PwC's head of research and analysis of fintech, Aaron Schwartz shares his views on what areas are more likely to attract investors' attention in the future. He talks to The Banker's Silvia Pavoni during Swift Business Forum New York.
Steve Biggar, Director of Financial Institutions Research, Argus Research, discusses what's driving the recent pullback in US bank stocks and which names Argus has "buy" opinions on.
The UK’s financial sector is the biggest and most respected in the world, with the City of London acting as a magnet for investment and industry talent. Here Craig James, CEO of Neopay, discusses with Finance Monthly the potential impact the FCA could have through its engagement in fintech beyond the City.
Most recently the capital has been a hotbed of innovation in the financial technology – fintech – sector, with a number of start-up accelerators and new companies coming onto the scene to challenge the established industry.
But with the confusion over Brexit now firmly in people’s mind, many are concerned that London’s position as a leading financial centre and the focal point of the EU’s fintech industry may be under threat.
Other EU countries are beginning to respond to this and attempting to entice fintech businesses away from London and the UK.
As a result, the British government and its financial regulator appear to be doing more than ever to boost the UK’s share of the fintech market.
This is definitely a good time for fintech businesses, as governments across the world compete for their business, and this is even more apparent in Europe and the UK as a result of Brexit.
In one of its latest initiatives, the British government are looking specifically beyond the borders of London to help boost fintech hubs in the rest of the UK and encourage greater development of fintech across the country.
Expanding access to regulation beyond the capital
Britain’s financial watchdog, the Financial Conduct Authority (FCA), has recently announced that it is to expand its regulatory support across the UK in efforts to aid emerging financial technology hubs based outside of London.
Specifically, the regulator is looking to areas with both a strong financial centre and technology presence.
Historically, fintech business have predominantly come from London due to its proximity to tech funding and major financial institutions as well as government and regulatory bodies.
Looking around the rest of the world, these four factors have been key in the success of fintech companies.
But devolution of government, the rise of non-London tech hubs and the increasing willingness of banks to have a presence in other major cities around the UK, means there is greater potential for fintech businesses to spread far beyond London, just at the time the country needs to solidify and expand its position in the world’s financial and technology markets.
Speaking to the Leeds Digital Festival earlier this year Christopher Woolard, executive director of strategy and competition at the FCA, identified emerging hubs in the Edinburgh-Glasgow corridor and the Leeds-Manchester area as significant areas for potential growth.
The developing “FiNexus Lab” in Leeds – a collaboration between local government, industry, and central government – is laying solid foundations for fintech firms to flourish in the city, while in Manchester, Barclays’ “Rise” hub and “The Vault”, a 20,000 sq ft co-working space for fintech firms in Spinningfield’s business quarter, is improving the conditions for innovative firms to collaborate and grow.
The FCA has also been seeking to assist up and coming fintech businesses through its “sandbox” scheme, which helps firms to experiment with innovative products, services and business models.
About two thirds of the scheme’s first cohort was London based, but a rash of regional interest has seen nearly half of applications for its latest round come from outside the capital, highlighting the growth of fintech across the UK.
Non-London fintech companies are also seeing an increased interest in investment with Durham based Atom Bank recently securing £83m of funding from investors including Spanish bank BBVA, fund manager Neil Woodford and Toscafund Asset Management.
Not an entirely new trend
While encouraging new fintech companies outside of London has just recently become a focus of the FCA, it is not an entirely new concept and as far back as 2014 politicians, as well as financial and technology bosses, were calling for an expansion of the UK’s fintech sector beyond the boundaries of London to fully recognise its potential – long before the possibility of Brexit became a reality.
For instance, Eric van der Kleij, head of Canary Wharf based start-up accelerator Level39, has been one of the leading fintech figures suggesting that a business’ location isn’t a factor in whether it will be a success, pointing particularly to Manchester as a place where fintech companies were performing strongly.
One of the major hurdles, and a major barrier the FCA is now seeking to breach with its latest commitment, is that much of the regulatory framework emanated from London, with businesses based outside of this area – particularly those further towards the north and Scotland – struggling to get access to the kind of help they needed.
Speaking at the Leeds Festival, Christopher Woolard said the FCA now wanted to make it “as easy as possible” for firms to engage with the regulator and get access to the advice and help they needed to get into the market.
While many businesses have been able to set up outside of London and travel, sometimes great distances, to access this regulatory assistance, actively moving this help closer to businesses could be a significant benefit to new businesses, and a boost to British fintech at a time when it most needs it.
