Scott Thompson looks at why so many investors are scrambling to get some FinTech action
FinTech is so hot right now. To (sort of) steal a line from cult comedy classic, Zoolander. There are more startup events than you can shake a stick at, all looking to unearth the next big thing. There’s Finovate, for example. And also the Barclays Accelerator, SWIFT’s Innotribe Startup Challenge, Accenture’s FinTech Innovation Lab London Investor Day and the BBVA Innova Challenge. Startups in this area raised a total of $6.8 billion in 2014, three times more than in 2013, according to research carried out by VC firm, Life.SREDA. The leading sectors in terms of funds raised in 2014 were: online lending ($1.8 billion), online acquiring and mWallets ($1.649 billion), PFM/PFP-services ($959 million), services for small and medium business ($783 million), and mobile acquiring ($491 million).
“A plethora of FinTech-dedicated funds, private and public, emerged last year, and one can hear recognised investors saying aloud what has definitely become a buzz phrase of the season: “FinTech is the next big thing!”. We expect to see yet larger volume of investments, splashy IPOs and truly disruptive technologies in 2015,” enthuses Vladislav Solodkiy, managing partner at Life.SREDA.
FinTech is, dare we say it, suddenly sexy. So many people are looking for a piece of the action, even the previously hesitant banking establishment. “There’s a recognition that they are somewhat behind the curve in terms of fringe areas such as social media and mobile wallets. They need to back a winner to differentiate themselves in the market, but in a lot of these areas it isn’t clear who the winners are yet. So they need to establish relationships and get themselves into a strong position,” notes Emma Rodgers, director, TMT market intelligence at Clearwater International Corporate Finance.
Or as Simon Barrows, director at Archioptiryx, puts it: “It seems that everyone is either involved in or talking about FinTech right now. If you’re not, well, you’re either not remotely interested in FS technology or have been hibernating or on some sort of grand walkabout for the last few years. When even the least trendy of the big behemoth banks and the Chancellor himself have gotten in on the act you know there’s something afoot. But just what is that? Put simply, the environment couldn’t be riper for focussed, nimble, innovative opportunists to be picking off choice elements of business from the decidedly stuck-in-the-mud big banks. Heightened customer demand for better service, greater convenience, transparency and value, coupled with the mobile revolution and digitisation of value on the web, has turned the heat up to roasting on the established players, who are still struggling with battered reputations and the handcuffs of regulation, old and overly complex IT and need to generate shareholder value, now!”
Simon Burrows, PWC FinTech director, agrees that it’s the result of a perfect storm of factors – technological change, smartphones/consumerisation, customer dissatisfaction with the “old” financial products, availability of funding, financial sector regulatory and market changes. “There are currently huge opportunities in FinTech which historically have been underexploited due to the vested interests of incumbent operators,” he comments.
So, are the right horses (online lending, mWallets etc) being backed? “International P2P money transfer services that allow consumers the ability to bypass traditional bank fees is attracting immense investor interest. We only need to look locally at the rapid rise and success of TransferWise,” says Mark Kanji, CEO at Apptivation. “Another area that continues to see traction is security. With more people trusting and embracing digital propositions, fraud prevention has never been so important to both growing startups and more established providers. The pervasiveness of mobile phones coupled with recent technological advancements has opened up significant opportunities to better authenticate and verify customers and transactions. Solutions that help improve personalisation are also gaining traction. This ranges from products that allows financial institutions to better understand the needs of their customers at a more granular level so they can better serve and target through to more dynamic and customisable user interfaces. Personalised and simplified services will increase customer retention in an ever increasingly competitive market.”
Burrows adds: “I would agree that these are all key areas – particularly payments/FX and online/P2P lending. In PwC we are seeing a lot of M&A deal activity as well as partnerships being struck in these areas. It’s particularly interesting to see the large banks actively engaging with FinTech startups, who they previously would not have considered working with.”
Professor Merlin Stone, a specialist in customer management, is, however, slightly sceptical about the amount of money going on mobile wallets, as opposed to just ensuring that web banking can transfer smoothly to smartphones and tablets without security risks, which is what most consumers seem to want. “However, I think that we may be on an S cure on that one, in the sense that eventually the market will take off and everyone will abandon their cards. The investment is looking towards that, but I fear the pay-off may take longer to come, partly because classic card providers are innovating like mad to keep control,” he adds. “I’m still unsure about PFM/PFP, as some of this investment implies a degree of sophistication in consumer behaviour which just isn’t there. I certainly believe that it is needed to stop people being silly about money, but they have a very strong desire to manage their money badly, it seems, according to all the behavioural finance research.”
Barrows observes that, “Oiling the wheels of value transfer and providing a rich, informed, and personalised experience for customers are two of the areas attracting the big FinTech dollars. The web and mobile technologies provide a multitude of ways to link consumers of finance with providers of finance, in whatever shape that takes, to enable value to be exchanged more easily and at lower cost either using new fancy engines running over the existing payment tracks or building new global payment clouds. To Bitcoin or not to Bitcoin no longer seems to be the question. It is now how can I leverage the blockchain?”
