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Matt Harris has been investing in FinTech companies since before the term was coined. He was initially drawn to the field partially due to the lack of attention it was getting 20 years ago. As he notes, “In the beginning, the incumbents ignored the startups because they thought they were insignificant, and then once the financial crisis hit, they ignored them because they had far bigger problems to deal with.” This was to his advantage.
Now, with a great number of winning investments to his credit, Harris has developed deep perspectives in and made investments to follow those insights into the core four segments of FinTech are payments, lending, investing, and insurance. He also argues in this this interview that real estate is worthy for consideration as a fifth segment.
He also covers his perspectives in crypto-currencies, which he personally invests in, and shares the reasons why he believes blockchain is a hammer in search of nails. This interview is a remarkable overview of FinTech.
(To listen to an unabridged podcast version of this interview, please click this link. This is the 30th interview in the Tech Influencers series. To listen to past interviews with the likes of former Mexican President Vicente Fox, Sal Khan, Sebastian Thrun, Steve Case, Craig Newmark, Stewart Butterfield, and Meg Whitman, please visit this link. To read future articles in this series, please follow me on on Twitter @PeterAHigh.)
Peter High: You are a Managing Director at Bain Capital Ventures where your area of focus is Financial Technology [FinTech]. Could you define some of the discrete segments that have emerged in FinTech?
Matt Harris: While I had invested in FinTech companies since before the early 2000s, it did not become my sole focus until roughly 17 years ago. At the time, there were not many VC firms that were similarly focused exclusively on FinTech, so I saw an opportunity to get involved. Back then, FinTech was mostly around vendors and about companies’ ability to build technology and sell it to financial services organizations. I called the buyers the incumbents, which were the existing banks, broker-dealers, and insurance carriers. From my view, these companies typically preferred to buy technology from other large organizations, such as Fiserv, FIS, Jack Henry, Accenture, and IBM. Because of this, the opportunity to build new vendors to help the incumbents be more successful was not there.
Instead, phase one of FinTech was focused on directly competing with the incumbents. This entailed identifying areas where the incumbents were not sufficiently focused on delighting their customers with innovative, technology-driven products. This phase included companies such as Simple, which was a competitive retail banking product built on mobile apps and novel forms of interaction. Other companies included Lending Club, OnDeck, Square, and Braintree, which attacked various aspects of what we now consider FinTech including payments, lending, investing, and insurance. In doing so, these companies were directly competing with the incumbents. In the beginning, the incumbents ignored the startups because they thought they were insignificant, and then once the financial crisis hit, they ignored them because they had far bigger problems to deal with.
The beginning of modern FinTech began roughly 10 years ago during the global financial crisis, which convinced the incumbents that they were fighting for survival. This provided a great deal of room for innovators to build businesses, and this is when Square got started, which was a seminal moment. Jack Dorsey, who was already famous for founding Twitter, turned his attention to the payment industry and FinTech, which legitimized the sector for many individuals.
When the banks began to recover from the financial crisis several years later, the companies that I mentioned had gotten some scale. By this time, robo-advisers had emerged, which included companies such as SigFig, Betterment, Wealthfront, and Personal Capital. As a result, every corner of financial services and insurance, the latter of which was the least likely to move to this space, began to move.
In the most recent phase, which has taken place over the past five years, the incumbents have gone from ignoring startups to fully recognizing the threat of technology-enabled, entrepreneurially-led competitors. This was made clear in 2012 when [J.P. Morgan Chase CEO] Jamie Dimon wrote an iconic portion of his annual letter to shareholders saying that Silicon Valley was coming. In fact, for the first time, the incumbents became strong customers for new vendors. As a result, the business model that I disdained 17 years ago, which sells tech to incumbents, became newly interesting. Despite their propensity to have this incredibly burdensome procurement process, the goad of these new competitors has forced the incumbents to recognize that Accenture and IBM were not going to solve their problems. Today, we are seeing strengths in every corner of financial technology. This includes the challengers, which are the new brands that are building customer bases and the new vendors that are selling modern technology, to the incumbents hoping to maintain their competitiveness.
High: We are starting to see some coopetition where startups are simultaneously partnering and competing with the behemoths. Could you reflect upon the business models that are emerging and the ecosystem that is developing as a result of this coopetition?
