answer this question based on this case

Explain why such a high percentage of Fintech startups go bankrupt before making any

any profits at all.

68 Part One Organizations, Management, and the Networked Enterprise Changes in the Financial Industry: Adyen and Fintech CASE STUDY eBay provides the t was an especially successful 2018 for Adyen, payments increase exponentially, there is huge room a Dutch company that mostly focuses on pro- for improvement here. Adyen is reducing this per- cessing Internet payments. In February, Adyen formance gap by integrating several components of announced that it would become the primary pay- the payment chain (such as the gateway, risk assess ments provider of American Internet giant eBay ment, and processing) into one platform. It has thus This was a big success for two reasons. First, been successful in ensuring a higher success rate in is, of course, a huge company with a large revenue its payments chain than other facilitators. (It also in 2017, the value of goods sold on the platform the company with a wealth of data on cus- to a staggering $36.28 billion. For Adyen, tomer behavior) this meant a huge increase of its business. Second, and perhaps more importantly, eBay gave preference is that its payments platform is connected to most A second advantage of the Adyen business model to Adyen over PayPal, which is very often the first choice of online companies . For a startup like Adyen payment systems being used in the world. Payment systems can differ greatly from country to country, to beat a market leader like PayPal was remarkable. In the Netherlands, for instance, most online pay. As if that was not enough, Adyen also had a very ments are done through the iDEAL system, which successful initial public offering (IPO) at the stock links payments to checking accounts. In other coun- exchange. Its shares, which were priced at 240, tries, most payments are done through credit cards nearly doubled in value during the first trading day. or debit cards like Visa or Mastercard. When it comes Some conservative commentators stated that this to processing payments, this variety of methods com- was the outcome of overhype, emphasizing that the plicates things enormously, as the payment proces- price of the shares did not reflect the profits the sors need to have several platforms. Adyen, however, company was making. However, at least for the first has one integrated platform that can link with most few months after the IPO, the optimism seemed well payment methods being used all over the world. This founded for in in December 2018, Adyen s n shares were is, of course, an attractive option for merchants or still priced around 430. Adyen, a company with online companies that sell their goods worldwide around 750 employees, was at one point more valu- When eBay decided to work with Adyen, it gave two able than win Deutsche a traditional financial insti- reasons for its decision: Adyen processes payments tution that employs more than 100,000 people! more cheaply and gives more control to merchants What plains Adyens sanswer to success? The that use the platform that lies in the data technology it uses. To mi cechnology it uses. To put it Adyen is a good example of a company that works simply, Adyen makes payment transactions easier in the field of fintech (financial technology). Compa Making payments on the Internet is a much more nies that use tuse technology to facilitate financial trans- complicated business than many people think it is actions have been highly successful over the last ten successo n many payment cycles, several companies work years. Founded in 2006, Adyen is relatively old for a together to ensure that the fintech company, but it has grown enormously-in To start with, there is, of course, the merchant, but 2017, as its website proudly boasts, it had 108 billion wo there are also o companies providing a gateway for the in processed volume Remarkable as Adyen's case payments, assessing the risk, and so on. Because of is, it is definitely not unique, other firms have used this crowded field of facilitators, many things can go technology to find a new niche in the international wrong. For instance, software may be outdated, or payments universe. The company TransferWise programs used by one provider may be incompatible (which was founded in Estonia but now mostly oper- with those of another. Because of this, many pay- ates from the United Kingdom) is another example: it ments fail for technical reasons even when the client facilitates money transfers from Country A to has enough funds to make the transaction. try B while avoiding currency conversion. According to Forrester, a consultancy firm that Initially traditional banks find it hard to com- focuses on financial data, around 10 percent of all pete with companies like Adyen. It is in the DNA payments fail for such "technical reasons. As online of fintech companies to develop and focus on a Bank, a tradi e payment is successful Coun- Chapter 1 Information Systems in Global Business Today 69 make it platform are tform processes y diverse (from state-of-the-art information systems. Traditional how fintech is changing the banking industry. This banks are very different; they work in buildings, company provides payment services just like a nor value direct, physical contact with the customer, and mal bank does, but it does not have buildings where often have branches in various countries that are customer more or less independent . Their IT staff often has agents give advice to the customers, every- thing is online. In 2018, N26 was attracting 2,000 new a supporting role and not, as in the case of Adyen, a guiding one. Traditional banks use IT systems to customers every day and had secured $160 million from private investors to expand One of the found facilitate businerad other fin business operations, not to compete with ers, Maximilian Tayenthal, remarked that traditional ally at the national level and may differ from coun- financial providers. Their IT IT systems are usu- banks had not taken N26 seriously when the com- pany was launched try to country. The heart of heart of Adyen is the financial platform, and the IT staff works continuously to Companies like Adyen and N26, which make online banking so much easier, have already had cheaper and more user-friendly. The data that com that come in on this are analyzed and used a huge impact on the physical presence of banks in many countries. In the United Kingdom, for to upgrade and update it. The data that Adyen gets instance, there were 18,000 branches in 1990; at the are global (the plant. The data that platform payments from end of 2017 there were only 8,000 left. In the Neth- all over the world) and highly pay- erlands, the digital banking experience progressed so ment transactions on the Internet as well as transac- rapidly that the Dutch government felt it necessary tions performed in physical shops). This wealth of to make it clear that it would not allow the loss of data ensures that Adyen has better opportunities to cash payments from the Dutch Iligh Streets as this analyze the market of payment transactions and its would severely limit the participation in society of