Increasing Brexit Britain’s competitiveness
The global fintech market is one of the fastest growing sectors in the world and, according to European Union figures, the value of investment into the sector reached $22.3bn by the end of 2015, a 75% increase on the year before.
Since 2010, large corporates, venture capitalists and private equity firms have invested in excess of $50bn into nearly 2,500 global start-ups since the start of the decade.
In the UK, the fintech sector – enveloping everything from online lending to applying blockchain to capital markets – is worth about £7bn to the economy, while more than 60,000 people are employed in the sector.
Looking at the UK’s global positioning, the country is second only to the United States in prominence on the top 100 fintech list, compiled by KPMG.
But while many of the UK companies on the list are London based, the highest based company, and the only UK business to breach the top 10, is based outside London.
The fact that a non-London business is the country’s highest valued fintech business is significant if we are to continue to convince new businesses to set up in the UK.
This is particularly important as other EU countries are attempting to take advantage of the confusion surrounding Brexit and boost their share of the fintech market.
A new public-private partnership, “House of Fintech” was recently set up in Luxembourg to attract companies to set up in the country, while French lobbyists have been making efforts to entice fintech businesses to relocate from the UK to Paris.
Even outside of the EU, steps are being taken to replicate the innovation and success being seen in the UK and The Monetary Authority of Singapore has moved to copy the FCA’s “sandbox” scheme to improve the prospects of its own fintech market.
With the UK’s future position in the single market still not fully known, and not likely to be defined for another year at least, the UK government knows it needs to maintain its popularity for fintech businesses. These businesses need to be given an even greater chance to succeed if the UK is to maintain its strong position during the Brexit negotiations and fend off the competition.
We can expect to see further new initiatives from the UK aimed at making that a reality and more positive developments for fintech as European countries compete for their business.
British entrepreneurs are being offered the chance to develop financial services ideas in one of the top financial regions in the US, with a $100,000 (£77,000) equity-based grant and a package of support for growing businesses.
The initiative aims to bring up to twelve of the most promising emerging financial companies in the world to Ohio and help them boost their growth beyond the start-up stage. Equity-based grants of $100,000 per firm plus coaching, office space, visa support and a strong business network are all being provided through the accelerator Fintech71.
Valentina Isakina, Managing Director for Financial Services and Select HQ Operations at JobsOhio, said: “Ohio looks ahead to the future by investing in technologies of the next generation. Our financial services sector is one of the strongest in the world, and it is always actively seeking innovative ideas and partnerships. Here people are more approachable and doing business is easier, so these innovative companies will have a better chance to blossom into the financial stars of tomorrow. JobsOhio is happy to support this innovative industry effort.
“Getting beyond the start-up phase is always difficult even when entrepreneurs have a great idea and have managed to get their business going, so the financial services industry wants to give them a helping hand by creating Fintech71. By bringing them here to enjoy Ohio’s support and hospitality, they will make contacts that will last a lifetime and benefit everyone.”
Fintech71 is aimed at start-up and scale-up businesses from all over the world which have matured enough to present a well-thought-out concept to test with a corporate partner or a market-ready business model. The application deadline is July 17 via www.fintech71.com.
The accelerator has a not-for-profit model and will negotiate a customised, entrepreneur-friendly equity-based participation in exchange for a grant of US $100,000 and access to the accelerator program for each of the selected companies. The finalists will be invited to the state capital Columbus to receive coaching from leading experts of the industry from mid-September to mid-November, in order to further develop their business ideas.
Additionally, the selected start-ups will get the opportunity to build relationships with the sponsor businesses, which are well established in Ohio and throughout the USA, and to network with mentors, partners, and customers. The selected start-ups will have access to free office space in the city centre of Columbus, with foreign businesses will be supported with their visa application.
Some 270.000 people, nearly the size of NYC’s workforce, work in the financial industry in Ohio, one of the largest in the USA. Ohio is also an innovative and successful hub for a large number of other industries, including automotive, aerospace, mechanical engineering, and chemicals. The state is among the top five US states for Fortune 500 and Fortune 1000 headquarters.
Fintech71, named as a nod to the cross-state highway I-71 connecting Ohio via its three largest cities, is backed by leading enterprises, banks and insurers from Ohio, like KeyBank, Huntington Bank, Grange Insurance, Progressive Insurance and Kroger, the largest food chain in the USA. JPMChase is also supporting the program, leveraging its large technology presence in Ohio. JobsOhio, the innovative non-profit economic development corporation, is supporting Fintech71’s operations along with its industry expertise, state and national contacts.