Harris: It is mostly driven by two factors. One is that banks have recognized that they cannot build all of the new technology that their customers want, and their existing vendors are not providing it. Because of this, banks are becoming more open to collaborating with startups. However, while there have been some success stories, such as Square, Stripe, OnDeck, among the others that I previously mentioned, many startups have hit the wall regarding distribution. There is a famous line that says that the race in competition involves whether a startup can figure out distribution before the incumbent figures out innovation. This line recognizes that the incumbent already has the customers, and it is awfully hard to pry them away. Many startups that look to compete with banks, asset managers, wealth managers, and insurance carriers recognized that the quickest path to building an important company is to partner with the incumbents. They can either sell them the technology or they can do the equivalent of joint venture work to collaboratively develop and deploy new technologies to serve the incumbent’s customer base.
As an example, I have invested in OnDeck Capital, which is an independent small business lender. OnDeck has incorporated major sponsorships with companies such as J.P. Morgan. While OnDeck has a multi-hundred-million-dollar business that makes loans to small businesses, J.P. Morgan has a multi-billion-dollar business that does the same thing. Despite the noticeable size gap, J.P. Morgan leveraged OnDeck’s underwriting tools, their onboarding tools, and all of the user interfaces for their small business customers.
Another example is with SigFig, a company that I invest in. SigFig developed a B2C robo-advisor, similar to Wealthfront and Betterment. However, they recognized that this model is a tough way to make money, despite having hundreds of thousands of customers. Because of this, they pivoted to serve existing incumbents, such as Wells Fargo, UBS, Citizens Bank, and many other large financial institutions. These large organizations want to develop digital wealth solutions for their customers. However, they recognize that they cannot do it themselves, so they have leaned heavily on SigFig to collaborate on those digital wealth solutions.
In the commercial payment space, we invest in a company called AvidXchange. Avid helps businesses pay their bills by moving them from a laborious paper workflow with paper checks to software-driven workloads with digital payments streams on virtual commercial cards, automated clearing house [ACH], and other less expensive ways to submit commercial payments. Avid has built a hundred-million-dollar business by selling directly to businesses’ accounts payable departments. Last year they co-developed a product with KeyBank, which they brought to market with Key. They have recently begun a similar partnership with MasterCard where they serve what will be dozens of banks in this collaborative platform where Avid develops the software, and the bank brings the customers and the payment trails.
The synthesis of these dynamic, entrepreneurially-led, technology-focused companies that are often backed by venture capital, combined with the incumbents who have the regulatory status and the customer base, is a brand-new chapter in the nearly 20 years I have been doing this. These collaborations only started happening roughly three to five years ago, and they are already bearing fruit.
High: You are on the investment committee of a digital currency group, which you have referred to as a firm that provides a front-row seat to cryptocurrencies and blockchain. Cryptocurrencies, specifically Bitcoin, have been in the news quite a bit over the past few years as fortunes have been made and lost because of cryptocurrencies’ extraordinary volatility. What is your thought process on the evolution of cryptocurrencies, and how bullish are you in that space?
Harris: I have been referred to as a Bitcoin maximalist because as it relates to crypto assets, I tend to be dramatically more bullish on Bitcoin than any of the other currencies or assets that have been developed. While I believe fixing prices is all inherently speculative, I get the use case for Bitcoin, and I have spent hundreds of hours speaking to owners of Bitcoin. While there are unfortunately no users of Bitcoin, the owners of Bitcoin tend to believe in it the same way people have believed in gold as a store of value for millennia. This store of value is not necessarily seen as stable on a short-term basis, but it is seen as a store of value that is divorced from the whims of governments and the inflationary tendencies of fiat currencies. It is instinct, rather than universal. Similar to many people, I have never owned gold in my life, but roughly five percent of people with means end up owning gold, and they view it as a hedge against inflation and chaos. For this new generation of mostly young people, the idea that gold has inherent value makes little sense. Frankly, other than the fact that gold has been valued that way for hundreds of years, there is no inherent logic in gold being valuable, so Bitcoin is far more appealing to this demographic.
As it stands today, there is $7 trillion of gold above ground right now, and there is about $200 billion of value in bitcoin. I view how we think about non-fiat stores of value as a market share game. We are beginning to see what percentage of people will want to own the new digital currency, as opposed to the venerable shiny metal one. To me, that is the bull case on Bitcoin. While I do not have a crystal ball on where it will go from here, I have made sure to own a good amount on my personal account and spend a great deal of time on it through DCG.
The second category where I have my conviction stems from the first. If you believe that people will want to invest in and hold Bitcoin and other crypto assets, then you will need a plethora of aspects market structure to facilitate that. If you are going to do that, you are going to need the following;
- Training venues;
- Company solutions;
- Ways to sell short and go long;
- If you are going to trade these non-fiat denominated tokens, you need something called a stable coin;
- Excellent management firms;
With DCG, there are some wholly-owned businesses and asset management trading, as well as events and media. Through DCG, we have invested in 115 different companies. Many of these are orientated towards capital market use cases that assume that there will be an emerging and evolving market for these assets, and therefore, it will need elements of market structure. While there is no evidence of success yet, I find the notion of distributed-applications extremely intriguing. I think of these as open-source protocols with an internal token.
