Marc Andreessen’s recent Essay in the WSJ entitled Why software is eating the world generated a strong feedback. He advocates that software is disruptive to all industries, from automobile to financial services as its importance finally comes of age with the growing pervasiveness of connectivity and calculation power. It’s an interesting read.
He highlights the following for financial services:
The financial services industry has been visibly transformed by software over the last 30 years. Practically every financial transaction, from someone buying a cup of coffee to someone trading a trillion dollars of credit default derivatives, is done in software. And many of the leading innovators in financial services are software companies, such as Square, which allows anyone to accept credit card payments with a mobile phone, and PayPal, which generated more than $1 billion in revenue in the second quarter of this year, up 31% over the previous year.
While it’s true financial services are a software based industry, it is stil very much reliant on dedicated hardware. Cash, checks, credit cards are all hardware based tokens to materialize value and ownership. NFC is the latest in this chain of hardware based solutions, using secure elements and dedicated POS hardware to ensure transactions. His choice of Square and Paypal is not surprising since they are software based disruptors in payment.
But startups and companies, with backgrounds closer to the disruptive companies quoted by Marc Andreessen (Skype, Linkedin, Netflix, …) are looking at the mobile / online payment market as a software based business. For them the question is : why do I need dedicated hardware when I can use 3G/wifi and cloud based solutions to run local payments and aim at the same level of convenience and security? I am guessing Paypal is one of the inspirations for these companies, having succeeded in internet based payment using a software-only solution, including fraud management when other players where proposing tokens, dedicated credit cards and other “stuff”.
Recent announcements show how these software based businesses are pushing for software based solutions in payment.
- From the outside, Square may seem very much hardware based since it is known for credit card acceptance on mobile. But it’s vision is software based. Card case is the perfect example of this, allowing local payments with merchants via mobile using a existing connectivity. Card case is now open to all merchants and with a dedicated app, I am expecting it to grow fast. To ensure fraud control, Square uses a mix of data (including social based), localization.
- Dwolla, the ACH based payment network, recently launched a P2P location assisted payment solution Proxi. Using your location, it allows you to discover other Dwolla users around you and make payment to them.
- Using Paypal on their phone, people can also Bump money to each other, or split tabs.
- Stretching this point a bit, I would be curious to know how many people uses Amazon mobile store and payment ”in-real world store” to make their purchase online (comparing prices, finding sizes etc).
What are the advantages of software based solutions?
- They are easier to launch, as the existing connectivity and tools can be leveraged. There is for now a limited number of NFC phones and Paypass POS are not that common.
- They seems easier to adapt as no dedicated hardware is used. App stores have also made app updates more convenient
Possible disadvantages are:
- Less secure (?) – Remains to be proved
What do you think, can software based solutions disrupt NFC?
I started Tekfin as a way to make my passion for innovation and financial services more “productive”. Basically, it was (and still is) a way to put my ideas “out there” and take whatever comments in to scrap them or make them better. Then came Twitter and the opportunity to learn, share, discuss with even more people. After a while it even lead to being invited to attend as a blogger event such as Finovate London or the Finextra event in New York (all my thanks to both teams for the opportunity).
Commenting is good, but being active in the ongoing disruption of financial services is better! So it’s really exciting for me to announce that I am joining Anthemis and will work with Sean Park, Udayan Goyal, Nadeem Shaikh and all the team starting September. If you want to know more about Anthemis, the best presentation is probably this post by Sean: Introducing Anthemis
If you look at our portfolio companies, you will find a lot of parallels with blog posts published since the creation of Tekfin.
I will keep Tekfin as a personal blog / twitter account, not sure if anything will change (most likely disclaimers when writing about one of our portfolio companies).
No turning back now
The ski metaphor fits perfectly since we are relocating from New York to Geneva, Switzerland. Which leads me to the most important thing, big thanks to my wife Barbara for being so supportive in this new endeavor. If you know someone looking for a kick ass digital marketer in Geneva, let me know!