Dave Sobel is host of the podcast The Business of Tech and co-host of the podcast Killing IT. In addition, he wrote Virtualization: Defined. Sobel is regarded as a leading expert in the delivery of technology services, with broad experience in both technology and business.
In this video, Sobel discusses the fintech market with Stephen Taylor, an assistant professor of finance at New Jersey Institute of Technology. They highlight the risks currently facing fintech companies and opportunities for solution providers.
Transcript follows below.
Dave Sobel: Today, I'm talking to Professor Taylor. He's a professor of finance at New Jersey Institute of Technology, and he's got a background in both technology and finance. He's been an analyst, researcher and consultant with businesses of all sizes. Professor Taylor, thanks for joining me.
Stephen Taylor: Thanks for having me, Dave. And like you mentioned, I have a bit of an unorthodox background. I'm a professor now but worked in the industry for 10 years -- large institutions, medium sized and, also, a lot of smaller startups. So, I've got broad experience.
Sobel: Plus, that's a cool title, and so we've got to stick with being a professor. So, I asked you [onto the podcast], because, I will admit, my listeners and I are deep in infrastructure and IT management and all of that. But as I track and think about this space known as 'fintech' -- financial technology -- I admit that I'm looking at this with a little bit of the puzzlement, saying, 'OK, I need to wrap my head around this.' Can we start with a basic piece: Can you define for me what fintech means when we're talking about it?
Taylor: Sure. So, fintech broadly stands for financial technology. Technology has been applied to finance for decades. What distinguishes a newer fintech company from, say, NASDAQ when it started up? I think there are a few different components right there. First, you're going to have to have a major technological component to the fintech company, but it also has to be innovative in the sense of [how] it's trying to improve upon or refine a traditional financial service.
Think of examples in the lending space. How did you traditionally get a loan? You would go to a bank, you would talk to a lender [and] they would approve your loan. There was a lot of manpower in that process -- whereas now, you can have companies like Lending Club, for example, where it's almost all automated, peer to peer, and a lot of technology has replaced that human element. That's one example of a fintech company.
Fintech offers advantages to small businesses
Sobel: These are companies that are focused on using technology to solve financial problems. So, let's link this to companies that are, say, less than 100 people or less than $10 million in revenue. How do these technologies and these innovations in fintech apply to companies of these sizes?
Taylor: A lot of times in financial services, you think of the big behemoths -- like large banks, large asset managers -- where you really needed the size in order to make the dollars make sense at the end of the day. But, nowadays, with all the new technology tools we have available, smaller-size companies that are really strong in the IT infrastructure side and software development automation side can do the work of literally hundreds of thousands of people. And a lot of times they're going to be benefiting from the rewards of this. If you cut out the boiler plate there, you're going to be able to offer a better price at the end of the day to your customers.
Fintech vs. e-commerce, point-of-sale tech
Sobel: Is [fintech] a category that includes things like point-of-sale technologies and e-commerce technologies and marketplace technology, or is it a subset? Help me relate [fintech] to those more familiar point-of-sale tech or e-commerce technology.
Taylor: I tend to think it's a little bit distinct from e-commerce or point of sale. They have some similarities in the sense of the automation aspect, where they're trying to improve upon traditional processes. But fintech is really targeted more on the finance side -- a couple of main areas for it: lending was one example, [and] asset management, automated asset management is another example. Cryptocurrency management nowadays -- things along these lines. [Fintech is about] taking a traditional financial service, trying to improve the automation and offering a lower price. That's, broadly, what we would consider a fintech company.
How SMBs typically engage fintech
Sobel: So, in particular, they're taking an existing financial process and they're technologically improving it, and that's the investment there. So, it sounds like -- and I want to make sure that I'm understanding -- that in the typical small business, they are a consumer of a fintech product, using these new technologies and new capabilities, versus implementing it themselves. If I think about a typical law office or a dental office or a plumber -- these typical small business examples -- they are customers of fintech companies more than they are implementers. Is that fair assessment?
