In today's financial services industry, many entrepreneurs and executives are grappling with the same challenge: how to harness blockchain, artificial intelligence, machine learning, and other fintech innovations to stay competitive. A new program from Harvard Business School (HBS) Executive Education, Leveraging Fintech Innovation to Grow and Compete—Virtual, helps both startups and incumbent firms manage this challenge. In this interview, Marco Di Maggio and Luis M. Viceira describe the issues they tackle in the program—and what participants can expect to take away from the experience.
Marco Di Maggio (MD): Fintech is a large and heterogenous space that includes subsegments such as lending, blockchain and cryptocurrencies, personal finance, payments, insurance, wealth management, money transfers, and proptech, which is innovation in real estate. Companies in this space use different technologies, serve different markets, and have different customers. In the payment and transfer space, we have companies such as Venmo or Stripe; in lending and finance, we have LendingClub or SoFi; in retail banking, we have ally and SIMPLE; in financial management, we have Wealthfront and Betterment; in insurance, we have metromile and oscar; and in the blockchain space, we have Ripple, Coinbase, Axoni, and ConsenSys.
MD: Global investments in fintech are growing rapidly. Estimates suggest that investments in emerging markets are actually growing faster than investments in the United States. Part of what drives fintech is access, which bypasses physical contact and location. In emerging markets, there is no physical infrastructure; consumers use electronic networks, so they are much more open to fintech services. For example, in Africa, people use their cell phones for banking, so it's much easier for fintech companies to develop there. By contrast, in the United States, that’s not necessarily the natural way of doing things.
MD: Startups need to consider questions such as: What is the underlying friction we're trying to address? How are we using technology to address this friction? Do we have a sustainable business model that can survive in the long run? Does our technology offer some new insights or service that helps target new customers that were not addressable before? What is the most efficient way to acquire customers? What is the best way to fund this company? Think, for example, about underserved borrowers in the U.S.—the ones that usually are not banked, because banks don't find it profitable to lend to them. Some of the lending cases that we cover in the program are about companies that are using technology to target that segment of the market.
Luis Viceira (LV): Scaling is also very important for startups in the financial business. A business model has to be scalable to be sustainable. Many startups go nowhere because they don't have enough assets or clients. Consider, for example, startups that are offering the same banking services as traditional banks at a fraction of the cost—such as online accounts with no fees. The only way they can make money is if they have enough accounts. Many of these startups are disruptive in the sense that they get incumbents to realize that they need to do something in this space. To that point, it is important for startups to understand the capacity of incumbents to react to their entry into their markets. Neglecting to consider this capacity can ultimately lead to a startup's demise.
MD: In fact, the next question is, what if the incumbents wake up? Suppose you are an online bank that’s using venture capital money and trying to scale, and then Bank of America wakes up and thinks, "Maybe we should offer a similar product. We already have all the customers, so we don’t have to spend millions in marketing efforts." Well, does your business get destroyed or not?
MD: Incumbents have to consider what happens if they are disrupted by new companies, and what capabilities they should develop now. Few companies today, such as Wells Fargo and Goldman Sachs, have their own innovation labs. However, the threat posed by new fintech companies is not something that only applies to the Goldman Sachs of the world. It also applies to places like Eastern Bank, which is a relatively small, regional bank. Incumbents need to think about: How do we gain customers that are more likely to switch? How do we retain customers that might switch to a new, appealing app?
LV: This is a big question for incumbents. If they start losing customers to the disruptors, they are finished. This is playing out a lot on the insurance company side, such as with property, casualty, and car insurance. All of these companies are getting very nervous about new entrants coming online to offer insurance to, say, a young person who got their first car after college.
The idea of trust is fundamental for the sustainability of a financial services business. Traditional firms, with their emphasis on personal guidance and contact, used to own this "trust asset." But it is not obvious that this is true anymore, especially for younger generations. They appear to be quite comfortable having their money and savings flow through apps and entities that only have an online presence.
MD: The other big question for incumbents is: Should we acquire the new companies in order to acquire the new technology? That's not a trivial answer, because young entrepreneurs will likely resist selling their companies—even at very high valuation—if they already have traction in the market. Meanwhile, incumbents might be too risk-averse to acquire new startups before they have proven that they're indeed a serious threat.
MD: If I'm an investor from a VC firm, I want to look at a number of factors: What makes a company unique. Whether the market is big enough. Whether the company is improving something that is already offered by incumbents or actually unlocking potential that was not there before. Whether there are barriers to entry.
We touch on all these issues in the program, and we also look at how to best fund a venture if you're an entrepreneur. That is, if I have a great idea, how do I raise money for it? How do I identify the right set of investors who share my vision? How do I prove that my business idea has promise? How do I scale my venture as rapidly as possible to build barriers to entry and build market share without burning through cash too fast? These are all pretty central questions for whomever wants to build a new company, particularly in this space.
MD: We want to look at companies in different segments of this market. For consumer finance, we'll look at SoFi; for financers of small business, we’ll look at Funding Circle. We'll also look at Marcus by Goldman Sachs, which is essentially a response to incumbents like LendingClub and SoFi. For the topic of payments, we're going to go more international, because I think that’s where the most exciting things are happening now. For example, in China, there's Alipay; in Turkey, there's Iyzico.
We will have cases on blockchain technology and different use cases across different segments—so that participants can understand how to use blockchain technology to facilitate how they do business. For example, AirSwap just did the tokenization of a condo building in Manhattan. Rather than go to banks to raise debt and equity for $30 million, they decided to sell little pieces of the condo building to a bunch of different investors. They essentially crowdfunded it and had access to significantly greater flexibility than what banks offer.
LV: There's also a case on Vanguard that shows how an incumbent can beat a newcomer at their own game. The cases will cover a wide spectrum of areas in fintech, but they all share common themes that are of interest to everyone across the industry. So, for example, a case on real estate will be applicable to someone from credit markets. What you’re going to learn is how to run these businesses, how to grow them, and how to think about disruptors. The issues are applicable to a broad range of sectors.
MD: I think a unique feature of this program is that it looks at fintech through three different lenses: the startup, the incumbent firm, and the venture capital firm. The other thing is that this is a finance-heavy program, but we try to involve faculty members from other units that have touched on some of these issues from different angles.
LV: The program goes beyond the purely financial or purely technology side of things. It also addresses aspects such as strategy and marketing—how you think about your clients, and how you think about the strategy for your company. These aspects aren't taught in other programs, which tend to be very focused on the finance and technological aspects of fintech. This program takes a more holistic view on how to grow and scale the business, raise the funding, and run the business.
MD: There are several different individuals that would benefit from the program. There are those on the incumbent side—rising executives from banks, asset management firms, real estate brokers, and other types of financial services. And there are those from the disruptor side—entrepreneurs, startups, engineers, computer scientists. The program is also appropriate for executives who want to move into private equity or venture capital and want to learn about opportunities in this space before making the jump.
MD: You will get exposed to technologies disrupting financial services. You can learn how to take advantage of these technologies, and how to target or define available markets or new opportunities in the U.S. or abroad. You can explore all of the phases of business development from funding to scaling to acquiring and exiting the business. And you can explore all of the issues on strategy and marketing.
