Ron Shevlin is the Chief Research Officer at Cornerstone Advisors, a consulting firm based in the US that works with banks, credit unions and Fintech companies. He is also Senior Contributor at Forbes and ranked among the top fintech influencers globally.
Paolo Sironi, one of the most respected Fintech experts worldwide. Paolo is the leader of Global Research for Banking and Financial Markets at IBM Institute of Business Value and an appraised financial writer.
How inflation and future interest rates expectations can affect tech startup valuations and how will VC funds’ strategies adjust?
Paolo
I am usually not concerned about valuations on public markets because they tend to be driven by expectations and heavily influenced by Central Banks policies. Inflation is on the raise and interest rates are going to be increased not equally across the different countries. I am not concerned because I try to look at what tech companies bring to the table in terms of industry transformation, which is not necessarily about the money they can raise, but about being consistent with sustainable long-term perspectives of the financial services industry. There is a clear trend about integrating a variety of solutions on the platform economy to build up more holistic perspectives to serve customers. Companies that have a weak proposition within the industry transformation will suffer these changes in a more accelerated way.
Ron
I agree with Paolo, I’m not concerned, I think it’s just a blip. We have to recognize that we might have seen an unusual uptake in 2021 in funding because there was a big recovery after the pandemic. Currently there is a bit of a shift in fact, while early investments used to be focused on front-end innovation, meaning that impacted consumers directly, and now on infrastructures, in the coming years they will be focused in Decentralized Finance.
Do you think the risk appetite is increasing?
Paolo
The definition of risk appetite for a VC is peculiar, because the VC has also the role to build the narratives that enable the exit strategy. The excess of liquidity in the market is still there, and that increased the risk appetite since the 2008 financial crisis, but any change in terms of more risk appetite could be considered as a marginal one. What may happen is that if there is a reconsideration about quantitative easing, which causes the excess of liquidity, the quality of investments made will be more revealed. However, I’m not sure these factors could affect the VC ecosystem and how they operate since it is a world on its own and with its own narrative.
Ron
Risk appetite for VC is totally different than the one for any other financial institution.
The VC has become so specialized in the past ten years and valuations in a particular industry may have been influenced by fundraisings. Anyway, in the long term, I believe that the increasing specialization of funds in industries will impact positively the sector, both regarding the understanding of risk and the success of startups.
What are financial institutions going to be like in the Metaverse? Who is most likely between traditional players and neo-banks to play a relevant role in the Metaverse? And even more, what services are going to be needed for this new economy?
Ron
The idea of building branches in the metaverse is one of the most useless I have ever heard. On the other hand, there are big opportunities for banks financing and funding the buildings in the metaverse. It is so early that it is hard projecting, but it seems that there is a couple of things that make sense already, and these are gaming and events. In my opinion there will be many metaverses and some of these will be very specialized.
In a financial services perspective, one of the most important activity banks can play is funding. We are not talking about issuing mortgages for lands acquisition, but something that is more about commercial real estate. There are two kinds of people that invest in the metaverse lands: the ones that are pure speculators and the ones who want to make money through buying certain locations. Obviously, to understand the value of these projects, banks will need to build new capabilities.
Finally, a second opportunity can be linked to payments as someone will have to power the economy and take care of how the money move around in a completely digitalized world.
Paolo
The problem of the metaverse, which may be an opportunity, is that in order to function it requires a higher level of interoperability, for example, between different blockchain environments. This is basically infrastructure. Thus, if you believe that the world is becoming more and more digital and that the metaverse is becoming a landscape that transforms the way people interact, investing in the infrastructure is an opportunity to make this available to everyone.
Ron
The opportunity is not about the metaverse per se, but what it changes. The internet is not an industry and so is not the metaverse. The metaverse is a new distribution channel for delivering and reaching.
Paolo
I would define the metaverse as an engagement channel because the idea of decentralizing is about empowering the parties to interact freely and autonomously. The new distribution model can be seen as a venue that enables you to deliver something you have created directly to someone else, without intermediaries, and this is the opposite of centralized system.
Which role are playing payment infrastructures providers as Mastercard and Visa within a platform economy? Which are their main threats and how can they innovate their business models to deal with decentralized systems?
Ron
First of all, I would not define Visa a payment rail but rather a network of networks. In fact, even if the Visa payments rail starts to decline, they are helping in creating ecosystem of players in financial services, thus even if some revenue lines will start declining, other will instead soar. I did an annual report on who are the winners and losers in banking and Fintech and I did not name Visa as I think that they understand the long term transition and the role they will play as a point of connection on data movement and management of payment transactions.
Paolo
The payment business is shifting inside banks from being a profit center to being a cost center, and this means focusing on the infrastructure alone. Instead, payment providers can keep their competitive advantage if they will learn how to move from being a pure transactional mechanism linked to the volume of payments, into fee-based services linked to the capability of connecting different actors and providing data to third parties. It is not easy, but I think they should be able to make this step forward as their business model is less complex compared to the ones of banks.
Ron
I would generalize Paolo’s point to all the industries. If you go back to Microsoft, they started as an operating system provider. If you think about Maslow’s Hierarchy of needs, you can apply this to each industry. Visa started making money just by executing the transactions but then it became a commodity as users wanted additional services. The same applies to banking, when users just wanted to make checks and have debit cards but then understood that they could optimize every aspect of their financial lives. In each and every industry the needs are moving up to that value chain.
Paolo
There is also something else changing in the value chain, which is the transformation of money, meaning that innovation is happening faster than ever. Consequently, products are commoditizing faster than ever, and leaving very poor margins to lots of companies. Business need to move out from this situation (centered on commoditizing products) and find strategies to stabilize their revenues in order to counter the commoditization leveraging outcome economies. This shift is hard but necessary.
