The Rise of Fintech in Finance How fintech is reshaping the finance sector and how you handle your money By Kantox CEO and fintech thought leader, Philippe Gelis and Finance Insights Manager Timothy Woods

 

 

 

 

 

 

 

 

 

 

 

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“Fintech is changing the finance sector just like the Internet changed the

written press and the music industries. In what is a stagnant sector

monopolised by banks, finance is ripe for innovation and fintech is

unquestionably the catalyst needed for change.”

Philippe Gelis, CEO of Kantox

 

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What is fintech and why should you care? Fintech is the term given to financial service firms whose product or service is built

upon technology, often resulting in highly innovative, pioneering services. “Fintech”

as a term is a compound of “finance” and “technology”. It is a relatively recent term

and is certainly not a buzzword. Fintech is here to stay. Why? Put simply, fintech is

changing finance as we know it and is already impacting how increasing numbers

of individuals and businesses alike conduct their financial matters. Are banks

worried? They certainly are. But their worry does not come from the market share

fintechs have currently, as it is miniscule. The real worry comes from what fintechs

could do to banks’ market share in the future. The fear is that mid- to long-term,

ironically, banks could lose their own sector: banking. Or a significant portion of it at

the very least. Fintech growth is seemingly unstoppable. Since 2008 global

investment in the burgeoning fintech sector has tripled, from $928 million to $2.97

billion and is forecast to reach up to $8 billion by 2018. The UK and Ireland now

account for over 50% of all European fintech investment. Venture capitalists around

the world have diverted attention to fintech, mainly as the growth prospects of the

sector are stratospheric.

London is the undisputed fintech capital of Europe. With Silicon Valley, London

forms one of the globe’s two fintech capitals. Between 2008 and 2013 investment in

UK fintech reached $700 million. The investment growth percentage in London far

outstrips its American counterpart, although the total amount is considerably less.

The UK is now launching an initiative to position London as the main global hub for

fintech, for which competition from Silicon Valley, Asia and New York will have

present sizeable challenges. However, London’s chances are good. The UK capital

is the financial centre of the world, already Europe’s fintech capital, attracts a highly

skilled and talented workforce to the capital, and the UK government will look to

make London an even more attractive option for fintechs to set up shop there, with

Chancellor George Osborne recently pledging support.

“Are banks worried about fintech? They certainly are”  

“London is the undisputed fintech capital of Europe.”  

 

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Image: the growth of global investment in the fintech sector from 2008 to 2013

Fintech is changing finance in virtually all its numerous offshoots and subsectors.

From banking to international money transfers, from business and personal loans to

personal investment, and much more, fintech is presenting traditional finance with

unprecedented challenges through waves of new, innovative ideas which are

having an increasingly sizeable impact on global finance and how as businesses

and individuals, we conduct our financial matters.

Why is there a sudden growth of fintech companies? The 2008 Global Financial Crisis (GFC) is credited in large part with the sudden

upsurge in fintechs. Since the 2007-9 global meltdown, fintechs have continued to

spring up from all corners of the globe. The reasons are considered to be many:

1. Anger at the established banking system and the main entities that it

consists of.

2. Widespread lack of trust with banks post-crisis.

3. After the crisis, banks stopped lending; businesses had to contend with

refusals on lines of credits or bank loans and individuals were turned down

mortgages and personal loans.

“Fintech is presenting traditional finance with unprecedented challenges through waves of new, innovative ideas.”  

 

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4. The internet is changing our relationship with money the same way it

fundamentally altered both the newspaper and music industries. Fintechs

have taken advantage of this and built finance services based on the

evolution of the internet. People now use their tablet computers or

smartphones to conduct financial matters. Fintechs have used the internet

to provide faster, cheaper services.

5. Banks resisted change because it was more convenient (and profitable) to

do so. They have monopolised financial services for so long, with little to no

competition, thereby allowing them to charge high commissions, and often,

obscure or hidden fees, such as inflated foreign exchange rate spreads or

letter of credit costs. Why would they change when such change would only

lead to lesser profits? Fintechs have seen this and offer an alternative,

often with cheaper rates and transparent pricing.

6. The GFC almost collapsed the global banking system. Since 2008 banks

have been precoccupied with recovery and a wave of new regulation with

which to comply. Investment in new technology and in adapting to the

changing financial landscape was not deemed a priority. For this reason

banks are now playing catch-up with fintech in terms of technology.

Fintechs are setting the benchmark high. This is one reason why banks

across Europe keep closing high street branches. People are simply not

banking in person any more, especially generations X and Y, and banks

have so far been unable to engage customers online whereas fintechs

have, as their strength lies in online interaction.

“Banks are now playing catch-up with fintech in terms of technology. Fintechs are setting the benchmark high.”  

