FINTECH

Record investments in Fintech over the last three years (above $100bn according to KPMG) are about to spark a massive wave of innovative financial and banking services

One of the most obvious outcomes of the Fintech revolution is the disintermediation of financial services and reduced costs for consumers as nimble companies take advantage of technologies such as AI to develop new kinds of services or to take business away from legacy players

While the emergence of mobile payment platforms has drawn much attention, other Fintech applications ranging from robo-advisers and peer-to-peer lending to money remittances and blockchain are also on their way

Against this backdrop, banks and insurers have to reinvent themselves and to invest heavily in new technologies in order to enhance customer experience and engagement and to extract major operating efficiencies through increased automation

This suggests that tech enablers (both hardware and software) should also be in the spotlight as they are in the early stages of a secular growth cycle

MOBILE PAYMENTS: THE TIP OF THE ICEBERG

Now that the mobile payment infrastructure is in place, widespread adoption of mobile payments by consumers is just a question of when, not if. 

MOBILE PAYMENTS INVESTMENT

ONLINE LENDING HAS BEEN A MAJOR AREA OF DEVELOPMENT 

According to KPMG, non-bank startups arranged more than $36bn of loans in 2015, mainly for consumers, up from $11bn in 2014. The boom of peer-to-peer lending platforms is mainly due to:
 

• Reduced lending by incumbents to small merchants and consumers following the 2008 financial crisis.
   
• The low rate environment which is a positive for the funding of P2P platforms.
   
• Increased use of online banking services by consumers.

Lending has become a natural extension of the services offered by many fintech and tech companies. They can leverage their existing relations with consumers and merchants to develop a potentially large and profitable lending business. They can increase the stickiness of customers to their main platform / business. A few examples:
 

• Amazon has offered more than $1bn in small loans to third-party sellers on its site in the past 12 months, compared with $1.5bn in the 2011-2015 period. Loans range from $1,000 to $750,000 and interest rates from 6% to 14%.
   
• Square and PayPal have launched lending businesses targeting small businesses.
   
• Qiwi, the Russian digital wallet and remittances company, is just launching a consumer lending business.
   
• Robinhood, which lets customers trade stocks for free, makes money thanks to margin trading.

Lending, and more generally financial services, fit well with tech companies’ know-how:

• They are data-rich businesses.
• The large amount of data that is easily labeled makes this an interesting place for Deep Learning (DL) methods.
• Access to detailed data on the customers’ business allows to mitigate risks.
• Securitization suggests balance sheets will not balloon.

A couple of tech companies already act de facto as banks by storing clients’ cash and allowing them to use their cash balance through debit cards.

TECH GIANTS LIKELY EAGER TO TAP A HUGE MARKET

Mobile payments offerings from Tech giants (Apple/Android Pay) could be a Trojan horse to develop a full financial services offering in the future. 

• Bypassing credit card companies would allow them to fully monetize mobile transactions.
   
• Leveraging huge numbers of users, unique data sets and AI skills, would then allow them to expand into lending and banking and to find a new growth avenue.

TRADITIONAL BANKS HAVE NO CHOICE BUT
TO MAKE LARGE FINTECH INVESTMENTS

There always will be new emerging competitors that we need to keep an eye on…

JP Morgan CEO, Jamie Dimon in April 2015

New competitors always will be emerging and that is even truer today because of new technologies and large changes in regulations. The combination of these factors will have a lot of people looking to compete with banks because they have fewer capital and regulatory constraints and fewer legacy systems. We also have a healthy fear of the potential effects of an uneven playing field which may be developing. Below are some areas that we are keeping an eye on.

Silicon Valley is coming. There are hundreds of startups with a lot of brains and money working on various alternatives to traditional banking. The ones you read about most are in the lending business, whereby the firms can lend to individuals and small business very quickly and - these entities believe – effectively by using Big Data to enhance credit underwriting. 

They are very good at reducing the “pain points” in that they can make loans in minutes, which might take banks weeks. We are going to work hard to make our services as seamless and competitive as theirs. And we also are completely comfortable with partnering where it makes sense. 

SOFTWARE SOLUTIONS: THE PICKS AND SHOVELS OF BANKS’ FINTECH REVOLUTION

• Online and mobile platforms
• Online account opening 
• Financial document automation
• Electronic payments
• Compliance and fraud prevention 
• Financial messaging

• Bill presentment
• Automatic invoice processing 
• Payment forms on web or mobile apps 
• Integration with mobile payment platforms and digital wallets
• Currency conversions
• Dispute management
• Fraud detection

• Customer loyalty programs
• Direct marketing services 
• Analytics

SOFTWARE SOLUTIONS: OUTSOURCING A SECULAR TREND

Keeping up with the latest fintech developments proves difficult. Rising interest rate environment a positive for banks’ revenue and capex/IT spending outlook.

BLOCKCHAIN: WIDE-RANGING APPLICATIONS

BLOCKCHAIN: NOT SO MANY WINNERS

While Blockchain is expected to be a massive technology over the next few years and to represent a major opportunity for financial institutions to cut back-office costs, we do not identify so many winners in the hardware/software universe as Blockchain is mainly about data storage, computing power and cryptographic processing.

IT services firm could stand out as they will be in charge of implementing Blockchain solutions within organizations:

• They are highly exposed to the financial vertical,
• Could also land assignments in many other industries that are likely to adopt blockchain.