Moving Towards the Fintech Age

The Banking and Financial Services industry is witnessing a rapidly changing landscape, with the rise of fintech companies being the catalyst. Traditional banking products, services, and channels are losing relevance as customers, increasingly influenced by social media and technological advancements in other spheres. There is immense, and largely unfulfilled, demand for better customer experience and convergence in services. Mobile-internet based banking services are being rapidly adopted, resulting in bank queues shortening by the day. Service levels are no longer the differentiating factor. A customer experience that is efficient, convenient, personalized and streamlined at every touchpoint is what sets financial institutions apart. The changing regulatory environment and other macroeconomic indicators have also contributed to making this a never before opportunity for the rise of fintech start-ups and their disruptive digital banking solutions.

Digital banking has influenced world economy manifold. Alternative Lending is probably the greatest innovation by fintech companies if you were to ask millennials. The traditional banking system has extremely rigid norms and mandates a cut-off credit score to qualify for a loan of any kind. Young adults, the self-employed, and people who have moved cities/countries have little or no credit history if they have not taken a loan previously or do not have a credit card. Such people would have a zero FICO or CIBIL score. In emerging economies alone, individuals, as well as institutions, rely on cash nearly 90% of the time. This increases the cost of servicing customers for financial institutions while leaving little or no usable data to assess the creditworthiness of such businesses and individuals.

Fintech startups like the UK-based Aire; Kabbage and Lending Club in the US; Data signs, Capital Float, Rubique, Finomena, OptaCredit and the likes in India have recognized the need for democratizing the credit score. Consequently, they have leveraged the power of Big Data, machine learning and Artificial Intelligence (AI) to assess creditworthiness. App-based lending services have used these techniques to assess “intent to pay” rather than the conventional “ability to pay”. This has helped transform B2B and B2C lending for Micro, Small and Medium Enterprises (MSME) and individuals. Forbes estimates, the 1,000 fintech companies in the world have collectively raised US$105 billion in funding and are currently worth nearly US$870 billion. Investment in fintech firms has more than doubled between 2014 and 2015, with California and New York in the US, the UK and France being the global hubs. They are followed closely by India and China, primarily because of a large population and a fast-rising middle class. In India, experts predict, as people and jobs become more mobile, alternative lending – rather than staying on the fringes – will be the new ’normal’.

It wouldn’t be too far from the truth if one stated that Alternative Lending is the poster-boy of fintech industry. It is worth noting, however, that the young adults living in urban areas aren’t the only beneficiaries of digital banking. It has also started touching the lives of the rural population in emerging economies, which were, so far, unbanked. According to a McKinsey Global Institute study, 2 billion people globally do not have a bank account or access to credit., At least 200 million MSMEs in emerging economies have little or no access to credit, impeding their growth. This gap between demand for credit and its supply is estimated to be at US$2.2 trillion. For governments, the predominant use of cash leads to leakage (estimates peg it at one-third of cash payments), enabling corruption and affecting the efficiency of delivery of government aid and subsidy.

Access to a smartphone, connected to an ecosystem of thousands of mobile apps running securely over a cloud computing infrastructure, provides the much-needed basis for a suite of basic financial services. A digital wallet (linked to a traditional bank account) can be used for payments and remittances, wages and government subsidies, transacting at stores and paying utility bills and school fees. All this at a finger’s touch saves time, money and effort, that too at no risk and greater convenience. Fintech startups can partner with financial institutions to provide digital banking solutions, at costs 80% to 90% lower than the cost of building brick-and-mortar bank branches. Over time, based on the database created by transactions made through digital wallets, credit risk may be assessed for providing loans. As the use of digital payments and other digital products increases, the benefits to all users increase, creating network effects that can further accelerate adoption. According to studies, in Kenya, the use of M‑Pesa mobile money system grew from 0 to 40 percent in the first three years of its launch in 2007—and rose to 70 percent by 2015, much faster than traditional banking could ever hope to achieve.

