Fintech Predictions For 2019
Happy New Year one and all!
Having returned to London from a restful break with family stateside, this week has been a good time to get settled and prepare for the key milestones we need to hit as a business in the coming year.
As is customary for the first week of January, the media is full of predictions for 2019. Human beings are hopeless at predicting the future and that trend shows no sign of abating. Most of the column inches are dedicated to the new technologies set to revolutionise financial services. But, no one talks about remarkable technology we already have. There is a widespread cognitive bias towards things that are shiny and new, but, in order to understand the impact of technology on capital markets, we need to look back as well as forward. We need to appreciate the enormous progress that’s already been made from integrating technological solutions into the daily operations of dealers, issuers and investors.
The Lindy Effect states that the life expectancy of non-perishable things (like technology) is proportional to their age. So every additional period of survival implies a longer remaining life expectancy. This isn’t obvious. When you compare a young person to an old person, you can be confident that the younger will survive the elder. But with something like technology, the old can often be expected to have a longer expectancy than the young, in proportion to their relative age. So, if an old technology (say traditional databases) is 100 years old and new technology (say blockchain) is 10, the elder is expected to live 10 times as long as the younger. This mental model helps explain our relatively sober view on blockchain and other de rigeur technologies. They are certainly promising, but it will take years (in some cases decades) to prove their utility and develop real-world use cases.
So will 2019 be the year where fintech finally breaks away from its obsession with overhyped technology? It’s hard to say. There are many people out there who have a vested interest in pushing excessively complex solutions to relatively simple problems.
But, while I’m not here to dish out stock market predictions, it’s fair to say that the outlook isn’t stellar at present. The fintech industry has enjoyed record levels of liquidity and investment in recent years, but 2019 could very well be the year that the funding tap is shut off. If this happens, the prevalent ‘spend money to make money’ mentality will fall out of favour very quickly. For many, customer acquisition costs are too high and unit economics are unsustainable. That’s why once-niche unicorns like Robinhood, Revolut and Monzo are converging on the same full-service offering across lending, banking, payments and investments – they must bundle different products and cross-sell to existing customers in order to justify the exorbitant costs of user acquisition. These costs are rising as the digital banking market becomes more competitive and commoditised, so expect sparks to fly.
Regardless of what happens over the next twelve months, as ever, the winners will be those who focus on identifying and solving customer needs. This sounds obvious. In practice, it isn’t. It takes discipline and humility. Here at Origin, we are constantly refocusing our efforts on serving our clients, which means listening to their feedback, ideas and concerns. It’s much easier to bury your head in the sand and build cutting-edge stuff that garners respect and adulation from thought leaders and fellow entrepreneurs. But it’s not good business.
I don’t believe that fintech is in a bubble. It’s just too important and useful to be characterised as such. But I do believe 2019 will be the year that the hype around our industry dissipates somewhat, leaving the more frothy startups scrambling to adjust to lower liquidity and higher expectations. Fintechs will need to focus on creating value and generating revenue, and they won’t be able kick the profitability can down the road. I expect this to herald a return to tried-and-tested technologies and protocols that are cost-effective to deliver to clients. As we’ve stated before, we believe that meaningful change within capital markets will come from working within the confines of the existing setup. And that’s what we’re focusing on at Origin.