Disruptors And Enablers,
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
Now that the mobile payment infrastructure is in place, widespread adoption of mobile payments by consumers is just a question of when, not if.
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:
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:
Lending, and more generally financial services, fit well with tech companies’ know-how:
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.
Until now, Fintech companies have grown wild, without many restrictions. The US government (through the OCC) just set up of a specific bank charter for fintech companies that may seem at first sight as a regulatory headwind…It has actually more pros than cons:
Mobile payments offerings from Tech giants (Apple/Android Pay) could be a Trojan horse to develop a full financial services offering in the future.
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.
J.P.Morgan Chase pumped $600mn
into fintech in 2016.
French Bank BNP Paribas is spending €3bn
to “build the bank of tomorrow”.
RBC wants 40% of total technology
budget devoted to innovation.
Credit Suisse further enhances digital banking with Fintech Partnership; launches regional industry’s first digital client onboarding application.
Robo-advisory start-ups (Betterment, Wealthfront…) have been making the buzz lately. Taking over traditional financial advisors, they offer asset allocation services to users based on their personal and employment situation, assets and liabilities, savings and retirement targets.
Their success so far is limited (roughly $100bn in AUM) as brand is key and client acquisition costly. While it’s highly unlikely to see a high number of start-ups thriving in this low-margin business, traditional banks are expected to capitalize on bots to reduce costs. From portfolio allocation in wealth management to customer service (chatbots) and process automation.
Keeping up with the latest fintech developments proves difficult. Rising interest rate environment a positive for banks’ revenue and capex/IT spending outlook.
Regulatory burden on financial institutions is a driver of continued outsourcing. According to IDC, 79% of bank IT spending is still in-house!
A blockchain is a distributed database of transactions recorded
and verified across a network of participants.
Blockchain technology isn't just a more efficient way to settle securities. It will fundamentally change market structures, and maybe even the architecture of the Internet itself.
Abigail Johnson, CEO Fidelity Investments
Bitcoin is a remarkable cryptographic achievement…The ability to create something which is not duplicable in the digital world has enormous value… Lots of people will build businesses on top of that.
Eric Schmidt, Executive Chairman of Google
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:
In transactions involving cryptocurrency payments (Bitcoin, Ethereum…), graphics cards vendors have a major role to play. Miners verify blockchain transactions, are in charge of the cryptographic processing, which is highly computing intensive, and get rewarded in cryptocurrencies.