From the VC’s corner (11): Starting a fintech from scratch within a game of fin-thrones
Summer is already here, Drogon flew away (and not sure we’ll ever see him again), Arya has been raising $2.5m in SV, the financial kingdoms are still there, and innovation in the fintech landscape marches onward. As younger startups in the sector begin to compete, legacy banks/companies find themselves under pressure. I remember the (a few months old) speech of a fat cat, representative of a top three local bank, mocking the fintechs. According to W.UP, 82% of financial institutions are admittedly just getting familiar with what ML and/or blockchain/DLT mean or do, and the lack of seasoned hires doesn’t exactly speed up this process. Well, looks like all the incumbent banks need to beef up their tech culture around if they want to survive in the long run. The fintech dragons bite strong and burn market share.
In this context, let’s scratch a bit where and what’s this major evolution about, and highlight how a niche product (one in a sea of opportunities) looks like.
For example, IBM’s World Wire is based on Stellar (a DLT having Ripple as ideological parent), caters to big financial institutions and facilitates clearing and settlement in near real time. The solution uses digital assets (think stablecoins) as an agreed-upon SoV exchanged between the parties, and integrates payment instruction messages.
And it’s not only the tech majors, but also some (central) banks are doing a tremendous job and implementing DLT based systems; several CBDC (Central Bank Digital Currencies) proof-of-concept and prototype projects have been conducted to date. In an inspirational article which you can read here, David Tang of Standard Kepler Research is comparing three powerful possible CBDC options, Corda, Hyperledger Fabric and Quorum, in terms of privacy, scalability and performance, resiliency and finality. All are suitable in supporting wholesale payment systems.
R3’s Corda uses the advantages of DLT and cryptographic hashes to identify parties and data without utilizing a blockchain or having a native cryptocurrency; additionally, there is no concept of mining. Corda defines its ledger as a set of immutable state objects, does not make transactions or ledger entries globally visible, and seeks to achieve consensus among parties on the state of a specific agreement as it evolves. The validity of a transaction can be checked independently, and a predetermined observer node (can be a central bank — potential point of weakness) is required to reach consensus.
Hyperledger Fabric allows for a Lego-like approach to building solutions from a fixed set of components. Fabric runs dApps without depending on a native cryptocurrency, and has at the core the concept of channels, a network of bilateral channels between participants, although multilateral channels can also be created.
JP Morgan’s Quorum builds on Ethereum’s work, with three different components. Foremost is the introduction of individual (node-based) private state trees; another component is a Zero Knowledge Security Layer (ZSL proofs for verification), while the third refers to “Raft” as a way of achieving consensus (there is no concept of mining involved.)
There are so many fintech unicorns these days, so founders need to get creative. I’m already working on my second one in the space, still in stealth; and working at startup pace is sometimes exhausting. We also learn, learn, learn, and know we’ll make a ton of mistakes (well, I’m trying to mitigate along the way.) My previous experience in M&A was pretty intense, so I’m used with the behavior of founders when burnout or success paranoia kicks in; it’s pretty exciting stuff and really gratifying when you invest early.
Meantime, I’m highlighting Paul Kesserwani’s Cushion, and you might want to listen his journey in starting a fintech from scratch, here ( a Wall Street Oasis podcast.)
Cushion links your cards, bank accounts, and where there are fees they automatically negotiate with the bank to get you money back. Their bot has a „black belt” in fee negotiation. You should expect refunds on fees like overdraft fee, minimum balance fee, late fee, wire transfer fee, foreign transaction fee, ATM fees, or credit card interest charges.
Paul comes from a country where everything can be taken from you at any second. Entrepreneurship is in his blood; he was exposed to it, and, like all of us, wanted money and to start his own thing. His piece of advice: “Excel at everything you do and just run towards the path of starting your own company. “
Early in his career, Paul took a deep dive in consumer finance, and definitely was not happy with how the banks have handled his fees on a specific occasion; so he surveyed apps, users (many months of research), and realized that people want to solve the issue with the high and even unknown fees, not talk to the banks.
“You see a problem, then it’s your problem, you research it to death, and becomes clear after talking to people what’s your pain point […]” The bank is charging fees, will put them on your bank account, and you don’t negotiate. People don’t have time, so Paul has built a service to manage finances for his customers. All starts from the trust; the customer has all those fees, plugs in the app, and boom … negotiation becomes an easy process and you’ll get bucks back. Sign up and go about your life.
Cushion can exist because CAC is high for banks. In a way, it’s sort of a money manager, as nobody digitized bank fee negotiation.
Both incumbents and neobank/fintechs should not forget the increasing competition they both face from tech giants. ”Your margin is my opportunity” (Jeff Bezos)
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Last, when (your fintech’s) success hits in, celebrate the win! Check and enjoy your bank account, go party, and then go back and run for the next peak.
My today’s preferred: Projector- to communicate clearly and memorably using visual information. “Initially that means a creative, collaborative toolset for visual communications, allowing users to develop really compelling slides, print materials or social media posts that are more visually compelling and easier-to-build.” (Mark Suster, and you can read about it here .)