Many of the apps that we use today as consumers, such as Facebook, Uber, and Airbnb, and those that we use for our businesses, such as Slack and Outlook, are software-driven tools that are now owned by companies or are companies themselves. I am interested in the notion that these should be open-source protocols, owned by no one and fueled by tokens that users need to buy, own, use, and earn through the utilization of the new school versions of Uber, Facebook, Outlook, and Slack. This is a massive idea, and there are thousands of highly qualified teams consisting of engineers and entrepreneurs who are building these applications on top of Ethereum. Many of them are launching these tokens before they are in use, pre-selling them, and using the funds to build the software. Most of them are going to fail, and many of them have already failed. Hundreds of millions of dollars have already been lost on a mark-to-market basis because this structure lends itself to the type of scammy promotional pump and dump schemes. However, that does not mean it is a bad idea, it just means that it is subject to abuse. While we have been cautious in the world of the distributed application and the associated token, we remain fundamentally intrigued by the idea that underpins the movement.
The last segment that we consider is enterprise blockchain. This entails the notion that the blockchain’s database architecture which underpins Bitcoin and Ethereum is a radical new innovation. Some believe that there are corporate use cases within an enterprise or between and among enterprises where there are existing workflows that can be transformatively improved through the deployment of that novel database structure, with its distributive nature at the core. However, I have been relatively skeptical in this area. While there will likely be some use cases, there will be fewer than what is generally believed. Frankly, the real innovation behind Bitcoin is the trustlessness or permissionlessness. This is the idea that people can exchange Bitcoin without having to know each other and without having a central counterparty such as Visa, Mastercard, or The Depository Trust & Clearing Corporation [DTCC] stand behind and clear the transaction. This is a magical innovation as billions of dollars can freely move around without anyone being able to edit or censor the transactions.
However, this idea is not something that has utility in the context of the corporate entity. In the enterprise blockchain world, you frequently hear the phrase, “permissioned blockchain.” If you believe that permissionlessness is the inherent quality of blockchain, then the idea of a permissioned blockchain is transparently ridiculous. However, this is an extremely negative view, and there are many great people who have an abundance of money desperately trying to find a nail for which blockchain is the right hammer. Because of this dedication, nails will be found, and I am certain that there will be successful projects. That said, I suspect when the final analysis is done regarding all the time, effort, and money that went into it compared to the results, I believe it will be viewed as a weak use of resources.
High: Do you surmise that the time and attention, especially among many large enterprises investing in the space, is based upon a misunderstanding of the ultimate value that the technology should have?
Harris: No. It would be ineffective to walk around Barclays and attempt to get people’s attention by trying to organize resources and budgets. If you said that, “We need to upgrade all of our databases. We need to move from relational database to NoSQL databases or even distributed ledgers,” people would say, “Get in line.” They would tell you that everything should be upgraded, including the chairs, but spending scarce resources, time, and attention on upgrading the databases is a bad use of money because the ROI is so vague.
It is no secret that there are new database structures, and moving from flat file to relational in the early ’90s was a smart move. While it took 15 years, we eventually moved off the mainframes onto the client server, we moved from flat file to relational, everything got better, and we should keep doing that. However, nobody was going to start handing out money, titles, and promotions to database upgraders. On the other hand, blockchain’s rise to prominence via Bitcoin created an enormous opportunity to create what people call, “Innovation theater.” You could go to Jamie Dimon and say, “I know you hate Bitcoin, you have been super public about that, and you are right because Bitcoin is for drug dealers.” What is interesting is the blockchain. It was an incredibly elegant and smart saying that co-opted the momentum of bitcoin and made it safe and thrilling for corporate America. As a result, a great deal of time, resources, and budget got allocated to the database upgrade project in a way that never would have otherwise happened.
There is truly transformative potential here. With the current system, it takes two days to settle U.S. equities transactions through DTCC, but if every single stock were on a blockchain or a distributed ledger, transactions could happen instantly. The technology is not what is stopping us from doing so. Instead, it is a social issue. There are thousands of counterparties who are used to a set of standards and who would all have to agree on a new set of standards. This transition is similar to how in the U.S, NACHA has finally developed real-time payment standards allowing you to do a real-time ACH. It took them 15 years, yet no one uses it because the delay is not a problem in 99.9 percent of the use cases. In fact, having a little bit of a delay when you are moving money around is advantageous because it reduces fraud and risk. After 15 years, NACHA finally figured out how to do the real-time payments without any distributed ledgers or blockchains just by getting banks to agree on a new set of standards saying that you do not need blockchains, and nobody wants it. My skepticism is that if this service was so radically desirable, we would already have it.
