It is probably a good start to outline what Fintech is exactly, as you may have heard the term, but never really had the chance to understand the immense impact it has on our everyday lives.
Not since the birth of the internet have we seen the opportunity for such rapid economic transformation. Technology is a powerful and key changing force, as we have seen time and time again. As many of you may remember, the internet burst into life in the nineties with mania sweeping across many industries, creating new businesses while forcing others to close down. The impact of this can be seen today by the dominance of companies such as Amazon. Again during the nineties we saw the music industry go under a major revolution with the introduction of new technologies such as MP3/4. Some industries like finance and insurance, have been adapting slowly without a major shift in its core business model. I think now, that is all about to change.
Fintech simply put, is the marriage of finance and physical technology with the aim of enhancing the customer experience, whilst making the service being provided quicker and cheaper. The interesting thing to note is that the field of finance itself could be considered as a technology in its own right, more specifically, the technology of making and transferring forms of exchange.
You might be asking why Fintech is so important. Because, finance is a technology that we use every day, which most of us benefit from without a second thought. Given that finance also involves the transfer of money for goods and services, and that this is also necessary for an economy to engage on a global scale, well it is of huge interest and importance. Fintech has the power, if harnessed correctly, to transform lives and increase prosperity. As an investor it allows you to be entrepreneurial but at the same you can create a great deal of value within your portfolio whilst benefitting from a level of enhanced diversification.
You have probably already benefitted from using Fintech services without even thinking or it. PayPal, Equifax or Experian are very good examples of Fintech service providers. One allows for the payment for goods and services, while the other two provide credit ratings.
Fintech is not , simply restricted to western geographies, it is very much a global phenomenon with companies at its forefront, like M-Pesa, which actually started in Kenya.
New advancements generally fall under the umbrella of what its known as ‘sustaining’ and ‘disruptive’ technologies. Most industries will not only benefit from the growth of but also new disruptive tech such as the blockchain. That is behind a new and completely different way of storing and sharing information. Examples of this would be potentially seen in areas such as and the creation of a global property register, completely removing a reliance in many countries on an archaic system of confirming legal ownership. Sales and transfers could be undertaken faster and more while fraudulent transactions are reduced. These advancements will all directly impact the way in which financial services are delivered.
The recent wide acceptance of Blockchain technologies will most likely see an increase of the pace of change across many fields. Most people are in agreement that the way business is conducted globally will be enhanced by these systems. This is very much a space that will offer those entrepreneurial investors great rewards if explored correctly.
Consumer behavior is changing and the way that we bank and pay for goods is certainly changing with it. The next generations will be huge adopters of these technological advancements and many new banks entering the market are choosing to only operate on a digital basis. This new breed of companies do not have the legacy costs their traditional counterparts have, nor the costs associated with hard assets such as bank branches. Companies such as Apple and Google have both launched payment methods that allow customers to pay devices such as your phone or even your watch.
As an entrepreneur, my natural desire is to adopt changes and move into new and advanced sectors. For me, that is what differentiates an entrepreneur from a businessman, one that doesn’t shy away from the unknown but rather seeks to dance with it.
In relation to Fintech itself, the term has been around for some time, with the first use being recorded in 1972 by Abraham Bettinger, a New York Banker. There are a number of fields within the sector and various classifications. These can be broken down into domains and , but are not exclusive to, Payments, Investment Management, Deposit, Lending, Capital Raising, Market provision and finally Enterprise Financial Software.
The areas above can further be split into supplementary components. Capital raising, for example, refers to forms of alternative financing such as Crowdfunding and Peer 2 Peer lending. These two areas have major implications for the developing the world and also SME’s. I find this sector especially interesting as it has so many inclusive or social benefits. Furthermore, the impact it can have potentially allows for transformation of the way the population is able to engage with the financial services sector.
As an entrepreneur, this is of particular importance to me and I will provide further insights detailing the impact of Fintech on the developing world and SMEs in forthcoming articles.
The scope of impact in Fintech is huge and everything from building investment portfolios globally, to lending and reporting will be transformed. The largest benefactor to date has been the payments sector with most investors’ interests being focused around payment solutions. The growth in this sector is further being driven by developing markets that have outpaced developed markets by over four-fold. Accessing those markets is often difficult and this is where it is vital to have a local partner that understands the human geography.
A recent report by Accenture on the Future of Fintech and Banking highlighted that the growth of investment into the sector had tripled in a single year between 2013 and 2014, and had reached $17.6bn in 2016. Much of this was split between the new and the old participants of the market. What this shows is that there is room for new entrants to enter the playing field and that momentum within the sector seems to be gaining pace. Many new entrants are not held back by old technologies and are able to rapidly scale up when required. In addition, increased regulation and the need for traditional banks to find cost savings for underperforming parts of established businesses, ensures that this playing field has become far more even. Banks need to focus less on product-based sales and more on the customer experience if they are going to regain some of this lost ground.
Whilst the adoption of Fintech is very much global, there is still a concentration of funding and human capital, in places like London, New York, San Francisco and Singapore, with smaller emerging pockets opening up in cities such as Lisbon and Dubai. Smart investment managers and investors would look towards the emerging markets as easy adopters of technology as it arises and should move away from these core centres.
There to be growing segments of the market that are consistently being opened up to new ideas. Specific areas such as Artificial Intelligence (AI) have been assisted by the launch of Amazon’s Alexa and Google’s Voice, with banks such as Capital One already trying to capture some of the positive sentiment towards these trends. The likes of Lemonade, Guevara and Brolly are shaking up existing providers in the Insurance space. Needless to say, will be at the top of the agenda for most companies and the adoption of blockchain technologies will further see general acceptance across the board towards new ideas.
Whilst the field seems to have endless opportunities, a coherent and pointed strategy focused on advancing existing technologies, and combining this with disruptive tech that has a focus on emerging and developing markets, for me, is a recipe for success.
I firmly believe that API (Application Programming Interface) is the likely future of the Fintech model within the direct banking space. This is where applications feed into existing banking or platforms to provide additional services. Whilst I envisage the same relationship we have today between the bank as the regulated entity and the customer, the bank will adapt to be a platform for providing data feeds to and from a huge array of 3rd party APIs.
Recent legislation in Europe (and the US) will further cement this trend. For example, PSD2 is a game changer, and banks should take note around the rest of the world. It’s a directive by the European Union aimed at creating a more competitive playing field across the board for payment service providers whilst at the same time ensuring that strict data and security protection protocols are maintained.
Basically, it allows an individual to authorize 3rd party apps to receive data feeds from their bank and link these to other entities. For example, there is a new application being created by a startup, that integrates your aggregate banking data with apps such as CityMapper, an urban journey planner. This enables you to see your balance, your defined travel budget for the month and then select a mode of transport that works best for you and that fits within your budget. The utility of this, for say students, is immense. Another application, MoneyBox rounds up your spending to the nearest pound and automatically transfers that to an investment account. The aim is to cement saving habits whilst engaging the younger generations in the benefits of early age investing and the effects of compounding. These are good examples of a practical use of that adds direct value and has a defined purpose.
I would say that Fintech is here to stay and it is undergoing a period of rapid growth. The uses are unlimited and it will change the face of banking and finance forever simply through integrating traditional models with applications. The adoption of this technology will be exponential in emerging markets. As an investor, you can either be on the outside looking or the inside looking out. I’ve very much have chosen the latter. However, having a partner that understands these markets is ultimately the key to identifying successful opportunities.