The FINTECH Book. Chishti Susanne

is some background information for novice readers: FinTech means “financial technology”. It encompasses a new wave of companies changing the way people pay, send money, borrow, lend, and invest. The most disrupted sectors – or at least the ones that we hear the most about – are payments and money transfer, with TransferWise (money transfer), Square (mobile payments), crowdfunding (Kickstarter, Crowdcube, Smart Angels …), and peer-to-peer lending (LendingClub, Zopa, Prêt d’Union …) increasingly becoming household names and products. So where is all this exciting activity taking place? London is clearly the leading FinTech hub, followed by New York, and other cities fighting to get to the top: Paris, Hong Kong, Singapore, Tel Aviv … Just to give you an idea, FinTech investments reached $22 billion (including $4 billion insurance) in 2015 and are expected to increase significantly, so there is room for new players!

      How Did it all Begin?

      The birth and rise of FinTech is deeply rooted in the financial crisis, and the erosion of trust it generated. People’s anger at the banking system was the perfect breeding ground for financial innovation. Good timing, because digital natives (a.k.a. millennials) were becoming old enough to be potential customers and their preferences pointed to the mobile services they understood and mastered, instead of bankers they could not relate to. In this favourable landscape, FinTech providers came in, offering new and fresh services at lower costs, through well-designed platforms or mobile apps.

      To sum it up, FinTech companies offer trust, transparency, and technology. Responding to a trust crisis towards banks, start-ups are able to offer services at a lower cost in a more transparent way, through easy-to-use interfaces. The customer is king and there is no one who knows their customers better than youthful, edgy start-ups, often drawn from the ranks of the millennial generation itself.

      More than a Fuss: What Does FinTech Bring?

      In four simple words, FinTech means: “Power to the People!” Take money transfers for instance. By allowing transparency and cutting middlemen fees, FinTech start-ups enable individuals to have control over their own money. End-users know how much they pay, and incidentally, this is less than what they used to pay. This innovation is actually having a really big social impact,12 as there are start-ups specializing in a certain kind of money transfers: remittances (money sent by foreign workers to their home country). WorldRemit and Remitly are attracting serious attention, having respectively raised $100 million and $12.5 million in funding. This is not surprising, as they are entering a market worth more than $600 billion a year.

      Another way of empowering people is to provide them with … money. The financial crisis not only resulted in a lack of trust towards banks – it also made it more difficult for people to take out loans. Peer-to-peer lending has broadened the availability of financing, enabling people and businesses to borrow money more easily, faster, and in a more transparent way. These FinTech start-ups have applied disintermediation to credit, connecting buyers and sellers through marketplaces. At the forefront of this trend stands Lending Club which raised almost $900 million in one of the largest IPOs of 2014.

      FinTech is also widening access to investment opportunities, through crowdfunding.13 Let us not forget that equity investment was once restricted to wealthy individuals. It is now accessible to all! If you have a small amount to invest, you can still have an impact and potentially reap some benefits. Kickstarter, Indiegogo, Crowdcube … just scroll down and choose your project. We already seem to be accustomed to this sector of FinTech, and tend to forget how revolutionary it is. Robo advisors are also shaking up the investment world, extending financial advice to just everybody.14 According to a report by consulting firm A.T. Kearney, these automated investment services will manage about $2 trillion in the US by 2020, accounting for 5.6 % of Americans’ investment assets.15

      Generally – and I think this is the biggest revolution – FinTech is providing access to information, that once belonged to a select few, to an ever-increasing pool of people. In our “information economy” age, that is a big democratic move.

