Chris Dean, Summit Partners
Managing Director

What topics have been hot in business circles over the last five years? How do you see these evolving over the next three to five years?

Chris Dean: One topic that has held my interest these days is one that – while perhaps a bit overused – is still very relevant to what is going on in the economy right now: disruptive new entrants taking market share from incumbent players.

It’s a theme you can see playing out across so many sectors - technology, transportation, lodging, commerce, media – the list goes on. There are a lot of new players entering markets and disrupting the incumbent players, primarily by delivering a much better customer experience. So the big question is, “Why has this trend not taken hold in financial services?”

I think some people may argue that it has. Many new players have entered the financial market over the last few years: in online lending, payment processing companies, digital advice, new currency innovators in the various forms of cryptocurrency, and many other service areas. Disruption is being attempted in countless ways, but these new entrants aren’t achieving the massive success in financial services that we’re seeing in other industries. There is no parallel to Amazon knocking off Walmart, Netflix challenging cable TV, or Uber reinventing the taxi and transportation industry.

To me, the thing that is different here — what makes disruption in financial services more challenging – is the power of brand in financial services. Our financial infrastructure is built on a fiat system. 70 or 80 years ago we moved off the gold standard to a system that is predicated on the “full faith and credit” of the government. As a result, consumers need to have a great deal of belief that the financial services company they are working with is, at the end of the day, capable of safeguarding their money.

Consumers of financial services care about the same things as consumers in other industries: a better user experience. All the features that are taking hold in other industries – improved user interfaces, more efficient systems, increased automation, more self-service – apply to the financial services industry as well, but at the end of the day, what they care most about is being able to sleep well at night — knowing that their money is protected and will be there tomorrow.

As a result, the concept of brand in financial services is extremely powerful, seemingly slowing the shift in market share away from – and extending the life of – incumbent players. Whether you are looking at payments, providers of financial advice or new lending models, the big winners in the marketplace today, in my mind, are the old, recognizable brands that are learning from and working to replicate start-up successes by incorporating new features into their product and improving the overall customer experience.

This is a really interesting time. You have start-ups battling to take turf and having reasonable levels of success. But given the massive size of the financial services market, incumbents are battling back. They are trying to adapt to the demands of customers so that they don’t lose the big war. To me, that is one of most the interesting battles that has emerged over the last five years, and it is one that I think will continue to play out over the next five years.

Will FinTech continue to play a big role over the next 5 years and trigger the creation of an “Uber”-sized success story?

CD: Yes, I think there is a lot more on the come in financial services. We are still in the early stages compared to other sectors. Up until now, we have seen some big winners, but we have not seen success on the same scale as some of the massive companies created in other sectors of the economy.

Companies with disruptive technologies in other sectors have been rapidly rewarded by both consumers and investors with valuations that exceed those of the legacy players. You can’t see the same level of activity in financial services. You can’t point to ten start-ups that have each grown market cap in excess of the market caps of leading banks or payment processors, etc. The legacy players have done a good job maintaining market share – building out their own technology suite or acquiring earlier stage companies to incorporate new technology into their own solution.

What will drive the winners of tomorrow in FinTech?

CD: I think it will come down to user experience: the concept of consumers wanting a more seamless, efficient, intuitive solution. In general, financial services companies have not excelled in this area. Businesses in the financial services sector have long been ranked among the lowest across the economy on a net promoter score basis.

When consumers don’t like their experience as customers, start-ups join the competition with the goal of delivering a better user experience – a more modern interface, a more automated solution, a more bespoke experience. They want a more efficient alternative to sitting through a two hour wealth planning session or waiting in line at a bank for thirty minutes to speak with a loan officer about a mortgage.

However, customers still want to be able to trust the party with whom they transact, and therein lies the conundrum for the financial services sector. How do the disruptors deliver both a better user experience, and a strong sense of stability and financial credibility. People want a better experience but, more importantly, they want a financial safeguard. 

With that in mind, do you think the disruptors are more likely to go the path of an IPO or get acquired??

CD:

The reality is that, in the last couple of years, there have not been a lot of IPOs of financial technology companies. A select few online lenders completed public offerings, but liquidity in other areas of the market –  robo, payments, cryptocurrency or any other segment of the financial market — is primarily driven by M&A.

Early-stage companies are selling to larger incumbents with an eye towards delivering a technology capability to the market while leveraging the brand of the incumbent for wider distribution.

It is expensive to build a brand – anywhere from tens of millions to hundreds of millions of dollars. As a result, start-ups are more often opting to try to align rather than go-it alone for the long haul. Incumbents already have brand equity with the end consumer and can therefore help drive adoption much faster.

While M&A is the more likely exit these days, these things come and go so maybe we will see a shift over the next five years.

What advice do you give to entrepreneurs who say; “I need to build my company for the exit”?

CD: The focus should not be on the exit. The focus should be on how to provide the best customer experience. We need to fix the industry problem that we all share: consumers rate the financial services sector very low in terms of user experience relative to other service sectors in the economy. 

So are you saying they need to focus on hiring a CMO who can help fix this brand credibility problem?

CD: I am not sure what the right path is. Building a brand can be incredibly expensive. Companies may be better served to focus on building the best customer experience and leveraging other, more established brands distribute that proprietary technology in the market place.

So you’re saying they need to focus instead on hiring the best product development officer they can find - someone who knows the market, knows the players, and may be a UX developer from a company like Google or Apple?

CD: Yes. I think that is where the management focus should be — to create the best possible customer experience.

We have seen these battles play out in other sectors of the economy driving massive shifts in market share in a very short period of time. Because of that, value creation is taking place at a scale that is unprecedented relative to any other time in history. The exciting thing for fintech is that much of this shift is still on the come. There could not be a better time to be operating or investing in the sector.