Perhaps I’m just simpleminded, but one of the most important things I look for in a company is the ability to summarize the problem they are solving in one sentence. Often, at the outset, I’m less interested in solutions than problems; I want to be asked a question that stops me in my tracks. At the heart of most transformative companies is a simple question, and once you’ve heard that question you are instantly convinced that there has to be a better way.
Starting with a question, rather than with a solution, gives you a telling diagnostic for the magnitude of the problem. Way too many companies start with a solution and go looking for a problem, and as a result end up without anyone who really needs what they are selling. Perhaps the most acute example of this in financial services is the current obsession with mobile wallets at point of sale. “Why can’t I pay for something with my cell phone?” is about as much of a burning question as “Why can’t my dog speak French?”; both things would be cool but aren’t exactly mission critical.
Here are some examples from the industries I follow:
- Square/Braintree/Stripe: Why can’t most merchants take credit and debit cards?
- Xoom/iSend: Why are international remittance fees 10% of the value being transferred?
- Taulia/Tradeshift/Billtrust: Why are most business to business payments made by paper check?
- Wealthfront/SigFig: How can the asset management industry extract so much value while significantly underperforming index funds?
- CAN/Kabbage/OnDeck: Why do banks underwrite small business loans using the business owner’s credit score?
- The Climate Corporation: Why can’t we predict the weather?
- Bluebird/Moven/Simple: Is it necessary for banks to charge fees?
- Paypal/Dwolla: Why is it so hard to move money around?
- SoFi/Common Bond: Why do all student loans have the same interest rate?
- ZipCar/RentTheRunway: Why do we have to own expensive goods that we use infrequently?
- Yapstone/Plastiq/Zipmark: Why do I still pay my rent with a paper check?
- DriveFactor/CellControl: Why do good drivers subsidize bad drivers?
Once you have your question, then you can do the required research to find out the answer. Sometimes the answer is a brick wall, but other times the answer points towards a solution. Frequently, as you can see from my answers below, there have been legitimate blockers to a solution historically, but advances in technology newly allow hard problems to be solved. When you find a circumstance like this, a painfully acute problem that was historically intractable, but due to new innovations is now solvable, please email me.
- Payments acceptance: Primitive and stodgy underwriting needlessly excludes many low risk merchants; legacy hardware creates a prohibitive fixed cost for low volume merchants.
- Remittance expense: Cash handling, both on the send and receive side, is wildly expensive.
- Paper in B2B payments: There is tremendous inertia, driven by workflow on both the AP and AR side. [This will not be solved quickly]
- Value destruction in asset management: In the absence of clear data, investing choices have been driven by brand preference vs. rational analysis.
- FICO scores in small business lending: Historically it has been the only scalable and low cost way to underwrite a sub-$100,000 loan.
- Weather prediction: The data capture and analysis problem has been too large and expensive to solve.
- Banking fees: Banks have to support a very expensive branch infrastructure, as branch location has historically been the primary decision factor for consumers in selecting a bank.
- Money movement: The four party payment model and the resulting interchange economics were built to compensate issuers for credit transactions and have been inappropriately applied to other types of money movement.
- Student lending: Government driven programs are slow to change, and as a society we have issues with financial discrimination relative to education (and health care.) [This may still end up being a problem]
- Sharing economy: The transaction costs in rental models have outweighed the benefits in the absence of inexpensive real time communication networks and scale infrastructure investments.
- Checks in rent payment: Landlords have mini-monopolies once renters move in, and therefore lack motivation to sacrifice any economics to make payments easier.
- Auto insurance: Collecting information on safe vs. risky driving has historically been impossible.