“Fintech71 and Ohio are ready to compete on a global scale given the alignment of the state, the private sector and its entrepreneurial ecosystem,” added Matt Armstead, the executive director for the accelerator.
(Source: JobsOhio and Fintech71)
For all the stability that this latest General Election was due to bring, the Great British Public awoke on Friday morning with more questions than answers. With a weakened Government and a reinvigorated opposition, what does the world now look like for the fintech industry? Here, Kerim Derhalli, Founder and CEO of fintech app invstr, discusses the results’ impact on the fintech sector.
Traditionally, politics and technology has had an uneasy relationship. On the one hand, tech innovators strive to upset the status quo and find new ways of doing things; on the other, governments tend to be comfortable once they have exerted control over the unknowns of new technology.
The great challenges
In the aftermath of two horrific terrorist attacks in London and Manchester, Theresa May moved quickly to criticise technology companies for providing “safe spaces” for extremist ideology, reinforcing the Conservative pledge for greater regulation of the internet.
Labour, conversely, support greater rights on the internet specifically, backing a ‘Digital Bill of Rights’ within their digital manifesto – released in August last year.
How will these two opposing ideologies play out in a fintech world brimming with optimism and entrepreneurship? There are pros and cons, and it may be that a hung parliament works in the favour of the tech glitterati.
The criticism of the Tories has been that they protect the big boys. Low corporate tax and a reduction in business red-tape will have the big banks rubbing their hands, but there’s also plenty for startups, disruptors and SMEs to be excited about.
But the Conservative’s manifesto declaration that “for the sake of our economy and our society, we need to harness the power of fast-changing technology” should be treated with caution.
Harness or heel?
The phraseology is fascinating. What does ‘harness’ really mean? If it means a managed level of regulation, which keeps consumers safe from the more sinister aspects of technology, while maintaining the capacity for innovators to try new things, then fintech entrepreneurs will be cheering.
If the real result is Big Brother laying down the law and attempting to bring the disruptors to heel, then the outlook isn’t so positive and, in reality, this approach is liable to backfire. As we’ve seen with Trump, the social revolution and today’s unprecedented access to shared information, the masses will soon make themselves known if they feel the palm of oppression settling on any of their concerns.
In January, Mrs May and Co. announced their modern industrial strategy, which promises investment and support for science, technology and innovation. On the surface, this is great news for the fintech set. University R&D funds, similar to that of the United States, could really accelerate advancement for innovative startups.
In the red corner
And what of their prime competitors? We’re now a decade on from the financial crisis, and Labour has said that it is time to reawaken the finance industry.
Their headline campaign announcement was a National Investment Fund that will bring in a £250 billion boost in lending for small business across the country. The manifesto cited private banks, small businesses and promised “patient, long-term finance to R&D intensive investments”. With fintech firms by-and-large falling into this category, this mantra could prove to be a firm positive for the sector, if the opposition flexes its muscles over the next term, as it can now do.
Back to the language of the document; Labour’s manifesto called out ‘big City of London firms’ as those which don’t support growth in communities. With tens of thousands of fintech roles sitting in the Square Mile currently, there may have been a few CEOs shifting uncomfortably in their seats.
Just last week, new figures from Europe’s prestigious Fintech50 list, which picks out the hottest fintech organisations, shows London providing half of the overall list.
Labour also pledged to appoint a Digital Ambassador to liaise with technology companies to “promote Britain as an attractive place for investment and provide support for start-ups to scale up to become world-class digital businesses”. Can one person change the face of tech investment in the UK? Fintech disruptors would be pleased to have an advocate in Whitehall, but similarly, the country is already showing that it is a leader in the world of tech and long may that continue.
The continuing turmoil is Westminster isn’t good for business on the whole. According to the Institute of Directors, confidence has plummeted since Thursday’s result – leaders want, believe it or not, ‘strong and stable’ leadership.
But the balance which the hung parliament gives us – a weakening of heavy-handed regulation policies on one side, and a firm dose of realism on the other as to what cash is available – may well work in the fintech industry’s favour.
Fintech is up to the challenge and will thrive. The arm-wrestle between governance and technology, politics and finance, regulation and disruption, between the established and the new, will continue. We’re opportunistic creatures, and we’ll continue to adapt and make the most of the breaks whatever government is there is provide them.
Fintech now refers to the innovative use of technology that cuts across multiple business segments, including lending, advice, investment management, execution and payments.
The Internet of Things can be utilized to make systems interconnected and protect against information attacks, tampering and fraud. Another function is data generation.
