Tag Archives: #Stripe

A Tale of Two #FinTech Cities – Part 2

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It feels like the inter-city #FinTech and startup rivalry between Melbourne and Sydney is starting to get personal. The blow-up between Victorian Small Business Minister, Philip Dalidakis and Freelancer CEO, Matt Barrie over StartCon is perhaps the most strident example, but other discontent is bubbling underneath the service.

screen-shot-2016-10-05-at-10-51-49-amLet’s take a look at what’s actually been happening around #FinTech in Melbourne, and try to understand what might be the cause of this apparent disquiet:

First, the recently announced LaunchVic grants have been met with a mix of gratitude, bewilderment and some sour grapes, based on the people I have talked to in the start-up community. There was a sense of “jobs for the boys”, “usual suspects”, “who?”, and “yeah, good on ya”. Nothing new there, then, when public money is being handed out. High-profile beneficiaries of the initial A$6.5m of grants include FinTech Australia (as part of a major FinTech Conference to be held in Melbourne), FinTech Melbourne (which is now the largest group of its kind outside the US and UK), inspire9, Startup Victoria and Collective Campus.

Second, Stripe‘s CEO, John Collison was in town to celebrate their 2nd birthday in Melbourne. (This is the 3rd time in 2 years Collison has been in Australia – he must love what we are doing here? Or maybe it’s the Victorian government incentives that attracted Stripe to set up in Melbourne: see below.) This time around, there were some major announcements among the celebrations, including:

  • 25% of Australians have paid for something online using Stripe
  • Stripe is launching “Connect” in Australia – making it easier for local businesses to roll out payment solutions in multiple markets overseas
  • Stripe continues to keep its APIs as simple and streamlined as possible – they even support Amazon’s Alexa voice recognition system

There was also a panel discussion with some of Stripe’s local clients, and a Q&A with Collison himself:

  • Andre Eikmeier from Vinomofo commented that payment solutions (like all technology) should be invisible, and just work in the background
  • Ben Styles from Xero explained that integration with Xero’s own APIs is critical, and that they have co-developed some products
  • Nicole Brolan from SEEK said that thanks to Stripe, her business is finally allowing clients to pay invoices on-line

Asked about innovation, Collison argued that mobile phone technology was the spur for services like Uber. However, he’s not especially engaged with Blockchain, as he does not see the use case. He thinks the next major innovation will be in medtech (telemetrics & wearables), and machine learning (speech and image recognition). As he said, “driverless cars are not just about the sensors but what the data is telling you. We know more about the health of your car than your own body.” He also had some words of advice to aspiring local entrepreneurs and startup founders:

  • Having a global or international perspective is determined by your markets, your competition, and access to specific talent pools.
  • It’s probably wrong to aspire to be like Atlassian – you need to understand WHY Atlassian has been successful, not WHAT it did or HOW it did it – which means getting back to core values and core purpose.

Third, as the Stripe celebrations started to kick off, across town FinTech Melbourne hosted an event starring Alex Scandurra, from Sydney’s Stone & Chalk FinTech hub. This was billed as a “pre-launch” for Stone & Chalk’s planned foray into Melbourne, and was part information session, part FinTech love fest, and part fan-boy hangout. Scandurra’s presentation was quick to point out that the “plan is not to bring Stone & Chalk to Melbourne, but to create Melbourne’s own Stone & Chalk”. (Spot the subtle difference?)

To its credit, Stone & Chalk is home to 300 people and 75 startups, has helped start 21 companies and create 150 jobs, and participants have collectively raised $100m in funding, although Stone & Chalk does not take equity. Scandurra also commented that FinTech is not an industry in itself – it is a horizontal that serves all industries.

There seems to be a lot of local clamouring for a FinTech hub in Melbourne. However, unlike the NSW government which has directly partnered with Stone & Chalk, I understand that the Victorian government is not prepared or able to “invest” in such a project – and certainly not before there is some private sector funding on the table.

Meanwhile, the founder of a rival payment system expressed his frustration that the Victorian government “sponsored” Stripe to come to Australia, but won’t offer similar support to local startups. Another FinTech CEO I spoke to was irked that Stone & Chalk would appear to be breaching its own mandate if it set up shop outside NSW.

In fact, could be argued that Stone & Chalk was established in Sydney to directly compete with Melbourne’s startup ecosystem. In large part, this is thanks to the huge success that the Victorian government continues to have in luring major tech companies and global startups to come to Melbourne. Names such as Zendesk, Eventbrite, Slack, Square, Stripe and now Cognizant.

If the debate over Stone & Chalk coming to Melbourne is about creating a local FinTech hub (whether or not the Victorian government tips in some money), we have to examine the need for such a hub. For example, is it simply a question of real estate, so that all the FinTech startups can be co-located in one place? If so, I would have thought that was easy to resolve: there’s a lot of empty office space, and Melbourne rents are cheaper than Sydney; also, a growing number of office landlords recognise the mutual benefits and knock-on effects of hosting co-working venues in their buildings.

