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)
Written by Richard Hurwitz, CEO of Tungsten Network
More and more we are enjoying the benefits that technology can bring. Drones are delivering packages. Robots are helping with cleaning around the house. Driverless cars have even begun ferrying passengers around some US cities. The recurring theme here is removing friction; doing away with tiresome, menial tasks that clog up our free time.
In the finance world, too, tedious jobs abound that needn’t. In my view the burgeoning FinTech sector is playing a huge role in reducing friction. Take electronic invoicing. As CEO of Tungsten Network, I’ve seen first-hand how digitising accounts processing frees up valuable time and resource to nurture partnerships. Equally, on-boarding suppliers reliably and securely fosters trust from the very beginning.
There are plenty of other examples of how FinTech enables frictionless business, such as Payoneer, an international money transfer platform that enables businesses and professionals to receive cross-border payments quickly, securely and at low cost – saving up to 90% on bank transfers while never leaving their desk. Another example is Lenddo, which uses non-traditional data from social networks and other sources to compute people’s identity and creditworthiness.
Technology is an enabler of relationships and development. Work streams like Procure to Pay – the implementation of a seamless process from point of order to payment – are allowing small businesses to link in partnership with large ones to innovate and grow. By cutting friction and easing pressure points in this way, the whole business community stands to benefit.
Technology is driving this change. In the retail industry, for example, automation and artificial intelligence are being used to speed up picking and packing. Current advancements in logistics are enabling humans to ditch the boring jobs and carry out more highly skilled tasks, such as robotics management.
Locus Robotics, with its strapline “robots empowering people” estimates that its warehouse solutions can help workers become up to eight times more efficient. Likewise, on the shop floor Target in the US is trialling a robot to track inventory – thereby freeing up staff to help customers more.
Twenty years ago, there were less than 700,000 industrial robots worldwide. Today, there are 1.8 million, according to figures from PwC, and this is projected to be as high as 2.6 million by 2019.
PwC carries out an annual survey of 1,400 CEOs around the globe. The most recent survey reveals that 52% of CEOs expect technology to have a significant impact in changing competition in their industry over the next five years, and 23% expect technology to completely reshape it.
Technological changes, perhaps, should be the focus in finance too. From procurement to payment there are plenty of opportunities to upgrade technology, yet many businesses still utilise time-consuming, unpredictable and inefficient sourcing and payment practices – wasting valuable human resources that could better target business growth and innovation.
To return to an example I’m familiar with, every day businesses waste time and energy by manually checking invoice documents received from an increasingly global supply chain, when technology exists that can reject incorrect invoices before they even arrive. Continuing with the theme, further time and energy is wasted for businesses and their suppliers who spend time calling and emailing to check on invoice statuses instead of accessing the information online. This friction can all be avoided.
Later in the accounts payable process, unanalysed procurement data stagnates in these paper invoices, instead of being quickly captured to understand procurement trends that can inform spending decisions. For suppliers, potential working capital is tied up in unpaid invoices, unavailable to be pumped back into the business and invested in targeting growth through new contracts or equipment. While invoicing is an old world example, the potential of digitising it sums up what FinTech is all about.
All businesses must think about what innovative solutions are out there, finance included, or risk falling behind the competition. At multiple points in the business lifecycle, sticking points and delays with manual systems cause friction not only for consumers of financial services, but also between suppliers in the industry and the businesses with which they work. This risks sowing conflict and mistrust between partners, weakening the trusted relationships on which supply chains are built.
I would argue that not embracing the potential offered by FinTech is a huge risk, causing friction at multiple levels. This can manifest itself in multiple ways: suppliers reticent to jump through too many hoops; administrative employees’ patience wearing thin; and finance departments hesitant to greenlight funds. Combined, the impact on the bottom line could be considerable.
The opportunities are endless and I’m confident that there’s even more potential for FinTech to enable the digital transformation of business processes, connecting buyers and suppliers with streamlined financial services capabilities and ultimately, removing friction across global trade.