Bhupender Singh, CEO of Intelenet® Global Services, explores the competitive challenges that banks face from FinTech players.
The finance and banking sectors have experienced a radical shift, driven by mobile technology, Artificial Intelligence (AI), automation, and the emergence of new FinTech players entering the market. Traditional banks are now facing the challenge of high customer expectations, outdated technology, the pressure of regulation stemming from the financial crisis, and cultural resistance from those who are apprehensive or unable to utilise digital services.
With high street bank branches closing down, elderly people and those who do their banking in person, are at risk of making costly financial mistakes. In addition, a high proportion of customers maintain the desire for face-to-face interaction, particularly in the case of making major financial decisions, such as applying for a mortgage. Even in the case of common customer needs, such as the need to discuss overdrafts or the replacement of a bank card, face-to-face interaction is better equipped than a machine to efficiently handle the process from start to finish.
A major bank reported that 90% of customer contacts were through digital channels in 2016, an increase of 10% from the previous year. It is this shift in consumer behaviour that can be attributed to the increasing number of bank branches closing.[1] In order to ensure customer satisfaction, banks will need to keep up to date with the latest technological advances, whilst also maintaining and providing new channels of communication to ensure that their customers are kept happy.
With the number of FinTech players and challenger banks slowly increasing, the need for banks to ensure their customers remain loyal has never been more important. Whilst the new breed of banks provide a mostly digital banking experience that can offer features such as real-time balance information, deep-dive spending data, biometric security, and instantaneous money transfers, the issue of trust still remains. Customers like to know that they can speak to another person when they need more information about a product or require help fixing a concern. In today’s automated economy, modern companies are conducting more and more business online, and so it has become increasingly important to not underestimate the importance of having a ‘face’ for your business. Relationships are built by people and based on these interactions and the level of customer service, customers will be more inclined to return.
Despite having the upper hand, in terms of a well-established customer base, the scale and speed of the digital revolution has left major players in the financial services sector struggling to keep up. Challenger banks actively seek to be different, and so to even the playing field, traditional banks must embrace technology innovations and employ next-generation tools. The technological revolution in finance is not a new phenomenon, yet, embracing this new landscape remains a challenge for most established financial institutions. Recent PwC research found that only 20% of finance executives feel their organisation is structurally ready to embrace a digital future[2].
In order to compete, traditional banks need to start offering a seamless blend of online and in-person banking which complement traditional services. An effective omnichannel experience is one that will allow customers to benefit from the advantages of a physical bank branch, with the speed and agility available through a digital offering. Next-generation technology is heading in a direction where it will be possible to combine both the full benefits of online banking and face-to-face customer services. The future of branch banking, as we see it, could result in banks moving towards a mobile branch model.
One option could be a mobile advisor workforce, where customers can manage their services through a mobile app, and maximise the effectiveness of customer facing staff. By implementing this, banks could allocate mobile teams to nearby appointments. The next-generation technology available also has the potential to enable banks to connect roaming advisers to nearby customers, at any location and at any time.
One of the main advantages of a technology such as this, is that the high proportion of customers that prefer face-to-face interaction, will still be able to interact with banking staff – a service that banks are currently able to provide via the use of ‘micro-branches’. With market pressures to cut costs, and many providers being forced to reduce their front-end outlay, tools that allow banking staff to be mobile, are a step closer to modernising banks.
In the face of mounting competition against new players that are able to implement technological innovations quickly and effectively, it is essential for banks to overhaul their existing IT systems. Well established financial institutions tend to operate using outdated technology. These legacy technology stacks make it extremely challenging for them to compete with their more nimble competitors, as the aging technology obstructs the movement of data between silos, preventing the 360-degree view of the customer that is required to provide personalised services to customers anytime, anywhere. For this reason, we are witnessing a real desire from companies to work with experienced IT solutions partners, in order to adopt the latest technology and modernise their information security frameworks.
Legacy systems are one of the biggest barriers in keeping banks from imitating the digital experiences provided by the likes of the latest FinTech players. These companies deliver personalised services faster than banks can and are not hindered by aging systems. In order to start levelling the playing field, banks must first invest in the right partnerships. Banks must then look to provide a far more seamless omnichannel approach that embraces new technologies and will bridge the gap between their brick and mortar operations and their digital offerings.
With more than 30 years’ experience in the City, Kerim Derhalli, CEO and founder of invstr and a former managing director at Deutsche Bank and JP Morgan, talks to Finance Monthly about the upcoming UK General Election, hinting at the overall spread of its impact and the value of its consistency in a current world of uncertainty.
