Part I - The industry accelerates but yet to reach cruising speed
For many decades, Wall Street and the commercial banking community have enjoyed relatively relaxed competitive environments while earning attractive financial spreads. The financial crisis of 2008 and the emergence of FinTech are beginning to shake-up the landscape.
”Innovation in finance is deliberate and predictable; incumbent players are most likely to be attacked where the greatest sources of customer friction meet the largest profit pools”
[World Economic Forum - The Future of Financial Services]
If there were ever an textbook example of the chart from Clayton Christensen's Disruptive Innovation thesis, it would arguably be that describing the rise of FinTech.
Simply put, FinTech is technology working hand-in-hand with financial services, creating tools and services to meet today’s demands. These demands are being driven by millennials, or those who have grown up in a world that’s digitally connected 24/7. Their behavior is linked to the rise of FinTech, and the emergence of new business models and companies.
“73% of millennials imagine buying financial services through Internet giants such as Google, Facebook and Apple. That's because 49% believe innovation in finance will come from those currently outside the industry”. [KPMG, China]
The term FinTech was originally coined for the back and middle office areas to assist customers of financial organizations - a technology for financial institutions and their services. That definition has evolved greatly, and today FinTech disruption in financial services is being seen across all verticals including Payments, Lending, Insurance, Asset Management and Equity Finance.
Ground zero, and the first casualty of financial disruption: payments. With the emergence of Pay Pal and newer platforms such as Apple Pay, revenue and margin pressure is being applied to VISA, MasterCard and AMEX. The next phase of disruption is the creation of a cashless world and mobile money. Traditional money aggregators’ profits will suffer if the challenge is unmet. In fact the largest players are supporting the change by investing in innovation and by setting up FinTech accelerators.
Lending has been a big beneficiary of the rise of sophisticated social networks - those which connect people for business or investment ends. The lending Club, Lending Tree and Prosper, are among a more noticeable group of emerging platforms. They serve capital requirements of sub-prime borrowers and major institutions alike. Their efficient business models raise the technology bar and soon are expected to chip away at servicing the needs of SME and the traditional corporate world. Commercial banks, with their significant infrastructure costs will struggle to compete, and over time may lose ground through margin erosion and uncompetitive service levels. Some banks are forming partnerships with alternative lenders as a way to participate and learn. Others are investing in alternative marketplace technology to level a tilted playing field.
Capital Raises through Crowdfunding and crowd-investing
One disruptive category with the potential to alter the future of Investment & Commercial Banking and Wall Street is the raising of capital through crowdfunding. Some in the industry today still write-off crowdfunding as niche; the domain of 3D printers, smart-watches and struggling movie-makers. That very complacency has the potential to significantly raise the stakes and potential for disruption.
Capital Raising platforms have already begun to fill the post global crisis funding gap to serve the Startup and small company market. In coming years, traditional intermediaries and investment banks stand to see aggressive competition as experienced platforms begin raising capital for multi-million dollar projects and global institutions. Capital Raising platforms have already iterated several times in the last 3 to 4 years, and will soon take center stage with larger offerings.
“We are not too far away from seeing companies such as Facebook raising money through crowdfunding directly with their one billion users. They are already investing in payment systems - which could also connect borrowers and investors around the world”.
Or Institutional investors? Why would Fidelity, Blackrock or PIMCO not want to create their own exchange to deal directly with public companies? We are already discussing change with small and large organisations looking to tap into future opportunities.
Part II - The Future of FinTech
The growth of FinTech will be uneven, and surprise many.
Statistics from 2014 reveal that Europe is gaining ground in harboring FinTech, and will give Silicon Valley and New York strong competition. The United Kingdom (and Ireland) leads the European pack, with the Nordic countries, the Netherlands and Germany making inroads.
Further afield, Asia will lead in many sectors.
The largest (though yet to be regulated) alternative lending market in the world is China. It has several key pieces of the puzzle to allow it to become similarly placed in other sectors too.
Activity in Singapore and Hong Kong is now more intense than at any time in the past. Conferences, forums, white papers - all directed at making these hubs the next FinTech capital.
If based on investments alone, Singapore is perhaps the most interesting for FinTech. According to CB Insights, the Government of Singapore Investment Corporation, GIC Private Limited (GIC), and other sovereign wealth funds such as Temasek Holdings, have made important investments in FinTech in recent years. Square, the mobile payments startup, received US$150 million from Singapore’s GIC, raising its value to US$6 billion. Last month the Monetary Authority of Singapore announced its plan to invest a further US$225 million over the next five years under the “FSTI” scheme to provide support for the creation of an ecosystem for innovation aimed at financial institutions to set up their R&D and innovation labs in Singapore.
Cities and regions across the globe will compete for FinTech Startups by enhancing their ecosystems and enacting new regulation.
While European FinTech hubs will play a role, the next race might well be for Asian supremacy. In April this year, Accenture together with ten financial institutions announced a call for applications to join the FinTech Innovation Lab Asia Pacific, with the aim of finding the best FinTech innovators in the region. Just one example of many where Asia is increasingly making its presence felt among FinTech entrepreneurs and investors alike.
The future of innovation and technology continues to develop - and at a faster pace than in the past. There are many possibilities for emerging countries and regions to participate.
Technology is enabling change in financial services. That’s welcome news for everyone, not only for those leading the innovation, but also for governments, investors and customers alike.
Fasten your seat-belts, let us show you the future...
A Grow Advisors article originally produced for Finance MONTHLY
Denisa Mäki, Grow Advisors
Political advisory, strategic communication and policy analysis. Subject matter expert in EU affairs, legal research and analysis of EU and International law. Use this link to contact Denisa.
Thomas Samuelson, Grow Advisors
Tom has spent over 25 years in investment banking and hedge funds. He is an investor in emerging markets and has worked and traveled extensively throughout Asia, specifically China. Use this link to contact Tom.
Grow Advisors is proud to support the growth of FinTech around the world. We offer consulting and professional services on crowdfunding, crowd investing and p2p finance globally. Our advisors develop platforms that connect startup ecosystems, set up marketplaces and co-investment models, structured investment instruments, and find innovative ways to create finance solutions globally.