Digital Payments: 20 years ago PayPal and WorldPay kicked off the first wave of fintech making it easier for consumers and merchants to do business together on the internet. In the last decade digital payments has raced ahead thanks to RFID and mobile apps and there is much to play for in this growing market expected to be worth $2 trillion by 2025.
Market leaders include Ant Financial, Stripe and Square. Klarna has transformed consumer retail purchasing through services for merchants in the “payments as a service” market. Mastercard and Visa dominate the global card market for payments, a point not lost on Apple who has partnered with Mastercard and Goldman Sachs to launch Apple Card. Payments is a lucrative market Facebook will attack through Libra.
M-Pesa is the poster child for mobile payments and deposits in Africa, has 17 million customers in Kenya and has expanded to South Africa, India and Eastern Europe. The Nordics have Swish (Nordea) and VIPPS (DnB) that allow peer to peer money transfers between consumers and to businesses, popular apps with high consumer adoption rates, delivered by incumbents.
Money Transfer: An early fintech play in the $600 billion remittances market that has revolutionized the cost of sending money abroad for workers from counties such as the Philippines, Mexico and India. Fees have dropped from high rates of up to 17 percent of the value of transaction, to zero.
No huge tech innovation here but great business model innovation. Apps are built on legacy infrastructure using customer bank accounts for KYC / AML and benefit from the legacy infrastructure, the fintech takes its margin on the foreign exchange spread.
Big players include XE, OFX and TransferWise. The Facebook team will have noticed this market when planning for Libra.
Alternative Lending: P2P Lending is an early fintech play that has focused the globally fragmented lending market. Estimated at over $200 billion P2P lending grew substantially following the financial crisis when big banks were not lending. P2P lenders often deploy more sophisticated data driven credit models than traditional banks and have much lower operating costs with no branches.
Big players include Lending Club, Funding Circle and SoFi. OakNorth, one of Europe’s highest valued fintechs, is taking on the P2P segment with an alternative lending model and a third party data driven tech offering. The opportunities for retail and SME lending have not been lost on traditional players with new entrants such as Goldman Sachs Marcus offering loans and Amazon re-focusing on its next wave of business lending solutions.
Bitcoin, Cryptocurrency, Digital Assets, the Blockchain and Distributed Ledger Technologies: This mouthful of a megatrend cluster wins my prize for the fintech megatrend of the decade. Bitcoin was launched on the blockchain in 2009 following Satoshi Nakamoto's 2008 whitepaper and the rest is history - blockchain sent a thousand projects sailing across all sectors although it took some time getting noticed. A decade in and we are only just getting started.
Forecasts that this sector will cross the $25 billion mark by 2025 seem grossly inadequate to me. Libra has awoken central banks, policy makers and regulators with the likelihood that a dominant global industry led stablecoin may emerge. The FSB, BIS, and IOSCO are all focused on analysing the market impact of stablecoins and central banks are reviewing their plans for digital fiat currencies. Libra may have fumbled in the early days with its own narrative, but its impact has been sensational.
Following the ICO crash and pullback of the bitcoin price in 2018 the sector has regrouped with an enterprise focus: new digital assets and derivatives, and a focus on exchange, custody and settlement infrastructure. Market leaders include R3 with its Corda platform and Six the Swiss stock exchange, who will partner to platform digital assets; a JP Morgan Coin for client payments; and Fidelity Digital Assets platform for institutional clients.
After Xi Jinping's comments expect the Chinese government to push the development of blockchain technology, ahead of the application of cryptocurrencies which are banned in China. Traditional cryptocurrency exchanges such as Binance, Coinbase, and Huobi are now trying to better understand the implications of their requirement to adhere to the FATF travel rule, requiring them to do KYC checks on customers.
Blockchain is also leading the sustainable finance world in areas such as impact coins, refugee crisis, migrant workers, and financial inclusion. Blockchain for green and blue bonds is positioned to take off, due to the efficiency of issuing and cost of administration. This follows blockchain bonds launched by the World Bank and the Commonwealth Bank of Australia.
