Simon Taylor has the rare quality of being very knowledgeable about decentralized finance but also about fintech. He is the co-founder at fintech consultancy firm, 11:FS, and he previously led blockchain research at Barclays. He also leads the excellent newsletter Fintech Brain Food. Simon points to a world where fintech and DeFi start to converge. All the capital and users in the traditional finance will have to bridged into crypto at some point and that bridge can be fintech.
Simon Taylor: I was always a gamer back in the day, so I was always building different machines out of Nvidia cards, ATI cards as it was back in the day. Even 3D effects, if you go way back, that’s one for the nerds. But in 2009, I started doing a little bit of Bitcoin mining on the sides, but even by then with the GPU I had, it wasn’t turning over a particularly large amount versus the electricity it was costing me and quickly, I give that up and forgot about it.
In 2013, I started seeing some things pop up around this thing called Ethereum and that really caught my attention. I saw the early video from Vitalik, and just all of the announcements around it, and I realized I hadn’t looked at Bitcoin properly the first time and I went back and looked at it properly, and really tried to understand it from first principles.
That’s when I sort of got the bug a little bit of this was a fundamentally different thing. They were changing the nature of how value is exchanged and settled, and it could be disrupted, probably not in a five-year time horizon, but massively over a 50-year time horizon. So I wanted to understand it because it was intriguing.
“They were changing the nature of how value is exchanged and settled, and it could be disrupted, probably not in a five-year time horizon, but massively over a 50-year time horizon.”
But I worked at Barclays at the time. At Barclays, I was running the Rise London Lab, which was essentially, the startup outreach program that Barclays was running at the time. Because of this, I was able to offer space, we had an auditorium about, I think it had 200 seats in it, and I was able to offer that to the London Ethereum community. Over the course of 2014, we had Vitalik visit, we had Gavin Wood visit, and a lot of the early Ethereum community in London really use that space as their base, and it was definitely a little bit of tongue in cheek trolling of like how we’re using a bank space for free to disrupt banks.
But from a bank’s perspective, we were learning. We’re giving you the space for free, and we got to watch all of this community developing. Depending who you speak to, there’s enterprise Ethereum, and there’s ETH, and some people will view anything that is corporate as bad. But from a corporate perspective, there was a load of cost and issues inside the organization that this new technology could start to resolve, so I got involved very early.
When I went back and told the folks in Barclays what was going on, instead of them saying, oh, well, that’s scary and risky, they said, okay, see if you can figure out how you manage the risks, see if you can take on the really big questions. That really led me down a voyage of discovery of how you try and make the world of law and finance fit with this incredibly disruptive, incredibly creative space. That has always been where I found myself sitting, so it’s a nice place to sit.
CR: I don’t know if you can condense this, but what are the main lessons that you got from that?
No Day Walkers
ST: I think the summary way of putting it is there are not many day walkers.There are not many people from banks that really deeply get crypto, and there are not many people from crypto that really deeply get banking. You can probably list maybe 100 in the world. A good friend of mine, Colin Platt is one classic example. These folks are deep in the world of DeFi at the moment, they understand it as well as anybody in the world, but they come from a capital markets investment banking background, and they see both sides of it.
Actually, I think the pure DeFi world, the pure crypto world views everything in banking as quite negative, some quite often, not everybody, but there to be disrupted. The banking world often views the crypto world and especially the DeFi world is too scary, too hard to use, never going to be regulated, we can’t touch it. The reality for me is somewhere in the middle. That’s the key observation.
“… the pure crypto world views everything in banking as quite negative, there to be disrupted. The banking world often views the crypto world as too scary, too hard to use…”
You can apply that to regulation, you can apply that to technology, almost any subject you want to cover. We have seen this movie before. Yes, some of the fundamentals have changed because of the new technology and the crypto-economics and everything that enables, but also, you’re still dealing with humans at some point, and you’re still dealing with numbers, and there are some things we’ve learned from the old technology that we should build upon. That sort of look at this from first principles, kind of mental model is still really, really useful. We can double click into to what that means, but I think that’s the high level.
CR: Before we get into all those details on DeFi specifically and what can DeFi learn from traditional banking and vice versa, I’d love to just go deeper into just fintech itself. Because, as you’ve said in DeFi, we live in kind of a bubble where we’re only looking at developments there and not really at what’s happening beyond. I’d love to take this opportunity for you to tell us what are the major trends happening in fintech, this year, for the past 12 months that you think are the most exciting?
