Culture: Why Big Finance Falters in Fintech

Greg Larkin
Nov 7, 2019

From 2009 - 2014, I built one of the first commercially viable robo-advisors, the first deep-learning network that could detect market-moving Congressional legislation, and one of the earliest trading algorithms for illiquid markets.I built those products inside some of the largest financial institutions in the world. And every one of those products was shut down by those banks. Everyone who was part of those teams quit or was fired.But none of the innovations died. All of the talent and technology resurfaced as a startup that grew, gained traction, and eventually disrupted the companies that expelled them. My back-of-the-envelope math is that the total value of all the financial products built by the entrepreneurs who were purged during that time is about $63 billion. That is about $15 billion more than the growth in market capitalization of the companies I worked with.My time in big finance taught me that Wall Street is some of the least fertile soil for innovation to take root and grow. Even (especially) in institutions that are losing market share to disruptive innovation. Many of the organizations which have invested billions in disruptive technology are unable to make those investments grow.I am a member of Wall Street’s entrepreneur exodus. This exodus continues to increase the cost of not innovating in finance. Because of us, big finance is fast becoming a diseconomy of scale - where a large institution’s bureaucratic heft makes it a vulnerable target for a lean, hungry, startup. The barriers to entry which once made investment banks, broker-dealers, and institutional lenders somewhat immune to disruption are all falling fast because of us.How did Wall Street get here? And how can it change? I will answer the first question here and share a roadmap for change in my next post.The root cause of the problem is more human than it is technological or financial. Spending any amount of time inside Wall Street quickly shows that banks have all the technology that money can buy but can’t attract or retain the talent that can make it work. I believe that big banks have to radically change who has power, who has a voice, and how they work in order to remain relevant and resilient.


Here are four of the cultural causes of banking disruption that need to be addressed:

1. Hierarchy kills entrepreneurship.

People in banks (and every hierarchy) obsess over who got promoted ahead of them, who’s making more money than them, whether their boss’s boss likes them, whether they’ll get in trouble. Far, far behind these obsessions are customer needs. They forget to care about whether there’s a better, smarter, faster way to serve the market. And they lose sight of the new businesses which have created a better way to do it. Entrepreneurs come out of startup culture—where you have very little time and money to move a big mountain. Every political impulse is outweighed by a sense of urgency to gain traction before running out of capital. Hierarchy kills that instinct.

2. Banks don’t distinguish between incremental pressure and existential disruption.

Executives at most banks obsess over competitors that are as big, old, and slow as they are. The executive leadership team at JP Morgan and Citi probably talk a lot more about one another than they do about Betterment, SoFi, or Kensho. There is a tendency to dismiss early-stage, fast-growing innovation as too small to matter or as a passing fad. Until it becomes an unmistakably large-scale threat to earnings. And then it’s too late.A dangerous by-product of this thinking is that the same tools for incremental technological improvement (like migrating data to the cloud or transitioning to microservices), which are standard for any competent bank CTO, are repurposed to detect and respond to radical disruptive threats. This is a huge mistake. Radical disruption is a fundamentally different threat than incremental pressure.

3. Banks believe they know their own vulnerabilities to disruption.

What part of your bank is most vulnerable to entrepreneurial disruption? Most banks believe they have a good answer to this question. They don’t. The executive strategists inside a huge bank (and their partners at McKinsey, Bain, and other consulting firms) will detect disruptive threats very differently than an actual startup entrepreneur. Most banks have no idea where they are vulnerable to disruption until an actual startup starts to disrupt them. Too often, bank partnerships with startups take the form of equity investments, vendor-client relationships, or incubators. They should also pay entrepreneurs to try to kill them. Only then will they have an accurate assessment of where they are vulnerable.

Quantum computing

4. There’s too much focus on shiny toys vs. powerful tools.

Many banks have sunk money into blockchain technology, artificial intelligence, and big data without ever using that technology to launch a product or realize new revenue. To do so would mean dismantling the fiefdom of a powerful executive who has been there for a long time. Most banks won’t do that. As a result, some of the most transformative technology of our time is a dormant asset inside of the world’s largest banks. Yes, it’s there, but it sits in the “innovation lab” of a middle manager who doesn’t have the authority to bring it to life. Startups with the same technology are not sitting on it. They are moving fast to use it to steal clients from banks with the same technology.In private conversations, most bank executives I speak with are aware of each of these problems. These issues are often what keeps them up at night. They know how hard it is to enlist entrepreneurs as executives. They have all struggled with the entrenched weight of legacy hierarchy. They can all point to a multi-billion dollar moonshot that gained traction only to die because of politics rather than market invalidation.But how can banks transform into a culture where exponential entrepreneurs fuel exponential growth? The good news is that it’s already happening, albeit quietly. I’ll share that roadmap in the next installment.