertheless, doing this means relying on various bits of the existing “plumbing” – the systems behind the scenes. It also means having the support of big institutions that are capable of cross-selling various services. Any sector with these two features tends to be hard for new entrants to crack.

Fixing the plumbing

First, circumventing established parts of the financial system’s “plumbing” such as Visa and MasterCard is hard. Indeed, several fintech businesses use MasterCard (like Monzo, Revolut, Tide, DiPocket, Loot and Starling). But for the newest startups, this is a ladder to kick away at the earliest convenience. Cryptocurrencies (and other innovations) will start making a dent in the payments infrastructure – but it will take years.

Just like Uber started with human drivers even though it knows the endgame is to use self-driving cars, the digital challenger banks I mention above are using MasterCard in the full knowledge that the endgame is to bypass it.

Read more: Revolut's launching an Amazon Prime-style subscription for banking

An alternative merry-go-round

Second, the major players in the established financial ecosystem try to take care of many of their clients’ needs. Fintech companies could try to replicate this by becoming technologically more integrated with each other, thus enabling users to frictionlessly purchase additional products from alternative fintech providers.

One very simple example, easily replicable for other fintech subsectors, could involve: first, enabling the “jump” between, say, a pre-paid card provider and a crowdfunding platform via a referrals system; and second, even the extra step of carrying out a crowdfunding investment within your pre-paid card app.

The idea is to keep the client on the alternative financial services “merry-go-round” (so to speak), so that they don’t end up getting pulled onto the established financial services merry-go-round. Whether that would be a positive outcome for clients is debatable.

Elsewhere in the tech world, Apple famously aims for a closed, deeply integrated system that, some argue, creates a more harmonious user experience. Others argue that it makes it harder for clients to shop around. Fintech companies would probably argue that the kind of integration I have in mind would merely simplify people’s lives and nudge them to stay within the alternative financial ecosystem, rather than actively prevent them from stepping out.

Keeping it in the family

One way in which these companies are already asserting their independence and mutually supporting each other is by bypassing traditional sources of finance and frequently raising equity funding through themselves or through other fintech players.

According to Beauhurst data, 59 UK fintech companies have secured 82 fundraises via equity crowdfunding platforms. Including money raised from other investors in the same rounds, they have raised £88m since July 2010. Out of these 59, the 10 that raised the most funding were Brightpearl, Crowdcube, FreeAgent, Landbay, Monzo, Revolut, Seedrs, SyndicateRoom, Tandem and WeSwap.com.

Read more: Digital challenger bank Monzo just smashed another crowdfunding record

It’s interesting to look at a breakdown here. Seedrs, CrowdCube and SyndicateRoom are equity crowdfunding platforms themselves (and each raised funding via itself, as you’d expect). Landbay is also in the crowdfunding business, but is more niche (it facilitates property-backed loans).

Tandem and Monzo are – or want to become – digital banks (although there are plenty of differences in their current offerings and business models). Revolut and WeSwap.com focus on currency transfers. FreeAgent and Brightpearl sell financial software tools.

There is a lot of scope here for cross-fertilisation and support among these well-funded companies, along the lines I discussed above.

Remember the endgame

But this rosy vision of collaboration needs bringing back to earth. It is important not to lose sight of the fact that, although these tactical moves might help to establish an alternative financial services ecosystem, they might also set the scene for some vertical and horizontal consolidation.

The equity crowdfunding space, to take an example, is already quite mature. Our data show that Seedrs and Crowdcube accounted for 86 per cent of all successful equity crowdfunding campaigns in the UK in 2016 (by number, not size, of campaigns). Down the line, this will presumably lead to some equity crowdfunding platforms shutting down and others getting acquired.

The same will happen across subsectors, and we’ll see vertical consolidation. Fintech companies will try to replicate the range of services that the incumbents currently offer, and we will be left with a handful of companies that seek to meet pretty much every financial need you could have. Each player will try to create its own merry-go-round, and keep you on it. It’s a many-horse race, but they can’t all be winners.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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