Spotting the Butterfly effect in Fintech

Most of you are familiar with the Butterfly effect, the phenomenon describing how a tiny event or change today can have much larger consequences tomorrow. In most cases, the Butterfly effect is hard to spot while it is unfolding, since at the time of the initial event, nobody pays attention. However, when it comes to upcoming technology, one might be able to catch the Butterfly effect in its early stages. FinTech, or more specifically, the rise of mobile money apps, looks to be one of these occasions.

To illustrate what I mean, I will compare the rise of two rapidly growing peer-to-peer (p2p) payment apps, one in the U.S., and one in Sweden.

Let’s start with the U.S.. There, the p2p money app Venmo is getting increasingly popular with teens and older people for splitting payments, paying small debts and conducting commerce transactions.  

Google Trends “venmo”

User numbers are not public, but in 2015, the app was used to transfer $1.6 billion over a period of only 3 months. The number of Google searches for “Venmo” is rapidly increasing. Among Millennials, “to venmo” had become a verb already back in 2014. Venmo is not the only app of its kind – there also is Square Cash and Paypal (among others). Apple is rumoured to plan a “Venmo-killer”, possibly as part of Apple Pay.

Meanwhile in Sweden, the p2p payment trend is catching on massively as well, represented by an app called Swish. Swish works pretty much like Venmo and has received verb status too (“att swisha”/”to swish”). Like Venmo, Swish is currently trying to transform itself from a pure consumer-to-consumer service into a payment tool for customer-to-business transactions.

Google Trends (Sweden) “Swish”

According to its public user tracker, the app is close to cross the mark of 4 million users. In a country of less than 10 million people, for an app which relies on network effects, this means nearly total domination and a huge market entry barrier for potential rivals.

What makes Venmo and Swish very different is the background story: Venmo had been launched as a startup and was then acquired twice, ending up under the roof of Paypal. Swish on the other hand was created as a joint-venture of seven of Sweden’s leading banks. It can be seen as a rare case in which incumbents succeeded in disrupting themselves, not letting fear of cannibalization come in between them and the future.

Currently, from a user perspective, the Venmo and Swish experience is very similar (with the exception that Venmo relies on workarounds to access the aging U.S. payment infrastructure, making it in turn vulnerable to scams). But the meaning and impact these two apps will have on their respective markets differs significantly.

With Swish, the Swedish banks have created a major market entry barrier for local or foreign (fin)tech giants. They have significantly reduced the risk of their own demise and might even be able to reduce the role of international credit card companies for Swedish commerce, if Swish turns into a popular way to pay for goods and services.

In the U.S. on the other hand, tech companies are establishing themselves as the facilitators of money transactions, while the banks are “scrambling to keep up”, as recently described by the New York Times. Maybe a major U.S. bank consortium will one day end up buying Paypal (and thus Venmo), gaining control over one of the key consumer channels for financial transactions. But one should not bet on it. Today it seems more likely that tech companies will end up taking over a lot of the consumer-to-consumer and consumer-to-business financial transaction services, diminishing the role of traditional banks.

When a few years ago decision makers at the big Swedish banks decided to launch a new company and tasked it with building a p2p payment app under a separate brand, that turned out to be hell of a smart move, seen from the incumbent’s perspective. It also seems legitimate to call it the possible beginning of a Butterfly effect. What began as an inconspicuous experiment might have determined who’ll be in charge of banking in Sweden for the foreseeable future. Thanks to the market developments in the U.S., we’ll have the fantastic opportunity to keep following these two stories and to see in which directions they will evolve.

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