John Waupsh is the Chief Innovation Officer at BancVue where he helps spearhead technology and marketing solutions such as Kasasa. His upcoming book, Bankruption, is set for release in 2016. We talked to him about the state of fintech today.
In the past you’ve expressed concern about futurists who are too starry-eyed about fintech. What is your main critique of their position?
Last year at a big industry conference I was waiting in line for my badge and I heard one guy say to another guy, “Some friends and I raised three million dollars to do something in payments, but we’re not sure what yet. I’m supposed to find out what we should build.”
I turned around and told him, “Build a fire for the pile of money you’re about to burn.”
Look, you could search the earth and you’d be hard-pressed to find a bigger dreamer than me of slick technological solutions to common financial problems. It’s not futurists I have a problem with — it is definitely not futurists. It’s alleged solution-makers who don’t deeply understand the problem they’re attempting to solve.
In order to break the rules, you have to first know the rules.
Said another way, you can’t just be mad that a problem exists. That’s not enough information to formulate a solution.
You need to fall in love with the problem. Obsessive-compulsive, did-I-really-turn the-light-off kind of in love with the problem. You need to know what the problem would eat for dessert. Sink into its embrace, no matter how bad its breath stinks.
You need to be a curious observer, a user, a fanboy, and a tinkerer. Consume everything that’s ever been written on the subject while listening to conflicting viewpoint podcasts. Interview competitors, their users, and test hypotheses with anyone who will listen. Follow the money and analyze the partnerships.
Ask questions you don’t want the answer to. Remove the decades of gloss that humans or companies or governments have painted on it so that you can separate myth from reality. Only then will you know the rules you need to break.
How would you describe the state of fintech today?
Lots of new, confused fish. Yeah, that was a fin joke. But seriously, you could say that all fintech was created post-2008, exists to eat financial institutions’ lunch, and is this super-narrow world of P2P payments and Bitcoin. But that’s simply untrue, and worse, it makes you sound lazy. Like a magician at a nursing home, you’re trying to pull a fast one on the audience. Don’t short-circuit the work required to understand the industry, or do us all a favor and start building that fire. Be at peace with the fact that you did not create the fintech industry. It’s been around longer than you’ve been alive, has always co-existed (and competed) with FIs, and covers a wide spectrum of financial technologies. For instance, the Association of Financial Technology has existed since 1972 to serve fintech of all types. If you run a fintech company, you’re invited to join. Tell them I sent you.
There really is a large range of fintech companies out there…
Definitely. And everyone uses different labels when talking about them. So, of course, I have my version, which I put it into three groups: White Label, Direct, and Gold Label.
1) White-label products are offered to an FI’s end users via a white-label strategy, where the tech is developed by a third-party, but branded under the FI’s name (or not branded at all, as in the case of the core processor).
In White Label, the end user sees the product as a “table-stakes” product that is “from the FI”. This is the kind of fintech that has existed from literally hundreds of providers for over 40 years.
Some examples of White Label are digital banking from Q2, bill pay from CheckFree, payment processing from TSYS, etc.
2) On the other side of the spectrum, you have Direct, which is offered unrelated to an FI. End users of Direct entrust the service directly and know that an FI is not involved in the service.
Direct often includes completely new banking models (P2P lending) or other interesting solutions that FIs wouldn’t traditionally consider or touch due to regulation, geographical restrictions, risk analysis, etc. This kind of fintech is what many newbies to the space exclusively consider as “fintech.”
I warn newbies not to mistake FI silence in new markets as a lack of understanding or capability. Direct can simply take risks that FIs can’t, so it’s more common to see truly exciting things come from them.
Examples of Direct would be PayPal, Venmo, Mint, Square, Stripe, Coin, etc.
3) In between the two you have Gold Label. Gold Label companies build product brands that people recognize and seek out; they and marry them with the FI’s brand of trust and credibility.
Like Direct, Gold Label products are unique, brand-first solutions to user problems. Like White Label, Gold Label products are designed to help an FI compete and scale, and they are distributed by FIs to their end users.
In this way, the FI gets to offer the most contemporary, compelling user-centric products without the expense of “building it here,” and the fintech firm receives a halo-effect of trust generated by the bank or credit union distributor. (Hat tip to Ron Shevlin for recognizing “Gold Labeling” early on in his April 3, 2013 Snarketing post.)
Examples of Gold Label are Visa, Kasasa, Moven, Simple, Go Bank, Dwolla, Co-Op Financial Services, etc.
