The Rise of the FinTechs
PUBLISHED MARCH '19
Written by Beate Oera, Head of Operations
Having worked with a number of FinTechs, our experience is that it isn’t just an industry for the young, as stereotypes would have you believe, but highly experienced executives, who understand how to disrupt the market. They have unshackled themselves from old business models, and are excited to start again with a clean sheet of paper.
Interestingly, as the sector has grown, high quality talent is keen to work in the sector too. It’s a potent combination of experience and knowhow, capital, ambition, and now it’s attracting highly talented individuals happy to be employees.
What is FinTech?
FinTech stands for Financial Technology, a pretty broad definition, which is drilled down as follows in the Oxford Dictionary: “Computer programs and other technology used to support or enable banking and financial services”. A whole range of industry innovations would at some point or other have fallen into this category.
The distinction is now being made between traditional and emergent FinTech. The former is often used for larger, established firms supporting the financial services sector, whilst the latter points towards smaller firms using innovative technology to disrupt the market – ‘disruption’ being the key word, alongside efficiency and customer experience.
Digital disruption is nothing new, of course, having already transformed several industries, such as media and retail. In recent years, FinTech firms have been at the forefront of change in financial services. The revolution is well under way.
Consumer behaviour is changing
The rise of the FinTechs was sparked by the 2008 global financial crisis, when established banks cut back on spending, and withdrew from some markets altogether, whilst customer confidence in the banking industry reached an all-time low. This created a vacuum for new entrants to establish themselves, and an opportunity for FinTechs to build trust in new technology, offering faster, easier means for customers to access banking services. Much like Blockbuster in their day, traditional banks have been slow to adopt new technology, creating an opportunity for FinTechs to take market share.
Forerunners like PayPal played a significant part in improving fears around trust and security, whilst our craving for all things instantaneous and convenient plays into the hands of FinTech innovations. Consumers are looking for a seamless, integrated experience, with instant money transfers and online transactions, regardless of which device they are on. Patience is a thing of the past. Consumer demands are changing, putting pressure on traditional banks, who are often slow to change.
All of this has contributed to a steep decline in customers physically visiting bank branches. In 2016, 9100 branches closed down in the EU, due to increased used of electronic payments and mobile banking. The trend is particularly strong in the UK, where two thirds of branches have closed over the last 30 years, and where consumers are showing a higher willingness to utilise ecommerce than their European and American neighbours.
"We are at a turning point for financial services," says Adrian Cannon, a serial entrepreneur in the management consulting sector. "A moment when multiple strands of activity in technology, regulation and people's engagement with technology allow for rapid change.”
A glimpse of the future
Some countries, such as China and Sweden, have almost completed the transition towards becoming cashless societies, but the revolution goes much further than that. FinTechs are offering new ways to manage money and make payments, both for consumers and B2B. FinTechs are producing digital applications to compete with practically every financial product category existing. At its most radical, FinTechs are creating new infrastructures to bypass the current financial system entirely.
Here are some key areas in which FinTech is changing the financial services industry:
- Instant transactions
At the moment, there is a delay between making a payment and it showing up in a bank balance. Real-time payments will help customers manage their cashflow.
- Customer experience
Machine Learning and AI are replacing laborious back office work with efficient machines, and is using the intelligence gathered to improve customer experience and client onboarding.
Biometrics is improving identification processes, making authentication smoother and faster.
Blockchain allows for improved transparency and less risk, human errors and transactional fees, enabling smart contracts and auditable data, amongst others.
A class of financial adviser, that provides financial advice or investment management online, with moderate human intervention.
Cryptocurrency has proven popular with migrant workers sending money home, and some industry experts talk of a future where crypto-currencies and digital currency technology will underpin all real-world transactions.
- Peer to peer lending
WhatsApp and Facebook Messenger are both launching P2P payment systems, illustrating how social media can implement secure payment systems to do away with banks altogether. Platforms enabling crowd syndication and crowd-funded equity schemes are also being developed.
- Cyber security
Alongside the rise in digitisation, comes an increased demand for cyber security.
Technology is also serving as an equaliser for smaller firms taking on their larger, established competitors. By leveraging partnerships with each other, start ups can increase market share.
Another major theme for the FinTech revolution is monetising data. Selling advertising and consumer data represents a significant revenue source, and forms a key part of the emerging business models. Financial services companies hold particularly rich data, and this is an area likely to cause debate around customer privacy and protection.
Britain – the epicentre of FinTech?
In the UK, a whopping 63% of banking institutions are new entrants, and they have captured 14% of total banking revenues to date (by comparison, the US figures stands at 3.5%). According to Accenture, the UK and Ireland is now the fastest growing region for FinTech investment. In the first half of 2018, UK surpassed the US and China when totting up the total investment in its FinTech sector. A total of 15 FinTechs have been granted full banking licenses in the UK.
The Brits are famous for innovation, of course, but there are a number of other reasons why the UK is leading the way:
The City holds an unrivalled position as a world-leading centre for financial services
The UK offers a high quality financial services infrastructure, as well as a supportive regulatory approach.
Availability of business capital and investment cash. Incidentally, FinTechs are reporting that Brexit has done little to dampen the enthusiasm of investors, a sign that long-term confidence in Britain has not suffered.
- Early adoption of the EU ‘Open Banking’ rules
The industry has bee boosted by the UK regulator’s early adoption of the ‘open banking’ rules, which force lenders to open up access for fintechs to the data and accounts of any clients who authorise it.
- Consumer trust
British consumers’ persistently low trust in the financial services sector, following the financial crisis, has boosted new entrants into the market.
- Supportive government
The UK government has pledged to support FinTech companies, and has created a crypto-assets task force.
- Strength in numbers
A large number of FinTechs are already established in the UK
The threat to traditional banks
Accenture’s report from Oct 18 found that new entrants to the banking market — including challenger banks, non-bank payments institutions, and big tech companies — have captured around one-third of new revenue worldwide.
For quite some time, the number of banking and payment institutions worldwide have been on the ebb, and yet despite this, nearly one in six of current institutions have entered the market since 2005, a sign that traditional institutions are struggling with competition from new entrants. The threat of reduced future revenue growth opportunities is real and growing.
“Most banks are struggling to find the right mix of investments in traditional and digital capabilities as they balance meeting the needs of digital customers with maintaining legacy systems that protect customer data,” said Alan McIntyre, a senior managing director at Accenture and head of its global Banking practice.
“Banks can’t simply digitally enable their business as usual and expect to be successful,” he said. “ As the banking industry experiences radical change, driven by regulation, new entrants and demanding consumers, banks will need to reassess their assets, strengths and capabilities to determine if they are taking their business in the right direction. The future belongs to banks that can build new sources of growth, including finding opportunities beyond traditional financial services.”
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