Because we want to move money faster, have more control over our finances and transact in a way that suits us best, technology is having to reinvent finance in a way we"ve never seen before. Dave Waller explores the fintech explosion
Financial services and technology seem to be inseparable these days, and the frankly phenomenal rise of fintech shows just how much can be gained by such a coupling. Once merely a catch-all description for back-office solutions being sold into financial institutions, the fintech sector has blossomed into something genuinely transformative, pioneering everything from alternative currencies to peer-to-peer lending. Want your own private wealth manager? Thanks to recent developments in fintech, you can have one - even if you don"t have a yacht parked in the driveway next to your car.
All those mysterious "1"s and "0"s may be baffling, but when applied to the finance world they certainly seem to command vast sums. According to Accenture, global investment in fintech ventures has more than tripled during the last five years - from under $930 million in 2008 to more than $2.97bn in 2013. Meanwhile over the past three years, global investment in fintech has grown more than four times faster than venture capital investment has overall.
But what exactly is fintech? For the typical financial services company, it will comprise a couple of key elements. Firstly, it"s about how the organisation uses technology to enhance the way it does business - generating efficiencies, improving controls and security, using data more effectively, enhancing communication and speeding up transactions.
But it"s also about providing these benefits to customers and clients too. Barclays, for example, launched its mobile phone payment platform Pingit in 2012. Designed to enable customers to make payments with just a mobile phone number, it had over one million downloads in its first six months alone. In July this year, a London cabbie became the first to use it as his sole method of taking payment, with the meter fare transferring from the customer"s bank account to the driver"s in 30 seconds.
At the beginning of 2014, five other UK banks - Metro Bank, First Direct, HSBC, Santander and Nationwide - announced they were adding a new mobile payment facility called Zapp to their existing smartphone and tablet apps. “Fintech is essentially about using technology to facilitate banking services,” says Derek White, Chief Design Officer at Barclays. “It ensures our colleagues, customers and clients can do what they want, when they want, and in a way that suits them best.”
Disruptive finance
As you may expect of a digital sector, the fintech world is one that"s constantly being disrupted. Developers are coming up with novel innovations all the time. The key thing is that the large institutions are aware of how much this can benefit their punters. “The existing payment systems have been seen as not cost-effective, and companies are becoming more savvy and looking for ideas for alternatives,” says Adrian Akers, Technical Services Director at Touchstone, a wealth management systems consultant.
Those seeking alternatives now have a range of options, with the emergence of cloud computing and greater access to processing power and data servers all meaning that it"s easier for small, innovative technology start-ups to turn their ideas into marketable products.
Take the company CurrencyTransfer. Every month, Co-Founders Daniel Abrahams and Stevan Litobac needed to send money abroad to pay suppliers. The pair were mortified at the hidden fees and ludicrous bank markups. Zero per cent commission was often a devious way of concealing a terrible rate of exchange, often up to five per cent of the value of the transfer. Trying to get "smart", the founders would call up two or three FCA-regulated foreign exchange brokers for sharper rates. The rates were very competitive, but the process of shopping around took a good hour each week. It all became pretty tiring, inefficient and inaccurate as the rates move by the second.
The two thought "wouldn"t it be great to log onto a platform, compare money transfer quotes from multiple suppliers, and book a transfer. All on the same venue. In a matter of 60 seconds?" And so CurrencyTransfer.com was born.
“The big banks" other key realisation is that nimble digital start-ups may well be better qualified to produce this stuff than they are,” says Akers.
Indeed, since the crash, banks haven"t been able to afford to invest large amounts into developing their own products, so they have switched to investing in specialist start-ups instead. Many now back fintech accelerators, programmes that back a handful of companies who are working to develop new financially focused technological platforms, giving them the support and advice they need to get their companies up and running.
HSBC, for example, has allocated up to $200 million for investment in tech start-ups with the aim of improving the bank"s financial technology. It"s a win-win: the start-up gets a leg-up, while the backers get to pass on the benefits of the improved technology to their customers. This could be anything from online payment systems to virtual private wealth managers (see box, left).