As with anything in life, grays abound, but you can fit most fintech companies into these three different buckets. Inside each of these three groups exist start-ups, mid-sized companies and giants. Ultimately, the distinction boils down to why the product exists and who is providing it.
Just as technology has evolved over the past 40 years, so has fintech. I look forward to seeing the next generation, and futurists who most understand the problems they are solving will get us there.
I’ve heard the idea that the future of the financial industry will follow the trend in the television industry, where traditional players such as NBC and ABC are seriously crimped by digital players such as HBO and Netflix. What do you think about that idea?
TV’s a whole other ball of wax. You don’t have enough room on the internet to print what I think about TV.
Just as it relates to banking…
It doesn’t. You know, proponents of this line of thinking talk about banking as a commodity, banks providing no value, and consumers only caring that their payment settles.
Do you see what they do there? They mix “banking” with “payments.”
The same people who think they invented fintech also suggest that banking is solely payments rails.
The scary, hyperbolic keynote talk track then associates “rails” with “utility” or “commodity”. So, on the following in-conclusion slide, with a beautiful full-bleed, high-resolution photo emblazoned behind the unfortunately kerned letters “banking = utility.”
[laughs] I feel like I’m revealing magicians’ secrets.
But here’s the problem with that, and I’m embarrassed to be quoted as having been made to say this, ”Banking is much bigger than payments.”
For the foreseeable future, banking remains a trust business.
You entrust a bank or a credit union to hold your money and keep it safe until you tell it to do something with your money: send it to a merchant, invest it in a CD, move it to another account, whatever. There are a lot of things that you can do with your money once you hand it over to the bank, but core to it all is trust.
So, what these guys are essentially saying is that consumers will just turn off their trusted system of traditional retail banking for literally anything else.
Think about the kick in the pants to “trust” the average consumer was hit with during the Great Recession. Even then, at the lowest point of trust in the US banking system during our lifetimes, what happened? People stayed with their bank. Heck, the big banks got even bigger.
We Americans can’t even stop writing checks without a government mandate. We like our traditions, rituals and patterns. We have faith in them; they’re comforting, nurturing and safe.
Technology may be moving fast, and the cost to produce technology may be dropping, but I’ve seen little evidence that humans are evolving faster. And, for the time being, humans are not technology.
The U.S. consumer moving en masse to something entirely outside of traditional banking will either be a generational shift or some sizable, catastrophic change to traditional banking.
Might math-based currencies reduce the cost of a federal fund that primarily protects against human incompetence? Hope so. Might various data sources and machine learning reduce loan risk, to compress loan margins beyond that which can compensate for human decision-making? They already are.
That’s just humans trusting math (over other humans) and technology smoothing wrinkles. That’s going to happen. Thankfully, capitalism will make it so.
But in our lifetimes, banking progress that gets universally adopted will happen as a partnership between fintech, government and trusted entities.
Because banking is bigger than payments.
So what would you say is the biggest disconnect between what banks should be doing and what they are doing?
That question makes it sound like all FIs are doing something wrong, which I don’t think is the case.
Still, if I had to choose one thing community banks and credit unions in the U.S. could do more effectively, it would be to learn as much about the consumer journey as possible, and amp up partnerships with vendors that provide you the competitive advantage of scale.
This only gets truer as you go below the $5 billion asset size institutions. They simply cannot afford to staff all the compliance, R&D, UX, UI, product, data security, and marketing expertise they need to compete in today’s world.
Find forward-acting financial industry vendors that have this expertise, and use them as extended headcount to partner with the retail, IT, marketing, and compliance teams at your FI. This is how you will achieve the efficiencies of internal and external scale that will take you into the next decade.
In that vein, do you see that certain employee roles at financial institutions are shifting as a result of technology?
Oh goodness. Yeah, every role at every institution is shifting in some way. Employees are getting more thrown on them, and expectation won’t stop.
For example, the marketing person or team at a financial institution now has to partner with the IT team on entity resolution or data cleansing, data security, data privacy, data access privileges, communication preferences, etc.
They need to work together to make sense and generate insight from exceptionally complex, and otherwise meaningless gobs of data. Then, they need to find a way to fold that into the fabric of a fascinating product set woven into various consumer touchpoints across time. A/B test it. Select, wash and repeat.
That’s just one tiny way that one small part of the FI must change immediately. Immediately!
That’s why banks (especially community banks) and credit unions should make better use of financial vendor experts. They need to find a way to grow beyond themselves without hiring more bodies and without killing themselves in the process.