Thread by @eriktorenberg

Scattered thoughts on fin-tech:

- Why it's been hard for legacy banks to innovate
- Why many more tech companies will be a fin-tech companies
- Infrastructure as a service
- Distribution strategies

Mostly summarized from amazing a16z fin-tech resources: a16z.com/category/finte…

Tale of two banking systems:

One for people with good credit, and another for people with no credit.

Neither work well.

Just 28 percent of the millennial and Gen Z generations trust their banks to be fair and hones

Why is it "expensive to be poor", or, why can't banks innovate?

Most legacy banks have relied on physical branches to acquire customers.

Customers don't go to branches anymore, so banks have this excess cost structure that they pass on to consumers in form of higher fees.

Compliance requirements also expensive:

75% of IT budget goes towards maintaining existing products

15% of work force is devoted solely to compliance. (e.g. manually reviewing alerts triggered by anti-money laundering (AML) systems and filing suspicious activity reports.)

So why not disrupt & start competing banks?

- To comply w/ regulation, need to partner w/ existing bank partner who "lends" their license

- Hard for bank to partner b/c needs to ensure startup complying w/ KYC, AML, etc

- Also need card issuer, processor, printer, etc

What's changed?

AWS moment for banks

AWS dramatically lowered cost of launching tech company; "Infrastructure as a service" companies will do the same for fin-tech.

What AWS did for compute & storage, fin-tech companies will provide elements of the banking stack as a service.

Unbundling banking stack into specific building blocks and verticalizing against htem. (e.g. KYC as a service, AML as a service.... all as APIs

a16z.com/2020/01/21/eve…

This isn't just for startups. This lets every company make money from financial services.

Uber for example can offer banking services as a revenue & retention strategy--lets users purchase goods during ride and lets drivers bank w/ them.

a16z.com/2019/11/21/ban…

Before infrastructure as a service, companies had to:

- find a partnership
- build from ground up
- figure out patchwork of compliance & IT

Much slower & expensive options, preventing many companies from getting off the ground.

Distribution strategies

- Get bundled into payroll
- Embed with employers
- Infiltrate existing marketplaces
- Activate social networks
- Revisit direct mail

Since new entrants don't have legacy infrastructure, they don't have to pass on costs to customers through higher fees

Fin-tech marketplaces: rather than the usual take-rate—a monthly SaaS fee or percentage of sales—new B2B marketplaces are monetizing through factoring or facilitating payments (e.g. Faire)

I discuss this in depth w/ Pete Flint & Alex Taussig

stitcher.com/podcast/ventur…

"Self-driving money": "If consumers aren’t making decisions, then they can’t make bad ones."

Phase 1 - automated investing (e.g. Wealthfront)

Phase 2 - automated saving (e.g. Digits)

Phase 3 - automated payment of credit card debt (e.g. Tally)

Future category: student debt