Confessions of a FinTech Junkie

All joking aside, predicting the demise of the traditional Banks is a popular position to take these days which IMHO is just an attention grabbing tactic used to drive home a salient point.  Banks aren’t able to keep up with the innovations being produced almost daily by a gigantic fintech ecosystem.  These upstarts are nipping at each and every profit stream that the traditional Banks have worked so hard to establish over generations and from the Banks’ perspective its quite scary.  The big Banks are well capitalized and whether one wants to believe it or not, they’ve been able to attract fantastic talent that has really good ideas.  I can hear the ***gasp*** from my loyal readers but I personally can attest that it’s true.

So while there are many reasons why they aren’t able to keep up I think there’s a profound reason that distills the entire problem down to a single variable.  In all fairness, this boiling of the ocean is clearly an overstatement to make a point, but here’s my single variable view of why the Banks aren’t keeping pace:

As simple as this statement sounds, it could be the single greatest reason why the Banks are losing ground.  It’s a truth with many causes and legitimate reasons behind the scenes that include regulatory intolerance, the number of exception cases that need to be addressed when applied to a customer base in the tens of millions, the sheer number of legacy platforms that don’t talk to each other, and an internal approval process that is difficult and time consuming to navigate.  The result is that they can’t quickly offer new products and services to their prospects or their existing customer base.

Innovation is brought to life in code and code is very much like trying to study the stars.  To look at a star 50 light years away means looking 50 years in the past.  To ship code 1 year after having an idea means trying to address problems that are 1 year old from a market perspective.  And if the next-gen fintech companies are shipping code in weeks vs. months or quarters or years at a traditional Bank, the next-gen players are clearly able to meet the “now” needs of the marketplace vs. its “yesterday” needs.

I’m not saying that it will be easy (it might actually be structurally impossible), but unless the traditional Banks can figure out how to ship major releases of code as fast as the next-gen players, they’re going to find themselves continuing to fall backwards quickly.   While it’s a crude metric, Banks should study how many many hours go into shipping 1,000 lines of code.  A good developer could write 1,000 lines of code relatively quickly and if the developer were flawless it could be promoted into production instantly after it was completed.  But no developer can achieve this fantasy standard because there’s planning involved on the front end and de-bugging and testing to be done on the back end.  The key is measuring from end-to-end how long that 1,000 lines of code took to go live.  I have no data to prove this but based on my observations the Banks are less than 1/10th as efficient as the next-gen players due to the various points of friction in their organizations and the number of hand-offs/sign-offs/standards/integration points necessary to promote code into production.

The implications?  Maybe the Banks will decide to partner with the fintech players to gain functionality (i.e. –  J.P. Morgan’s partnership with OnDeck).  Maybe they’ll purchase companies with fantastic systems and new product offerings as a strategy by design to stay current (i.e. – BBVA’s acquisition of Simple).  Or maybe they’ll convince themselves that hiring more developers with backgrounds from hot tech-companies and adopting an Agile methodology will be the solution to their problems (prediction = epic fail).