We also have to consider if Melbourne’s existing FinTech startup eco-system/infrastructure is willing to come together to underpin such a hub. If so, what is the hub going to do? What is its purpose? What is the missing piece that the hub is designed to fill? And who/what/where is best placed to fill that need/gap?

Looking back, Melbourne has been the home of a number of FinTech businesses, that are now global public enterprises – IRESS, Computershare, Touchcorp, Novatti, for example – so there is obviously something in the local water (or coffee). For me, however, a key barrier for FinTech specifically, and startups more generally, is the inability to connect to institutional funds and investors (Clover being a notable exception?). Other obstacles include the stodgy procurement processes used by the public sector and many large corporations, which make it more difficult for startups to compete for work, and the reluctance by enterprise clients to try a local product or service unless it has been tested and proven elsewhere.

Finally, on a more positive note, it was very interesting to see that founders from Atlassian and Vinomofo are backing Spaceship, a new superannuation fund appealing to a younger, tech-savvy audience.

Next week: Bridging the Digital Divide

It’s not enough to be #disruptive – you also have to #collaborate

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For most tech #startups, especially in #fintech, it’s no longer just about being #disruptive – there’s a growing realization that entrepreneurs also have to be #collaborative.

One year on from his last visit to Melbourne, Stripe co-founder John Collison was back in conversation with Paul Bassat from Square Peg Capital, courtesy of Startup Victoria and sponsors Envato, LIFX, BlueChilli, Bank of Melbourne and PwC. Previously, John spoke about the need to be “disruptive rather than incumbent”, yet it seems that Stripe’s growing success can be attributed to relationships with other providers in the payments industry, such as AliPay and VISA, plus deals with retail sites such as Catch Of The Day and RedBalloon. Oh, and it probably helps that most U.S. presidential candidates are using Stripe for campaign donations….

Stripe has already launched an SDK platform for developers, and is planning to launch StripeConnect, a market place platform. The point being, the more users (upstream and downstream) you can plug into your platform, the greater the traction, but also the deeper the collaboration. Why would you want to annoy your potential partners, vendors and suppliers?

Meanwhile, Australia is now Stripe’s 4th largest market, and close to being its 3rd largest.

Going forward, despite some criticism (e.g., it’s still not rolled out in Australia), ApplePay has huge potential. It has an estimated 800m credit cards registered with iTunes (making it 5x bigger than PayPal), and with people currently paying as little as $1.69 per song download, ApplePay could crack the market for broader micropayments (e.g., the $2 on-line daily newspaper?).

However, Stripe stills sees that there are disconnects between traditional credit card application processes, account registration forms, payment solutions, merchant set-up and downstream payments for low-value (but high volume) transactions.

Looking ahead, Collison is talking up opportunities in same-day delivery for e-commerce (hard to see this happening outside of Australia’s main metro areas – unless the infrastructure is there…), and better video-conferencing services (again, in Australia this is hampered by poor broadband services).

A few days later, and Adrian Stone from AngelCube was in conversation with StartUpGrind‘s Melbourne convener, Chris Joannou. Adrian restated the sentiment that angel investors tend to back founders rather than ideas, which can seen by some of the ventures AngelCube has backed so far, including Tablo, LIFX and CoinJar. Each venture has been successful in raising early-stage funding (despite some teething problems and much pivoting), although AngelCube itself has not yet completed an exit.

Rather like his associate Dave McClure from 500 Startups, Adrian recognizes that for various reasons, VCs are having to make smaller, multiple bets, rather than betting the farm on single or a few ideas.

Perhaps this gives further credibility to the proposition that every portfolio (including individual members in retail and industry superannuation funds?) should have a discretionary 1-2% allocation to startups, but you still need an investment vehicle or platform to screen and manage opportunities. Sadly, we see that there is still a disconnect between institutional investors and startup founders. The former are having to get bigger to reduce operating costs, yet this means they have what one friend of mine has defined as the “Allocation Gap”. And of course, founders far outnumber the available sources of VC funding. Time for a rethink on how investors can collaborate to access startup opportunities?

Next week: Cultural Overload

 

 

The future of #FinTech is in Enterprise Solutions

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Talk to anyone involved in FinTech, and apart from telling you the sector is “hot”, there’s little consensus on what happens next. Despite positioning itself as a disruptive force within financial services, much of what goes on in the sector is either driven by regulatory reform, or by technological developments in allied fields. Most of the disruption so far is in retail and B2C services, yet the more significant opportunities are likely to be found in enterprise and B2B solutions. But as The Economist commented recently, “The fintech firms are not about to kill off traditional banks.”

The Current State

In broad terms, FinTech is working in four main areas:

  • Cryptocurrencies
  • Payments
  • P2P lending
  • Financial Advice and Planning

The first two are responding to dual technological advances – namely, the use of block chains and cryptography; and increased sophistication around mobile and GPS. Patrick Maes, CTO of ANZ Bank, has stated that “Bitcoin and block chain are the first payments innovations in 2,000 years.” He also has a FinTech “wish list”.