Taylor: They could be, absolutely. I mean, if you're a small company and you want to, say, set up a 401(k) system for your employees, you could do this through a fintech company like Wealthfront or Betterment, for example, who tend to offer a much lower rate than, say, a traditional large asset manager.
You could also be creating a fintech company. I mean, if you're a small business, I think this is the prime area. Small numbers of people to midsize companies -- these tend to be the sizes of a lot of the new fintech startups we're seeing.
Examples of fintech companies
Sobel: So, you probably can't name somebody specific, but if you can, that'd be great. Give me an example of some of the small business success stories to focus on as [we are] trying to understand this space a little bit better.
Taylor: I really like to think of the stories of the Wealthfront and Betterment, the examples I gave before. So, these are both companies that started off probably [about] 10 years [ago] now as asset managers. Their main goal was to look at this traditional process of financial advisement. You save up some extra capital, you want to invest it, you don't feel like you're an expert, and what did you traditionally do? You would go and find, then, a human advisor. That advisor would invest your money on your behalf but take quite a fee -- usually, 1%, 1.5% was not uncommon -- per year. And that adds up over 20, 30 years. That becomes rather substantial when compounding takes effect.
So, both [Wealthfront and Betterment] started small -- a dozen people or so. And their question is, 'How can we automate this process? How can we choose better securities? How can we have a better allocation algorithm? And how can we automate rebalancing and trade through at very low commissions?' And the overall product, I think, is substantially stronger than a lot of what you see in the traditional service [offerings].
The risks facing fintech firms
Sobel: Let's dive in, then, a little bit on some of the risks here, because that seems like the big area where this technology space would meet with an infrastructure one. As you've given me that example, instantly I'm coming to those compliance questions. What are the big risks that fintech companies struggle with on the technology front that need to be thought of from a protection perspective?
Taylor: Exactly. And just to go with this example, one risk you can imagine if you're automating, rebalancing and executing securities [is] that the code and infrastructure behind that has to be about as solid as it possibly gets. If something goes wrong, if something goes haywire, suddenly, you're bankrupt the next day, and there has been more than one story of that happening. So, you have to have really, really strong IT infrastructure, making sure all the execution pipelines are working well, making sure you have lots of unit testing and a lot of eyes on the code and people monitoring it on a daily basis.
Sobel: That's the answer that I would expect consistently. I'll use either the [COVID-19] pandemic as an accelerant or the rise in cybercrime: Are either of those the big new ones that you're worried about and seeing results from? Are those risk areas?
Taylor: Cybercrime -- [particularly] in the lending space -- is the major issue. And to give an example of that, I think when Prosper first started -- Prosper and Lending Club being the two largest peer-to-peer lending platforms -- when it started 15 years ago or so, the original people that would apply were the ones that had very, very low credit quality. They were taking loans for 25% to 35%. They basically couldn't get a loan anywhere else. And there was a lot of fraud built into the system. So, they would basically go, they would get their loan funded, and they would take the money and run. How do you prevent that as a lender? How do you build fraud analytics in there? That's the major loss that people have on the platform. If you can convince them that there's not going to be an excessive amount of fraud, then you can improve the overall platform.
Sobel: So, what's the big risk that you're thinking about in the next, say, 12 to 24 months, that you think is going to be the big one that no one's talking about?
Taylor: I'm always really concerned about a major equity market pullback. We've seen the stock market, after COVID, after the government stimulus, has just been going through the roof, up 60%, 70%. It's very likely we're going to have a pullback at some point during the next six months to a year. The reason why? Who knows? Maybe we have a resurgence in COVID. Who knows what's going to happen? But once something like that happens, people who are invested in these asset management platforms are, ultimately, going to see a decline. And, sometimes, people blame the platform, whereas it was really just more of a broader [issue]. Anywhere you invested the capital, it's going to decline. So, things like that worry me.
Sobel: One of the things you hadn't brought up as a risk yet, and I want to ask about it because it's something that we do talk about on the show a lot, is the idea of regulation. As government is getting more interested in big tech in general, technology in general, and, of course, now poking at some of these systems, are there government policies that you're thinking about that are the wild card to keep an eye on right now?
