We were glad to welcome a world-renowned #paymentsgeek, Dave Birch from Consult Hyperion, to the #PaymentsGeek Roundtable. Dave spoke with Modo CEO, Bruce Parker, on the differences between fintechs and techfins and what he sees for the future of payments inside enterprises. Watch the full webinar below, or read the Q&A* below.
You recently had an article posted in Forbes that was really interesting. The title was “Bye Fintech. Hello Techfin.” One of the first things you called out in your article was some of the impacts that you think that coronavirus has had on the industry of payments. As we start to frame up the future, how do you think people’s perspective on the future and status quo have shifted due to coronavirus?
Dave Birch: We have to distinguish the payments stuff and the payments related stuff. On the payments side, I think you can reasonably say that the virus simply accelerated trends that were already there. We were already going cashless, we were already going contactless, we were already going contact free, actually, even more than contactless. So, on the one hand, the crisis accelerated trends that I think we all saw.
One thing I have noticed is the transition to contact free, rather than contactless, has accelerated quite rapidly. Having experienced the new contact free ordering at restaurants, it’s not transparently obvious to me that people will go back to doing it the old way. The contact free ordering is easy and convenient and it works. We characterize this as the shift from “checkout” to “check in” - the idea that you check in to places rather than checking out of them. What that means is when you scan the code or use location services to announce that you’re in a place, the service providers (food, drink, etc) can deliver a much better service to you because now they know who you are. When you walk in, they know that you’re the guy who bought the toothpaste last week. This transition to contact free rather than contactless has created interesting behavior that you wouldn’t have thought about before. From a payments point of view, it’s not obvious that people will go back to the old way of doing business. I think we’ve known for a while that, in the particular case of food service, the value to the customer is actually the bill at the end. The fact that you can finish your dinner, choose your tip, and get up and walk out, that’s a pretty good experience.
You’ve got those payment things, but then you’ve got some adjacencies - the stuff that’s related to payments like fraud and security. Now you have zillions of people going online that were never online before. People want to continue buying stuff from their local stores, so now the stores have to get a card reader that they’ve never had before. That means there are millions of people going online who have never been online before who are very susceptible to fraudsters. I fully expect to see a really significant rise in fraud figures as we move through the year.
The title of the article was “Bye Fintech. Hello Techfin.” Could you define those terms? And, in the article, you quoted Ron Shevlin to note that this transition you’re calling out is the end of an era. How do you characterize that?
Dave Birch: A Fintech is a company whose business model is financial services delivered using new technology. The services they’re offering are, in many cases, not in the least bit innovative, exciting, new, or radical. But they are using new technology to do it in a better way. Fintechs try to make money from financial services whether it’s loans or credit cards or something else, but they use new technology to do it.
Conversely, the Techfins have a business model that makes money from something else. They don’t care about making money from financial services. They provide financial services because it’s a better service to their customers. But they don’t care if the margin on those financial services is zero. In fact, in many cases, they don’t care if the margin on those financial services is negative because their business model isn’t the financial services. An example would be marketplaces that do merchant funding - maybe they make some money on merchant funding, but if they don’t make money it doesn’t matter because their business model is contingent on having the merchants.
We are coming to the end of the Fintech experimentation era, and we’re moving into the time of the Techfins.
There is a large scale study across different industries looking at innovation and what inventions were turned into sustainable new business models over time. The business you would expect to see at the top of that was there - pharmaceuticals. You have to have sustained innovation there otherwise you go out of business. Not only did banking come way down that list, I was stunned to see that it came below textiles. The textile industry was rated on a global basis as more innovative than banking. Textiles! When I began to think about it, I thought, “What is this fintech innovation that we’ve seen?” Because if I think about my phone right now, the financial application I use the most is my Barclays bank application. It works fine, but what do I do with that banking application? I access a checking account, a debit card, a credit card, a mortgage account, and a savings account that are exactly the same as they were before the application was invented - even before the iPhone was even thought of. If you’re going to be harsh, you would have to say that actually there has not been anything like the innovation that’s necessary to propel the industry forward.
Let’s go back to forward looking - why don’t you tell me about this idea of embedded financial services? What is the nature of embedded financial services? Does that mean the torch for innovation is passed from the Fintech to these other organizations? Or is there collaboration with the banks?
Dave Birch: First of all, there are different kinds of financial services. The crucial role of payments is that payments represent almost all of the customer touchpoints. If you lose access to those touchpoints then you lose access to the data, which means your information functions are suboptimal, then you can’t manage risk and if you can’t manage risk then what are you doing in the banking business? You might as well let someone else take over. From a banking point of view, we want the embedding to take place because we want financial services to be easy, efficient, cheap, good for people.
You can imagine a future where I see an advertisement in Facebook, and I just hit “pay” and it happens. Through the magic of APIs, consent management, strong authentication, and everything else, the money just gets whizzed from my bank account to the merchant’s bank account. Maybe Facebook makes nothing on that transaction, but because that transaction can take place, I’m in Facebook. And I’m not coming out of Facebook to do other things in other places because I can do it in Facebook. In payments, it’s easy to imagine that kind of embedding.
