The FINTECH Book. Chishti Susanne

in at £459 million, an increase of one-third on the previous three months.6 These figures are small when compared to the sums advanced by the big banks but it is a young and rapidly growing market.

      Importantly, the P2P market not only provides businesses and private borrowers with a source of cash, it also offers investors and savers a place to deposit cash and earn higher interest rates than in a conventional bank account. Elsewhere, challenger banks – some of them digital only – are also moving in on the deposits market.

      Some aspects of FinTech innovation remain well outside the mainstream. Digital currencies, such as bitcoin,7 potentially offer an opportunity and means to exchange value, but most would agree that the real value will emerge from the application of the supporting distributed ledger technology. The use of the distributed ledger brings additional value in the recording of non-financial asset ownership and, coupled with digital currency, could provide a platform for future innovation to reduce costs and speed up transactions. Effective regulation of this environment is required to reduce risk for all participants.

      Move away from the corporate face of FinTech innovation – PayPal, Apple, Google, et al. – and thousands of companies are working in technology hubs around the world on ways to make familiar activities such as stock trading or money transfers not only more convenient, but also more attuned to the way consumers use their smartphones, tablets, PCs, and smart watches. This wave of innovation is not only coming from established FinTech centres but also from emerging hubs. For example, Johannesburg has become a centre for bitcoin development, while across Africa entrepreneurs are developing mobile-based banking and payment systems appropriate to the local telecoms and financial services infrastructures.8

      The Challenge to the Banks

      So how will financial institutions – and particularly the big banks – respond to this wave of FinTech innovation? The banking sector is vulnerable to disruption, partly as a result of recent history. Until the onset of the financial crisis, banks enjoyed a degree of public trust that was crucial to their brands. Although that trust hasn’t been entirely eliminated, it has certainly been eroded. As a study by the CCP Research Foundation revealed in June 2015, the world’s top sixteen global banks have, between them, incurred US$306 billion in conduct-related costs since 2010.9

      In contrast, the leading lights of the digital era tend to be viewed positively. Research carried out for the Millennial Disruption Index report found that 73 % of respondents (teens to mid-thirties) would be much more excited about a new financial service delivered by Google or Apple than one announced by their incumbent bank.10 In that respect, traditional financial service providers are at risk. Customers no longer necessarily see the bank as the default provider or first port of call – what’s out there in the market is more exciting. And what’s out there in the market is treading heavily on the toes of incumbents. So, while individuals and businesses will always need banking services, will they still need banks?

      At the most simple level, retail banks provide three crucial functions, namely:

      ● They take deposits and provide customers with a secure place to store cash and earn interest, backed by deposit insurance and significant regulation.

      ● They facilitate payments through a range of systems, including cash, cards, and transfers.

      ● They lend money.

      To a financial services agnostic the same services can be provided by the new generation of technology-driven challengers. In terms of retail banking, money can be deposited with challenger banks, placed in pre-paid cards, stored in PayPal accounts, invested in bitcoins, or invested through P2P lending sites.

      Credit is available from challenger banks and alternative lenders (including P2P), and customers have an increasing choice of payment options, including PayPal, e-wallets, and phone-based systems. While many of these options still use the plumbing of the banking system, in the medium term we may see payment and foreign exchange mechanisms that completely bypass the incumbent banking systems.

      The Utilities Risk

      So the major risk for the incumbents is that they come to be perceived as utilities that do little more than supply the infrastructure while the FinTech companies take the credit for providing innovative consumer-friendly services – and ultimately own the customer relationship. When this happens, the brand equity of banks will surely take a hit.

      Unlike the major banks who are often constrained by legacy IT systems and operating models, the new players have designed their digital services from the ground up to meet the needs of specific customer groups. FinTech challengers can be both agile and completely focused on positive customer outcomes.

      While traditional banks are dealing with increasing layers of compliance, consumer protection, and their own bureaucratic structures, P2Ps have a transparent approach to borrowing and lending, based on disclosure by the company seeking credit, and assessment by the community of lenders (rather than faceless credit committees). This approach speaks to a generation raised on social media and these lenders regularly score high on customer satisfaction. Equally important, P2P sites have lower operating costs than banks and the capital requirements they face are also lower.

      The Future for the Banking Sector

      BBVA chairman and CEO Francisco González forecast in early 2015 that up to half of the world’s banks will disappear through the cracks opened up by digital disruption of the industry.11 That may be so, but I would argue that the most forward-looking banks will not just survive the wave of digital disruption, but will thrive, as these FinTech-driven challengers gain momentum. The world’s major retail banks enjoy huge advantages, not least in terms of their collective customer base and the data they hold on their clients. These “thriver banks” will migrate the majority of their customers to their own digital banking services. They will reposition themselves in the value chain from being a provider of infrastructure and product, to being at the heart of the customer relationship in a secure and holistic digital environment. In effect, they will become financial app stores showcasing a range of financial solutions from different providers. In doing so, they remain relevant to customers as a single source for the best global financial solutions.

      So, in the future, once I have logged into my mobile bank (presumably using heart biometrics or face recognition) I will be able to borrow money P2P via Ratesetter, make an international payment using Transferwise, top up my Starbucks e-wallet, or make a deposit into my Alibaba money market fund. In order to achieve such a goal, collaboration will have to become the norm. Corporate incumbents can’t match the speed to market and the ability to innovate that the best FinTech developers bring to the table. So, rather than trying to reinvent the wheel by developing their own solutions, banks will have to work with innovators to bring new services to their consumers.

      From start-ups working in shared spaces in London’s Tech City or Johannesburg, to the corporate giants such as Apple and Google, FinTech is a dynamic sector. But while market leaders have emerged, no one really knows where the next successful payment system or bitcoin wallet will come from. And for all those ideas that make it to the market, many others will fail. The services that succeed will be those that genuinely make life easier, perhaps by mixing FinTech with other technologies. The bank of the future could be a place to deposit not just your money, but other valuables – for example, your medical records, your will, or the biometric data used to start your car.

      With their customer base and experience in securely handling data, banks are in an ideal position to create holistic customer solutions that combine financial services with a wider range of digital offers. It could be the key to their future prosperity.

      Why We’re so Excited About FinTech

      By Rébecca Menat

      Director of Communications, The Assets

      Banks are not exciting – FinTech is. Why should we be excited

6

P2P Finance Association, “Strong Growth Continues in Peer-toPeer Lending Market”, 30 April 2015, http://p2pfa.info/strong-growth-continues-in-peer-to-peer-lending-market.

7

For more information on crypto-currencies, blockchain technology, and bitcoin, see Part 9.

8

For further insights regarding emerging and established FinTech hubs, see Part 3.

9

Financial Times, “Banks’ Post-Crisis Legal Costs Hit $300bn”, 8 June 2015, http://www.ft.com/cms/s/0/debe3f58-0bd8-11e5-a06e-00144feabdc0.html#axzz3eT1XUB4B.

10

Millennial Disruption Index, http://www.ritholtz.com/blog/2015/04/millennial-disruption-index/.

11

Half of the world’s banks set to fall by the digital wayside – BBVA, http://www.finextra.com/news/fullstory.aspx?newsitemid=26965.