He adds: “Or back in the land of the men and women on the street, in their homes, their businesses, or at the top of a red run, how can all that lovely data about them that’s rattling around be put to some practical good use, to make something a lot easier or actually quite special – distil it all down, regardless of whether the data is Big or not, and produce a single smile? Don’t try to sell me a loan if I already have one, or a few thou’ gathering dust in a savings account right there. Them’s the basics. And let’s not go into what you were planning for Google Glass. Piffle! Look after my data. Use my data, carefully, wisely, creatively. Give me something back that I value, right when I need it. Help me transform not just my financial affairs but my life through technology. I’ll probably trust you with a bit more of my data then and see what else you can do.”
The buzz remains
When something operates at a significant premium and becomes shrouded in hype, a raft of companies usually pop up and start riding on the coat-tails of genuine innovators and trailblazers. Witness the overstuffed mobile payments sector, where arguably something will have to give before too long. Whilst there is undoubtedly a lot of opportunity, what technologies are overhyped and could we see the FinTech bubble burst?
“I don’t see the buzz ending this year. When there is a lot of buzz around a market, it doesn’t go on forever but I can see it continuing for at least the next couple of years as there is such a fundamental shift going on, it won’t play out quickly,” says Rodgers. “Thing like payments technology, for example. People were expecting mobile payments to take off more quickly, but it’s happened quite slowly. It will play out over a number of years and the buzz will remain but not forever.”
Kanji believes that the buzz is definitely sustainable and that the enthusiasm for this sector is being driven by the way the financial industry itself is developing. “Banks are increasingly willing to open up their data to enable an offering that matches often demanding consumer expectation for seamless technology. In essence, a seemingly insatiable consumer need for increased efficiency is driving this buzz. Consumers are now more willing than ever to digress from using services provided by traditional High Street banks,” he says. “Yet, banks are under increased pressure to cut costs, maintain transparency and remain compliant: making it increasingly challenging to use their archaic in-house systems. FinTech offers agility: a flexible business model that accelerates the speed with which traditional banks can adopt new solutions to meet consumer demand, and this continues to be applicable across a wide range of segments in the industry. Moreover, as the millennial generation gives way to Generation Z, we will see even more reliance on mobile and online technologies and an even greater shift away from services associated with brick and mortar locations, further solidifying the scope and scale of the FinTech sector’s current growth ambitions.”
In the rush to find the next big thing, we shouldn’t lose sight of the fact that FinTech isn’t just about technology for financial services, it is about transforming financial services through technology. And like any form of innovation, not all of it will work, or at least not initially. “It can’t do. That is almost the very definition of an innovation process, otherwise we’d all be using WD-1 not WD-40,” observes Barrows. “Some FinTech companies will form part of the new world order. Others will be acquired by large banks or technology companies of the current establishment (BBVA/Simple). Some will continue in their niche. Many will go to Logo Heaven. Listen to all the pitches. Look at all the demos. Place your bets!”
Big Data, mobile wallets and social media often find themselves in the firing line for being overhyped. But all three still have legs. “The larger financial services companies tend to have a massive amount of customer data and aren’t perhaps using it quite as effectively as other sectors. That Big Data story will develop more over the coming years as they tackle the issue more effectively,” says Rodgers.
Stone comments: “Banks have always had Big Data, they now have even more of it, so I don’t think they face anything new here. It’s true that they sometimes can’t bring it to bear sharply on recurring problems (customer fraud, customer profitability, management control/ethics). But they are learning. Social media is overhyped still; useful for market research and that’s it. And mobile when seen as a magic solution as opposed to just migrating web banking to smartphone, which is something different.”
Burrows sees huge opportunities around better exploitation of data. “But Big Data is a bit of a nebulous concept without further detail. For example, as payment interchange fees reduce, PwC believe that monetisation and exploitation of customer data will become a much larger proportion of revenues derived from payments processing. For me, wearable user interfaces are one of the more doubtful areas as I believe users are starting to resent the intrusion of smartphones into their daily lives. I think people want boundaries – and besides, wearable technology has the added complexity of keeping up with fashion changes.”
Kanji concedes that Big Data has had its ups and downs but it is expected that, as we see a move away from simple data collection and toward creating more advanced products and services in the artificial intelligence and wearable tech market, interested investors will follow. “Equally, social media has been overhyped throughout the years, but as digital analytics companies refine their offering to include more actionable predictive intelligence from data collection, the social media space will become more valuable as a source of insight.”
Yep, FinTech is so hot right now as the IPOs just keep on coming and more and more innovation labs spring up. Some of the companies riding this wave will fall by the wayside, some could well go on to transform the way FIs operate. FinTech enthusiasts have high expectations for a sector full to bursting with cool startups looking to disrupt the old guard. These ventures are leading the drive to innovate in financial services, they rave. Their excitement is contagious, but it’s important to keep things in perspective. I’ve lost count of the number of emails that have appeared in my inbox with the opening line, Hi Scott, this will be the next big tech company! Hmmmm, excuse me if I err on the side of caution. FinTech never sleeps, is a popular mantra right now. But on the flip side, bubbles have a tendency to pop when you least expect it.
Scott Thompson looks at why so many investors are scrambling to get some FinTech action