It’s a question on everyone’s lips at the moment, and though we know what trends are emerging, the progress therein is rapid and you might just miss it, so what does the future hold for the fintech sector? Nicholas Gill, Founder & Strategy Partner at Team Eleven, gives Finance Monthly his thoughts on the matter.
Living in a world that is rapidly evolving, all business sectors need to be able to innovate and adapt to keep up with changing and exacting consumer demands. This is no different, and perhaps some may say, even more crucial, in fintech. The rate at which this sector is developing is mind-blowing. Fintech is becoming an increasingly important part of how traditional banks are trying to gain competitive advantage. It is no longer possible for them to survive on sentiment and legacy and they face the constant challenge to prove their transparency, ethics and efficiency.
The smartest operators are driving investment for tech-based start-ups, have embraced the bots and are actively trialling innovations like blockchain. Blockchain was initially designed to make financial transactions quick, cheap, easy and most importantly, trustworthy between people who don’t know or trust each other. It is now increasingly being implemented, acting as a further assurance of safety and privacy.
Fintech has already come a long way since its infancy in the 1950s which saw the early incarnation of the credit card. It took almost two decades more before we saw the next big innovation - ATMs descending onto our highstreets. Since then the change within the financial sector has been rapid especially after the introduction of the World Wide Web. This paved the way for online stock brokerage websites, massively changing the fintech structure into what we now use every day. Post the introduction of the internet, the pace of change was unheralded – it feels a long time ago that we were wary of online financial transactions, and only a very few were even using online banking, let alone apps.
Those early and rapidly evolving changes underline the financial sector is all about developing and building on previous trends. Take social media platforms Instagram, Facebook and Twitter, there was a time when they were keen to direct their users straight to the purchasing website if they saw a product they liked. Twitter quickly changed its mind though and killed the instant buy button after taking notes from research suggesting consumers wouldn’t take notice. However, following the success of Amazon, and how the one click buying has evolved into a hugely successful mobile platform for the company, Instagram is now keen to develop the idea itself. When a brand as big as Amazon makes it work, it changes the consumer mind-set and consumers’ expectations adapt accordingly, so the investment from Instagram is not surprising.
We live in a society where everybody wants the latest tech products, whether it’s from the newest phone to the latest VR headset, so why should it be different when it comes to our finances? Consumers look for much faster shopping experiences, whether it be online or in store with the introduction of contactless payments.
As consumers’ behaviours change, we increasingly expect similar advances in our working lives, and fintech is now making strides in the B2B arena. The huge spend from Intuit in the UK on QuickBooks is a great example. I run a medium sized ad agency with billings approaching £2m using QuickBooks. We don’t have a Financial Director, but I am comfortable with the information available to me online via my mobile app. I can give accurate forecasting information in meetings from my app, and even submitted a quarterly VAT return from the gym.
More and more, fintech is helping consumers manage their finances themselves with millennials being a driving force for the shift from in-branch to digital channels. With increased competition and demand, this is set to accelerate in 2017. To be able to compete with the likes of Paypal and Apple Pay, traditional banks must optimise their digital channels. Already, the start of 2017 has seen Paypal introduce its first bot which enables Slack users to make payments without leaving the conservation. As consumers become better acquainted with the new trends, their confidence increases with the process of using these intelligent robots. This already started taking place last year as UK banks began adopting AI to speed up processes. RBS for instance started implementing intelligent robots online to help customer interactions. This year will definitely see an influx of bots into our lives, especially within the finance sector, whilst humans start taking a step back.
Another advance that is going to see less human involvement is the development of blockchain. Created a few short years ago, blockchain is already being used in many different ways, including by the Estonian Government. They are using the new technology to secure all of the country’s health records which will ensure everyone’s data is retrievable and will eliminate the potential for doctors or the government to cover up any changes to healthcare records. Again, this new technology will cut out the middle man, creating equal opportunity and distributed value through decentralisation. For instance, artists will be able to receive more than 90% of their income, without the need for managers, production companies, record labels etc.