There has barely been a door knocked or a baby kissed since Theresa May surprised the nation with her snap General Election announcement, yet we’ve already witnessed our first gaffes, stumbles, awkward moments and grave predictions of the election campaign.
As if the past few months haven’t been turbulent enough, the curtain falls on the shortest Parliament since 1974 with voices from all sides of the political divide speaking of testing times ahead. In the right ear, we hear that Mrs May and co. are walking the line towards stability and a stronger negotiating position when it comes to Brexit. From the left, there are warnings of years ahead of Conservative strong-arming and marginalisation of the masses.
On the political front, we’re certainly set for a few more twists and turns before the UK finally makes its exit from the EU, but what does the changing face of British politics mean for the country’s economy or, more broadly, the markets at large? The answer: not a lot.
The City has long been battered, bruised, consoled and comforted by successive Parliaments, so the choppy waters which business leaders, investors and fiscal policymakers have been traversing is nothing new.
Does Brexit become clearer if Mrs May secures a stronger majority? No. Will banks rip up their plans to either relocate or stay in the City following the UK’s departure from the EU? Probably not. In the arena where invstr operates – fintech – disruptors revel in the unknown, finding any edge they can as the world changes around them – this will simply continue.
Concerns around the strength of the pound continue to circulate, but financiers know that currencies can be fickle. On that day in late April when Mrs May first announced an mysterious press conference, before dropping her bombshell, sterling first dropped to lows of 1 GBP = 1.17 EUR, before rallying to highs of 1 = 1.20. After yet another topsy turvy day, the currency closed just a penny higher than it had opened, and today has settled back to pretty much the same rate it was before the General Election furore began.
On the investment front, finance is still smarting from the 2008 global crisis. An air of trepidation reigns and many of the big players are cautious, making them less susceptible to risk. This means that the City is in robust shape when it comes to the fallout of Brexit, and the effect that this General Election will have (or not) on its future.
The repercussions from international businesses based in the UK are also unlikely to change. For every Goldman Sachs or HSBC that announces a move to Paris, Frankfurt or Dublin, there is a Deutsche Bank or Bank of America that has reaffirmed their commitment – and growth – in the UK. Even those who are looking at their options of moving their European bases have, beneath the headlines, opted to keep the vast majority of their workforces in London.
In this strange dystopian present, the one constant has been inconsistency, and many firms, big and small, in the finance world have learned to expect the unexpected. So, for all this change on the political and economic scenes, the City has actually become one of the more stable epicentres on which the UK’s global future continues to rest.
From the bitcoin to regulatory functions, here Alexander Dunaev, COO at ID Finance, discusses the need for cooperation in the fintech segment and touches on five vital steps for the sustainable growth of one of the largest emerging sectors in the financial sphere.
Ronald Reagan once succinctly summarized the US government’s view on regulation the following way: “If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it”. Taking the UK as an example, financial technology is worth c.GBP7billion and employs around 60,000 people - safe to say, the sector is on a roll. On top of the direct economic effect, one has to consider fintech’s wider broader economic impact from lowering the lower cost of credit or insurance, improving the level of financial inclusion and reducing financial transaction costs across remittances, payments and investments.
Of course any industry is prone to missteps along the way. The few examples for fintech globally include the proliferation of Ponzi schemes in China together with the growth of P2P lending, the use of bitcoin for illegal purchases and investor misleading at Lending Club that brought the demise of the company’s founder. Nonetheless, since the industrial benefits are beyond reproach, the ball is in the regulator’s corner to curb the excesses, streamline the judicial framework and establish the rules of the road for the multi-faceted and rapidly ascending Fintech industry.
There is clear recognition worldwide that regulation is needed to ensure long-term and sustainable growth. At the end of last year, the Office of Comptroller of the Currency (OCC), a division of the U.S. Department of the Treasury, proposed to create a federal charter for non-deposit banking products and services – a major change for a country with state-by-state financial regulation which could lower barriers to entry for companies looking to innovate the financial services industry. While the Governor of the Bank of England Mark Carney has recently stressed the need to create holistic infrastructure to support the flourishing sector.
Having had first-hand experience in a regulated financial services industry from Brazil to EU and Central Asia, I believe there are a number of clear steps that can drive the growth of fintech globally.
1. Clear communication with the industry
Although it may appear obvious, it is critical for the regulator to engage with the fintech industry in gaining an optimal understanding of the needs of the industry. Obviously the industry is only one of the voices, but in the environment of rapid technological and economic change, it makes sense to get first-hand information. This may help the regulator to prioritize and focus on solving strategic issues.