High: You are passionate about real estate tech, which gets less press than the other topics we discussed. For those who are interested, part of your thesis can be found in a Forbes article titled, “The Future Of Real Estate Tech: How We Got Here And What’s Next In An Exploding New Ecosystem.” Could you talk about your perspective on real estate tech and why it is an exciting area for you?
Harris: We have been active in real estate tech for a while now, but over the past 18 months, we have become even more vigorous. I am frequently asked what real estate tech has to do with FinTech. People are wondering if my new activity is a new expansion of my interest, or if it is the fifth segment of FinTech. The core four segments are payments, lending, investing, and insurance, so I have been thinking about whether real estate tech is the fifth segment.
I am drawn to the space because it represents a huge amount of global economic activity, and it has massive inefficiencies, analog prophecies, and technologies that will become digital over time. In fact, some of them have already become digital. The opportunity is there, and I found that my skill set and understanding of FinTech dramatically lent itself to real estate. My FinTech expertise does not get me all the way to becoming a real estate expert because there are vertically specific idiosyncrasies that need to be understood. Real estate payments are meaningfully different than restaurant payments or higher education payments, so there are significant vertical distinctive elements within real estate. However, it is one of those industries where the four critical aspects of FinTech are deeply important. There are big businesses at the intersection of real estate and payments, real estate and lending, and real estate and insurance. In a sense, it represents a departure from so-called pure FinTech. However, in another sense, it is one of the first of likely many intersections where individuals who are interested in FinTech will start finding cool stuff to do at the intersection of healthcare, payments, lending, insurance, commerce, and transportation with those core FinTech segments.
The evolution of FinTech reminds me of how many VC firms in the late ’90s asserted that they mainly invest in internet companies. However, you do not hear this anymore because that would sound archaic. I do not even know what that means anymore because all companies use the internet, so non-Internet companies do not exist. While I do not believe FinTech will become as pervasive as the Internet did, I do believe FinTech will become somewhat of an ingredient brand. There will be few pure payment companies as more and more payment companies will become vertically oriented. While the skill set will be around understanding payments, it will be equally important to understand real estate, healthcare, higher education, transportation, or whatever the domain is. As I think about the next 10 to 20 years of my career, I realize that many of the innovations have already happened with FinTech in and of itself. The next chapter is about applying those innovations in a vertically specific way.
High: Can you talk about what you are seeing in the insurance tech [InsurTech] space?
Harris: InsurTech has been fascinating for me to watch. Insurance is an industry that does not typically lend itself to disruptive change. While the same is true of any regulated business, insurance, particularly in the United States, has its patchwork approach to regulation driven by state insurance commissioners. As a result, building a nationwide, disruptive, and game-changing insurance product company has no minimum viable product. Instead, you have to tangle with regulators on day one if you are going to be making meaningful changes. This factor was one of the main reasons that insurance was the last part of FinTech to get moving. Big payment innovators, major alternative lending companies, wealth management, and the investment space saw a great deal of innovation before real dollars went into InsurTech. Despite the slow start, since it has started to move, it has built meaningfully. Insurance is multifaceted, and there are three major buckets.
- Health insurance, which is where the first activity was. At the intersection of healthcare and FinTech, some of the companies that received massive funding included Oscar, Devoted, and other well-funded innovators;
- Property and casualty, which includes all of the risk-related companies, such as auto, home, renters, and travelers insurance. In this bucket, we are seeing companies such as Lemonade and Metromile raise massive amounts of funding. Most recently, Root Insurance has emerged by raising over a hundred million dollars to do novel forms of auto insurance, and they are valued at over $1 billion;
- The wealth category, which includes life insurance, annuities, and all the other insurance products designed to protect your wealth, rather than your risk or health. There are fewer companies here. For example, life insurance is an area where you will know if you did a good job on risk 30 years later. Because of that, it has historically been a difficult category to move. That said, we are seeing companies such as Ladder, Halo, and other businesses raise a great deal of money and work to build new types of companies.
The other way to segment the insurance space is through a value chain where you have various levels of risk.
