Brutal...

 It seems as though a payment process is a (relatively) easy flow to sketch. There are many out there, but here is one:

http://mqs.gtpl.net/mqsubscribe/Help/Online_Payment_Flow.htm

Here's what's funny (not funny "haha" but funny "hmm") to me. This is one of the biggest money grabs in the world, almost $32 billion in 2021 alone. This explains why the space to process payments is so crowded and why there are so many companies acting as middlemen. In fact, the payment systems in the US are quite inefficient compared to those in many other developed countries.

But nobody wants to work with the consumer. Like... nobody.

I mean, I think this is true generally. We, as consumers, don't get the new new thing from companies because they think we are stupid, stubborn, unwilling to change, etc. etc. - and in many cases they are right. On the other hand the enterprise side of this world is loading up on new technology and the consumer has a government filled to the brim with octagenarians on his/her side. Rough stuff.

There are some basic ideas that could help the consumer quite a bit here. In particular, what if I want to change my bank or I get a new credit card. In all of this mess shouldn't I just be able to swap out the account and routing numbers for new ones and carry on with my life, payment rails intact? The answer seems to be "yes" but you can't do it. 

Why? 

Well, I suppose it's mostly because JPMorgan Chase won't build a tool to let you jump ship to Wells Fargo in a heartbeat. Admittedly you'd need to have an account at WFC anyway, so that gets in the way. But on the other other hand (back to the original hand?) you have to complete (basically) the same document every time you open a new account. You can't just say "see my existing account @ Bank Y instead, please."

SO if you want to open a new account you have to complete the same document again. If you need to change something you have to tell everyone one at a time. If something changes in your life and you don't tell these companies, then they never find out and keep at you with their data-driven marketing that is now more off-target then it was when your information was correct.

Brutal... 

What Do We Really Know About Technology?

 One of the reasons I'm interest in a fintech company is that we don't really know how impactful technology "should have been."

Wut?

People who do no think that innovation in established businesses is important point to the lack of measurable and significant impact across industries. But I don't think you can lay this at the feet of the tech.

The responsibility here lies at the feet of management in two primary ways. 

1. I've sat across from the CFO of two of the largest banks in the United States. Both before COVID hit. Each of them regurgitated the old MBA line that they use capital to buyback stock when it is viewed as a good use of capital (using the cost of capital as a guideline). Then, COVID hits and nobody is ready to even consider implementing remote work. How can a bank like JPMorgan, with an $8 billion+ technology budget miss this? Because the mone is being spent to directly benefit shareholders, rather than making employees more efficient and effective which would impact shareholders but indirectly.

2. Tech is never fully implemented. The reverberation would have been much more significant in terms of jobs and other issues. INstead enough money is spent to "adopt" new technology without disrupting the business as completely as it could. Is this a bad decision? Not if you are printing billions of dollars a quarter. But it does blunt the potential impact of technology on the business.

What should have the impact from technology advances over the 20 years have been? I don't think we'll ever know.

Technology for Me but Not for Thee

 Not only is the consumer consistently underrepresented in existing markets but it is also starting to happen (again) in new technology markets.

I get it.

Nobody wants to build for the consumer because he is unwilling to change, uninformed, dispersed, unreliable, etc. 

And sure, we (you and me) as consumers are responsible for changing that reputation if we want to get "the good stuff."

That is why everything I'm seeing is about building AI and LLMs to help existing enterprises do their jobs better. I heard this a while ago (maybe 2-3 years) and almost nothing has proven to be more accurate:

Incumbents don't adopt technology to change their business model. They adopt it to make their distribution channels (existing and perhaps new) cheaper.

So yes, there are a ton of AI-driven assistance being built. Trust me, there are more than you can count. As I expect(ed) they are falling flat because they were a rush to build "something I can sell to Google." There has not yet been a great consumer-focused company that disrupts the enterprise and gives the power-to-the-people (TM). 

This is the opportunity no matter the industry (almost). This is the opportunity in fintech. Not just to use technology to change the landscape but to change the business models that we confront. In the case of fintech, to truly be able to own, understand, and manipulate our data to match and change each of our unique circumstances.

Where to start...?

 The problem with dropping a new company or product focused on financial services is that you are dealing with important personal information. It seems difficult to imagine a company coming out of nowhere and asking people for their account numbers, SS#, and other information that is important to keep secure. The vast majority of people don't have the ability to evaluate the security any new organization puts in place either so, like the rest of finance, it is a trust game.

