To understand where FinTech has come from and where it might be going you’ve got to look under the hood of the traditional financial institutions and see how they work. That way you can start to understand where they are being attacked from, by who and most importantly - why?
I’m going to start with some background to give some context…
In the the early half of the twentieth century corporates saw the way to increase profits was through diversification - branching out in to new markets opening up alternative business lines which could benefit from economies of scale. The idea was to own and manage the assets. This downside of this strategy was that it required ever increasing layers of management - leading to bureaucratic inefficiencies that hampered progress and drove up costs.
The solution was largely technology-driven: outsourcing. With outsourcing corporates could concentrate on the core business, focusing on efficiencies with centralised functions and shipping off operational activity to far flung corners of the earth.
However, people soon realised that they could have the best of both worlds. This required restructuring themselves so that each business line was set up to run as its own business where managers were responsible for, and paid from, their individual unit’s P&Ls. This solved a variety of problems:
1.) Less management: each business line was responsible for its governance and therefore could be more agile.
2.) More incentivisation: employees would be incentivised to succeed as their bonuses could be more closely linked to performance.
3.) More flexibility: every part contributed to the overall business, yet each part was separate and if its performance was below par it could be severed.
For well capitalised businesses - like banks - It meant that if they were outsourcing a non-core area that they noticed was being increasingly profitable they could simply acquire it. This was the perfect solution - a series of inter-connected businesses operating under an umbrella entity that could be rapidly scaled up or time depending on whether times were good or bad.
The beast that is JPMorgan Chase…. Full Stack Financial Services.
The modern bank is like a big lego set made up of bricks that can be plugged into each other, chopped and changed and cut in many ways. The image above is taken from JPM marketing material but it illustrates simply how the organisation is structured. All of these business lines can operate independently and can be carved out and sold (e.g. commodities) or shut down.
Every unit is vulnerable to competition.
Right now that competition is not coming from within the industry, it’s coming from outside. It’s coming from the technology sector - new arrivals to the party with completely different tools, skills and knowledge.
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