       FinTech in the Developing World: Starting from Scratch 16

      John Chaplin, a payments industry veteran, gathered a bunch of experts to generate insights into the state of the FinTech industry: their conclusions are assembled in The Payments Innovation Jury Report.17 Among various questions they asked themselves: which region will show the most payments innovation over the next 24 months? Verdict: FinTech innovation will come from Asia for the most part, followed by Africa, North America, Latin America, and eventually Europe. The reason is quite intuitive: the lack of infrastructure in developing countries leaves room for innovation that would not find success in over-banked and heavily entrenched economies in the West. As one of the report’s contributors perfectly sums up, “the developing world is not bound by existing legacy systems, business models or customer behaviors and as such offers a fresher perspective that can often see beyond the scope of established business models.”18

      In addition, whereas FinTech services in developed countries are focused on online customers, start-ups in developing countries are addressing a broader market: cell phone users. According to the International Telecommunications Union, an estimated 95.5 % of the world’s population have access to a cell phone – which gives SMS a greater impact than the internet. Mobile money transfer services such as M-Pesa have made major contributions in changing the economic situation of underbanked populations in Bangladesh and Kenya. In Bangladesh the M-Pesa equivalent is bKash which is focused on mass-market mobile financial services. While Bangladesh offers a strong micro-finance industry (small-scale unsecured credit), bKash works like M-Pesa, sending payments quickly and easily to others.19

      In 2013, International Finance Corporation (IFC), a member of the World Bank Group, became an equity partner in bKash and in 2014, Bill & Melinda Gates Foundation also invested in bKash to ensure access to a broader range of financial services for the low-income masses of Bangladesh to achieve broader financial inclusion.20

      Looking at the impact of FinTech solutions in Africa it is important to keep in mind that in sixteen African markets, there are now more mobile money accounts than bank accounts.

      Thus, FinTech in developing countries is not only about making existing services more convenient: it is creating new infrastructure, and providing for greater inclusion of millions of people in the real economy. Since the markets addressed are enormous – and admittedly represent huge potential opportunities – one can truly say that FinTech is “changing the world for the better”.

      Banks, Beware!

      FinTech has already unveiled many “disruptions”, and is probably keeping many more under its belt. Is there enough space for these innovative new entrants and traditional institutions alike? What are the concrete threats to the latter?

      “People need banking, but they don’t necessarily need banks,” Heather Cox, Citi’s Chief Client Experience, Digital, and Marketing Officer said during IBM InterConnect 2015. New and more convenient and customer-centric services are changing the landscape, while customers are becoming more demanding. No bank can deny this: the proliferation of niche players focusing on certain services makes it more and more difficult for traditional financial institutions to keep ownership of their customers. The time when financial institutions could bundle their services together without transparency and still enjoy full loyalty from their customers, is coming to an end. Admittedly, this phenomenon only applies to a certain generation in certain areas, and even most of my “millennial” peers are still using their bank’s services for all of their financial operations. We are not there yet. Actually, this is probably just the beginning of what is forecast to be a financial revolution.

      In his annual letter to shareholders in April 2015, JP Morgan’s CEO Jamie Dimon raised the alarm: “There are hundreds

12

For additional insights on the social impact of FinTech, see Part 5. For further information on crowdfunding and the impact of FinTech on other sectors, see Part 8. See Part 10 for more information of FinTech influencing investment and capital trends. See http://money.cnn.com/2015/06/18/investing/robo-advisor-millennials-wealthfront/.

13

For further information on crowdfunding and the impact of FinTech on other sectors, see Part 6.

14

See Part 6 for more information of FinTech influencing investment and capital trends.

15

See http://money.cnn.com/2015/06/18/investing/robo-advisor-millennials-wealthfront/.

16

For further information of the applicability of FinTech solutions to emerging markets and their social impact, see Part 5. Currency Cloud, “The Insider’s View to Payments and Fintech”, 2015, https://www.currencycloud.com/payments-innovation-2015. Ibid. Source: http://www.totalpayments.org/2014/08/05/bkash-bangladeshs-m-pesa/.

17

Currency Cloud, “The Insider’s View to Payments and Fintech”, 2015, https://www.currencycloud.com/payments-innovation-2015.

18

Ibid.

19

Source: http://www.totalpayments.org/2014/08/05/bkash-bangladeshs-m-pesa/.

20

Source: http://www.bkash.com/about/company-profile.