What turned out to be really problematic for banks was the lack of data. When you don’t see those payment transactions, you have no idea what the customers are doing. All you see is WeChat, WeChat, WeChat, WeChat, Alipay, Alipay. And you have no idea whether the customers are in the city or the country, if they were buying for travel or insurance, if they’re spending this money on home improvements or something else. You don’t see any of that data! Alipay and WeChat see ALL of it. If I’m a bank, I want to provide the best possible API, the best possible service, and the most efficient authentication because I want Facebook, Google, Amazon, and Apple to use me so I can see that data. If I can’t see any of that data, I have a real problem.
Payments have had a big run of attention. People have been talking about payments more than they were before. That coolness sort of surprises me. Do you think that level of attention or focus is going to continue broadly in the economy?
Dave Birch: I can remember when payments were boring, and then they were exciting and fun. We’re probably coming to the end of that. I think in many organizations there have been reasons for getting involved in payments. If you take the canonical examples people always talk about - let’s use Uber. Why did Uber spend so much effort on creating wallets and payments? Well, it’s because the financial system didn’t deliver those products. It’s the same example as when I was working for transport for London - why did a transport company spend gazillions on contactless cards and giving them to people? Because the banks didn’t provide suitable products for that so people had to step in and do it. When the banks came along and provided a product that did do it - contactless cards - then the transit companies were happy to use those instead. If you think about the management of Airbnb, the banks just didn’t have the products to manage multi currency transactions so Airbnb had to build it themselves. But I feel we’re coming to the end of that era.
In reality, in many countries, the instant credit networks have Open Banking sitting on top of them, and we have a different set of issues to worry about - digital identity, consent management, authentication. But the idea that I fire up my WhatsApp and send $5 to Bruce and, under the hood, that no longer routes through ISO8583 card networks with bandaids stuck on them but instead gets zipped into 20022 Super Speed FedNow and a few microseconds later shows up in your account with rich data and all those sort of things. Unless I’m really missing something, I can’t help but feel a lot of things are going to move in that direction.
In businesses, heads of payments are seeing this opportunity to change the trajectory of their careers by calling out payments in a similar way that people called out business intelligence, customer success, procurement, supply chain, working capital management, etc and become the CEO of that function. There is an opportunity for the heads of payments (aka Payments Czars) to do the same. If you’re the payments czar (the CEO of a PayCo) what are the things you should be thinking about in order to take that elevator ride up through the organization?
Dave Birch: We are in a chaotic time, but if you were an up-and-coming executive scanning the horizon in financial services, I think I would be looking at how the API ecosystem is going to evolve and develop. Any of you that have lived through the process of publishing and connecting with an API know that it’s just really not that simple. You’ve got to have identification, authentication, authorization, consent management, manage the upgrade cycles, work out how to keep things in sync, you’ve got to keep track of standardization, etc. I think if you were your young self now I don’t doubt you would be looking around for some kind of #APIgeek opportunity. In 20 years, APIs will just be how things work. Right now, there’s a lot of pressure to move in that direction. People who have lived through it know it’s just not that simple.
You once said “Payments are a pain in the ass.” It used to be the case that you could bet on a few really really big guys and you’d be fine, but I’m not sure that’s the case anymore. There’s complexity, there’s changed expectations, the bar has been raised. What are the key points to be thinking about? And what do you think of the notion of payments orchestration versus building yourself or outsourcing?
Dave Birch: Orchestration is a word that comes up a lot nowadays. APIs make orchestration a lot easier because you can pull and play different things. You don’t have to rip out a whole infrastructure. Instead, you can orchestrate. The idea that you orchestrate to take best-of-breed in different areas and present them through a common interface is actually quite a strong proposition. I think the reason why people like the orchestration part of it is because they don’t necessarily want to throw all of their eggs in any one particular basket. I saw a comment recently where somebody said there are 5000 banks in the US but they all run on about 4 different systems. That’s not the future. The future isn’t that you go and buy your banking infrastructure from this particular provider. Maybe you take some services from here, some services from there, and actually it’s constantly shifting as people come up with more innovative, better solutions. The person managing payments doesn’t want to continue making these micro-calculations about which of these platforms or services they should be using. I think that’s a pretty good vision of the future and I would say marketplace activity would tend to support that view.
You do speaking engagements all the time. What question has no one ever asked you that you wish they would ask?
Dave Birch: The question I have never been asked is why I am so fascinated with money. The transition in money fascinates me. When we had the industrial revolution, we created a new kind of economy. Suddenly you needed money where you didn’t have money before. In a very short time, a space of about 30-40 years, you had central banks, checks, circulating banknotes, and the proto gold standard. I think that we’re now in a similar time. We’re going through a post-industrial revolution, and we don’t have the money of that post-industrial revolution. And don’t say bitcoin. I track very closely what’s going on, but I haven’t seen what’s coming next.
*The Q&A has been edited for clarity and brevity