Ron
Yes, and I also think that the challenge for established companies is not to keep up with technologies but innovating their business model. You can always purchase new pieces of technologies from outside, but you can’t buy a business model.
Apple has recently announced the acquisition of an Open Banking provider called Credit Kudos. iPhones may be the new payment terminals. How other companies will react to this? Will it disrupt the industry?
Paolo
I’m not sure about to what extent Apple want to succeed to be a payment provider, I think it’s more about the trust advantage that they wants to build. Apple is a peculiar company since its core business propositions is still operating on hardware, but it has also an operating system powered on that recognized hardware that is characterized by the trust of the consumers. For example, I recently received a message from my iPhone in which I was told that my bank account password was compromised by a data leak. I immediately called my bank and they said that they didn’t have any evidence of any problem and it must have been a problem of Apple, not theirs (?!?). Who should I have trusted? My bank or Apple? I trusted Apple. Security and trust are becoming more and more important, coupling with privacy. Apple is trying to serve an ecosystem that centers on trust with solutions that want to eliminate frictions and that, at the same time, nurture the ecosystem.
Is Apple going to provide Buy Now Pay Later?
Paolo
I don’t think BNPL is anything new, it is a mechanism used by Fintech companies to onboard clients with unsecured funding. And this is why I think it relates more to fintechs or new players rather than banks, since banks already have those relationships and don’t want to get their hands on more unsecured lending.
Ron
I wrote an article about why Apple bought an Open Banking provider (Credit Kudos). Contrary to the conventional wisdom of Apple launching is card or entering the BNPL, I didn’t see that as the big driver. What I didn’t write in the article is the opportunity for Apple to create a credit scoring system. Think about where the friction is. When you are a big player such as Apple, Amazon or Google you want to take the friction out from the system, making the experience better. If Apple can use data from their customer, over time they would be able to compete, or even replace, credit bureaus. One of the most iconic lines, I think from Jeff Bezos, is: “your margin is my opportunity”. Apple can do it faster, better, and cheaper and at a lower cost while gaining market share. The problem is that they don’t have the market so they can’t beat the global providers.
Paolo
I would add a point to this. When we talk about the evolution of payments that intersects with credit scoring, we are not talking about payments that become easier to use, but about identities that are becoming easier to be proved. For example, You certainly remember a time when you had to go to your bank and qualify yourself to get the cash you needed to buy something in a shop. You see all the frictions here, right? Then, you remember when credit cards appeared. They started investing in the identity part of the value chain as they allowed you to go to a store and buy things with your card by proving your were a trusted identity just showing the card. As everything is shifting digitally, it’s the definition of your trusted identity that must shifts to eliminate more friction and unlock more value. Once you have your mobile phone and you do your things there, inside a mobile-oriented ecosystem, you look for easier capabilities of proving yourself.
According to your opinion what can be the next evolution in Buy Now Pay Later? Can we expect to see this service widely taking place in physical point of sales?
Ron
I am underwhelmed by BNPL as the capability has been around for a long time and it has not been proven to be a very great product for consumers. Of course, it allows to buy something paying it periodically but what concerns me is that almost 40% of users in the US have been late with their payments, and the crucial point is that around half of them have been late not because they didn’t have the money to pay the installment, but because they lost track of it. Think about the 4Ps of marketing (price, product, place, promotion), I think payments are becoming the fifth P as the way you pay can influence what you buy and who you buy from. What companies like Klarna and PayPal are doing is trying to influence consumers by using the payment mechanism as an factor. This is why the BNPL label doesn’t make a lot of sense, it’s just how they came into the market but they are becoming a digital commerce provider.
Paolo
I will add something to what Ron said based on my 15-years risk management experience. A financial institution is made of 4 pillars: payments, credits, insurance, investments. Every time you transform one of this pillar into another (or mix them), unwanted problems may well occur. Think about when subprime credit became investment products. Credit is now transforming into payments, and we need to be careful again. S such, BNPL is not really a payment mechanism but a credit one. Now, a financial institution is 3 things: security, because money need to be safe; risk management, since you need to face challenges; and lastly, client relationships. Inverting the set of priorities can be worrisome. In reality, BNPL can be better understood as an opportunity to onboard clients into an ecosystem where acquiring them is complex and expensive. In fact, providing free money to clients can be a good way to onboard them, as long as there is enough capital (in this case, coming from venture capital) to cover for the potential losses.
Yet a problem remains that is related to “responsible risk management”. What concerns regulators the most is that BNPL may affect (with excessive borrowing) the weaker links of our ecosystem: retail investors. I would finish by saying that BNPL is not a business model but rather a product allowing companies to onboard customers in a cheaper way that might not truly eliminate the friction, but move it from when you buy (ex-ante) to when you have to pay the installments (ex-post).
What is the final client of BNPL? Customers or businesses? Who should they focus on more to be profitable in the future?
Paolo
It is a two-sided market, but customers (the shoppers) have to be prioritized because if they are unsatisfied, the marketplace will dry out. The problem here is that in this business model you are not funding one of the two sides of the market, but you are funding (subsidizing) both.
Ron
I would add that what we will see in the future of BNPL is an increasing specialization. What BNPL providers do is bringing customers to merchants which means that that providers will have to understand shopping behaviors and preferences of customers. That’s where they will have to compete over the next years.
Students are always looking for advice on how to face future obstacles in their careers, what advice would you give us?
Paolo
Everything is changing faster than ever, so make sure you understand the difference between money and value.
Ron
Don’t overlook banks and the traditional financial institutions. The experience you get working in a large company is really valuable, even if you leave after a couple of years. Secondly, large banks are hungry for young people and want new blood and new ideas. So don’t always choose fintech startups over banks, because they may not be the best environment for you, in terms of organization and culture.
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