My old boss at JPMorgan said that……….all the time.
It always made me smile because it made everything so clear. That was our job.
But the question is how do banks make money?
When you boil it right down banks act as intermediaries between their clients, adding value through their expertise which is packaged in the forms of products or services. They do this by collecting, analysing and acting on information gathered in the market.
For me the key things in that are “information”, which is the asset and “expertise” which is the value add.
Now lets think about technology for a second, specifically digital technology and lets again boil it down to the absolute basics: digitisation is about storage and distribution of information.
If we think about information as an asset, the disruption of technology lies in the exponential economic impact of three things:
> increasing production of information, i.e. data
> penetration through an ever-increasing web of connected devices
> rapid distribution through networks
The problem is what to do with all the information. There is just so much of it and it grows at such velocity that it’s hard to know what to do with it. This is what we call Big Data. But in order to use it you need to make sense of it so bring some sort of order to it, then apply some framework through which you can analyse it. There is a rapidly growing range of tools at our disposal for doing this - the problem is the final part: acting on it. This is largely where (to date) technology ends because the human element enters. This is where ‘expertise’ comes in. Arguably the tech world has not cracked this bit yet….but the finance world has: this is what the financial world does in order to make money.
With this in mind let’s consider the phenomenon that is FinTech.
With tech startups the aim of the game is to build, test, tweak, test again and repeat until you find market fit - and to do this in the shortest time and at the lowest cost.
Finance does not sit so well with this model - mainly because of the heavy regulation. The regulation is there for good reason: you can not simply test out products when people’s money is involved.
Finance is also fairly complicated stuff that you can’t just learn about overnight, so to date techies have honed in on easier targets. But seeing as every conceivable thing - from buying a record to walking your dog seems to have been disrupted, these guys need to look elsewhere for the next opportunities….and the world of finance is now firmly in their sights.
Activity to date has focused on certain areas - where regulation (or lack of) allows it and in services and goods that can be easily commoditised, require relatively limited financial sophistication, and no collateral.
But that’s changing. Before it was just tech, but now software is starting to eat the financial world. As the market develops inevitably competition drives ever more sophisticated innovation, and I think this is why FinTech, a term that has been around for years amongst very small circles, has suddenly exploded and became a thing.
We have reached that stage of the curve where the powerful forces of finance and technology collide.
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