5️⃣ Considerations for Vertical Fintech

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One doesn’t learn about one’s customers’ unique challenges by referring them to API docs

In my last write up I begged people in Fintech to ditch their Fintech googles and look at Fintech through the lens of any industry vertical served by ISV's (independent software vendors).

It doesn't have to be Agrifintech - real estate, travel or education are often cited as low hanging fruit - but agriculture is one vertical that is currently under development and ... well .... I just happen to be writing about it. 😁

Why look at verticals? It is where fintech is headed - B2B and 'deep embedded banking'. However, the tooling fintech has developed looks quite different to what is actually happening. The quote above from Shaul David above sums this up.

So.... I want to expand on this problem vs solution gap by considering the 5 points I left off with in my last issue (linked above).

These were:

• Industry bits, bobs and atoms;
• Product Design;
• Investors (and Mistake IP);
• Brand alignment;
• Financial IP;

📰 I've skipped news in this issue. I know, I know, poor form for a NEWSletter

1️⃣ Industry bits, bobs and atoms

Launching B2B tech into any industry with bits, bobs and atoms means that scalability doesn't necessarily follow the flywheel effect that B2C software does

Brian Arthur, the economist who first described the network, or 'winner takes all', effects in technology, described the nature of technology in the real world as taking a generation to develop.

A generation to develop. Specifically, a capex generation (capital expenditure) before systems or processes really update.  Who's hanging around for that?

Specifically, looking at Agriculture, the idea has been put forward that "Silicon Valley set Agtech Back a decade" by following the 'User is the product' mantra. This didn't work. Secondly, the value chain already had distribution channels in place where the various actors went to do business. Note from the same article:

In agriculture, the vast majority of the value accrues in the middle of the supply chain, with the traders, manufacturers, brands & retailers that transform food from farm-gate to consumer. These players can afford to bear the costs of change, and have the incentives to innovate, given they will realize the benefits of digital transformation.

This is relevant to any industry and especially relevant to financial services and fintech.

🤔 Where do people in the industry vertical do business? What do the contracts and cashflows look like?

Hey, by the way, thinking about the financial services value chain is also important.

2️⃣ Product Design - problems and solutions

As vertical fintech develops, I'm betting on non-financial product managers to create the winning bets.

Vertical product managers view the world through an array of problems. Fintech product managers - in my experiences - are solution oriented.

An example of this TractorZoom. About 18 months ago, they hinted they were working on something fintech.

What was it I wondered? Did a lender want to launch a product with them? Were they developing a lending solution?

And it arrived. Their users wanted to shop around for equipment finance - as they do in the real world - so the team developed a financing marketplace, originally with 3 lenders but now has many more.

Yes, financing marketplaces, were theoretically supposed to be a major part of the future of finance, but actually not many in the wild.

This made sense. Clients wanted it and they developed it with lenders who were experienced in the market. A good example of developing financial IP - more 👇

But the key consideration is...

🤔 What do clients want? Maybe they just don't have financial jobs to be done at all? Maybe they do but it requires different tooling.  

3️⃣ Investors (or the IP from mistakes)

Everyone learns from their mistakes. It's only when you see how many mistakes I've made that you realise how smart I actually am. 😂

(that's from somewhere in the hit Silicon Valley TV show).

Every industry has some institutional memory of initiatives that have tried and failed.

There are others which have been tried repeatedly and failed. Repeatedly.

A grain marketplace sounds like a terrific idea but, mostly they have failed and this excellent article from Mark Johnson discusses why. IMHO this article documents industry mistake IP (intellectual property from mistakes made).

We've all banked mistake IP at some point. It should be classified as an asset.

Relevance?

I've seen Agtech investors back fintech related businesses which have huge obstacles (financial regulation is a big blindspot) and I've also seen fintech investors make optimistic punts on agtech companies, including marketplaces. Oops.

My point is not to throw mud or downplay business models (who could still be wildly succesful) but I think the role of investors in a trend towards vertical fintech will be important.

Currently, founders in Agrifintech often talk about "falling between the cracks" with sets of investors not understanding their proposition, despite it being perfectly sensible. Finding a lead investor with enough conviction can be problematic.

👀 If you are building a financial proposition for real estate or, maybe, healthcare, which investors do you speak to? How do we entertain a sensible sector X fintech deal? Maybe more collaborations happen?

I really hope we don't let bullshitters take over and sell stories to investors who just haven't unpicked the realities of some sectors.

4️⃣ Brand alignment

And finally, this insight came after reading about a potential hiccup in the financial products that Apple and Goldman Sachs jointly launched. The post and key comment was:

The end user does not care who is behind the Apple account. The 'nightmare' has a direct impact on their Apple relationship. The one long term thing Apple cares about.

💭  Hmm..

5️⃣ Developing Financial Intellectual Property (IP)

From my own conversations I guesstimate about 40% of those independent service providers (ISV's) in agtech have shown some degree of activity in embedded finance.

It's probably even less, but let's work with that.

For an ISV deciding to develop an embedded financial product, there are several ways to approach this, ranging from transactional (low IP) to tactical (high IP).

⦿ non traditional financial provider (5-10% of ISV's)

This provider is good at integrating but lacks industry context.

This might be an easy win in terms of getting up and running but can be transactional - and indeed suits transactional products like payments. Integrating credit such as BNPL (buy now pay later) is tricker without the provider having context experience (likely to run when stuff gets muddy).

It is low on the IP scale but can generate revenue with minimal overhead and the Bain figure below would call this 'Thin stack'.

⦿ single traditional provider (25% of ISV's)

This refers to integrating a product with someone versed in the industry you are serving e.g. agriculture, real estate, travel etc. Where I have seen this, it relates to credit.

This leads to bit more IP for the ISV as they are providing access to a dataset not otherwise available. They can even clean datasets and add other external parameters to enhance this IP.

This approach has the benefit of demonstrating a use case with an informed partner for the ISV. (On the Bain continuum this is somewhere in the 'Hybrid' stack).

⦿ multiple traditional providers (5-10% of ISV's)

The clever tech providers transition from single to multiple providers or better still, start off in conjunction with several providers (e.g. TractorZoom above). Again credit is the main product.

The clever financial provider might even encourage this also. Why? If they help develop a process or internal capacity, it becomes the de facto way to do business in a sector, akin to infrastructure, and reduces risk of wasted time and effort working with a provider who may not be around in 2 years.

(On the Bain continuum this is also somewhere in the 'Hybrid' stack)

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Bain use the graph below to demonstrate the embedded finance stacks which I have referenced above in relation to IP. These stacks are useful, but I think when we look at industry verticals capturing that context experience needs to be added on another industry and IP dimension.

P.S. There are a few 'Full Stack' providers in agriculture but not many, operating mostly in developing markets where the financial infrastructure is also limited.

👉 Developing your own IP has to be the name of the game

That is everything for this week. I hope you have enjoyed this thought piece and do reach out with your own thoughts.

Also please note: I have two write ups in the pipeline but will pepper these into your inboxes sometime over the summer. Enjoy!

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