The Fintech phenomenon
December 2016
Financial technology (fintech) is not a vision of the future. It is already here and disrupting many
industries, not least banking and investment. Iain Plunkett (IP), Group Chief Operating Officer &
Chief Technology Officer at Aberdeen discusses the fintech phenomenon, disruption and
empowerment with Michael Harte (MH), Group Head of Innovation at Barclays, Eileen Burbidge
(EB), Founding Partner of Passion Capital, Taras Chaban (TC), CEO of Sybenetix and William Gilmore
(WG), Head of Primary Funds Europe at Aberdeen.
IP introduces the discussion with some eye-opening statistics.
There are 7.2 billion mobile devices in the world – more than the
number of people. Apple’s iPhone 6 is a more powerful computer than
IBM’s Deep Blue that beat former world chess champion Gary Kasparov
in a 1997 match. Apple’s iPhone 6 is 120 million times more powerful
than the computer on board the 1969 Apollo space mission.
An incredible 90% of the world’s data has been created in the last two
years. The majority (53%) of the UK’s bank branches have disappeared
since 1999 and UBS, the Swiss bank predicts that 50% of the remainder
will go by 2026. Fintech is growing rapidly. From $5 billion invested
in 2,500 companies in 2010, the industry drew $12 billion of funds in
2014 and $22 billion in 2015 with growth concentrated in Asia, Europe,
the Middle East and Africa.
“90% of the world’s data has been created in the
last two years”
Digitalisation is driving disruption in three ways. First is the exponential
growth in computing power and the falling cost of this computing
power. Second is the modularity of modern machines – an Apple
iPhone user can potentially download millions of apps transforming
their phone into a multi-purpose tool. Finally, there is the rapid rise of
automation and digitisation.
EB explains how the 1990s saw the first wave of disruption of
consumer-facing services with the emergence of Yahoo, AOL,
Amazon and eBay. Salesforce was incorporated in 1999, on the eve of
the dotcom crisis and is now among the largest enterprise software
businesses in the world. We are now seeing similar revolutions in the
music world with streaming services like Spotify and in ride-hailing
with Uber.
“The only constant is change”, comments WG, referring to financial
services. There’s a confluence of factors around customer sentiment
and trust, new regulations and innovation, and separately, big data and
techniques to extract that data. Material change is underway through
the emergence of the robo-advisor industry, estimated to grow to
$2.2 trillion in the US by 2018, and the rise of platforms and passive
products that can deliver cheaper services than rivals. Regulations
like the Markets in Financial Instruments Directive II (MIFID II) set
for implementation in January 2018 will require European financial
institutions to be more transparent with regards to the financial
instruments they own and trade in.
Different regions are reacting to disruption in different ways. In the
US, fintech firms have not yet gained significant market share as only
1% of revenues have been taken from incumbent banks. In China
however, there’s been a rapid accumulation of money market funds
and the emergence of large aggregators like Tencent and Alibaba which
can take advantage of disruption created by the web. In Europe, large
institutions are increasingly partnering with small start-ups to bring
financial services to consumers faster than they could alone.
When trying to pinpoint the reasons why financial institutions are
being disrupted, EB notes that financial services have historically led
in technology by, for example, developing faster payment networks
and reconciliation. Connectivity through smart algorithms helps
incumbents know its customers and find new value. Technology also
allows production at scale.
Disruption in finance is unlikely to come from smaller financial firms
but companies entering from other sectors like Apple, Facebook
and Alibaba. EB suggests that the strength of Apple and other firms’
customer relationships is likely to be a deciding factor. One study found
that people would be more comfortable entrusting their money with
Apple than a bank.
But today, deep banking experience is no longer necessary to develop
more efficient and cost-effective modular solutions. Data aggregators
can develop scoring models based on transaction and social
interactivity. These firms can update scoring in real-time to offer new
products, putting them in direct competition with banks.
The role of boards is flagged as a key factor in determining a company’s
ability to embrace change and innovation.
MH comments that many legacy institutions have rules and data
structures that are antiquated and so they cannot provide real-time
information to customers. These structures can’t be easily broken down
and rebuilt. TS agrees – even though Sybenetix is only five years old,
it already has legacy systems, underlining why it’s so important to be
open to new technologies.
Young people’s aversion to financial matters is also driving disruption.
A recent study found that 71% of millenials would rather visit the
dentist than open a bank account. Many would much prefer to use a
banking app than go into a bank branch.
Collaboration, rather than competition, is perhaps the solution.
WG draws parallels with the pharmaceutical industry. Many big
pharma companies have struggled with lack of innovation as drug
patents expire. The rate of new drug replacement has been low.
Many firms concluded that in-house research and development was
not working so started buying up emerging biotechnology companies.
Big pharma companies have approached venture capital firms to
exploit unmet needs and we may see a similar trend in financial
services. Large banks may partner with fintech firms and other external
experts to develop technology more efficiently and cheaply.
“Large banks may partner with fintech firms to
develop technology more efficiently and cheaply”
Given the threats posed by fintech firms, will large financial
institutions willingly share intellectual property with them? TC cites
the pharmaceutical industry where incumbents have stayed ahead of
the market through collaboration with small biotech firms. Banks and
asset managers have access to innovative technology and smaller tech
firms benefit from the brand of a larger company. EB agrees that it’s
a collaborative effort – fintech firms cannot do some things like final
reconciliation without working with banks. Banks also need startups to
test new ideas and technologies.
