The FINTECH Book. Chishti Susanne

and more financial services provision is being conducted online and as Generation Z (the demographic segment born after millennials) will only ever know “mobile”, it should come as no surprise that this is and will continue to be the case. Smart wearables, specifically technologically advanced financial apps and an increase in mobile payment opportunities, are the result of consumer demand.

      Although they are taking a somewhat slow foothold, there are clear signs that crypto-currencies are here to stay – for example, California made them legal tender in 2015.27 In Europe some countries are already seeing bitcoin – an example of a crypto-currency – take hold in bartering-type exchange systems. Arguably, there is not yet a bitcoin usage model quite where the industry needs it to be, but this will be developed over time. However, the development of all of this could be hindered by regulations and national laws. Seen from an idealistic viewpoint, people would be able to use bitcoin, or other crypto-currencies, anywhere in the world, instantaneously. Yet, with different rules and regulations governing states and the different financial institutions involved, getting unanimous agreement on how crypto-currencies should work could prove difficult.

      In this respect, blockchain (the technology on which bitcoin is based) is a distributed data store that holds a public ledger of transactions for crypto-currencies, such as bitcoin itself. A dedicated chapter in the book covers crypto-currencies and blockchain technology.

      It is clear that FinTech has already made huge inroads into many aspects of our daily lives. What is perhaps even clearer is that the surface has barely been scratched in relation to what FinTech can do for us all in the future. As we consumers become ever more demanding and discerning in our choices, you can expect to see financial institutions rely increasingly on FinTech developments to provide the solutions to keep us happy and meet our needs.

      In summary, we are now living in times of significant transformation of the banking sector. We can probably assume that banking over the next 10 years will experience a higher degree of change than in the last 100 years. Financial technology innovation has started a global shake-up of the sector. Now the most important question remains: will banks be able to successfully embrace FinTech innovation or not? FinTech is set to play a bigger role in your life than you might have ever expected.

      2

      FinTech Themes

      After the introduction to the financial technology sector in the previous part, this second part focuses on some key general themes. The chapters highlight the importance of collaboration between the established players and the FinTech start-ups while providing a global overview on regulatory frameworks impacting FinTech. Regulatory compliance is a prerequisite for success for FinTech companies worldwide. Marketplace lending – one of the key disruptive FinTech business models is also explained in more detail here.

      As we all tend to live increasingly digital lives, we have several identities online. The topic of identity management, particularly important for FinTech, is covered here. The threat of tech giants to incumbents, as companies such as Apple and Facebook have entered the global payments arena, is also highlighted.

      Finally, principles and the importance of good design are discussed to ensure that the user experience of financial products and services is what the customer expects, based on their interaction with the leading consumer and technology solutions.

      Banks Need to Think Collaboration Rather Than Competition

      By Rachel Nienaber

      VP Engineering, Currency Cloud

      Historically, banks have been responsible for most innovations in the financial industry. The inception of the credit card in the 1950s and ATMs in the 1970s completely revolutionized the way we access and pay for goods. Jump forward to 2016 and it is a very different story. Those developments came decades apart, but following the significant growth and accessibility of the internet and the technology that advances in its wake – including smart phones, big data, social media, and cloud computing – demand has come from consumers to make it even easier to manage their finances. As such, financial innovation is no longer restricted to those institutions, allowing outside players to creep in to shake up the industry.

      The financial sector has continued to witness many impressive innovations and technological advancements such as contactless technology, digital wallets, and crypto-currencies. However the innovators are now rarely banks but small FinTech firms. These are often led by former bank employees who have identified a gap in an existing offering or service.

      Application Programming Interface (API) is the term used to describe a set of tools that enable different software components or systems to effectively communicate with one another.28 Using an API, banks or challenger financial services providers can incorporate the technology from FinTech firms into the key areas in which support is required – simplifying the process of adding innovative technology services by piecing together building blocks of flexible services, much like financial lego.

      With financial lego APIs, IT leaders within businesses can create their own financial IT solution or support other internal processes without having to build every piece of the technology from scratch. Instead, they can mix and match a portfolio of financial technology APIs to create a bespoke solution where the development team can integrate the functionality of the APIs as part of their technology. For example, banks and payments firms can send money internationally through Currency Cloud’s API, rather than having to develop proprietary technology.

      The flexibility of APIs means that it is also easier to create experiences that users will enjoy because the experience can be easily decoupled from the system behind it. Barclays’ development of mobile payment service Pingit is a great example of this where opening their API has helped in bringing a successful new service to market. Pingit has experienced extraordinary growth since launch in 2012, with users in London alone sending more than £60 million via Pingit in the first six months of 2014.

      Despite the scale of innovation sweeping across the financial services industry, many banks still retain their R&D behind closed doors. Understandably, security is one of their top priorities and rather than risk sharing information with another party, banks tend to only trust themselves. While this means that the threat from the outside is limited, it also means that there can be no external development. And we just need to look as far as the success stories from Apple and Google, who routinely open up their APIs to outside creative minds, to understand just how valuable and exciting the results of the latter can be.

      Developed in a pre-internet era, banks’ business models and technology infrastructure has largely been constructed around product sets and delivered through the branch. In other words, banks were not built to serve today’s fast-paced and digitally savvy customers. As such, a whole host of technology players have taken the opportunity to develop innovative alternatives, built on flexible platforms that can adapt to this changing environment. PayPal is one of the first notable examples of a successful solution that provided great benefit for the customer and since then has paved the way for an explosion of alternative services, offering everything from investments to international payments, loans, and bank accounts. From the likes of Kickstarter and Seedr, which have been leading the crowdfunding market for some time, to Amigo which provides personalized credit approval, and Transferwise which offers consumers cheaper access to overseas transfers, these firms are redefining old verticals or creating entirely new ones.

      Yet, the rise of FinTech newcomers in the industry does not need to send banks panicking about the challenges involved with overhauling their entire IT infrastructure in order to compete. The “us versus them” debate that has gained perpetual popularity does not provide an accurate picture of the relationship between FinTech innovators and banks. Let us be very clear, the banks are the cornerstone on which our economies are built, they are the rails on which most FinTech firms operate and they are not going away in the near or even the distant future. However, we are creating a fundamentally different way of viewing and approaching the industry.

      Tech start-ups look at this financial services landscape and using the rationality of the internet, see poor customer service and room for tremendous efficiencies. The same

27

“Cryptocurrencies made legal in California”, 8 January 2015, http://www.bobsguide.com/guide/news/2015/Jan/8/cryptocurrencies-made-legal-in-california.html.

28

See the chapter entitled “Embracing the Connected API Economy” for further details.