Cutty Sark, UK’s legendary sailing ship built in 1869 transported tea across the world. Lots of incremental innovations and design improvements made the clipper to one of the fastest sailing ships in its time. Unfortunately, the owners did not see the disruption coming when steam technology took over and soon steam ships came to dominate the global trade routes. As a result Cutty Sark became a training ship and today you can admire her, beautifully restored at a dry dock at Greenwich, east London overlooking the shiny skyline of Canary Wharf’s financial centre. Will banks and insurance companies face a similar fate, will it just be a question of time until some of them turn into museums as one author of The FINTECH Book (published by Wiley in April 2016) predicts?
(Source: The FINTECH Book: The Financial Technology Handbook for Investors, Entrepreneurs and Visionaries , the 1st globally crowdsourced book on the financial technology sector – Chapter “FinTech is the Future itself”. Amazon Bestseller in “Financial Services Books”)
Disruption is part of our lives: What happened to Kodak and its film business when they missed the trends towards digital photography? What happened to Nokia who owned 49.4% of the global smartphone market in 2007 and ignored the launch of the iPhone that same year?
Disruption has started in financial services – summarized by the term FINTECH. JP Morgan CEO Jamie Dimon warned of the growing competition by fintech startups when he said in a letter to shareholders in April 2015 “Silicon Valley is coming …. There are hundreds of start-ups with a lot of brains and money working on various alternatives to traditional banking”.
Since 2010 more than $50 billion has been invested in almost 2,500 fintech companies by venture capitalists, private equity firms, corporates and other investors globally. In 2015 alone the value of global fintech investment was $22.3 billion (an increase of 75% compared to 2014). Deal-flow especially in Europe and in Asia was strong and now represents already more than one third of global fintech financing activity (with almost two thirds still taking place in North America).
Successful fintech IPOs dominated 2015 with PayPal, Square, WorldPay and First Data achieving multi-billion-dollar valuations. So why is FINTECH so “hot”? What does FINTECH offer what incumbents can’t do themselves?
Since the financial crisis two goals dominated many corporate strategies across financial services – one objective focused on regulation and the other on cost-cutting/operational efficiency.
Regulatory requirements globally increased enormously since the financial crisis and understandably the first priority was to ensure that incumbents continued to be compliant globally, paid off any fines and put new control structures in place with first, second and third lines of defence based on new conduct risk models.
On the other hand, headcount was cut and assets, business areas and locations which were deemed as non-strategic, were spun off into non-core business units and/or sold off.
Accenture published a study in early 2015 where bank managers were asked if they felt that they were equipped for the digital age and the honest response was that 80% said that their banks were only “somewhat or minimally equipped for the digital age.”
So during these last years leading financial services companies were focused on regulation, internal cost-cutting initiatives, and most IT investments were spent on incrementally improving legacy technology.
At the same time thousands of smart entrepreneurs globally started their own businesses trying to improve all aspects of finance:
- Some fintech founders were frustrated by the lack of financial services they could get themselves, for example in the case of Transferwise (an Estonian developed and UK based peer-to-peer money transfer service launched in 2011) where the co-founders Kristo Käärmann and Taavet Hinrikus just wanted to make a simple international foreign exchange (FX) payment without incurring too many fees. Now Transferwise is one of the leading Fintech “unicorns” (a term given to companies with a private valuation of over $1 billion) which has transferred more than £3 billion and supports more than 300 currency routes across the world.
- Others entrepreneurs created platforms to dis-intermediate finance called the “alternative finance market”. In 2010 Rhydian Lewis founded Ratesetter which is now one of the leading peer-to-peer lending platforms in the UK which has surpassed the £1 billion lending threshold. The Alternative Finance sector grew by 84% to £3.2 billion in 2015 and includes many fintech brand names such as Zopa and Funding Circle.
- Other founders wanted to help SMEs raise money while at the same time supporting investors get access to private equity investments. Equity crowdfunding was born – raising money from a diverse group of people in return for equity. When Gonçalo de Vasconcelos realized that often valuations are too high at crowdfunding sites, he co-founded Syndicate Room in 2013 which requires that deals get pre-vetted by professional investors/angel networks who invest alongside and at the same terms as the “crowd”. Other well-known crowdfunding sites are CrowdCube and Seedrs.
The above examples are fintech firms which fall into the category of Business to Consumer propositions and are often classified as “disruptors”. Competitive Fintech can pause threats to established players in various ways such as dis-intermediation or loss of the client relationship, the loss of relevance or loss of revenues as the margins get squeezed due to higher competition.
In addition to these new disruptive fintech start- and scale-ups, technology giants have started to embrace fintech, too: Google, Apple, Facebook, Amazon and Alibaba (GAFAA) have redefined the customer experience. These players increasingly offer banking style services to customers combined with superb user experiences, for example:
- Amazon Lending offers loans to small businesses selling products on Amazon’s Marketplace. Amazon’s credit scoring includes its own data – trading data and vendor reviews.
- Amazon also offers instalment loans to customers buying via a “pay monthly” option on orders of more than £400 at checkout. Customers are then invited to apply for a loan (2-4 years) and an online credit check takes place.
- Google Wallet allows to make payments via email. In the UK, Google Payment Ltd is authorised and regulated by the Financial Conduct Authority (“FCA”) as an electronic money (“E-money”) issuer.
- Apple Pay famously launched in the US in 2014 and now allows globally to pay via app, iphone or iwatch and is bringing in one million new users per week although Apple claims that it does not get any meaningful revenue from Apply Pay yet.
- Facebook has launched its friend to friend payment service. The service lets users pay friends within their private messaging app in a few taps.
- The Chinese Alibaba group made history in 2014 with its blockbuster IPO, the largest public offering in history. Ant Financial Services Group, an affiliate company operates the powerful Alipay platform. Alipay will launch in Europe in 2016 after securing a huge Series B round of $4.5 billion in April 2016. Ant reaches 450 million Chinese users (most via Alipay) and also offers payment, insurance and wealth management services reaching 140 million people in rural China.
These disruptive forces will completely change the way we bank and insure ourselves and our businesses. So what can existing banks, insurance companies, and other financial services providers do when they are attacked from all sides with such force?
The answer is collaboration. Half of all fintech firms are so called “business to business” (B2B) players and they want nothing more than to work with incumbents, licensing their software and often offering “white label services” where banks and insurance firms can continue to use their well known brands even though the new service was developed by a fintech startup. Collaborative fintech solutions include big data analytics, predictive algos, KYC/AML etc should be a win-win for both established and new players leading to reduced development cost and shorter product launch cycles, smaller operating costs and risks and new digital business models which could not have been developed inside a large and less agile organization.
FINTECH Circle Innovate supports tech savvy leadership and strong digital boards among financial incumbents to recognize these changing market drivers, make strategically right decisions and execute these with the best fintech partners that can be sourced to fit their business models and customer segments to guarantee long-term relevance, growing market share and strong valuations.
The goal should be that banks do not end up as museums as the beautiful Clipper Cutty Shark did but reposition themselves by replacing their legacy systems with scalable and safe banking platforms in order to integrate the best-of-breed fintech solutions for all customers while at the same time benefiting from B2B fintech solutions internally and across their mid- and back-office functions.
I have no doubt that FinTech will be a great sector for both entrepreneurs and investors for a long time. Hopefully it will also act as a wake-up call for leading financial players to stop their cost cutting downward spirals by creating powerful future visions combined with a sense of urgency, to make financial services compelling again for both their customers, partners and employees.
By Susanne Chishti, CEO of FINTECH Circle