Global fintech and funding innovation ecosystem

To Support Disruptive Technologies, Take Bigness Seriously

Denise Hearn | Myth of Capitalism | May 24, 2019

future start - To Support Disruptive Technologies, Take Bigness SeriouslyShivaun Moeran and her husband Adam Raff founded one of the most promising startups you’ve never heard of.  Adam managed Europe’s supercomputers used for weather forecasting and Shivaun managed software products for General Motors. While having a cigarette outside his office one day in 2006, Adam was struck with a brilliant idea. What if you could create an online search platform to find the best price for any product? It would aggregate specific information about category verticals, and nothing like it existed at the time.

They quit their jobs, hired a team, and began beta testing. Their site, Foundem.com ranked well on Google and they were receiving a steady flow of traffic. However, a few days after the official site launch, visitors to the site disappeared and never came back.

Upon investigation, they discovered that Google had updated their search ranking algorithm and had demoted the site, so it appeared on page 4 or even 170 of search results. Foundem had effectively disappeared from the internet – blacklisted. They suspected that they had been intentionally knocked out of the market and, after speaking with other entrepreneurs who had similar experiences, filed a complaint with the European Commission. Nearly 13 years later, Google was fined 2.4 billion euros for crushing competitors and steering users to its own product search sites. This was the first of 3 big antitrust fines leveled at the company, the third coming this past March.

The story of these two entrepreneurs is representative of the challenges facing many new entrepreneurs today – they are up against concentrated and centralized power not seen since the first Gilded Age, making it very difficult to compete.

See:  Advancing Competition in a Changing Marketplace

Across many industries in the US and Canada, (and indeed globally), industries have become increasingly concentrated via waves of mergers and acquisitions. Many Canadians are aware of the main oligopolies of telco companies and banking. Banking is controlled by the Big 5 (TD Bank, RBC, Bank of Nova Scotia, Bank of Montreal, CIBC) which would have been the Big 3 had the Competition Bureau not blocked merger proposals in 1998. And The Wireless Telecom industry in Canada is heavily concentrated, with the big three capturing an estimated 88.7% of the market between Rogers, Bell, and Telus.

But fewer are aware of how industrial concentration has seeped into nearly all areas of the economy: eyeglasses, pharmacies, grocers, retail, and even funeral services. Park Lawn Corp, Canada’s largest publicly traded funeral service provider, went from owning 9 funeral facilities in 2013 to over 149 locations by the middle of 2018. Investment strategists praise the company’s consolidation efforts because death, though unsexy, is now becoming highly profitable for shareholders.

When companies merge, they announce the great savings from “synergies” that they will share with customers.  To give you a sense of how outlandish the estimates are, the accounting firm Deloitte calculated that the announced cost savings of the current mergers boom amounted to $1.9 trillion, which is more than the entirety of Canada’s GDP. Despite the purported ‘efficiency gains’ meant to come from merging, Canadians pay some of the highest rates globally for international travel, cell phone packages, and banking services.

Wall Street earned $21 billion in merger fees last year, so there is an incentive to keep this engine running.  And the US has its sights set on Canada: outbound deals into the U.S. increased by 40% from $80.56-billion in 2017 to $112.9-billion in 2018 (USD).

This matters for fintech firms for a variety of reasons. Most crucially, it should serve as a warning. The internet was invented to avoid single points of failure and protect from nuclear attack. Yet, in 2014, nearly 50% of all internet traffic moved through the Google and Facebook universe. Today, it is closer to 70%. What was meant to be the world’s decentralized, democratized exchange of information has become beholden to two choke point companies that extract the majority of revenue value from the internet.

See:  Technology is the ‘most profound force bearing down’ on big banks, ex-Barclays boss says

Denise Hearn ffcon19 - To Support Disruptive Technologies, Take Bigness SeriouslyBlockchain-backed cryptocurrencies were invented with a similar premise of decentralization and democratization. However, Bitmain, a Chinese bitcoin mining company, is estimated to have 70 to 80% market share in bitcoin miners, earning $2.8 billion in revenue in 2018. It is unclear, more than 10 years since inception, who has benefitted most from blockchain technology as it has yet failed to significantly deliver on its most lofty claims about equitable distribution.

This is why it is increasingly important to recognize the powerful forces with incentives to re-centralize power, and to set up appropriate checks and balances via regulation and citizen engagement to support the next wave of Canadian entrepreneurs – fintech or otherwise.

For regulators and government: Tax and transfer approaches treat symptoms, not the true disease of concentrated market power and capital ownership. We need to adopt economic policies that support distributed economies that more widely disseminate power. We also need to get serious about bigness. Antitrust and merger review need a return to the forefront of political discourse, as they increasingly are in the United States. Caring about innovation means taking concentrated power seriously and supporting disruptive industries like fintech, crowdfunding, and blockchain.

Funders should change success metrics away from chasing elusive unicorns with billion dollar valuations to fostering thousands of stronger locally grown and supported companies. Yes, we want national champions, but we also want a robust network of medium-sized businesses that are sustainable and adding value to the economy that do not get swallowed by foreign giants.

Lack of competition in markets hurts consumers, workers, innovators and entrepreneurs. It leads to a host of other symptomatic ills like income inequality and, by extension, populism. As the famous US Supreme Court Justice Louis Brandeis said,

“We must make our choice. We may have democracy, or we may have wealth concentrated in the hands of a few, but we can’t have both.”

See:

The time is now to admonish incumbent oligopolists and to support challenger entrepreneurs.

Disruptive technologies will play a key role, but it is incumbent upon regulators to foster markets where everyone has a chance to compete. We all have a responsibility to help create a more equitably distributed economic future.

 

Denise Hearn, Co-Author, Myth of Capitalism, mythofcapitalism.com

Denise Hearn 200 - To Support Disruptive Technologies, Take Bigness SeriouslyDenise writes, presents, and consults on economics, systems change, and human flourishing. She has presented to over 50,000 people at venues including:  The Oxford Union, Bloomberg, a Canadian Parliamentary Standing Committee, and group homes for foster children. Things she find fun: investigating complex social and economic problems and co-creating organizational growth strategies with entrepreneurs and founders. She has done this across diverse fields: impact investing, education, the sharing economy, and macroeconomics.


NCFA Jan 2018 resize - To Support Disruptive Technologies, Take Bigness Seriously The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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