Uniquely poised among the emerging economies is India with the third-largest smartphone market i.e. 314 million mobile web users as of 2017. Faced with the herculean task of delivering on its promise of financial inclusion and transparency, the Indian Government is relying on innovative digital solutions. Hundred million new mobile wallets have been created in India in the past one year by fintech start-ups that did not exist a decade ago. More than a billion citizens have been brought under the digital grid through India’s Unique Identification Program (UID) in five-and-a-half years, which is probably the fastest digital service growth in history. In a massive exercise, the government has also opened more than 200 million bank accounts linked to the UID to deliver government welfare funds including wages and pensions, aimed at reducing leakage.

The widespread use of digital finance can uplift the GDP of emerging economies by as much as 6%, or US$3.7 trillion, by 2025. Close to 1.6 billion unbanked people can gain access to formal financial services if the India example can be replicated by fintech start-ups in other countries. An additional US$2.1 trillion of loans can be provided to individuals and businesses. Governments can potentially save US$110 billion each year from leakage. Together, the resulting growth in aggregate demand could create 95 million new jobs.

The global economy witnessed a lackluster 2016. With uncertainties surrounding the policy stance of the new administrations in countries like US, UK, and France, 2017 is expected to be a year of moderate growth too. The huge opportunity created by fintech start-ups has the potential to jumpstart the global economy, creating a win-win situation for financial services businesses as well as emerging countries. The demand created by emerging markets, in turn, would be enough to fuel businesses worldwide. Traditional Banking and Financial Services firms are now beginning to take note of this. Investment Banking behemoth Goldman Sachs, for the first time in its 147-year history, has entered into the world of retail lending by building a technology infrastructure called Marcus by Goldman Sachs, a new online personal lending platform, where credit-worthy borrowers can apply for fixed rate, no fee personal loans up to US$ 30,000 for periods of two to six years.

While this is an unprecedented chance for the fintech start-up community to impact every life across the globe, there is also the risk of handling exponential amounts of sensitive personal and financial data pertaining to individuals and businesses. Especially when financial institutions and/or governments are involved, this may well turn out to be a double-edged sword. While competition may be tough, making margins wafer thin, investing in top-notch security infrastructure may eventually turn out to be a greater differentiator than innovativeness alone. Following established industry practices such as performing KYC, due diligence and AML checks along with fair interest rates will ensure healthy growth for this sector. Fintech startups must remain wary of going down the microfinance route, which started with great promise but faced issues due to lack of transparency, poor governance, coercive recovery practices and high lending rates. This opportunity can only turn into a remarkable success story if fintech startups stay close to their core competence: accessibility, ease of use, low cost and innovation.

Getting the most out of your mentor

 

slide1If there’s one irreplaceable asset that your startup might have, it would be your mentor. Having a really good mentor can help you in ways that would normally take your months or even years to do. And it’s because they give you advice based on their experiences that can help you avoid making mistakes that a typical novice on the field would make. Having one is great, but just having one (or even more) is not enough. You need to know how to extract the most out of them.

Think of the interaction with a mentor like a web search, or perhaps a book search in a library. There are things you must know and do before you get the right – accurate and adequate results.

 

Know what you are looking for

Let’s say you wanted to read a book, but are not very clear about what you want to read – what subject you want to read, what topic within that subject, whose viewpoints, etc., and so, you type in “book” in the library search system. Do you expect to find what you were looking for? (Try that with Google. Type in “website” in the search bar and the chances of finding a website of your interest is pretty slim, almost next to impossible.)

You have to really know what you are looking for if you want to search for answers. A mentor’s mind is like that search system, but unless you know what you want, there not much sense that the mentor can make for you.

 

Drill down to specifics

Okay, so you want to know more about strategies for your business, great! “Oh, dear mentor, please tell me about strategies for business.” Chances are that the request will, as Google search result would, make your mentor start all the way from basics, “What is a strategy?” (Of course, your mentor, in all likelihood, would be drilling down for more details on what you seek.)

Instead of doing 20 questions with your mentor where your mentor has to figure out your question and in the process wasting a lot of time, do the ‘drill down’ exercise yourself. Let’s try that right now (it’s a crude example, but it’s more realistic that you might imagine):

 

“I want to know more about strategies for my business?” (To achieve what?)

“I want to figure out a strategy to grow my business?” (In what sense?)

“I want to figure out a strategy to make more products?” (Produce more or make new products?)