- Reinsurance, which is where people take most of the risk;
- Carriers, who take some risk and are the most heavily regulated segment of the value chain. The companies that I previously mentioned are all carriers. Carriers are looking to compete in this heavily regulated, risk bearing segment of the value chain where they can cause the most disruption. This space allows companies to transform how a product works. For example, what you can buy from Oscar Health is meaningfully different from what you can buy from Aetna in terms of the value proposition and how they deliver their product;
- Brokers, which is where we have seen a great deal of activity. These companies, including Hippo, Lemonade, Next Insurance, CoverWallet, and Goji typically do not have to raise much money. These companies are selling existing insurance products, mostly by selling and binding coverages from incumbents such as Allstate, Progressive, and Prudential. While selling the existing companies’ offerings, they are going to market using modern digital methods. We are seeing brokers of all types across property, casualty, health, and wealth, and while the amount of capital is less per company, there are many startups in that space.
I do not see this slowing down anytime soon. People are attracted to the combination of the historically large market size and the historically slow-moving incumbents. There is a perceived and actual gap between what customers want and what the existing players are delivering, so start-ups are rushing to fill that void. Personally, I believe that you have to be aware that these are very challenging markets from a regulatory, risk, and capital-intensity perspective. Because of this, we have been highly selective in this space, and while I made a few investments, it has been less than many of our VC competitors, many of which are extremely excited about InsurTech.
High: In an interview with an institutional investor who ranked you number three among the FinTech Finance 40, you revealed that you do not use deal pace as a metric. In fact, you only made two and six deals in 2016 and 2017 respectively. What are some of the common themes you look for when making an investment?
Harris: I have learned that there are at least two dangers that result from being too vertically focused on financial technology.
- It can serve as a blinder. I spend a great deal of time thinking about insurance as an example, and I have some deeply held beliefs. However, great entrepreneurs can change the world, so my frequency notion can be proven wrong by incredible people. If I get too married to my own ideas, I am not going to be able to see that, and in fact, a generalist VC with no preexisting notions is going to be the one to back those companies. The ones that are able to prove me wrong can be some of the most exciting companies, so it is important to have an open mind;
- I worry about falling in love with a company simply because they match my ideas. If I have a passionate belief about commercial payments, I meet an entrepreneur, and they have the same belief, that can be extremely compelling. Everyone loves their own ideas, and I am no exception to that. To avoid falling into this trap, I keep reminding myself that agreeing with them is not the most important aspect. Instead, what is most important is trying to invest with the best entrepreneurs in the world because even if their ideas are terrible, they will still find a great idea along the way.
It is common sense to say that management is the most important aspect. However, it is worth repeating because it is so easy to forget. There are many cognitive pitfalls that we fall into when we are trying to remain focused on management quality, but we inevitably get distracted. I keep reminding myself of this, and while I make mistakes, I keep trying to come back to that as the true north. My job is to back the best people in the world. My efforts to learn about these segments of FinTech is not so I can be discerning about what is a good deal and what is a bad deal. Instead, it is so that when I meet that person that I believe is capable of building the next world-beating company, that they will look at my FinTech nerdiness and say, “I want him on my board” when they are making their choice.
High: Since you are not colleagues of these people, you are not with them for a significant amount of time, seeing each decision that they make and how they treat their team on a regular basis. Because of this, you are unable to have a fully informed position on these elements. How do you overcome this and evaluate the quality of a management team?
Harris: There are several ways in which I overcome this. They are as follows:
- A big part of my job is getting out there and meeting people so that I know the entrepreneurs before they pitch me. Mark Suster, who is one of my role models in venture capital, talks about how investing should be about lines, not dots. Investing should not be a single meeting, but it should be a series of interactions that you can draw a line through. This allows you to get to know the person relatively well;
- Because I have been doing this for a long time, while I have not worked with the individual for several years, I likely have several relationships with people who know them intimately. Because these people owe me enough allegiance, they will likely tell me the truth about the person’s strengths and weaknesses;
- I have the evidence of my own eyes. When you meet somebody that you believe is extraordinary, your job is to drop everything to spend time with them. This allows you to truly get to know them, and you can decide if they are the type of person that you want to go to war with. If you only do one or two deals per year, that is fine because how many extraordinary people do you meet in a year?
Peter High is President of Metis Strategy, a business and IT advisory firm. His latest book is Implementing World Class IT Strategy. He is also the author of World Class IT: Why Businesses Succeed When IT Triumphs. Peter moderates the Forum on World Class IT podcast series. He speaks at conferences around the world. Follow him on Twitter @PeterAHigh.
December 17, 2018 at 10:40AM
Forbes – Entrepreneurs