"Every company will be a Fintech company" declared Angela Strange, a Partner at leading Silicon Valley VC firm Andreessen Horowitz.
I absolutely agree.
"We need banking, but we don't need banks" Bill Gates apparently said in the 1990's.
I completely disagree. (Sorry Bill!).
Lets discuss these and answer the question 'if all companies will be Fintech, what does this mean for Ag?'
I will discuss:
➡️ The Financial Stack;
➡️ How Fintech stole some of the stack;
➡️ How Agritech will become part of the Financial Stack
➡️ What role is there for banks? (Bill - maybe don't read this bit!)
The Financial Stack
Below is how I view the Financial Sector and its building blocks.
I think every financial product imaginable will have a structure like this and it will touch each part. I have labelled the top as 'Banks' but for now, this is really every product or provider.
Regulation - Let me share a secret with you. I love reading Financial Regulation. I am no expert in this area, but any product idea will either sink or swim by reading through the regulation.
- Can a product design or idea fit within the existing regulation?
- What will the challenges be?
- What regulatory capital is required?
- Or... importantly, will there be a change in regulation which might influence the direction of a market?
Banks, quite rightly, are heavily regulated mostly because they hold deposits from the public and need to protect these.
Funding - Banking is about Trust - who do you trust to hold your money? As banks are heavily regulated, people just prefer to hold their money with them. Also, if they have been around for a long time, they are less likely to disappear.
This means they have large pools of deposits which they can use to lend out and earn interest income, which is the staple of their business. The crazy thing is, these deposits have been climbing steadily and have increased 23% in the past 12 months - see Ycharts here and the graph below. This is a significant jump from on average annual growth rate of 5.21%.
I have deliberately focused on deposits when discussing funding as these are generally the cheapest and easiest to manage for any financial institution. If you cannot access deposits (because you are not regulated to hold them) funding gets more expensive, less flexible and actually becomes a risk. This funding element is critical for Fintech firms as I discuss below in relation to Analytics for them.
But.. banks are struggling to deploy all this capital - as there is less demand for their favoured products - see this in the UK for example.
Products tend to be quite generic - just look at the website of any bank and I am willing to bet the products are mortgages or home loans, credit cards, savings and deposits. Business loans too have not been subject to much innovation.
If you want a financial product you need to fit your life or business around it, rather than vice versa. That is an issue.
Technology in Finance went through a renaissance ... probably sometime in the 1980's. The term tech debt is one I love 💚 and often arises when describing banks and their inability to change processes.
(As an aside, there are numerous other non financial debts in the financial sector I also think about - bureaucratic debt, human capital debt, strategic debt... all legacy things that have decreased their agility).
Analytics traditionally refers to financial statement analysis, or credit scoring, which are certainly still useful. We don't need to throw the baby out with the bathwater. But it is interesting to see how Fintech companies have developed new lending models by applying data science.
Distribution - think about where you have most often consumed financial services 🤔. It is most often the branch or maybe at an ATM or checkout via card.
How Fintech stole some of the stack
There are two key reasons that Fintech has come to dominate the financial stack:
1️⃣ Better distribution
2️⃣ Better analytics
Let's discuss both.
Distribution and Customer Acquisition
Originally, when I was first involved in Fintech in c. 2008, one of my main frustrations was having to operate clearing accounts through a business bank account which added huge amounts of friction to any volume I had in the business.
But in stepped entities such as ClearBank who were absolutely on the side of fintech - in fact, created for them. Other payment companies built out their own rails and almost commoditised the processing activities. This meant companies could focus on user acquisition and growth strategies 🚀.
ARK Invest have published some of the best research into this - see their white paper here on CashApp vs Venmo. This lays out in fantastic detail the advantage that Fintech products - in this case Wallets - have enjoyed over their traditional counterparts.
Wallets for example have grown at a furious pace due to inherent network effects and virality of managing peer to peer payments for users. The acquisition of one customer inherently allows for the acquisition of a second in order to make payment and then a 3rd, a 4th, 5th .... Fintech made this virality easy by removing friction from account opening processes such as enabling photos of ID to be used for account verification or using additional accounts. Try that with most banks - it is difficult if not impossible.
This drives down customer acquisition costs, which ARK estimate at just $20 for digital wallets. Compare that with up to $1500 for an account with a bank 😞.
We've all heard of Signet Bank - right? 🤔 Umm.. not exactly.
In the 1990's two pioneers of data modelling realised that Credit Cards were mis priced and that terms could be tailored to borrowers based on predictive modelling of default. Obviously, nobody believed them and the large US banks shunned this crazy talk. Finally, a bank called Signet Bank decided to give them a shot and from there Capital One was born - you have heard of them though?!
Analytics needs data and the correct data is not that easy to collect. The data you need is lending data, not just demographics or social media data.
How do you garner lending data? You need to make some assumptions and give loans to test those assumptions and then refine those assumptions. I once ran such an experiment and it was an abysmal disaster. We recovered ALL our money so we learned nothing. Disaster. Trust me, we would have preferred some defaults - certainly not 100% - but some, just to learn.
Fintech companies are more experiment based and happy to take risks. For regulated banks, risking customer deposits in such fashion can be difficult to explain to regulators and customers later - which unfortunately I have also witnessed in some projects in sub-Saharan Africa.
There are two Fintech projects I love which are developing interesting credit scoring models and analytics.