Whilst the debate between decentralized public networks and private permissioned networks evolves, most commercial players are seeking interoperability between blockchain and distributed ledger protocols and would like their digital assets and smart contracts to “work” across the Blockchain, Ethereum, Hyperledger, Corda, EOS, etc. Decentralized Finance (DeFi) has emerged as the ultimate tool for the disintermediation of financial services in a world where many of the intermediaries are jurisdictional based entities with statutory mandates – high friction territory.
Love or hate bitcoin and the blockchain, Satoshi has helped to change the world by combining two technologies that have been with us for over 40 years: distributed data storage and cryptography, into new innovative applications and use cases whilst taking on the fractional reserve banking system with a new digital currency not controlled by a central authority.
While the first generation of this technology is energy inefficient and slow relative to the traditional transactional payment system, it is highly innovative, has many practical use cases and newer generations are improving performance. It is NOBEL prize thinking, not like he’d ever win, whoever he or she is.
Challenger Banks: More challenger banks have popped up in the past few years than you can shake a stick at. A greater flexibility in the licensing options for new banks along with a new generation of banking infrastructure partners has reduced both statutory and working capital requirements to get their plays to market.
Most of the plays focus on delivering outstanding brand driven customer services on mobile and internet technologies. These include savings and current accounts, payments, cards and loans, and many are moving into share trading and investments, connecting up the “wealth account” to the “current account”.
Market leaders include Chime, Revolut and Monzo, and while most are a long way from making a profit they are attracting new customers, an outcome not to be discounted in an often fickle and inert consumer marketplace. Demographic changes are on the side of challenger banks, baby boomers in the West are heading to the rock and roll retirement home, and half of the planet is under the age of 30.
In an era of zero to negative interest rates, arguably the traditional banking model is broken, so it is unlikely we will see challengers focused on delivering better savings rates, though customer charges should be lower than traditional banks with no physical branches and legacy tech. In any event, the customer experience and getting the job done in real time and cost effectively is the value add.
Challenger banks are transforming banking in the same way low cost airlines transformed the service proposition of national air carriers. Low cost airlines did not put national carriers out of business, but significantly expanded the air travel market with customers that did not (as) regularly use airlines. Let’s see if challenger banks can deliver this market expansion, demographics are on their side.
Low Cost Stock Trading and Investments: Whilst Robo Advisors have not lived up to the expectations of gaining a large share of the investment market, they have delivered technological solutions for investing in stocks and funds that is now being deployed across the market from challenger banks to larger wealth managers.
Robo Advisors in the U.S. include Betterment, Wealthfront and Robinhood, the latter leading on commission free investing. In Europe Scaleable Capital is a Blackrock backed quant and tech team partnering with big banks to distribute investments. Nutmeg, the U.K.’s Robo poster child attracted investment from Goldman Sachs in their 2019 funding round leading to rumors of an investment account offering to accompany Marcus.
Wealth managers have responded and firms like Vangard and Schwab, with its recent acquisition of TD Ameritrade, have delivered new robo tech tools to their investors. With the rise of passive investments and the race to the bottom on fees, technology is the best lifeline strategy for wealth managers.
Offering free share trading in history’s longest secular bull market is a winner. Offering a technology proposition for customers to self-help their way to a risk adjusted passive investment plan has been largely positive, though surveys indicate many people would still appreciate (human) advice when it comes to investments.
Innovative Financial Services Regulators: Following the financial crisis, the Financial Conduct Authority (FCA) in the UK was given a competition mandate. After the failure of two of the four universal banks in the UK serving 80 percent of the market, the government wanted to promote greater competition in financial services.
This heralded a new era of regulatory innovation, led by Chris Woolard, the FCAs strategy and competition director, started with the (fintech) Innovation Hub and the Regulatory Sandbox. Global financial services regulators were quick to copy this playbook, with MAS in Singapore and ADGM in Abu Dhabi delivering a range of regulatory tools and innovations.