New frontiers
But it"s not all being driven by the tech. Just as the banks" purse strings were being tightened, so new and tighter regulatory demands were being imposed upon them too, requiring improvements in everything from capital adequacy to client accountability. Now the larger financial services companies needed new technology that would prove they were performing at the top of their game.
As if that wasn"t enough to create a perfect storm for fintech, there were other factors too - not least the changing economy. “There"s a whole pool of talent within the financial services industry of people who got made redundant in the downturn and simply went off and launched their own start-ups,” says Eric Van der Kleij, Head of Level39, a fintech accelerator in Canary Wharf. “All this when the regulatory regime in the UK is improving for entrepreneurs too. It"s getting easier both to start a business, and to hold on to your capital gains when you come to sell it.”
The world leader in fintech is Silicon Valley. The area"s fintech industry raised $950 million in venture funding in 2013 alone. The UK and Ireland are some way behind - total fintech investment there has reached a comparatively low $781 million since 2004 - but the region is making great strides. The volume of fintech deals there has tripled since 2011, while the five-year compound growth rate for fintech financing was twice the global average and twice that of Silicon Valley.
The good news for the Channel Islands is that fintech represents a strong opportunity. As the technology sector requires only a light footprint, it means not only that fintech can help their financial services businesses improve their processes, but that the islands may just be able to diversify their own economies further by moving into the digital space.
Take cryptocurrencies like Bitcoin. Such technologies may capture the imagination, but they need interest not only from business, but also from the regulators. When Jersey launched GABI, its first regulated Bitcoin investment fund, in August, the island"s financial services commission was quick to give it support. There"s now a drive to get Jersey recognised as the world"s first "Bitcoin isle".
“There"s an interesting opportunity for the Channel Islands to use their heritage and experience to do something very powerful in this space,” says Van Der Kleij. “The islands have so much experience in financial services they could become a pioneer in hybrid finance, facilitating the transformation from the old world of financial services to the new one. There"s no question that the Channel Islands could prove transformative if they get in now.”
Beyond the vast experience they offer, the Channel Islands may also benefit from their size. The high concentration of heavy-hitting financial institutions makes it easier for dynamic start-ups to get access to those who decide where the money goes. Meanwhile organisations like Digital Jersey and Locate Jersey are working to bring local companies on board, helping politicians understand the businesses, and going out to find opportunities.
Venture capitalists and entrepreneurs are out there, whether you"re talking London, Silicon Valley or beyond, with fintech accelerators designed to help entrepreneurs through the process of getting ideas out to scale. Many of these new fintech businesses will be looking to Europe for expansion - so why not head them up in the Channel Islands instead of the UK?
As is so often the case with new opportunities, success in fintech will rest on showing the desire to get in there early. Do that, and the Channel Islands will be a long way towards boosting their digital pockets.
Setting the tills ringing
The following fintech developments are those that have really gained traction in recent years:
Non-bank banks. Companies like Zopa and Funding Circle are pioneering peer-to-peer innovations in lending and invoice discounting, helping to plug a crucial gap by providing finance to SMEs in a way that traditional banks can"t.
Real-time fraud and compliance screening. Kusiri is a company that will go to a bank that"s using 50 different banking systems, the legacy of years" worth of different systems installations, and use "data scraping" to create a single dashboard that reaches across them all, making it easier to see what"s going on in every corner of the business at all times. This is a technology that was innovated in the internet, now being applied to improve solutions for banks.
Automated private wealth. Users of services like Nutmeg, the online investment management software, get an automated system that feels like they"re receiving advice from their own private wealth manager. This democratises the world of wealth management, opening it up to people who would have previously been priced out. A case of technology actively increasing the scope of the market.
Payment systems. People are seeing how much their bank charges them for making payments. Now many smaller companies are going with cheaper payment bureaus or payment hubs to lower the costs. Expect the likes of TransferGo and TransferWise to be raking it in pretty soon.