In my mind, the Fintech Revolution is happening. Every conference i attend, banker or industry “expert” i speak to has a Fintech angle to share. Innovation in financial services is at unprecedented levels with new technologies (distributed ledgers, APIs, big data) and upcoming regulation such as PSD2 opening up financial services to new players. Then last week i read the Accenture report – Fintech – Did Someone Cancel the Revolution? – and it offers some interesting counter-arguments. Please read the report for full details, and keep in mind that it has a UK focus, but following is a quick summary:
To set the scene, Accenture acknowledge there has been plenty of hype around what Fintech and Fintech startups will do to the industry. Accenture go on to ask – 5 years on, is this buzz justified?
Firstly, What is Fintech?
The Accenture report defines Fintech as:
“The deployment in financial service business models of a set of technologies singularly or in combination that have matured in the last ten years to the extent they are usable and which can deliver transformative benefits and savings“.
Or in short:
“Fintech is the application of recently matured technological advances to financial services”
Nah Dude, This Fintech Revolution Ain’t Happenin’…
- Based on the above definition, Accenture suggest that many of the known Fintech players dont actually use, or do only very lightly, the latest technology
- In many cases legacy technology is being used to develop new solutions and reach new customers
- VC (Venture Capitalist) investment dropped by a third in the UK in 2016, from $1.1 billion in 2015 to $0.7 billion in 2016 – although the number of deals over the same period increased by 5.5%
- Accenture suggest that Fintech unicorns have not materialised as initially expected
- Payments and peer to peer lending models are key focus areas for Fintech companies, Accenture feel that the technology has already been utilised by incumbents and actually the solutions have not really made use of “new” technology
- Accenture highlight the domestic success of AliPay (445 million customers) and JD Capital (226 million customers) in China, but propose that this success is will be largely contained to the domestic market due to:
- Local market conditions – 20% of population are unbanked
- Local regulation which is facilitating growth, but recent regulatory changes may slow growth
- The success of Chinese fintech’s due to new and innovative products will probably be replicated to some extent in other countries, but the success will be limited due to a lack of customers and brand recognition
- Some Fintech challengers are developing solutions that sit on legacy infrastructures, the challenge of delivering such solutions at scalable costs and the operational reality is resulting in some providers (such as Revolut) needing to reconsider their business model
- All of the fintech hubs, fintech incubators and innovation centres haven’t actually delivered any revolutionary products
- Accenture suggest that “death after proof of concept” is the overwhelming reality
- Put Fintech to one side, the financial services sector is changing due to the economic environment, changing customer demands and regulatory requirements – all of these are resulting changing the nature of financial services providers.
- Financial service providers can no longer be a one-stop vertical shop, they need to partner with new players who can provide specialist solutions and products – this will naturally result in more transparent and fairer pricing models, and draw in new providers
Warning for Incumbents, Don’t Rest on Your Laurels!
Despite the above, Accenture share how mindsets are now changing:
- There is widespread recognition that new players are innovating and the resulting products will likely end up in the west pretty soon
- Incumbents need to understand innovative solutions and changing customer behaviours and be on the front foot
- Accenture acknowledge that after the 2008 crash financial services needed to focus on restructuring, rebuilding and ensuring regulatory compliance and could not afford to invest in new technologies even when they recognised the potential
- The above is likely to change, Accenture argues, the speed of deployment of new technologies will increase among incumbents as they cannot afford to be complacent in the current climate
- An Accenture study found consumer preferences among Generation Z (born 1995-2012) and Generation X (born early 1960s to early 1980s) in mature countries would trust a entity other than a bank to deliver banking services
- Customers often experience “surprise and delight” with new Fintech solutions
- In the UK regulators should consider new categories of banking licences and the impact of Brexit negotiations on passporting rights into the European Union
- Globally there are about 2 billion unbanked people, they are people who are simply too far and therefore do not have access to a bank or cannot afford the costs of holding a bank account – this includes around 300 million migrants (90% of migrants) – this unbanked population, often have access to a mobile phone, need access to financial services — and therein lies the opportunity
Yeah Baby, The Fintech Revolution is On
Clearly, the world is changing. For me, the overriding takeaway from this report is that both incumbents and fintech companies will need to partner such that both can seize the opportunity to deliver an improved customer experience, and more importantly incorporate a largely excluded population from financial services. Developments in blockchain, the unleashing of APIs with reference to PSD2, the Internet of Things (IoT), and robot based automation will surely transform financial services and the way in which consumers receive those services.
Oh, i also learnt a new acronym – GAAFAs – Google, Apple, Amazon, Facebook, Alibaba.
The Fintech Revolution is happenin’, we just ain’t there (wherever there is) yet..!