(Forbes)
OBSERVATIONS FROM THE FINTECH SNARK TANK
In a blog post titled Full Stack Startups, Chris Dixon wrote:
Suppose you develop a new technology that is valuable to some industry. The old approach was to sell or license your technology to existing companies. The new approach is to build a complete, end-to-end product or service that bypasses existing companies. Prominent examples of this full stack approach include Uber, Tesla, and Netflix. Most of these companies had partial stack antecedents that either failed or ended up being relatively small businesses. The problems with the partial stack approach include: 1) bad product experience; 2) cultural resistance to new technologies; and 3) unfavorable economics.
"The full stack approach lets you bypass industry incumbents, completely control the customer experience, and capture a greater portion of the economic benefits you provide. The challenge is you need to get good at many different things. The good news is that if you can pull this off, it is very hard for competitors to replicate so many interlocking pieces.”
Most Fintech Startups are Partial Stack
Dixon’s articulation of ‘full stack” versus “partial stack” startups helps explain why so many fintech startups–many of whom claim to be disruptive–are anything but disruptive. Plain and simple, they're partial stack companies.
Partial stack fintech startups don't suffer from a bad product experience or cultural resistance to new technologies. In fact, these factors fuel fintech startups more than they hold them back.
Unfavorable economics is a challenge facing fintech startups, however. Generating revenue by charging for something on top of all the other things that consumers must pay for to get their banking done is a significant challenge. If consumers are going to go apoplectic when a bank charges them a $5 monthly fee, how are they going to stomach paying for all the point solutions offered by all the emerging partial stack fintech startups?
Fintech Startups Are Unlikely To Become Full Stack Banks
What Tesla and Uber have done–while pursuing a full stack strategy–is achieve a high degree of scope and scale. The strategic choice of full stack versus partial stack for a fintech startup is similarly about scope and scale.
For a fintech startup to reach the level of scope and scale and Tesla and Uber have, it would require: 1) A lot of money; 2) A lot of time; and 3) The reformulation of a complex industry structure.
Considering the mega-round financing happening in the industry, numbers one and two aren't out of the question. Number three is a different story, however.
Legacy Banks Are Partial Stack Banks, Too
Here's the bad news for the legacy banks gloating over the fintech startups' challenges: They're partial stack banks, too.
The reliance on the Fed, the payment networks, NACHA, etc., to move money where it needs to go is an illustration of why banks--who may think they're full stack banks--aren't full stack.
If existing banks were full stack, they wouldn't have to wait five years for Fed Now to offer real-time payments, or even need The Clearing House in the short-term to do so.
No fintech startup or legacy bank–in the US at least–comes anywhere close to creating a sustainable alternative banking ecosystem.
Can Apple or Amazon Become Full-Stack Banks?
Regarding full stack strategies, Dixon wrote “if you can pull it off, it is very hard for competitors to replicate so many interlocking pieces.”
So, is there any firm out there that could pull it off?
Apple and Amazon seem to be two candidates for the job.
Apple's Full Stack Achilles Heel
Apple likes to tout that its new credit card was created "by Apple, not a bank." I guess we should pay no attention to the folks from Goldman Sachs and MasterCard behind the curtain.
Apple's moves with Apple Card, Apple Pay, and Apple Cash are big moves towards a full(er)-stack bank, but the company is hampered by one big weakness: It's DNA is in tech products.
For all the innovative moves Apple makes across industries like financial services, entertainment, and health, one thing is constant: It wants to sell devices. This prevents Apple from achieving the openness needed to become a full stack bank.
Amazon's Acquisition Approach to Full Stack Banking
Amazon would appear to be better positioned to take on the task of becoming a full stack bank. Amazon's DNA is rooted in an old quote from its founder and CEO, Jeff Bezos, who said:
"Your margin is my opportunity."
The margin opportunity in banking today is not with the banks--it's with the technology companies that provide applications and systems to financial institutions and with payments providers to merchants.
Amazon could make moves toward full stack banking with two acquisitions: A digital account opening vendor and Square.
The prospect of Amazon acquiring Square has been floated before. A 2017 article on TheStreet.com quoted Jim Cramer as saying that there were two reasons for Square's 14% stock price increase (at that time):
One is that people are theorizing that Amazon is going to buy Square and the other is that Jack Dorsey is going to leave and hand it over to CFO Sarah Friar."
Neither happened. The logic for the first, however, is well-articulated by Christopher Rae in an article titled Why Amazon Is Going To Buy Square:
Amazon currently has little to no visibility at scale into the purchasing behaviors of small businesses such as coffee shops, boutique shops, etc. To get access to that data to funnel back into the Amazon platform, Amazon will make a play to buy Square. The reason is to gain access both to the small business merchants who increasingly use Square readers and iPad, iPhone and Android terminals and adapters to accept credit cards, Apple Pay, Google Pay, etc. as well as the In-App Payments SDK which allows websites and app builders to take payments via Square’s platform. This is intelligence that previous point-of-sale (POS) terminals, such as NCR, have not provided, or if they do now, are too late to the game to be helpful to their churning customers."
We're Stuck With the Short Stack, For Now
Pundits and consultants love to talk about how the pace of change is increasing. That may be true, but disruptive change comes faster in some industries than in others.
The pace of disruption in banking in China is not a good reference point for the US, for one good reason: There was little or nothing to disrupt.
The existing structure of the US banking industry has been a barrier to the existence of a full stack bank. Self-proclaimed disruptors in banking ignore or overlook that fact.
So we're stuck with the short stack, for now. But that may change.