Because I think there’s this perception in DeFi that there’s nothing new in traditional banking, and that there’s fundamentally a lack of meaningful innovation because the rails that fintech is building upon are really old, and so all innovation can happen at the margin. I think that’s the common perception in DeFi, so would love you to answer that and maybe prove people wrong.
Banks are Struggling
ST: I don’t know if I’m ever going to prove people wrong. But what I would say is fintech is enormous, and banking is really, especially in the pandemic, in a real sticky spot. If you look at the share prices of banks, they are really, really struggling at the moment. Bank’s ability to be profitable is really not looking good for the next four or five years, they’re really, really struggling and their business model is fundamentally troubled. Interest rates are at an all-time low, and their risk models don’t allow them to lend in this market. They don’t understand what good lending looks like. Because how do you lend at a pandemic? Nobody’s ever done that before.
“Bank’s ability to be profitable is really not looking good for the next four or five years, they’re really, really struggling and their business model is fundamentally troubled.”
Banks have built their models of who they lend to based on hundreds of years of experience, and there’s no map for where we are right now. You take those two things combined, and bank earnings, unless they’ve got a trading desk, they’re down 50%-60% from the previous year, bank losses are heading higher. So that’s that side.
But then go look at PayPal, go look at Square, go look at the folks like that who have built fintech businesses, and their earnings are doing really well, they are continuing to grow. I think Square’s earnings were up 70% year over year, PayPal was up nearly 50%. These are massive, massive businesses. PayPal is nearly as big as JPMorgan by market cap, and I think Square is almost as big as Goldman Sachs. People haven’t made that connection that fintech is mainstream.
That’s I think threat number one. It’s massive. So if it got massive, and it’s now as big as the banks, surely, there’s something we can learn from that. What is it that they did that the banks have not done?
“PayPal is nearly as big as JPMorgan by market cap, and I think Square is almost as big as Goldman Sachs. People haven’t made that connection that fintech is mainstream.”
Start With The Market Problem
I think the banks are a little bit like the DeFi folks, especially come across, not all, but a subset, started the technology or started the business model on work back. Actually, what fintech did is they started the market problem and worked back and that’s a fundamentally different space. What do I mean by that?
Square starts with we’ll help you move money, and we’ll figure out how we make money later. But the first thing is, it’s just too hard to get money from A to B, let’s figure that out; Paypal, similar thing, and then they figure out a whole bunch of ways to layer on financial products and lending and all that kind of thing as a secondary consideration.
So they started at the customer, solve the customer’s problem, and then figured out what’s the tech we need and then figured out how do they make money.
Banks, the answer to the question is they make money by taking deposits and lending, but it almost doesn’t matter what the question is. They know the answer.
I do find this with a subset of DeFi is that the answer is yield farming, the answer is lending, the answer, it’s going to be decentralized, regardless of what the question is. We forget sometimes that there are problems in society to solve, and the things that go make it outside of their bubble, the things that make a meaningful impact on the world are the things that solve our society or consumers’ problems. Can we think about how we connect to that? To me, that’s the big observation about fintech, number one.
CR: That’s perfect. But the fintechs you mentioned, have been around for a while, PayPal, Square. I’d love to really, just to dig into what’s new right now. What are the emerging trends? Who are the innovators right now in fintech? What are the new market needs that they’re answering?
ST: Probably the hottest thing at the moment right now is B2B fintech, so this idea of banking as a service or banking platforms is probably more accurately described. So I look at companies like Synapse, Marquetta, I look at companies in the UK, like Railsbank, these are building API-first abilities to create a bank.
You go to Railsbank.com and you can create a working card, an app in a very short space of time. They provide a regulatory framework and umbrella for you to sit within, and you just need to focus on building the front end and interface with their API. Banking is becoming invisible.
“Probably the hottest thing at the moment right now is B2B fintech, so this idea of banking as a service or banking platforms.”
But then the other thing is, there’s a lot more to banking than moving money around and payments in the app. There are things like preventing fraud, so a lot of users care about this. There are things like preventing fraud, account takeover, money laundering, there are things like dealing with risk, am I lending to a person that’s going to be able to pay me back? So all of these sorts of things are now being built by specialists.
Everybody talks about, oh, well, the technology in banking is really, really old. Well, actually, there is now a fintech B2B supplier that does just about everything a bank does, and you can basically build a bank out of Lego bricks. You can construct a bank out of all of these newer suppliers and get to market a lot faster.
