The Opportunity In Fin Tech

Next year, I am in NYC on a panel on opportunities in Fin Tech.  Later that month I am going to a wealth and asset technology event put on my Morningstar.  It’s a busy start to the year, bi-coastal and I like it.

One of the great things about investing in Fin Tech is that it is “impact investing”.  Virtually every investment you make gives a company an opportunity to radically innovate.  They bring what were once services to the few to many and they drive margins down.  They put customers closer to the market or a provider eliminating layers of distribution.  They create more transparency, which brings more freedom of choice.  This allows people to lift themselves up and make their lives better.

Democratization of finance is all about increasing the amount of liberty someone has in their life.

Given that, where is the opportunity?  I think in the past ten years, businesses have focused a lot on decreasing the cost of customer acquisition.  An app for this or that.  The mobile phone and tablet were revolutions that fin tech embraced but the focus was on getting customers through the funnel.

I think that continues but I think the opportunities elsewhere are bigger.

There are a lot of assets that are illiquid and non-transparent.  For example, yesterday we were having a chat with our accountants on valuation of our portfolio.  How do you do it?  There are many ways and all are imprecise.  There is no market based way to do it.  Tokenization of portfolios will happen.  Will it work to set a market based price?  Don’t know.  Will it work to allow more people to participate?  Don’t know.  But, in the next ten years we will find out.

That tokenization concept will extend to any kind of illiquid asset with that has cash flow.

If you are a true market-maker that knows how to create a bid/ask spread and you are willing to take risk, there will be a lot of opportunity for you.  Initially, these markets will be manual but as liquidity develops, they will automate.

I think there is a lot of opportunity in data.  Data is vertically integrated by a few firms.  Bloomberg has built an entire business off of it.  How do you unbundle and recreate it?  In the news business, we are seeing data transmitted with lots of confirmation bias and it is not designed to inform at all.  The news business has been disrupted, but I think we are on the verge of an even bigger earthquake that will really topple it and reshuffle it.  Are the unbundled markets big enough to support venture investment?  That remains to be seen.  More transparent data will help drive better decision making in all kinds of markets.  Ultimately, that drives down the price of goods and services and enables more people to get what they want and have self-determination in their lives.

Another key area ripe for innovation is in the middle and back office.  Roughly 60% of cost of goods sold at a major financial institution like a bank or an insurance company can be attributed to costs to operate a back office.  It’s the tasks and operations that take place there which make the entire financial system hum.  It’s not enough to automate them.  I think that is relatively easy.  It’s about gaining insights and making better decisions freeing up people to do more creative things for the company.  If that person doesn’t need to mindlessly reconcile an account, they can have a conversation with a customer and find out new ways to delight that customer.

We talk a lot about AI, algorithms and automated ways to deal with tasks in finance.  Yes, we know it is coming.  Sure, it is whiz bang innovation.  But, it seems like that sort of thing is table stakes to be in the business these days.  Wealth management with roboadvisors is done.  It turns out, customer acquisition costs are pretty high for the small accounts they target.  I think the bigger thing is what does an employee do with all their extra time?  How does automation and innovation allow them to be creative?  I think that is a huge opportunity in finance because it could make markets that were once expensive to go after a lot more economically efficient.

Marketing and finance is an interesting place to focus too.  Have you ever bought insurance or gone to a new wealth advisor because of an ad in mainstream media?  Using technology to enable word of mouth marketing will be an fascinating place to watch.  Right now it’s all brute strength marketing on social media but I think the value of that marketing is depreciating.  I am not sure if this is a channel that is venture worthy but it is one to watch.

One of the areas people don’t understand in finance is risk.  Measuring and accounting for risk is a big area that more transparency will have a large effect on.  Stablecoins in crypto are evidence of trying to figure out ways to deal with risk.  People are uncomfortable with risk because they don’t understand it.  It has always been hard to quantify efficiently and in a cost effective manner.  That’s going to change.

One of the things that is certain in a world of uncertainty is that the innovations that win are going to look really stupid at the beginning.  They will jump linear lines.  In the rear view mirror they will look simple and everyone will wonder why they didn’t think of that.