Entrepreneurs and VCs have been salivating at the prospect of disrupting the finance industry for many years and fintech activity in Europe has been accelerating with $12.21 bn invested last year, representing 215% YoY growth and with $623m invested alone in the UK & Ireland.
Global Fintech Financing Activity 2010 to 2014¹
Top 5 European Regions for Fintech Activity, 2014¹
Given the growing interest in this area, we wanted to share a few thoughts and insights we took away from the recent Disrupt Finance event hosted by the Next B2B Forum at Bloomberg HQ. The event opened with a keynote speech by Holger Spielberg, Global Head of Innovation for Credit Suisse, who explained that he felt it wasn’t so much the case that banking needed to change but more that finance needs to be shaped. He went on to state that the issue with banks was that either:
- they don’t know what to do; or
- they can’t innovate or change to do it
He also provided my favourite quote of the event:
“Fintech ventures are like teenage sex – everyone wants to do it, no one knows how and everyone’s disappointed at the end of the day.”
He concluded by saying that there would always be a need for financial services and his advice was to think about use cases and flows and aim to put the customer at the forefront.
During the panel discussion it was mentioned that, due to some of the IT infrastructure at banks dating back to the 70’s or 80’s, problems are emerging including security risks arising from the mishmash of different systems and the interaction between legacy and more modern technologies. In fact some systems still run on COBOL which has become an increasingly serious problem – the people who know how to program in COBOL are dying out!
Olivier Peeters from BNP Paribas Fortis raised some other interesting points. He stated that banks have a tendency to move very slowly and need to be not only more pragmatic, but also more focused going forward. Therefore, rather than just trying to service everyone, it makes more sense to focus on the customer (lean startup principles?) and provide a better quality service focused on the core sector and needs rather than just a generic service for banking customers.
How equipped do banks feel to address the challenges with the next wave of digital innovation¹
As an example, and focusing on Private Wealth Management, what are your customers needs and what do they really want? Credit Suisse believes that live video links with relationship managers are key and are rolling out this functionality in the APAC region. In view of the clear shift to online banking and increasing smartphone adoption, other questions that were raised (and answers still need to be found) are:
- do customers NEED or even WANT branches? Given the trend, the expectation is that a physical presence is not required, however in practice there is uproar among certain customer groups when branches start shutting down. What conclusion can we draw from this? Beware of assumptions – sometimes the customer doesn’t really know what they want.
- With the shift (and less of a physical presence), how can you connect and onboard the millennial generation?
- With ID cards, biometric technology and the amount of information available (whether formal or informal (social media etc)), how will anti-money laundering and security / personal verification change? Are there potential opportunities in compliance?
So what does the future hold? The keynote speech by R. Jesse McWaters (Disruptive Innovation in Finance Lead, World Economic Forum) attempted to address this question. Mr McWaters had undertaken a 2 year research project focused on understanding the following three themes and their future impact on the finance industry:
- Interaction between financial provider and customer;
- How internal operations are changing or are being forced to change; and
- Connections between banks and other institutions
From the research, three big questions (and possible answers) emerged:
1. Will innovators replace incumbents?
Answer: Not really. Innovators are currently providing niche solutions whether supporting the status quo or in an attempt to disrupt the industry. Therefore, if anything, they are providing more of a competitive impetus for banks to innovate (or acquire alternatively).
Key Takeaway: it was noted that there is the potential for niche solutions to be aggregated into a banking Amazon-style competitor.
2. Are innovators only a threat?
Answer: Not really. Innovators actually seem to be solving pain points for incumbents.
Key Takeaway: The potential outcome is that this will change the market landscape by levelling the playing field among financial institutions that traditionally did not have the ability or were not able to provide certain services.
3. What role are regulators playing (i.e. are they insulating the industry and just blocking innovation)?
Answer: In addition to their role as guardians of the system, regulators have been inadvertently acting as a “moat” to the industry – protecting incumbents from disruption – especially from large, well-funded potential competitors like the Four Horsemen – Amazon, Apple, Facebook & Google.
Key Takeaway: this is increasingly becoming a double-edged sword, with the same regulators holding back incumbent financial institutions from innovating. In summary, an optimistic outlook that banks will be able to evolve, adjust and reposition themselves in the digital future and echoed in a recent poll by Accenture:
The hypothetical future according to banks¹
Despite the increasing investment activity, there are still a lot of questions as to what changes technology will bring to finance over the next few years and it was interesting to note that there wasn’t much discussion around the potential impact of cryptocurrencies and Bitcoin 2.0 / Blockchain technologies (perhaps because these technologies are still finding their way into mass adoption (if they ever get there) and haven’t represented the dramatic paradigm shift that some were expecting?).
With each of The Four Horsemen dipping a toe into the waters (Apple, Facebook & Google providing some kind of payment platform and Amazon providing lending to vendors) the disruption is more likely to be come from them in the short-to-medium term rather than the startup scene.
¹Source: Accenture Report – The Future of Fintech and Banking: Digitally Disrupted or Reimagined?