There’s a really interesting company called hummingbird.co, built by the team actually, who was originally at Circle and built out their compliance program. So that team’s spun out and with the learnings that they have from the crypto world and being in the startup world, basically figured out how do we take and productize this thing and make it available to the rest of the market? That Lego version of banking is a realistic thing at this point. I think that’s super exciting.
“That Lego version of banking is a realistic thing at this point. I think that’s super exciting.”
Imagine, if you’re going to found Square today, you could actually, instead of just doing the peer to peer app, you can build something quite complete. I know where DeFi is going is like unstoppable Lego bricks. These may be more stackable Lego bricks, but at the same time, I think that’s super interesting trend to watch.
Generally, there’s a third trend as well. Soone is big, two with modular, three, everything is becoming fintech. It was Matt Harris at Bain Capital Ventures, who said fintech is becoming the fourth platform of the internet. First platform was the internet itself, the second one is cloud, the third one is mobile. He’s saying that financial technology is as big and as important as the first three, which I think is huge. Of recent, Andreesen Horowitz have said every company will become a fintech company. This is major VCs are now baking their theses around finance will start to get embedded, the finance will appear at the point of need.
As an example, a company like Shopify helps you build a website. It helps you take payments on that website. It helps you manage logistics. They’ll also lend to you, and they’ll also give you an expense card to run your day-to-day business. So they’re not a bank, but they do financial services, and increasingly, that’s where banking sort of needs to go. It needs to disappear and be provided by people who are solving your broader problem at least. So one, fintech is big; two, it’s modular; three, everything is fintech.
“[Banks] needs to disappear and be provided by people who are solving your broader problem at least. So one, fintech is big; two, it’s modular; three, everything is fintech.”
CR: Leaving out the big part, the modular part and this idea that money needs to be ingrained in the way the internet works, that’s exactly what DeFi is going for and people building in DeFi perceive that DeFi’s edge or advantage. The fact that it can be open source and composable and people can build on top of each other and use each other’s pieces, and at the same time that this base layer has money built into it. These networks are made to transact and to transfer money from point A to point B unlike the internet protocol that we’re using today. So it’s interesting to see you talk about, non-blockchain fintech and these are the same traits that you’re seeing.
Merging DeFi and Fintech
ST: I think that’s super interesting, because I’ve been a big believer in convergence for quite some time, that the macro trends will come together, that DeFi and fintech will sort of find its middle ground. You can see the early stages of this in, again, Square Cash, allowing you to buy Bitcoin, but also Robinhood and Revolut.
Fintech, it’s sort of moving to where Coinbase and some of the wallets were four or five years ago. Actually, why doesn’t that come together? The interesting thing, depending on where you’re standing, there’s either an on-ramp to crypto, or an off-ramp from the old world of finance, but all of the capital and all the users are in the old world of finance, for me, that’s going to have to be bridged at some point.
“…all of the capital and all the users are in the old world of finance. For me, that’s going to have to be bridged at some point.”
Now, you can build an alternate universe and grow that alternate universe to a certain size and scale, and maybe you never have to bridge the two, but I would imagine at some point, you’re going to have to. DeFi probably has quite a ways to run before it has to really be backwardly compatible in any way, shape, or form. But fintech actually becomes an interesting bridge in sort of 1.5 technology, if DeFi finance 2.0, it becomes a really nice space where it’s sold for consumer problems, it’s sold for business problems and market problems, and it’s really deeply understanding the customer.
It would quite happily work with better rails if somebody could provide them. Why it doesn’t surprise me that Jack Dorsey spending so much time looking at Bitcoin and crypto, and they have Square crypto and kind of that whole Blue Sky initiative, because they are really trying to look for tech upgrades and rails upgrades, because most of the financial services stuff was kind of built in the 70s. But there’s probably more value for financial services businesses dealing with that just because of the scale and the money involved. But if you’re a fintech, that inflection point is going to come.
CR: What value do you think DeFi can bring to Finance 1.5 and vice versa?
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Paid subscribers have access to the full transcript, including sections on:
- Going beyond the DeFi petri dish
- DeFi providing modular rails for fintech
- DeFi helping traditional finance with regulation
- Decentralized identity as the Higgs boson of finance
- The draw of governance rights (or lack thereof)
- The dark side of forking
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