IP highlights that while many companies in the fintech industry are
young and lack a financial heritage, they’re able to apply technology
in novel and disruptive ways. For example, Apple has a successful
consumer payments business and Alibaba, a Chinese e-commerce giant
has a $90 billion dollar money market fund in its diverse business.
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The Fintech phenomenon - December 2016
WG agrees, emphasising the difference between public and private
markets. In UK public listed markets, the corporate governance code
stipulates that the board of directors must have a balance between
executive and non-executive directors. In private markets, functional
experts – non-executive directors who can help the company expand
into new markets – are permissible. Domain expertise is then key.
WG looks for venture capital investors who are not just academically
bright but who have real world experience of running companies.
Often the best investors are those who’ve made mistakes and learnt
from them. There are cultural differences here: in Europe, having made
failed investments is often frowned upon; in the US, it’s seen as a scar
of office.
Given that, environmental, social and governance factors are gaining in
importance in finance. The panel was asked whether technology can be
a true force for good?
MH explains how Barclays has been involved in expanding banking
services in Africa. Algorithmic power can unleash the potential for a
valuable product or service, and scale can then allow millions of people
to benefit from it. For example, JANA is an application that allows users
in emerging markets to interact with apps free of mobile data charges.
Importantly, the app works on “less than smart” devices, as the large
majority of people in Africa cannot afford an iPhone. “In developing
countries which lack efficient credit markets and good risk models,
such innovations allow people to enjoy the same access to information
and benefits as we do in the West.” The key in emerging markets is
producing a service of value at the right price point.
Indian e-commerce business, Paytm is a good example,
offering affordable goods and bill payment services. The company has
benefitted from changes in the Indian banking market, and is wellcapitalised as a result of backing from Chinese e-commerce
giant, Alibaba.
Like any disrupting force, technology has taken market share from
incumbents. But, as EB notes, technology has also drastically
increased the available market for companies in various sectors.
Importantly, it has also encouraged greater financial inclusion. Even in
mature economies, a large proportion of the population lacks access
to banking. Financial planning and investment advice is generally
perceived as being the preserve of wealthy people, but in reality the
less well-off are most in need of financial advice. Technology plays an
important role in solving this problem.
The overall role of public funding and government oversight and
intervention was probed. WG thinks that governments are in a
tricky situation – governments naturally want to encourage
innovation but they also need to ensure it is regulated effectively.
Governments require commercial input and must talk to venture
capital firms about how their technology differs from that of the
incumbent and what they are trying to achieve.
“Governments naturally want to encourage
innovation but also need to ensure it is
regulated effectively”
On innovation, it’s encouraging that the UK now has a British Business
Bank which can provide funding for new start-ups. Further afield,
the European Investment Fund is planning to create large-scale venture
capital fund-of-funds to back European start-ups. Europe’s venture
capital industry has struggled compared to the US, largely because
venture capital firms provide insufficient capital to successfully realise
new ideas. Furthermore, large institutional investors and sovereign
wealth funds across Europe have been wary of investing in startups
given the high risk of failure. Governments and regulators therefore
need to implement more scale to capitalise new start-ups.
As banks and fintech firms make services more convenient and private,
for example through banking apps, new opportunities for financial
crime have opened up. The demand for innovative tools and risk
management techniques to detect or predict financial crime is among
the fastest growing areas in financial technology. Notably, the UK
Government Communications Headquarters (GCHQ) is re-evaluating
its internet protocol amid concerns over cybersecurity. MH states
that cybercrime is “the number one issue in the boardrooms of every
financial institution on the planet.” EB agrees, pointing out that the
UK Chancellor’s announcement of a £190 million investment in
cybersecurity is encouraging.
Regarding predicting the next big theme or disrupting force, the panel
raise exciting possibilities around machine learning. A rapidly advancing
area is the development of robots, or ‘chatbots’ that can simulate
intelligent conversation with humans. Those with accountability and
autonomy that protect and respect users’ privacy and data will gain
in popularity. The best ones like Assist will give power back to the
consumer, rather than the data aggregators.
Discussing finance and investment, MH believes that machine learning
will provide much of the advisory services and product management
currently offered by asset management firms. Algorithms can access
and interpret large quantities of data enabling new insights and
solutions. “The easy money will be mocked up by machines and so
humans will have to develop new products and value propositions.”
TC doesn’t share the “apocalyptic” vision of the future. Instead,
the current generation must teach its children and grandchildren
how to adapt in this disruptive world. TC is optimistic on the potential
for artificial intelligence. We are only beginning to understand
intelligence and how humans learn. The next step will be to develop
specialised machines that can crunch very large data sets and help
humans do their jobs better. “It’s more about man plus machine,
rather than machine.”
Image credit: Jamie Jones / Alamy Stock Photo
EB is chair of the UK’s Tech City, a community for small and
medium-sized enterprises, offering life-cycle programs, mentors and
advisors, skills and visa programs for current and potential employees.
In this role, the UK government has been very keen to promote the
digital economy. Elsewhere, the founders and early employees of
companies like Skype, Last FM and Spotify are funding and supporting
new entrepreneurs.
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