2. Share regulatory functions
As much as is possible, regulatory functions have to be shared. The fintech umbrella covers multiple industries: consumer and corporate lending, insurance, payments to name a few. In our experience it makes sense to functionally compartmentalize the regulation. For instance, the central bank or consumer protection bureau division regulating consumer lending by the banks should be regulating the similar area of fintech activity. This makes sense from the perspective of synchronized standards for consumer protection. It’s in everyone’s interests to have a unified set of standards on anti-money laundering (AML) and know-your-client (KYC) information disclosure as well as collection practices. Furthermore, incorporating fintech regulation together with mainstream financial services firmly places the former into the center of regulatory attention.
3. Focus on creation of new infrastructure
Any government should be actively seeding, sponsoring and promoting what Mark Carney calls “hard infrastructure” for the new breed of financial services companies. This type of infrastructure is more often too much of a burden even for shared corporate investment, yet its potential benefits are clear for any country. The area of focus should be within payments, settlement, identification and data access. One of the best global examples of the sovereign strategic thinking on the subject is undoubtedly Aadhaar in India – a biometric ID system with over one billion enrollees or most of the country’s adult population. This gargantuan project coupled together with the country’s recent clamp down on hard cash in the economy can really change the lives of hundreds of millions of its citizens by actively encouraging financial inclusion.
4. Share the use of existing infrastructure
While creation of the infrastructure is clearly needed, there is lower hanging fruit for driving industrial competitiveness available to regulators globally. First and foremost it is key to empower the citizens to take ownership of their data held by large incumbents including mainstream financial services (banks, insurance companies) and telecom companies. The way to do this is through the mandatory sharing of this information to third parties, obviously with the explicit consent of the ultimate data owner. While on the one hand it enables the latter to monetize the data and get access to more competitive offerings, this also enables the fintech firms to focus on what they do best: deploy cutting edge technologies and data analysis in targeting market inefficiencies. The prime example of data sharing is the PSD2 directive in the EU that is forcing banks to open up the trove of transactional data to third-parties via API. This initiative is clearly laudable and should be mirrored by regulators globally.
5. Introduce 5-year road maps
Regulatory uncertainty acts as a major overhang, preventing the industry from developing. First and foremost this uncertainty stops the flow of capital into the industry creating a massive earning multiple compression. This further prevents the reinvestment of capital due to the increase in uncertainty. It’s important to emphasize that in the fintech world global players with technological know-how have optionality over geographical expansion. All else being equal, these companies will always invest in the countries with the most transparent rules of the road. This implies that the countries that take an ambivalent position are in a precarious position of losing out.
The future of the fintech industry will not be shaped by market adoption and technological advances alone. The role of the government in fostering fintech and steering it in the direction of sustainable growth is key.
Written by Mark Cresswell, CEO of LzLabs
At the beginning of March, the UK government announced its Digital Strategy, a section of which detailed its design to spark competition in the FinTech industry. FinTech has seen a rapid evolution of products to support more agile and accessible financial solutions for both business and the consumer. Enabled by ubiquitous global internet connectivity and smart phone advancements, the speed and efficiency of a wide variety of financial solutions can be improved dramatically.
The blight of the big banks
The challenge for many, when enhancing digital financial services, is that the longer established portion of the financial industry, much like the global public sector, remains awash with legacy systems born during the first FinTech revolution of the 1960s and 1970s. These systems continue to support business models built well before the internet, and when consumer banking was provided by branches and ATMs. It’s estimated that over 70% of global transactions are processed by mainframe applications running on COBOL code, often written over half a century ago. While these core banking systems continue to provide reliable back-end processing, they can be extremely limiting in today’s modern, globally connected world. Furthermore, these systems are highly dependent on a workforce whose culture, education and reference points are changing, as the baby boomer generation (1946-1964) marches inexorably towards retirement. As the technical and business knowledge of these systems decline, the global financial community needs to take advantage of the power and flexibility of modern computing solutions.
This transition can be painful, both technologically and financially, if organisations aren’t careful. Managing the transition to modern platforms, more adept at supporting FinTech solutions at a more effective price should be done in an evolutionary way. Modernisation is a continuum, but procrastination is no answer. Hope is not a strategy. Solutions are available that can reduce the cost of continuing to execute these reliable back-end systems, minimising the financial impact and risk of the effort. For many financial institutions, the reluctance to modernise is based on cost and risk concerns. In such a highly-regulated industry, risk must be managed. And few financial institutions, whether prodded by the UK government or not can spend vast sums of money to completely replace these systems.
