There’s no denying it. Financial services providers as we originally knew them, are exposed. Payment networks are seeing their oligopoly begin to crumble in the face of several new payment rails, including blockchain-based payments. Traditional lenders are facing an onslaught of frictionless and more flexible alternatives from FinTechs. Banks are losing consumers to neobanks. Credit card companies are seeing pressure on fee-models and are losing the connection to their customer in light of Integrated card experiences that are bundled with slick and multi-faceted software platforms. Borrowing in general is being offered at the point of need (BNPL) rather than from lenders directly. Businesses are empowered to choose from a buffet of next-generation finance automation suites with embedded financial products. And lastly, new technologies such as the blockchain are calling into question the longevity of entire categories of financial services altogether, not to mention disruption being placed on the currencies themselves. The battle for middle earth has begun.
The battle for middle earth refers to Tolkien’s imagined mythological world depicted in the Lord of the Rings trilogy and the Hobbit (…obviously!). This feels like the most appropriate analogy given the varying parties at play. In this battle, you have: traditional banks, business banks, lenders, insurance companies, credit unions, investment brokerages, payment processors, credit card companies, etc. No one is safe. More recently, we have seen new armies make their way onto the battlefield including neobanks, tech-enabled lenders, alternative lenders, marketplaces, and let’s not forget the biggest army of all, software. Nearly any software company can now come to market with a lethal combination of software and essentially any financial service — just offered in a more friendly, tech- enabled way. The rise of embedded finance has catalyzed a battle for the end-customer and there is no turning back.
You can trace FinTech back to the 1850s, but for our purposes let’s agree on 2008. Since 2008, we have seen consistent and prolific growth in FinTech startups, new unicorns, overall funding volumes and innovation. For the first decade post-2008 — these new platforms were still working things out, still achieving scale and were dismissed by non-tech incumbent providers out of pure ignorance or perhaps out of fear. More recently, we’ve reached an inflection point whereby traditional financial services providers can’t ignore this threat and moreover, are actively scrambling to retool before it’s truly too late. To steal an analogy I heard from a payments entrepreneur — the incumbency just woke up, and their houses are on fire.
The above are just a small sampling of recent announcements underscoring some of the forces at play. Everyday, thousands of tech entrepreneurs wake up every day on a mission to steal customers from financial services providers and similarly, financial services executives are making serious efforts to fend of FinTechs.
We’re in the end game now.
As PeakSpan, we are looking to back the next generation of financial technology and payments platforms and as it pertains to this thesis, we see two flavors: 1) back the platforms overthrowing the incumbency, or 2) arm the incumbency with tools and technologies to fend off tech-driven financial services providers. Regardless of whose side you are on — it’s clear that technology-enabled solutions are the future for businesses and consumers alike. End-customers will eventually pick tech over non-tech solutions simply because the removal of friction and bureaucratic processes lend themselves to a superior customer experience. The question remains: will traditional financial services firms + third party technology (or acquired tech) be enough to fend off emerging FinTech platforms — or will we see a new group of financial services market leaders.
In Part II of this series, we will dive into what solutions are disrupting traditional financials services and in Part III, we will dive into solutions helping traditional financial services fight back.