Consumers are leading the way in how services need to be orchestrated and it’s up to the brands to make sure they keep up with them if they are to retain their competitive advantage.
Traditional banks were arguably late to the party, but innovation now seems finally to be at the top of their agenda, and not for its own sake. They are listening to consumers and are beginning to partner with tech start-ups to open their digital channels which will also keep them relevant to many of their customers.
But these big, household name brands have built their reputations on security and privacy, so their innovation must also reassure their traditional consumer. Blockchain scores highly in this area as it is one of the most secure services to date, which is key to all consumers whether they are early adopters of tech or not.
By the end of the 2017 the fintech sector will have massively changed again as technology and consumer demand accelerates - and I for one look forward to seeing the progress.
Speaking on the developing relationship between consumers and the financial sector, here Tracey Follows, Chief Strategy & Innovation Officer of The Future Laboratory, offers her take on the future of the consumer finance sector.
Money. It is something that is in the back of most normal people’s minds most of the time.
But the brands involved in money are not generally amongst the public’s favourite or most salient brands. Stop anyone in the street and ask them to name their favourite brand, and it is not likely to be a bank, an insurer, or an aggregator. And if people are happy with their bank or insurance, they don’t talk about it.
What does peak consumer interest though, is the prospect of making something onerous or boring a little bit simpler, quicker, more convenient or better value. And it’s around these benefits that we see the consumer finance sector pivoting and changing.
The arrival of so called FinTechs, companies offering new technology and ways to manage money – Apple Pay, PayPal and Circle, or Bot based automated savings services like Digit – is changing our relationship with money and finance. And with 40% of Brits believing that the image of big name banks has deteriorated in the past year, it’s no surprise that money clubs and a new generation of digital alternatives are beginning to be used in place of the traditional banks.
As the march towards a cashless society continues, and as new entrants and non-financial brands begin to offer real replacements to traditional financial services, the traditional finance brands are going to have to adapt.
So how fit are the category players and their brands to face the future?
The Future Laboratory has identified six key behaviours that make a business ‘fit for the future’. These include: Long Term Planning, Brand Stretch, Innovation, Conscious Business, Thriving Employees, and Agility.
Within the sector of consumer finance there are some very different types of business. Traditional banks, Insurers, and payment firms such as PayPal, Visa and Mastercard are all there. But there are some common themes and challenges despite their obvious differences.
For the purposes of comparison, we’ve looked at the brands in this sector in two broad groups: Banks and building societies and ‘Others’ – a more eclectic group made up of insurers, aggregators and payment gateways.
All the brands in this sector score above average on Agility, a measure of the brand and businesses ability – in financial terms, to actually make its ideas come to fruition. Only eight of the 45 brands making up these two groups fall outside the top 50% of all 547 brands in this study. To be expected, given the nature of these businesses.
Where these groups start to pull apart is when you look at Brand Stretch and Conscious Business. The last couple of years has seen consumer trust and the reputations of banks fall away as tales of scandal, collapse, failure and huge salaries have been paraded through the media. While some individual brands fare better than others, as a group every single brand falls well outside the top 50% of all brands in the study on Brand Stretch with banks being pulled down by poor reputation scores.
Presumably, in an attempt to correct their failing reputations and to answer to ever greater calls for transparency and honesty in the sector, these same banking brands score very well on our Conscious Business behaviour. This is a measure which assesses if a company or brand is behaving in an ethical way that doesn’t have adverse effects on people, wherever they are in the world. Consumers understand that they are part of a “whole system” and they increasingly don’t want to buy from companies that are having a bad impact on the environment or on people. They increasingly expect brands to publicly own their impact on both.
On this measure, the overwhelming majority of banking brands are fully compliant with the GRI – the global reporting initiative that provides a method for companies to assess and report their impacts on the environment and society.