Taylor: In terms of tech government regulation, definitely the antitrust ramp-up in the Biden administration is something that I've been watching. But it seems like they're targeting the same names -- Google, Amazon, for example. As probably [you will agree with me] as [a tech fan], I hope the government doesn't screw up Google. Google's a great company. I love what they do. It's not perfect, but they've changed the work environment, the culture, just how things work in tech so much over the years. I hope they don't get broken up, but we'll see. I think antitrust is the big issue there.
Sobel: Yeah. Interesting you went to Google because they are, in my mind, not the lead candidates for actions. When I stack rank who I think is most at risk, they're in the middle of the pack, not leading the pack.
Advice for solution providers
So, if you wanted to give advice to companies that spend their time thinking about IT infrastructure -- be it they've come from a world of legacy on-premises [technology] or they're the ones now managing your AWS, your [Google Cloud Platforms], your [Microsoft] Azures. Where are the areas that they need to make sure that they're really thinking about to be relevant and helpful as it relates to fintech?
Taylor: I can speak to a few examples I've seen in fintech startups. So, I've been in startups where all the IT infrastructure is running like the Swiss train system, where you basically never see it and it's perfect and it's running great. And I've been in places where it's just a complete disaster, where you're having failures, nightly production job failures, and you're getting 2:00 a.m. emails day after day. And I know people would definitely prefer the former of the two, as modelers and non-IT experts.
And so, how can companies get involved in this? I think there's a lot at the architecture phase that can be done. What I've seen [in] a traditional ramp-up, you would get a group of people together -- three, four or five people. You start a company. We use GitHub for code. We use AWS, Azure for cloud computing services, but then we get to the point where we're not using them as effectively as one might need. We have an [Elastic Cloud Compute] instance running nonstop, but I'm using it maybe 5% or 10% of the time. This is where somebody comes in and gives a nice feasibility study and says, 'Hey, just put [in] a box. You can pay 25% of the cost for this box internally on premises. It's going to make a lot more sense just to run that.' And then how do you scale that out? How do you architect this [in] a way to scale things out as you grow? Having that in place in the beginning, I think, would solve the vast majority of problems I've seen where it becomes rather chaotic at times.
Sobel: I want you to verify a way of thinking for me, because it sounds like, particularly, based on the way that your talking [about] them, that these organizations, as they grow up, are used to consuming technology on that subscription model. Is that fair? What are the ways that are best to work with these kinds of companies?
Taylor: Indeed, I've seen it as a pay-as-you go model in the beginning. One example where I think we had a very effective use of AWS: About seven or eight years ago, we had certain jobs that we would run for asset allocation that were Monte Carlo jobs that were very CPU-intensive. So, we would split a job across a thousand cores and each core would do its own thing, and then everything comes back and we aggregate results. We use it for an hour, but then we need the scale. It wouldn't have made sense to buy all that in-house machinery, but it made a lot of sense to use AWS for that, and, so, pay-on-demand in that case. So, I think cases like that are good, as opposed to just this reserving a thousand cores constantly and then running up the bill there, which I've seen happen in other cases.
Sobel: Well, Professor, thanks for taking the time today. I really appreciate it. And how can people get in touch with you if they're interested in asking additional follow-up questions?
Taylor: Feel free to email me: [email protected]. It'd be great to talk to you. I do a lot of finance consulting, as well, and am always trying to get involved with new and exciting companies and opportunities. So, feel free to reach out.
About the author
Dave Sobel is host of the podcast The Business of Tech, co-host of the podcast Killing IT and authored the book Virtualization: Defined. Sobel is regarded as a leading expert in the delivery of technology services, with broad experience in both technology and business. He owned and operated an IT solution provider and MSP for more than a decade, and he has worked for vendors such as Level Platforms, GFI, LogicNow and SolarWinds, leading community, event, marketing and product strategies, as well as M&A activities. Sobel has received multiple industry recognitions, including CRN Channel Chief, CRN UK A-List, Channel Futures Circle of Excellence winner, Channel Pro's 20/20 Visionaries and MSPmentor 250.