It’s hard to find a market bigger than finance. Only a few quickly come to mind such as food and water. Most startups talk about how their market is in the billions or tens of billions of dollars. Fintech companies operate in the trillions. Yet the majority of the market is still serviced by legacy companies operating legacy technologies, or very little technology at all. Today’s big banks still spend billions of dollars a year just moving physical currency around from one bank location to another.
The latest generation of consumers won’t accept a system based on handshakes, phone calls, and paperwork. They’ll expect their financial access to be simple, low-cost, elegantly delivered through modern technology, and ubiquitous.
Due to its size, that means there is also room for large, profitable businesses to be built that cater to specific financial services categories and customers. An example might be a banking solution custom-built for the independently employed or banks focused on serving startups.
Today’s financial services solutions are mostly two-sizes-fits-all where there’s a category of products and services for the ultra-wealthy and a separate category of products and services for everyone else. Software is fundamentally egalitarian in that it levels the playing field by lowering costs and broadening access.
As a result, it can also be used for greatly enhancing customization and specialization and by introducing high-end solutions at a much lower cost and higher unit volume. In other words, the features that only rich people had access to previously will not be made broadly available and integrated into vertical-specific products.
Global and Social
Consumer finance has been marked by periods of drastic increases in access via technology. The next step-change in market access will come from making investing a social activity. If you were to map out the step-change stages that occurred over the last 50 - 100 years, it would be the following
In-person meetings → phone calls → web access → smartphone access → global/social
First, a brief history lesson.
Discount brokerages arrived in the ’70s. Charles Schwab was the tech innovator at the time. They figured out how to enable lower-cost trading via phone call. That broadened access to markets significantly. The incumbents at the time said “That’s irresponsible. Who on earth would buy a stock over the phone with a broker they’ve never met!?” Turns out, a lot of people. Incumbents said that was a bad thing. Meanwhile, Boomers got access to markets for the first time.
Fast forward to v1 of the consumer internet era and the eTrades of the world broadened access once again off the backbone of nascent internet + PC access. The same bemoaning of “That’s irresponsible!” by “experts” trying to defend their castle wall followed the wave of mainstream consumers engaging with financial services on the internet.
Today, we have robo-advisors (Wealthfront) and mobile-first brokerages (Robinhood) broadening access once again. And once again incumbents are talking about how that’s bad for the average investor.
But if internet access is now ubiquitous and there aren’t fundamental technology barriers to market access, then where will the next big access leap come from? Some would argue that it’s via more financial education but that’s never proven to be true. Rather, I think it will come from merging the world of fintech and social. A platform that will foster the creation of 1,000 Jim Cramers, enable one-click copy and sharing of trades, and broaden access through existing trusted relationships while creating new relationships.
If this is true, someday there will be an online brokerage with 100M+ MAUs that span multiple geographies and bring Gen Z into markets. Eventually, it will grow to manage $20T+ in AUM in the next few decades. What’s cool is that it’s starting already. The big banks and brokerages need to buckle up since the next 20 years for them are going to feel like what the last 20 years was like for brick and mortar retailers.
We should expect to also see examples of vertical social networks that are large and very profitable, debunking the prior belief that vertical social networks can’t be big enough companies. They’ll be lucrative because they will merge social with another sector’s business model.
Infrastructure & Embedding
Next-generation financial infrastructure is also necessary if we wish to continue the trend of expanding market access while elevating the quality of the experience.
There will be consumer-facing startups that deeply embrace vertical integration. They will maximize what’s possible for the user by running home-grown frontend and backend technology. It will require them to invest significant sums of money (tens of millions to hundreds of millions of dollars) to build proprietary infrastructure, but with the promise that they can offer differentiated features unlike anything else in the market. Just as Amazon’s proprietary infrastructure has enabled Amazon Prime, the same will be true for groundbreaking fintech features and services.
But there will also be several breakout infrastructure companies that are created to enable a Cambrian explosion of other fintech entrants. There’s much-needed room for new infrastructure in payments (ACH still exists!), asset custody, trading, clearing, customer verification/validation, and security.
Every layer of financial services infrastructure will eventually become an API that can just be embedded in another application. The end result is a large market of “fintech infrastructure as a service” that can be sold and integrated into non-financial services companies who wish to integrate new financial features, such as Uber and Lyft offering debit cards and other financial products to their drivers.
Someday, you’ll be able to rent a bank for the low cost of pennies per API call.