The Global Financial Innovation Network (GFIN), formally launched in January 2019, is a consortium of 50 regulators collaborating on fintech innovation and now includes the U.S. SEC and CFTC. Its aims to produce a global sandbox to allow industry to focus on cross border multi-jurisdictional innovations and is eagerly awaited by industry.
Regulating financial services markets is like driving while looking in the rear view mirror. Tools and engagement models that support industry and regulators working together to better identify technological and financial risks to consumers, counterparties and the financial system in the early stages should be lauded. U.S. policy makers may wish they had taken this approach in earlier years with tech firms like Amazon and Facebook.
Financial Services Infrastructure: The growth of APIs to obtain client data in the financial services sector has been explosive. Open Banking in the U.K. and PSD2 in Europe offer the industry an interoperable data protocol for client data sharing that most customers have no idea of and probably don’t care about but will change their engagement with providers, hopefully for the better. Data growth is also driving the big data / machine learning / AI trends that are emerging.
Clearbank, the first clearing bank to have launched in the U.K. for over 200 years is one of my favorites for real fintech innovation. It offers digital clearing between counterparties and is taking on the four big U.K. clearing banks. Founded by Nick Ogden who calls himself “the plumber” and is also the founder of WorldPay, he has gone on to found RTGS.global to take on real time gross settlement market for central banks.
Chinese Fintech: The rise of Chinese fintech over the past decade has been nothing short of breathtaking – we in the West can learn a lot. Ant Financial, the finance subsidiary of Alibaba, leads the way and is the highest valued fintech on the planet at a whopping $150 billion and Tencent is not far behind.
While the geo-political relationship between the West and China has stalled due to trade and technology security issues, pay attention to Chinese fintechs growing their payments, banking and investment businesses in China and Asian markets.
The Chinese government’s commitment to blockchain over cryptocurrency is significant, there is a big push to use this technology to underpin further development of the Belt and Road Initiative. The US government has been noticeably quiet on blockchain and European governments are just starting to think about policy.
Following the noise that Libra has made this year, The People’s Bank of China is rumored to have accelerated its plans for a central bank digital currency. With little of the legacy of the Western financial services infrastructure and a demography of digital adopters, watch this space closely.
Industry Wide Investment, Collaboration and Innovation: Investment in fintech has increased over 13 times in the past 10 years from $8 billion in 2010 to over $110 billion in 2019 driven by venture investing and crowdfunding. The U.S. and China typically account for more than 80 percent of the total investment with the U.K in a very distant third place with $1.5 billion. I call this the bookend investment scenario where everything in between the U.S. and China bookends is sub-scale with respect to (fintech) capital investment and likely sub-scale with respect to talent in numbers.
Whether it is corporate venture capital, Y Combinator models and labs, or joint ventures and partnerships, innovation seems to be contagious in financial institutions. Barclays Accelerator is notable for its partnership with Techstars, which was run by the outstanding Chris Adelsbach, and Goldman Sachs and Citi dominate institutional fintech investment.
The trend has extended to governments and regulators and I have lost count of the regulatory sandboxes around the world. The OECD has set up the Blockchain Policy Forum, BIS is launching three innovation hubs for central banks starting in Singapore, and fintech industry membership and advocacy organizations have popped up all over the planet.
I must confess to proudly taking part in this historic and unprecedented epoch of digital innovation in financial services. Following my role as the CEO of Innovate Finance - the UK fintech hub, I went on to found Global Digital Finance with Simon Taylor (11FS), a not-for-profit dedicated to professional standards and codes of conduct for the crypto and digital assets sector.
Having spent a career in financial services, not-for-profit advocacy has become a priority for me. Following the financial crisis and the birth of my daughter, I have been consumed with the future and ensuring we leave the system in better shape for our children.
I maintain my day job as an advisor and investment manager as a partner in a boutique firm and can reliably confirm I am long on digital in the global financial services sector, for the benefit of everyone.
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