From Andreessen Horowitz’s blog posts. Links provided at the end.
… new entrants using this software infrastructure to get started faster and more cheaply, incumbents are beginning to augment, or even replace, some of their legacy systems.
- The state of IT in traditional banking (or why they keep hiring software developers with vague job descriptions?):
At some of the larger banks, 75 percent of the IT budget goes toward maintenance. Beyond software, there’s a large manual labor force. Ten to 15 percent of the workforce at larger banks is devoted solely to compliance. Citigroup alone had 30,000 of its 204,000 employees working in compliance last year…
… Anyone still coding in Pascal? You’re in
- B2B fintechs for fintechs:
But the next bank does not have to start out as a bank. I believe the next era of financial services will come from seemingly unexpected places. Just as Amazon Web Services dramatically lowered the cost and complexity of launching a software business, unleashing thousands of new companies, the “AWS for fintech” stage has arrived in banking. Before AWS, it could cost $150,000 a month for a business to run compute and storage; it now costs roughly $1,500 a month. In much the same way, we are nearing the point at which any company can start or enable financial services. Consumer apps across multiple categories—home-screen fixtures highly valued by users—are becoming banks. It’s not as crazy as it might sound: Many drivers already consider Lyft and Uber their de facto bank. These ridesharing companies didn’t even exist a decade ago.
- On the API economy:
Today, technology allows innovative new companies to be created and enables existing banks to better serve the needs of customers. Specifically, that’s happening through (1) new financial-services infrastructure companies providing APIs (application programming interfaces); (2) new distribution channels that enable better, differentiated products to spread more easily and at lower customer acquisition cost; and (3) better data that allows companies to assess and assign risk more precisely.
First, the infrastructure: We are at the beginning of a growing ecosystem of banking infrastructure companies—an “API economy”—that both startups and incumbents can draw on. These Lego-like companies specialize in building and providing specific building blocks for banking (for instance, KYC/AML compliance). By providing APIs to their services, the companies democratize their expertise. This means that any one company doesn’t have to know every single thing there is to know about complex regulations; another company that specializes in that area has created an API for others to use. It also means that it’s easier to create new financial services companies of all sizes and of all kinds. Rather than having to build or maintain regulatory systems themselves, they can just “plug in” to that expertise.
Not only are new entrants using this software infrastructure to get started faster and more cheaply, incumbents are beginning to augment, or even replace, some of their legacy systems. Instead of going the way of other brick-and-mortar retailers—many of which either went out of business or became glorified showrooms for ecommerce—the beauty of the API economy for banking is that it lets everyone participate, play to their strengths, and concentrate on their core offering. The demand for better and more inclusive financial services is big enough that there’s room for many players in the market to succeed as large, stand-alone companies. All of this results in better products at less cost, serving a wider range of consumers.