Get Fronted is a UK fintech which lets people pay rental deposits over time rather than in one large upfront payment. This is an excellent product targeting a niche demographic, which will grow with the provider over time. Similarly, Petal who have spent the past 5 years analysing user data in the US, including credit, have developed clean credit models for their customers and released these using an API 🚀.
Along the way, Product development has followed Fintech and so has the overall Technology stack i.e. not just distribution, but the entire operating system.
The Technology evolution is extremely important as it is this exact change towards open banking, open data and Banking-as-a-service provided by ClearBank or Plaid (and many others) that facilitates the improved Fintech product development and also ushers in an era of embedded finance.
Financial products can now be built outside of the traditional financial ecosystem, but interact with it to verify users, collect payments or gather data.
U.S. Bank has joined with FinTech company Plaid in an open finance partnership that will allow customers to connect with apps and services.
In this changed landscape, domain expertise in Communities, Creators, Restaurants ..... or even Agriculture, becomes a competitive advantage in both distribution, analytics and overall financial product design.
And hence, I am predicting that ...
...Agritech becomes part of the Financial Stack
We have witnessed a shift to domain specific finance in many verticals in the past 18 months in everything from SAAS companies (e.g. PIPE), creators (e.g. Stir) or for cultural communities such as Black Americans (First Boulevard).
This gets really interesting for Agriculture. I cannot think of another sector which has such unique Jobs-to-be-done! Can you?
As financial services move to where people carry out their daily tasks - rather than being a separate physical or digital task - this opens up the opportunity for Agritech companies performing these tasks, to design, distribute and de-risk better financial products.
Let's now look at distribution and analytics as examples.
Agritech as Distribution
This is one of the reasons food marketplaces are so exciting. Not only do they help producers access markets, but they help them digitise these records, creating a financial personality often presented with payment data.
Marketplaces are helping participants to manage their business but at the same time becoming a distribution point for the relevant financial services.
One example is Silo which operates as a wholesale platform for perishables in the US - see below.
Silo is a platform that automates the perishable supply chain. More time, more opportunity, less waste.
Silo is tackling surmountable industry problems but as they solve these and gather business records it becomes a valuable distribution point for the relevant financial services to support those businesses. Silo raised $9m in a Series A last September 2020 from investors including Andreessen "All companies will be Fintech" Horowitz.
According to them "We believe that financial services will be a key enabler of this ecosystem, where factoring and faster payments, coupled with laws like PACA, can solve many of the cashflow challenges that growers and distributors face. Indeed, Silo is an excellent example of the kind of “fintech adjacent” businesses that we’re excited to invest in."
Simple... 👉 Solve problems 👉 Embed Finance
Further recent examples of this have been ProducePay (US, Mexico), Tanihub (Indonesia) and Bushel (US) who are solving customer problems and just happen to have raised funds to take advantage of these 'fintech adjacent' opportunities in recent weeks.
But it is not just Marketplaces - any product distribution companies can also utilise those channels to offer finance in the right context. For example John Deere Financial is the 4th largest lender to Agriculture in the US with a loan book of $2bn according to the American Bankers Association.
Oh... and what is the customer acquisition cost of an already paying customer? Please email me with answers.
Agritech and Analytics
If there is one thing Agritech is good at, it is producing data. I do wonder if any other industries have more data? Honestly?!
As mentioned about, some Fintech firms have built a competitive advantage for themselves in the market by focusing on data analytics and using this prowess to underwrite better loans.
But who are the Capital One's of Agritech or Agri-fintech?
This is where the Insurtech companies look very interesting.
Let's look at CropIn for example, an Indian agri insurtech based in Bangalore. CropIn pulls in farm level data on everything from pest infestation and disease to localised weather reporting and input advisory services. The more data that can be gathered from along the entire value chain (see below) the better this is and CropIn counts insurance and banks as clients.
I can imagine sequencing this data together to document the entire financial value chain from farm to fork.
As IOT and sensors develop I think this is how investing, financing and marketing decisions will be made.
But like their Fintech cousins, I think risk capital is an issue at present to refine credit models. Ideally, we would have refined lending models for all major value chains from seed to shed.
What role is there for banks?
As you can see above, banks are still part of the financial stack I have mapped out.
Banks are trusted - maybe some more so than others - but as long as they are, they will continue to attract deposits (aka cheap funding) which can be utilised to finance business and consumers. Isn't this just the 'dumb pipes' vision for banking? Yes, if they don't address open banking and digital integration.
Banks embracing open banking are especially relevant. Cross River, Evolve Bank & Trust or Lincoln Savings Bank are not huge institutions in their own right but they are powering the Banking-as-a-Service sector by allowing products be built on top of their regulated infrastructure and collecting all the deposits as they go. The U.S. Bank partnership with Plaid I have referenced above is another example which opens the door to many fintech products and services.
This is how financial services will develop - it will be delivered in micro services by specialists. Banks will be specialists in some activities but Silo will be specialist at delivering financial services to the wholesale produce market for example.
What sector are you in and who will be the specialists in your area?
1️⃣ Fintech has made magnificent strides to capture audiences where banks could not. This has been propelled by
- Customer acquisition costs magnitudes lower than traditional banks, and;
- An ability to reinvent data driven products.
2️⃣ Banks - at least the smart ones - are realising that they can co-operate with Fintechs by utilising their regulated status to allow product development on top of their infrastructure and benefit from the cheap deposits accruing from Fintech wallets.
3️⃣ As Agritech businesses develop with their customers and solve their problems, these relationships will represent 'fintech adjacent' opportunities for wallets, payments, credit or insurance. This will be the beginning of Agri-fintech.
In fact it has already started!