“I want to figure out a way to produce more of the products we already have?” (Do you have constraints?)

“I want to figure out a way to produce more without expanding my production line or hiring more people?” (Now we getting somewhere… what are you willing to do for that?)

“I want to figure out an optimal strategy for increasing production without decreasing my bottom-line (reduce profits/increase costs)?” (The only way to do that is by improving efficiencies of your production line, so…)

“I want to figure out strategies to improve the efficiency of the production line to produce more, capture the markets and grow my business?” (I can help you with that!)

 

Make a really specific ask

Most often, people want to help others. The only time when they are not enthusiastic about helping others out is when they are unsure about what is it that they would need to do. Mentors are the same. They want to help you, they really do, but a vague or ambiguous ask is going to scare them away.

Once you drill down to what you want, make a very specific ask and be nuanced about the information you provide or seek. Here’s an example of a snippet of the conversation or email:

“Hi Ravi, I want to  figure out strategies to improve the efficiency of the production line to produce more, capture the markets and grow my business? Could you help me determine which methodology – six sigma or TPM, would be the best approach? Would you have time to discuss this with me on Monday morning at 9am? I could meet you at your office.”

 

You will need to do the groundwork, always

One of the worst mistakes I have seen entrepreneurs make is to expect the mentors to do some of the work for them. Listen up, they are not going to do any of the work and you would be immensely stupid if you expect them to do so.

Here are few things entrepreneurs make the mistake of expecting their mentors to do, using the example we have been using so far:

 

  • Buy or supply reading learning materials (books or links on six sigma or TPM)
  • Learn something new just to make you understand
  • Learn new ways of explaining things to you
  • Calculate the pros and cons of each method
  • Create or test hypotheses for you (in other words, help you define and execute a pilot project)
  • Identify resources for you (if not already known to them or not in their network)
  • Speak to people or represent you
  • Give you ready-made answers

A mentor is someone who shares her experiences and imparts the wisdom from those experiences. She is there only to show you the possible options available to you. She may guide you, but it’s not her role to carry you through the door.

Do not make the mistake of making your mentors do more than give guidance; if you do you will only eventually erode the compassion and trust that she has placed on you.

 

These are not the be-all, end-all of mentor relationships (management). These are some things that, if you do, you will have a healthy relationship with and make the most out of your mentor.

Ravi Warrier (@raviwarrier), COO, Spark10

 

Entrepreneurs and Risks

 

Entrepreneur, the term, when it was coined by the French economist Jean-Baptiste Say, he really meant to use it as, “bearer of risk” and was mostly translated as “adventurer”, before it became a part of the normal parlance of business.

The meaning, though derivatively, still holds. A person who starts her business is in a way, an ‘adventurer’ or a ‘bearer of risks’. Albeit, the risks are very different from those when you backpack across a country or climb a treacherous mountain range. And while risk is a risk, we need to know what a risk really means?

A risk is a futuristic event that has some amount of probability of occurring and poses some level of threat to the person involved in or with it. Simply put, it’s something that can happen in the future that can cause you harm. (The opposite of risk is, you guessed it, an opportunity – a possible event in the future that may cause you gains.)

Business people face risks all the time. The largest of those risks is to have to shut down your business and lose your money, time and perhaps even reputation when the shutters go down.

 

Risk Takers and Risk Avoiders

 

Not everyone is capable of taking on all risks. For example, you may take the risk of breaking your leg (analogous to losing some money) and not lose your life (analogous to losing all of it).

The level of risk one is willing to take depends on the perceived impact of the risk. And everyone perceives the impact differently. For example, a twenty-something may see the risk of losing a job as a minor problem, but for someone who’s got two kids and has to pay for a house loan, losing a job could be dire. The problem is still the same – losing one’s job, but its impact on two people may be entirely different.

Whether you are a risk taker or an avoider depends entirely on your threshold of bearing the impact of that risk. One could also say (I definitely do), that it also depends on how rationally and accurately one can assess the impact of the risk. Sometimes, people falter with this, as is the case with some people in the West who believe that vaccination causes autism in children (there is evidence that it doesn’t).

The threshold that you are comfortable with depends on a lot of factors, but it boils down to how you are as a person. Namely, it depends on your personality or innate characteristics.

