FinTech’s Eureka Moment: What, How, When?

fintech hatfieldby Jacqui Hatfield (Partner, Reed Smith)

Fintech is making consumer finance faster and more flexible. It’s challenging established banks and financial services with the offer of services including robo advice, on-line execution only dealing systems, crowd funding platforms, banking and payment initiators and settlement systems. It’s also plugging gaps in the market traditional financial institutions are struggling to fill – proving popular with the 18-25 age group and providing credit to SMEs.

There is still a long way to go though. A recent Citi report estimated that only 1% of North American consumer banking revenue comes from digital models. Likewise, the UK alternative lending market only accounts for a small percentage of lending currently but this is likely to grow. Despite the hype, Fintech is yet to have its ‘Uber’ moment. It has not yet caught on to the mainstream, however this may soon change.

In the UK, the Government, the Bank of England and the FCA are succeeding in making London the centre of the Fintech world.  The Bank of England has recently set up a Fintech incubator similar to the FCA.

Pre the Brexit vote, the UK had been attracting huge investment from US firms looking for opportunities in the UK’s less developed market. This investment is now uncertain given the fact that London may no longer be able to provide these firms with a European financial passport. However, as long as Brexit does not deploy assets away from Fintech and if the Government is able to agree a favourable trade deal with the EU, Fintech firms should continue to see London as their natural home.

What?

What next for the Fintech sector? Most of the disruption is likely to be in relation to the customer interface on mobile phones. The customer experience has historically proven key in the success of Fintech as consumers want to be able to organise their financial lives through their mobile devices. Thereby eliminating the need to leave their homes and visit their high street banks.

As a result, the next major disruption to the finance industry is likely to come from the social media behemoths. Facebook is currently an authorised electronic money institution in Ireland and Google Payment Limited is a UK authorised electronic institution. Should these firms decide to provide other financial services such as robo advice, dealing services and banking services, they would have the ability to offer personalised investments and banking services to consumers at the click of a button.

Likewise, Amazon is currently regulated in Luxembourg as an insurance broker and has passported throughout the EU.  It has recently entered the food delivery market and will be a disruptor there.  If it decides to enter into the financial services area, it will no doubt be equally disruptive.

How?

The tech giants are well placed to significantly alter the landscape of the financial services market. Up until this points, Fintech has been held back by the natural capabilities of Fintech firms and the banks.

Fintech companies are generally small, agile and innovative. They have great products, ideas and services to sell but they lack the customer network of more established institutions. On the other hand, the more established banks have a great customer base but are burdened with legacy IT systems which are costly to overhaul. They also suffer from a slower decision making process and are increasingly finding it a challenge to recruit the best talent – all of which hampers their ability to innovate. For this reason, many Fintech firms seek to link up with established banks and regulated firms

The tech giants, such as Google, Apple and Facebook, on the other hand, have the best of both worlds. They have a huge customer base and modern infrastructure already in place with which to target them. Importantly have access to vast reams of personal data, which they could use to make financial services recommendations based on customer behaviour.

These potential disruptors may decide to link up with existing Fintech companies and operate on a white labelling basis, or develop these services organically in-house. The latter would prove a challenge for existing Fintech companies and traditional financial services firms who could find themselves squeezed out of the market.

When?

Generally, consumers trust the traditional banks with their money, more than any other institution. The fear that they do not have the same levels of trust is conceivably why Facebook, Twitter, Google or Amazon have not entered the market already.

However, it appears that customers are beginning to trust them more. A recent survey suggested that consumers would be prepared to buy financial services and products from tech firms.  In particular, possibly at least until there is a huge security breach, customers are generally becoming less concerned about data privacy, believing it is a price worth paying for the benefits offered by such sites as Facebook, Google, Twitter and Amazon.

As a result, and combined with the huge technological advances made in data capture, it is conceivable that we will see these firms offering financial services and banking services within the next 24 months. This could potentially be Fintech’s Uber moment.