By Brandes Elitch
Anyone reading The Green Sheet has at least a passing familiarity with financial technology (fintech) companies that are disrupting traditional bank business models with new solutions that provide easy access, speed, convenience and efficiency – typically by employing smart devices. These innovative services are powered by artificial intelligence (AI), machine learning, mobile wallets, distributed ledgers, and crypto currencies (I hesitate to mention bitcoin, which I've long characterized as a speculative commodity – with additional incentives for criminal activity).
In 2016, the investment bank Financial Technology Partners estimated fintech companies raised $36 billion worldwide, spread out over 1,500 deals from 1,700 investors. The PwC Global Fintech Report 2017 projected the cumulative investment in global fintech will exceed $150 billion this year. Comments like "Silicon Valley is the Wall Street of 2017" are now common.
These are serious numbers. All payment professionals should pay attention to developments in this space. Banks and ISOs won't be disintermediated directly or immediately, but thousands of talented entrepreneurs are seeking ways to disrupt the existing order and, not incidentally, to create new revenue streams for their partners and themselves. Inventive, ambitious creators One way to keep informed is to attend the Money20/20 conference. This year's show was held in Las Vegas at the Venetian Hotel conference area. Additional Money20/20 events are slated for Amsterdam, Singapore and mainland China. Fintech and this show represent a powerful wave sweeping the payments system that will be around for a long time.
The organizers of the sixth iteration of this giant show (15,000 attendees) described its genesis as follows: "We started Money20/20 because the industry needed a space where the smartest, most inventive, and ambitious people could come together and explore the ever-new possibilities in the payment ecosystem. … As a Money20/20 attendee, we firmly believe that you are the creators of the future of money."
Attendees, called "creators," can be characterized, organizers said, as some subset of the following: explorers, evangelists, taskmasters, pioneers, protectors, alchemists, or connectors. I found it interesting to contemplate the titles of some of the presenters. These are not your typical presenters at banking conferences. Here are several examples: Director of Innovation; Chief Identity Officer; Head of Awareness; Security Maven; SVP, Internet of Things; Global Innovation Lead; Russian Hacker & Director, Research & Data; GM Global Digital & Incentives; Fintech Investment Lead; Chief Science Officer; and Renowned Futurist & Professor of Theoretical Physics.
Besides the vendor booths, kiosks, and meeting cubes and pods (about 300) there was Startup City, with 24 startup finalists vying for the first place award of $40,000. In addition, a 24-hour Hackathon featured teams competing for $125,000 in cash prizes using APIs, SDKs and other tools from the show. The showdown for the winning startup was compelling. Four finalists, YayPay, Steady, Tomorrow and CreditStacks, each received three minutes to present their pitch and three minutes to answer questions from judges. The audience voted in real time.
Top honors went to Steady and its CEO, Adam Roseman. Steady addresses an important issue: the gig economy. In the near future, as many as half of all adults in their twenties will have no career trajectory and no employee benefits; 40 percent will experience large fluctuations in their monthly income. The Steady platform allows people to plan and reach their income goals by matching them with jobs that require their skills when and where available. Steady is paid by employers.
I was also impressed by Tomorrow, which provides a free online platform for creating wills, trusts and guardianships that are maintained in the cloud in perpetuity. Tomorrow earns compensation by selling insurance to consumers who find they need it. Given that most Americans don't even have a will or a trust, in part, because they are intimidated by the cost or don't know who to go to, this seems like a perfect example of a financial disruptor.
Since I live in the check world of corporate cash management, I attended a presentation called Paper Checks are Under Fire. Thirty years ago, I worked at a leading cash management bank, First Chicago, which was implementing the General Motors Electronic Data Interchange (EDI) project, expected to be a revolution in payments. Today, EDI has had limited success or adoption beyond the very largest enterprises and perhaps the top 15 retailers.
The majority of B2B payments are still made using paper checks, much to the amazement of the attendees at this conference. With the exception of EDI, it is difficult for businesses to exchange purchase order and invoice information electronically, unless they are using the same accounting system, which is unlikely. Further, many businesses do not want to share their bank account information with anyone else, including their suppliers.
At the conference, any mention of paper checks was greeted with muffled laughter. But for some time, virtually all checks have been converted to digital image files and cleared electronically for next-business-day settlement; they don't take longer to clear than ACH transactions. If you run a large enterprise, you want the safety and security of the Uniform Commercial Code and 200 years of banking law behind you, not the NACHA Rules and Regs and Reg. E, which is a consumer protection statute. My company is working on solutions that enable consumers to write virtual checks if they don't have checkbooks; the paper aspect is just not all that relevant anymore.
The event's presentations were divided into tracks comprising regulation, entrepreneurship, financial inclusion, globalization, payments, commerce, security, banking, blockchain, lending and the customer experience. It would be impossible for one individual to see everything. My guess is that to cover the show thoroughly, it would take a team of at least three people from a given organization ‒ two to attend the presentations and one to cover the tradeshow floor, and even then, you'd still miss a lot.
Most of the presentations I attended were in the payments track. The show started at 9 a.m. on Sunday and finished at noon on Wednesday. Four nights at the Venetian, airfare and the ticket price would take up most of $5,000, so it's a bit of a rarefied atmosphere. I'd say many senior level people in the payments industry attended from all over the world, judging from the different languages I heard spoken. One track was held in what looked like a boxing ring. Participants were given small radio transmitters and earphones to aid listening because presenters did not have traditional microphones. I thought this was a good idea, although in a session I attended, organizers ran out of transmitters.
One presenter noted that it took 60 years for the card brands to issue 3 billion cards and equip 44 million merchants worldwide to take card payments. However, there soon will be ten times the coverage in terms of ways to reach customers and accept payments. Visa is now giving out APIs and SDKs to developers; for all of its previous history, it was a closed shop.
This is a big change for the card brands, which are keenly aware that many disruptors are building ways for consumers to pay so that merchants do not have to pay interchange. This brings to mind a memorable comment by a presenter whose name I can't recall: "I've learned two things in life: don't start a land war in Asia and don't bring up the topic of interchange at Money20/20."
About 1,500 fintech startups are operating in the payments segment. As writer Elena Mesropyan put it in her regular column at https://letstalkpayments.com, "The vast majority of fintech startups around the world are competing for capital, traction, and an extended runway before the next round. On that level, the only competition that matters is with fellow startups …only a handful have a chance in an intensely competitive market."
Most such fintechs will not survive the cash-flow needs of starting a new enterprise and building it to be self-sustaining or sold to someone else. Until now, banks haven't been particularly forward-thinking about digital strategies, but now many banks are talking to fintech startups about how their products can help commercial banks transition to the next stage of the digital economy. I suspect this progress will be slower than many would want. In speculating about the future, I heard one attendee say, "What if Amazon buys ADP?" ADP is a provider of human resources management software and services. Big changes.
Brandes Elitch, Director of Partner Acquisition for CrossCheck Inc., has been a cash management practitioner for several Fortune 500 companies, sold cash management services for major banks and served as a consultant to bankcard acquirers. A Certified Cash Manager and Accredited ACH Professional, Brandes has a Master's in Business Administration from New York University and a Juris Doctor from Santa Clara University. He can be reached a firstname.lastname@example.org.
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