Mind the Gap

Big banks know to steer clear of fintech for some very good reasons

Financial services could suffer the same digital fate as the record industry did under iTunes

PUBLISHED : Monday, 25 January, 2016, 7:00am
UPDATED : Monday, 16 January, 2017, 10:26am

Fintech has grown up and emerged from incubators to achieve a level of recognition and validation. In the third quarter of 2015, global investment into venture backed fintech companies such as marketplace lending hit a record US$4.85 billion, according to CB Insights. They are supposed to challenge the dominance of financial institutions and cultivate new age of financial services.

Even stranger, fintech has finally opened up the tech business to bankers who’ve lost their jobs or seek opportunities in the burgeoning tech bubble. The fintech industry’s biggest headache is that too many ex-bankers are involved.

Bankers are trying to reinvent themselves in the tech sector. Several high profile senior Wall Street bankers, who presided over major banks leading up to the 2008 financial market implosion, are trying to fund and shepherd startups that seek to disintermediate the entire financial services industry.

It is a wonder none of them are in prison

High profile leaders of the fintech movement cover a rogues gallery of the financial apocalypse. Three of them: Vikram Pandit, former Citigroup CEO; John Mack, former Morgan Stanley CEO; and Blythe Masters of JP Morgan, played such large roles leading America straight off the subprime cliff that it is a wonder that they could even raise money. It is a wonder none of them are in prison.

These bankers probably spent more money on decorating their offices than a round of startup funding. And Blythe Masters was a leader in the development of credit default swaps, which are like buying fire insurance on your neighbour’s house and then burning it down to collect the payout. Let’s hope that these guys will revolutionize the financial industry with a better outcome than derivatives and structured products.

Investment bankers are ill suited to be venture capitalists or founders of tech startups. A venture capitalist builds businesses from ideas. That is so fundamentally different from banking, which is all about buying and selling money.

Even worse, many investment bankers are too self-entitled after years of high salaries, big bonuses and support staff. They don’t bring any real functional value to a fintech startup where you need programmers, marketing and product people who possess familiarity and deep insight into certain back office financial processes.

Then, there is very little process and structure in startup situations. You must take initiative, innovate, identify problems and decisively solve them. High tolerance for failure, which is likely to occur, isn’t something you learn from financial services. Producing Powerpoint presentations, industry analysis and financial research are not valuable in startups. Roll up your sleeves and prepare for all sorts of humbling challenges. The comfort zone of bankers will be stretched. They have to learn and adapt at a rate unmatched at a large company.

Investment bankers are ill suited to be venture capitalists or founders of tech startups

Fintech has become one of this year’s hottest sectors. Being free of stringent regulations and the burden of legacy IT systems is supposed to drive innovation. But that creates its own dilemma when they become so big that they fall under regulation.

The biggest challenge that even bankers can’t navigate is how to convince and coerce big banks to use their products and make them market standards. And big financial institutions don’t want to suffer the same digital fate as the record companies so don’t expect them to be complacent as they are being encircled.