Incentivise IT modernisation
Born-on-the-web FinTech companies benefit from regulation including the recent Competition & Markets Authority (CMA) directive, and the EU’s planned MiFID II - If the UK government really wants to drive the FinTech industry to invest in systems that can “support those who struggle to access financial services”, they should incentivise IT modernisation projects within the financial industry. Investment in digital platforms that can support greater ease of access are often held hostage to the high cost of continuing to operate legacy systems on expensive and often proprietary platforms. These costs limit financial institutions’ ability to continue to grow their FinTech investments that would broaden the options available to a broader UK constituency. The problem is not a lack of FinTech solutions, but rather a continued dependency on legacy systems and their restrictive cost models that are highly limiting to investment in modern solutions. The financial industry HAS invested in FinTech solutions, but the broader growth envisaged by the UK government’s digital strategy can only be achieved if these institutions can free themselves from the bondage of legacy system’s costs and limitations.
The Challenges of Legacy Modernisation
Legacy modernisation projects have been started and stopped in all industries for the last two decades. Some succeeded. Some did not. Several challenges must be overcome to ensure successful modernisation projects. First, the project needs to be justified on sound financial and business principles. Cost reduction alone is sometimes enough, but often better business justifications are warranted. Second, the technical challenges of modernisation encompass a number of issues. Most IT modernisation projects today impact the underlying infrastructure on which the legacy applications have been implemented. These changes affect the application technology, operating environment, often the data base management system (DBMS) underpinning the application and a wide variety of operational practices that have been honed over the decades that these systems have been executing. Risks can be managed utilising a variety of modernisation practices that have been available for a number of years. Overcoming political, cultural and generational resistance to change is another matter. For the UK government’s digital strategy to be successful in the financial industry, they should focus efforts on combatting these challenges.
Written by Paresh Davdra, CEO and Co-Founder of Xendpay & RationalFX
2017 is an exciting time to be alive. Along with the various socio-political developments, it is also a period heralding monumental strides in the human way of living. The bug has bitten the financial industry as well, which is now converging with the tech space to co-create what we see as the future of handling the world’s wallet and forex. Across payment gateways to remittances, we are being pushed to bring in an element of the ‘instant’ and ‘now’ – a fast and easy world of immediate money transfer and delivery. Markets are no longer convened by pockets; the change is multi-lateral and multi-layered. For instance, in the developed markets we are engaging on a platform of routing forex transaction buoyed by political uncertainty, while simultaneously upgrading the business models in developing markets to suit economic experiments such as the recent demonetisation drive in India.
The tsunami of tech inspired disruption that the payments industry has seen over the past few years has given birth to multiple business concepts and ideas like digital remittance services, e-wallets, digital payments and ecommerce have burst to envelope the current narrative. While the developed markets across the west and east have embraced new forms of ICT enabled currency handling, the developing markets hold immense potential as they begin to experience revolutionary changes in their systems. For example, China and India are the world’s largest cash economies which spend millions of dollars printing and minting physical currencies. In such markets, there is scope for bountiful improvements and value additions using ICT enabled services.
In the case of India, the government had all of a sudden on 8th November 2016, demonetised the 500 and 1000 rupee notes, taking them out of circulation and rendering them no longer valid legal tender within a window of 3 days. For a country with 86% of cash transactions, the ensuing confusion and panic nearly brought the country to a standstill for a week. However, necessity turned to opportunity, and during that period of cash crunch, e-wallets and payment gateways pushed themselves forward to recalibrate their business model to expand their offerings in a new cash deficit environment. About two months since the demonetisation exercise, a leading e-wallet company generated a huge market share and elevated its business operations to amass enough collateral to become a payment bank! While India is now onwards to digitalise its economy, countries such as Sweden and Norway operate their economies with less than 5% in cash; while Australia’s Citibank had very recently announced to stop accepting paper money altogether.
The past couple of years have been particularly interesting for the payments world, and if we look back at 2015 – around February is when the initial trend in payments start-ups became more pronounced. This period also saw a boom in other forms of payments than the conventional cash transactions, and with the development of a cashless economy, more protruding questions on the trust and security factors around e-payments started to solidify booming the frequency of use, creating a new market that gradually became its own bionetwork. One year later, we witnessed major progress in investments in the FinTech sector in the UK and Europe, which inundated the sector as insistent tech developments in the sector marched on and harvested gravity defying momentum. Trial, adoption and application entered the day-to-day routine in the industry and almost each passing day experienced a new breakthrough.