It seems like there are two ways to address this:

1. FInd a way to establish trust immediately. This is probably best done through a partnership with a large and well-known institution that is already trusted. This sounds like a good idea unless it is anathema to the idea that you want to build.

2. Start small. Super small. Start relevant to your niche but not based on the information above. Something that is not as key and that won't be as difficult to get someone to share with you. 

Point #2 seems more interesting to me and there is no shortage of interesting data points around people's financial life. The question is what is the right place to start?

Cost to Serve - The Numbers

 Taking some of the constituents of the XLF (financial services ETF) produces the following breakdown of operating expenses or "non-interest expense" in the case of banks:

Expense                                            %

Compensation                                57%

Occupancy                                       8%

Technology and Equipment            11%

Marketing                                         4%

Professional Services                       8%

Other                                            Remaining

These statistics are interesting and reveal the structure of the costs that these companies have built to deliver their services to customers. Obviously these numbers are skewed away from retail customers in some ways because they include the numbers behind commercial and investment banking. It would be reasonable to expect that the pure retail side of the a bank would not have quite as high a compensation expense and might have a much larger RE footprint to boost the occupancy expense. Some of the smaller banks bear this out, though there are few publicly traded pure-play retail banks.

Most of the more interesting fintech companies (e.g. Chime) that might show different results are still private and therefore not available for analysis. These companies specifically targeted incumbent cost structures in their strategy so it's likely that the mix is different and more heavily focused on technology and away from occupancy. 

Pricing - How Much?

 It seems like a good idea to keep in mind the target customer when we consider the way and amount we want to price.

Let's say that we want to price this service at $150.00 / month ($1800 annually). If you are already paying $18,000 per year in fees and taxes for your financial life then you are going to increase your annual cost by 10%.

But...!

You are probably saving yourself more. 

Let's say that you think that an hour of your time is worth $500 (how you get there is unique - maybe that's your job or you just sort of have this idea in your hear). If you need 3 hours a month to manage and react to all of the different aspects of your financial life, then you are spending $1500/month.

If a company can offer you a 66% reduction in time, in this case $1,000, how much would you pay for the service?

To be clear, you are still spending $500 a month on your financial life. You are also still spending $18,000 annually on your financial life for fees and the like. 

But if you pay $150/month for this service, you are keeping $850 each month of the value that the company has created for you. So, you are paying $1800 more in fees but you are saving $10,200 annually of indirect costs and you can go further by spending that time with you family or whatever it is that adds even more juice to this equation.

Party on Wayne!

Party on Garth!

Pricing - Structure and Concept

 The correct way to price any service has to be (i) in context of the industry, (ii) competitor aware, and (iii) appropriate for the service/product.

1. Context - As stated earlier, the estimate for banking Cost-to-Serve is $550/yr/client, which is $45.83. This is not charged directly to the customer but is something that is felt in either lower returns or higher fees on products. Companies do, after all, just pass costs through to their customers.  

2. Competitors - There are a lot of competitors in various parts of the financial services industry when it comes to dealing with people. Some of them are free (or ad supported) while others have a periodic fee. TO go beyond the cliche "if it's free you're the product" I also think that if you are a customer and you aren't paying for something then you don't have a seat at the table. You are not in a position to be well represented when you are willingly using a product or service that you don't pay for.

3. Appropriate - Financial services must be bound by the realities of the first two points above. On the other hand, there has to be a strategy of its own. I recently read Game Changer on pricing and until I find more nuance or a better theory, this is the framework I'm going to use.

a) Most important driver - Value and competition (excluding costs)

b) Industry Structure - B2C has many buyers with a mostly shared set of problems - there are only so many when it comes to financial life. Suppliers are more constrained but barriers to entry are low and there are new companies targeting slivers of these markets all the time.

c) Best model(s) - Value (how much is created above competitors, what is it worth, and how is it split between the company and customers - see: Apple) and Choice (Building a set of features that help to further segment the market - see Salesforce).

Financial Life (v1)

 This is a good example of financial life. This shouldn’t be stuck on an ad on X. It should be a tool, a lens through which you can see this offer and its details before you even lift a finger to start opening an account. 

It’s time for the era of fine print to end…