 

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Image: Graph showing the increase of investment in fintech from 12 leading venture capitalist firms,

including Accel Partners and Andreessen Horowitz. (Source: CBInsights.com)

Fintech by numbers $3 billion – global fintech investment in 2013

$950 million – the amount in invested in Silicon Valley-based fintechs in 2013

$781 million – the amount of fintech investment in the UK and Ireland since

2004

1/3 – The portion of global fintech deals that took place in Silicon Valley in 2013,

easily confirming the Californian tech hub as the current global fintech capital, but

London is an eager challenger

51% - Year-on-year growth rate of fintech in London

26% - Year-on-year global growth rate for fintech

23% - Year-on-year growth rate of fintech in Silicon Valley

69% - Percentage of European fintech funding for fintechs based in the UK and

Ireland

 

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What are the different types of fintech company? Fintechs in large part act as disintermediating agents where before it was traditional

finance sector entities, mainly banks, that managed the following financial

subsector. Now fintechs are nibbling away at the banks’ stranglehold. It is worth

noting that nearly all the following companies mentioned are merely a few years

old. As more investment flows into fintech and they become more mainstream with

time, their market share of financial services will almost certainly go up, at the

expense of banks and other more traditional finance entities, such as brokers. Many

of the following companies mentioned will likely become household names in time.

1. Money transfer

Where before banks and brokers were the sole middlemen necessary to

complete international money transfers, between countries and currencies,

usually charging a significant spread in addition to other charges for the

priviliege, companies such as Kantox and TransferWise have sprung up to

offer peer-to-peer transfers based on mid-market rates.

2. Equity funding

As Global Financial Crisis bank lending to corporates after the Global

Financial Crisis nosedived, equity crowdfunding was the solution for many

budding start-ups, providing much needed capital in exchange for equity.

Equitynet and FundedByMe are but two examples.

3. P2P lending

P2P lending companies including Zopa, Funding Circle and MarketInvoice

have seen a sruge in popularity as businesses turned away from banks for

funding have turned to new P2P lenders. As banks divert their investment

in government bonds rather than the corporate sector, the growth of P2P

lending firms will almost certainly rise. As the term “P2P” becomes more

mainstream, with people slowly but surely coming round to considering

alternatives to the established, traditional financial sector status quo, fintech

companies offering P2P lending services will likely make up the largest

 

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portion of the fintech sector. Lending Club in the United States is

particularly prominent.

4. Mobile payments Allowing people to conduct transactions through their mobile phone or

tablet, fintechs such as Square and SumUp have stolen a march on banks

by leading innovation in mobile payments.

5. Trading platforms

People can now trade for themselves now using a wide choice of online

trading platforms. Some even provide services where the research is done

for you and specific stocks or mutual funds (group of stocks) are

recommended. Rather than go with a broker or investment bank, people

are now choosing platforms such as Nutmeg. Moreover, such fintech

platforms are able to offer much lower fees than the typical bank or

stockbroker rate.

6. Additional fintech subsectors

Fintech is a term applied to a vast array of different financial service firms.

As well as the main types of fintech there are many others, including

financial advice services such as NestEgg. Fintech is even home to

companies with big social change objectives, like Kifiya, who aim to “bank

the unbanked”. In Africa particularly this is a problem, where the vast

majority of the adult population (80%) do not have bank accounts. Kifiya

aim to change that. Other fintech subsectors include financial research and

advice, remittances, banking infrastructure as well as consumer banking.

All of the companies in fintech leverage technology to provide their financial

services.

Image: One Word Trade Center - explored 10.07.2014 by Maciek Lulko licensed under CC BY 2.0

 

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Will fintech change finance? According to Anthemis group, a leading digital financial services investment

advisory firm, finance “is in the midst of a revolution”. The future of fintech can be

summed up in how Kantox’s CEO, Philippe Gelis has described its impact: “The

future of finance will be shaped by what the fintech space is doing right now. As

with all industry-changing innovation, it takes time for a widespread paradigm shift

to take place, and with fintech right now we are transitioning from the group known

as the “early adopters” and the “early majority”. It is only a matter of time before we

see fintech pervasively change finance in the same way the Internet changed the

music and newspaper industries. Furthermore, fintechs have the technological edge

over banks, and as technology develops, we will only see more pioneering solutions

offered uniquely by fintechs.”

Image: “The adoption curve” illustrated above, theorised by Simon Sinek, explaining how innovative

ideas become popularly bought into

As more investment flows into fintech companies, with new fintech startups

springing up all the time, and wider recognition of the alternative finance sector,

fintech will grow from strength to strength, leading to more growth for the sector;

more investment in fintech companies; more talent choosing the fintech sector over

traditional finance; more innovation in the financial sector, and more market share

taken from banks and traditional finance sector entities. The UK Chancellor of the

Exchequer George Osborne recently pledged to support fintech growth and position

“Fintechs have the technological edge over banks, and as technology develops, we will only see more pioneering solutions offered uniquely by fintechs.”  

 

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London as the global fintech centre. With backing from the City of London, the

global finance capital, driven by the UK government, fintech is afforded the attention

that its increasing importance to finance and the wider economy demands. It is a

testament to how it is changing finance from the outside in, and to the role that it will

undoubtedly play as the driver of change in finance.

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