The second two (at least, within Australia) are benefitting from regulatory changes, such as the new positive consumer credit reporting regime, and the Future of Financial Advice reforms. And when the National Payments Platform scheduled for 2017 mandates real-time settlements, everyone will have access to immediate inter-bank payment services.

Of course, there is some overlap among these categories, which in turn are also benefitting from developments in big data analytics, mobile solutions, social media platforms, and consumer trends like crowdsourcing and the shared economy.

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It may be interesting – but it’s not whole picture

Disintermediation May Not Be Enough?

Most of the FinTech disruption has been in the nature of disintermediation – displacing the role of traditional banks and merchant services in providing payment solutions, point-of-sale facilities and personal loan products. But given the relatively small margins on these services, you either need to have a totally different cost structure, or a significantly large market position to achieve scale and volume.

You will have seen the above infographic, often quoted with a sense of wonder at how these companies have built huge businesses seemingly without having to own any physical assets. Well, yes, but dig deeper, and what do we find? The banks have always worked on the same principle – they take customer deposits (which they don’t own), and then lend them to borrowers (whose secured assets they don’t own unless there is a default).

The main difference is that banks are highly regulated (unlike most of these digital market disruptors), and as such they have to hold sufficient capital assets to cover their exposures. Meanwhile, the banks finance the car loans taken out by Uber drivers, they provide credit facilities and export guarantees to Alibaba traders, they underwrite the mortgages on properties used for Airbnb, and will likely provide e-commerce services to advertisers who use Facebook.

For me, probably the last major FinTech disruptor was Bloomberg (founded back in 1981), because it changed the way banks and brokers accessed news and information to support their trading activities, by introducing proprietary analytics and data tools via dedicated terminals, screens and datafeeds. So successful has Bloomberg been that it now owns about one-third of the global market for financial data, and is the single-largest player (albeit by a very small margin over main rival Thomson Reuters – itself, a merger of two key data vendors). Plus Bloomberg is still privately held.

The Future State

I don’t believe FinTech can truly come of age until a major enterprise solution appears. For different reasons, Stripe and BlueDot could be on their way, but both are primarily operating in the consumer payments sector.

I have written previously on the areas where FinTech could impact institutional banking and securities trading, including loan origination, data analytics and risk management. I’ve also reported on the opportunity to disrupt traditional market data vendors by changing the pricing and consumption models. And elsewhere, I have hypothesized on how banks’ trade finance services could be disrupted.

The areas where “Big FinTech” could truly make a difference are:

  • Counterparty Risk Management
  • Predictive Credit Risk Analytics
  • Loan Pricing Models
  • Unit Pricing Calculations
  • Collateral Management
  • Portfolio Performance Attribution
  • Sentiment-based Trading and Risk Pricing

However, the final word should go to Patrick Maes, who suggested that a huge opportunity exists in deposit products linked to customer loyalty programs and frequent flyer points – what if your credit card points could be used to finance a car lease or as part of the deposit on your first home?

Next week: Change Management for Successful Product Development

Stripe’s John Collison: “Better to be #disruptive than incumbent”

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In a Melbourne fireside chat with Paul Bassat (hosted by NAB and Startup Victoria) Stripe‘s co-founder and President, John Collison offered the insight that “it’s better to be disruptive than incumbent”.

Incumbency comes with all the baggage of legacy data, semi-redundant systems, siloed business operations, and customers with long memories.

Whereas, a nimble and agile startup like Stripe can cut out inefficient and lazy business processes – especially in areas like online and mobile payment systems. And in doing so, a disruptive service can make us think, “how did we ever manage before this was invented?”

Collison was careful, though, to point out that Stripe is working with the banks, not against them, in case anyone thought his company has designs on becoming a fully fledged financial institution. “We simply want to make the payments business more efficient.”

Stripe’s approach is to leverage engineering skills and solutions “to fix first world and middle class problems”. Precisely so – why would you want to undermine the system (payments and transfers between banks and their customers) that gives rise to your very existence?

Collison also reflected that never before has it been possible for such a small number of people to create such enormous value, very quickly – citing the fact that WhatsApp had a mere 55 employees when it was acquired by Facebook earlier this year for $19bn. (Stripe itself, founded in 2010, had about 100 employees when it was valued at $1.75bn around the same time.)

While WhatsApp does not yet generate revenue, its valuation as a disruptive IM platform is largely based on a notional value per user, and what that may represent in terms of data from customer analytics or premium pricing for add-on services.

But you don’t even need to be a startup business to disrupt an existing market, as the music industry continues to discover to its cost – you simply need to be part of the demographic that is used to “free” stuff, has no real concept or appreciation for IP, refuses to pay for anything on the internet, and develops brand loyalty based on likes, shares and number of views. Even Stripe would be out of business if everyone switched to peer-to-peer money transfers without wanting to pay commissions or transaction fees.