 

Myth: Entrepreneurs are wild risk takers

 

Contrary to popular or common belief, entrepreneurs do not blindly take on any and all risks. The good ones at least don’t. Good and successful entrepreneurs take on risks that they can mitigate or manage or even handle without breaking down. The bad ones, take on ridiculous risks.

The difference between the two, in this case, is not the threshold, but how they have calculated the risks of the decisions they are about to take. Good entrepreneurs consider most factors in a system rather than considering a few factors in isolation.

Some risk-based questions that entrepreneurs must ask themselves (not an exhaustive list):

  1. Do they have savings to rely on?
  2. Do they have alternative income?
  3. Do they have financial obligations and expenses that have higher priority?
  4. Do they have the skills to do what is required?
  5. Do they have the capabilities to manage or lead?
  6. How does not earning money for months affect the lifestyle and well-being of their family?
  7. What happens to their reputation if their idea bombs (generally for highly technical fields like, let’s say, rocket-building)?
  8. Do they have a safety net or a backup plan, if the business tanks?

The answers to these questions need not be positive, but a good entrepreneur does consider the outcomes of these potential problems and weighs them against all or at least some possible actions to take.

 

Entrepreneurs and Hedging Bets

 

A good way to minimize the risks is to not plunge into the pool by doing a 30-foot dive. One toe, one foot, one leg, you get it, take baby steps.

There is a lot that needs to go your way before you can know if your business would succeed. Until you test the waters, hold on to the rope. This is akin to keeping your current job or staying in school/college until you really know that the idea works.

Many people think that Bill Gates quit Harvard to start Microsoft. Others know that Steve Wozniak left his job at HP to start Apple. However, these are half-truths. Bill Gates applied for a leave of absence from school to try out selling software and Steve Wozniak did not quit HP for months after the launch of Apple.

Only when they felt confident did they “let go of the rope”.

Hedging bets is not bad. In fact, it would be a really, really, really smart strategy. However, once tested, holding on to the hedge would be a very, very, very bad move. At some point, entrepreneurs will need to have their both feet into their projects. Investors want to see this happen and do not generally invest in something that is a hedged bet or a hobby.

 

Things to do to test things out

 

A business idea, just like all ideas are conjectures or hypotheses. And they need to be tested. Here are a few things you need to (read as ‘must’) do:

  • Build your product ASAYC (As Soon As You Can): Don’t waste time. Even if you are holding on to your day job and working only weekends, don’t stretch the development period beyond what would be necessary. This can also prove whether you can (have the capabilities) build the product or help you identify what you need to build or finish your product (resource identification).
  • Validate your product: Ask the people if they like using the product? If they are comfortable using the product? If they’d like to change anything about the product? If you don’t have a prototype, then ask them to do a thought experiment around the same questions.
  • Validate your market: Ask people if they would pay $X for that product? How much are they willing to pay? How frequently are they willing to pay?
  • Start selling early: Don’t wait for a big launch. Don’t wait for a gala opening night. Don’t wait for tides to turn. Start selling. Build a website or put up a stall in the neighborhood. Asking people if they would buy versus seeing if they would really buy are two different tests.
  • See trends: Don’t just quit everything because you made a huge sale on the first day/week/month. It could be beginner’s luck (often something that you didn’t and still don’t know needs to be attributed to your business) – the warm weather, the festival season, the closing down of a competitors’ shop, etc. One data point (or a set that counts as one) is not enough. Wait for a sizable period for the trend to emerge.
  • Analyze Competitors: Always keep an eye on the enemy (Art of War, Sun Tzu). Need I say more?

 

Summary

 

It’s a myth that entrepreneurs take crazy (types and amounts of) risks. The good ones don’t. They calculate the risks and often hedge their bets. The bad ones charge like a bull in a china shop.

There are many things that need to be processed before they take the leap. And there’s no way around it. Whether they do it mentally or on paper, with co-founders or alone, quickly or slow-paced, they will need to do it.

They hedge their bets and rarely put all their eggs in the basket.

Once convinced, they go full throttle on the project.

Ravi Warrier (@raviwarrier), COO, Spark10

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