• Alan

Balsamic vinegar and the blockchain

Updated: Feb 19

Everyone loves balsamic vinegar, especially with extra virgin olive oil or fresh tomatoes. But apparently it also goes well with a generous dose of fintech marketing. So I learnt recently when I picked up my favourite brand at the supermarket and noticed a change in the label, which now featured a QR code and a banner saying “Blockchain traceability”.

Intrigued, I scanned the code. The use of fashionable gold text for a QR code made it somewhat difficult to scan but eventually I was directed to a website asking me for the batch number: a 6-digit number printed next to the best-before date in tiny gold text on a white background. With some good lighting, I managed to type it in and their blockchain traceability system proudly told me that my vinegar was bottled on 11 November and the acidity level was ‘none’.

Why would anyone use blockchain for this purpose? I would have thought an old-fashioned SQL database was more than adequate to display a bottling date from a batch number. It made me think about the fintech industry and how much of it can be marketing hype rather than real innovation.

Fintech has all the ingredients for a great story: a David v Goliath plot line featuring millennial kids using their coding and social media skills, villains in the form of evil banks skimming hefty fees to pay bonuses and the boxing-like testosterone of a Reddit forum with a mission to destroy hedge funds. And of course lots of AI and blockchain.

Fintechs like to promote how they are a new force bringing innovation to finance. I completely agree on the innovation but disagree on the timeline. The first fintech was not even Michael Bloomberg bringing technology to brokers in the 1980s; far earlier than that were the Italian gold merchants setting up benches in Florence in the 15th century and giving us the word bank. If you want to understand how that is an innovation, take a look at the betting ring at Cheltenham or Ascot. Just like the Florentine benches, it’s the very definition of a marketplace: everyone is there in one location openly displaying their prices, both to compete and to speed up price discovery. And it’s a true marketplace, not the kind of ‘marketplace’ promoted by some tech companies which more closely resemble a Google-like monopoly.

Fintechs really do drive innovation and competition, not least by forcing the banks to innovate and reduce inefficiencies. Any many do so without all the hot air, quietly providing new products and solutions that bring real value to consumers and business. They are very much part of the that banking innovation journey that has been going on for centuries, as so brilliantly visualised here:

So what makes a successful fintech? Bill Aulet of the MIT Sloan School of Management has put together four pillars that he thinks need to be mastered for a fintech to succeed: 1) entrepreneurship, 2) technology, 3) domain knowledge and 4) policy & regulation.

Entrepreneurship has been omnipresent throughout the history of the financial industry from the Italian gold merchants to Gordon Gecko and fintechs continue that tradition. It has its problems but ultimately capitalism does work.

Technology is of course critical, although I would argue there is a lot to be gained from using existing technology in a new or better way, e.g. finding that new use case that nobody saw when they were making too much profit. Technology doesn’t have to be just about AI or blockchain for the sake of it.

I think the next two are somewhat lacking in the industry today: 3) domain knowledge and 4) policy & regulation.

Fintech domain knowledge often more closely resembles the tech sector than the finance sector. That is a problem. You might have the best digital marketing campaign in the world and can convince venture capital funds that you use AI for everything, but you also need to understand those fundamental elements of finance, often learnt from experience than text books. From credit underwriting to liquidity squeezes and loan covenants to the dangers of commission schemes, finance rewards experience and an understanding of human nature as much as innovation and marketing. And if you are going to bring in £1.4bn in customer deposits through slick marketing, you need to know what to do with it, not just park £1.3bn of it at the central bank, as a well-known UK challenger bank seems to have done, i.e. get your credit underwriting in order before funding your loanbook.

Finally there is policy & regulation. Some fintechs still think like Facebook and see the regulator as the opponent in the boxing ring. But an increasing number are beginning to see the regulator as the referee. They are also learning that financial regulations give pretty good guidance on how to manage risk and governance. Like a Big 4 consultant but for free.

So, yes, fintechs are definitely a force for good, as long as they are more fresh air than hot air. They bring a great culture of innovation and efficiency to finance. But maybe they should focus less on the Facebook business model and utilise better the knowledge and skills gained over centuries in the finance industry. And for those who prefer style over substance, there is always balsamic vinegar marketing.

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