From then on, the focus shifted towards the consumer experience. Now, in 2017, we are bound to witness a thriving increment in the numbers of consumers whose lifestyle and purchasing parity will pave way for change, and witness more consumers gearing up to ride the technological wave their way. As digital payments have already become the norm in the developed world, the slow seepage of structure onto the eastern world will systematically affect how transfer of value is carried out – the incredibly fast pace at which new businesses and solutions are emerging has created a cat-mouse chase between innovators and regulatory sector. Consumers now have to keep pace with the movements in the tech sector. The sector is urging more technologies into the mainstream, especially protocols like the Blockchain technology.
More importantly, the FinTech developments are becoming more or less very disruptive and will continue to dent the establishments and empower the common man. For instance, the forex trade largely involves banks and corporates which act on market movements to operate on the remittance space.
When a customer wants to transfer money back home, they are bound for a three day wait as the bank or company explores for a favourable trade for themselves before completing the transfer. Companies such as ours are challenging this very lethargic and age old status-quo, to promote instant money transfer without implementing middlemen or brokers. We are truly empowering the end consumer with a fast and easy system on their fingertips. Why? Because it is 2017!
Besides these key points, transparency has been playing a pivotal role in consumer sentiment; as this generation of consumers have high expectations when it comes to flexibility and sharing of information and data. This factor encapsulates the trust element of an organization. Upcoming firms should take a note of this trend to focus on strategies that implement transparency and flexibility when it comes to communicating your value proposition to the customers.
This year will witness a world of instant digital payments with immediate validation, acknowledgement, and exchange of transaction data between the point of transaction and the seller’s ledger. This is against the 2016 idea of “near real time,” which pertains to accelerated sets that may range from minutes to hours or even more days, real time would be truly, absolutely instantaneous dispensation and processing of information. Lastly, it should be noted that payment systems are crucial to any economy considering their vital role to enable the intermediation process, a core requirement for financial stability. Upcoming technological applications and adoptions like the Blockchain protocol will most likely serve as a key factor in facilitating immediate intermediation, due to its seamless process automation capabilities to keep a ledger sound without human intervention.
The latest market report from technology M&A advisory firm, Hampleton Partners, reveals a reduction in fintech transaction volume in 2016 whilst overall transaction value remained stable as early hype has been replaced with cautious investment in proven and more established technologies and businesses.
The Fintech M&A report, which covers mergers and acquisitions in the period between July 2014 and December 2016, shows deal values for the first half of 2016 were down 32% from the previous half year. With investors increasingly prioritising profitability and resilient business models, EBITDA multiples fell to 15.0x compared with 15.4x in the previous half-year, while revenue multiples through 2H 2016 also dipped to a four-year low of 2.2x.
Top acquirers
Enterprise financial software companies accounted for 46% of the deal count on the trailing 30-month period, with a total of 689 deals completed.
Broadridge was the top acquirer, buying eight 8 businesses, its most recent acquisitions being investment advisor compensation firm M&O Systems, brokerage and shareholder communications business INVeSHARE and outsourced customer communications company, DST Systems.
SS&C, ICE and IHS Markit came in second place, acquiring six entities each. Other active acquirers included IRESS, Accenture, Envestnet and Digital Asset Holdings.
Search for scale and global consolidation
Deals were driven by acquirers looking to build scale, as well as the opportunity to enhance or replace in-house legacy systems. Hampleton also believes that CBOE Holdings’ $3.2 billion offer for Bats is the latest sign of a push towards global consolidation in the exchanges sector.
Enterprise resource planning and front-to-back office management solutions were particularly sought after. Meanwhile, the growing adoption of cloud and mobile services prompted established players such as SSC&C and Fiserv to buy digital solutions that either complement their existing portfolios or replace them entirely.
Miro Parizek, Hampleton managing partner, says: “Going forward, Hampleton believes that the Fintech M&A marketplace will remain consistent, continuing to deliver attractive multiples for sellers. Despite wider concerns surrounding Brexit and other geopolitical issues, London will remain an investment hotspot for fintech assets with investment activity driven by the three forces of consolidation, compliance and disruption.”
Blockchain and AI
Jonathan Simnett, Hampleton sector principal, adds: “Despite the market focus on mature technologies during 2016, Hampleton expects to see strong demand for blockchain companies and increased interest in artificial intelligence (AI) applications in the coming months as the technologies move to being a key area of focus in financial services. Disruptive alternative payment and lending services will also continue to thrive, attracting more interest from technology majors such as Apple and Google.”
(Source: Hampleton)