developments than traditional banks do vulnerable groups such as the elderly Fintech is a good example of what economists call According to experts, the next wave of technol- "creative destruction." This term, originally labelled ogy will be even more disruptive. In 2018, Antony by the Austrian economist Joseph Schumpeter, Jenkins, who ran Barclays from 2012 to 2015, told the describes the influence of technology on the econ BBC that in the coming years around 50 percent of omy. According to his theory, new technologies inev- all jobs in banking (including those of middle manag- itably result in winners and in losers. One famous ers and customer agents) would be replaced by some example of a disruption is the invention of the Spin- kind of artificial intelligence. Andy Haldane, the ning Jenny, a device invented in Britain during the chief economist of the Bank of England, warned in eighteenth century. The Spinning Jenny made the the same year of a fourth industrial revolution that production of cloth more efficient, cheaper, and would cause severe disruptions in the job market, critically-reduced the number of laborers needed and at the heart of it would be artificial intelligence- in the textiles industry. Over the last 30 years, the a modern counterpart to the Spinning Jenny. Internet has had the same effect on society: some This does not mean that success is automatically jobs have disappeared, and others have come into guaranteed for new companies like Adyen, Transfer- existence. A good example is travel agencies. Forty Wise, and N26. A majority of these fintech startups years ago, there was a travel agency on every high go bankrupt, and many of these fintech companies street, but according to the official Dutch statistics need to make large investments before they can gen- agency, 67.2 percent of all holidays in 2017 were erate profits. Even when they generate profits, these booked online. Likewise, traditional hotels now have are often, for a time at least, rather small compared to compete with sites like the overall value of the company on the stock Creative destruction comes in waves, and the exchange. During the first six months of 2018, for banking industry is now in the frontline of change instance, Adyen increased its profits by 67 percent because of the emergence of fintech companies to 156.4 million. This may seem like a staggering Adyen has incorporated many stages of the pay- amount for a company that was only founded in ment chain, and traditional companies that used to 2006, but it is not a lot of money compared to the provide, for instance, risk assessment now have to total amount of payments it processed (70 billion) either make their business model more efficient or It pales even more if one takes into account the total face the very real possibility of going out of busi- value of the company on the stock exchange (around ness. The German firm N26 is also a good example of 616 billion). Sanizations, Management, and the Networked Enterprise Adyen released in 2018 show that the company may survive competitive challenges. Year-on-year, Adyen reports, the processed volume of payments has grown by 43.1 percent. TransferWise has also been growing rapidly; in 2018, it reported that 3.9 bil- lion dollars is being sent through its network every month. Both firms illustrate how fintech startups are changing the traditional bank and payment systems using new technologies and business models. man Tech companies are also being challenged by and major traditional banks who are rapidly develop- ne their own versions of online payment systems, from peer-to-peer payments for retail customers, to highly automated online payment and billing sys- tems for global businesses. As consumers and firms have moved towards mobile and online payments, many traditional banks have invested heavily in new technologies in part using the funds saved by closing down traditional physical bank branches. Where in-house innovation has not worked, the large banks have purchased fintech firms and folded them into their existing business and technology plat- forms. Traditional banks have a decided advantage over fintech startups: extraordinary cash flow and tens of millions of loyal customers and firms. In this scenario, fintech firms have been early to the party, but typically do not survive to the end of the party, at least not as independent firms. Like so many other companies in fintech, Adyen is still more of a financial promise than an immedi- ate reality. Investors pay for profits that are still to come, as well as IPO exit strategies that promise rich rewards even in the absence of profits. CEOS month of startup companies in the fintech sector need to have a keen marketing instinct; they must be able to explain why their idea will make money in the years to come. TransferWise, the company that facilitates huge fees for cur- rency conversion, was founded in 2011, but it only made its first profit in 2017 Adyen's founders were very experienced entre- preneurs when they started their company. They had already created another company, Bibit, which they sola to The Royal Bank of Scotland for 100 million Indeed, the word adyen means "again" in a language from Surinam, meaning that Adyen is their second endeavor in the field of financial technol- ogy. Many companies never get a second chance, and research shows that around 90 percent of new fintech companies go bankrupt without ever having been profitable. But those that survive change the banking and payments industry. The first financial results that Sources: Jan Hammer, "Adyen: A Global Success Born in Amster- dam,"Index Ventures, June 13, 2018, https://wwwindexven- tures.com/blog/adyen-a-global-success-bom-in-amsterdam "The Forrester Wave Global Merchant Payment Providers, Q4 2018, Adyen, https://www.adyen.com/landing/online/ global/forrester-wave-report: Dutch Payment Firm Adyen First-Half Profit Surges, CNBC, August 22, 2018, https://www. cnbc.com/2018/09/22/dutch-payments-firm-adyen-first-half profit-surges.html "Bank Joe Could Fall by 50% in 10 Years Says Ex-Barclays Boss, BBC News, November 26, 2015, https:// www.bbc.comews/business-34933960, Kamal Ahmed, "Bank of England Chief Eranomist Warns on Al Jobs Threat, BBC News, August 20, 2016, https://www.bbc.comews/business-45240758 Tomasz Grynkiewicz, 5 Years Ago Nobody Took Their Bank Seriously. Today This Fintech Attracts 2,000 Customers a Day, Netguru, April 9, 2018, https://www.netguru.com/blog26-fin- tech-disruption-digital-banking: Transferwise com all accessed January 2019 money transfers without asking for CASE STUDY QUESTIONS 1-12 According to Adyen, the payments platform has two advantages compared to other pay- ment platforms. Describe these advantages in your own words 1-13 Many fintech companies are very valuable on the stock exchange even though they make lit- tle or no profit. Fixplain this situation. Why do investors pay so much for shares of companies that hardly make any profits? 1-14 Explain the term "creative destruction." Is the German bank N26 destroying jobs or creating new jobs? 1-15 Explain why such a high percentage of fintech startups go bankrupt before making any profits at all Case contributed by Bernard Bouwman