The other, non-banking business and brands simply haven’t faced the same pressures and it shows when you look at their Brand Stretch scores, making allowances for the general apathy to finance brands, they score much better. They are much less concerned with ethical behavior (and so far, haven’t had to be)
The comparison between PayPal and Halifax – the two best brands in each sub group within consumer finance – shows that each group needs to learn from the other if they are to be fit for the future.
The traditional retail banks need to look towards servicing their consumer and future consumer in ever more innovative ways while continuing to rebuild trust, reputation and therefore their brand.
The others can’t afford to ignore the lessons of the last few years and that includes the drivers of Conscious Business. They could bolster their brands by doing so and help to insulate themselves against any future scandal in the eyes of the ultimate judge – the consumer.
In the last few years fintech has taken a prime spot in R&D, investment and market value, and is increasingly crucial to the progress of financial services and the growth of businesses worldwide. Here to tell us why, and offer particular insight into the development of this key sector is Gary Turner, Co-founder and UK Managing Director of globally leading accounting software programme, Xero.
Fintech, despite being amongst the newest global industries, is already one of the most vital in terms of supporting the growth of businesses across the world. At the time of publication, there are 1,362 fintech companies across 54 countries with the US, UK and China holding strong as innovators and market leaders in financial innovation. Globally, businesses are working to become entirely digital, and early disruptors saw the opportunity to create a financial digital platform to perfectly compliment the modern way of working - the timing and execution of fintech allowed it to become the biggest industry in the world. But for the less initiated, this raises questions around how fintech has had such an influence in macro and micro economics.
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The key is simple – it creates a level playing field for businesses who aren’t restricted by software. SMB growth can often be restricted by the online tools available within budget, the data they have access to, and how quickly they can access it – all of these shortcomings have been recognised and seen as potential by the fintech industry. By using cloud-based software, business owners can interact with a real-time system of record, something that was previously only available to enterprise companies. This has helped create a central platform for small businesses and owners to share information with other businesses and partners, as industry relationships can be improved and built upon through open data.
Numbers in real time
Another relationship that has evolved is the one between a business owner and their finances. Originally, owners would have a recurring meeting with their accountant to get a briefing on their business’ performance, but cloud software has changed the routine. Now, with improvements to financial technology, owners can now log-in anytime to check in on the numbers that keep the business running. The advantages for an owner to oversee trends on a daily basis are paramount to their success, with charts and graphs making it simple to understand where you are over or under servicing. Quick data allows for quick action. Having data readily available in one place gives a business understanding of what their customers need.
Public vs private
This brings to light what fintech means for the private sector, and the public sector is looking to learn just how it can improve the way they work too. In the UK we have being trying to streamline the HMRC and other departments’ services by shifting to a digital services model – this is an example of institutions recognising how critical real-time financial data is for business success. In early 2017 the HMRC announced new concessions to the policy to support small businesses who were struggling with some of the technicalities of the roll-out - while most businesses will have access to a personalised digital tax account by the end of the roll out, free software will be available to the majority of small businesses, while those that cannot go digital will not be required to. Despite the recent changes, the overarching vision of the Making Tax Digital policy will ultimately be of benefit for the UK’s business infrastructure, as the appetite for digital services is growing and traditional paper-based processes gradually becomes obsolete.
A global change
The UK private and public sector have felt it necessary to make these seismic changes, and it’s interesting to see how it translates across the world. Unsurprisingly the US, UK, Europe and China have had the largest fintech investment in the past five years, but India is one country that has expanded its offering, with a $2.2 billion investment – the money being pumped into the global industry is phenomenal. Beyond the usual suspects, Luxembourg has experienced huge growth in its digital economy in the past 10 years and has invested substantially into its world-class IT infrastructure, all of which is provided to entrepreneurs looking to innovate in the fintech sector. Similarly, Hong Kong has earmarked $250 million for an innovation and technology fund designed to match funding from venture capital outlays in local tech startups.
It’s these reasons and more that has allowed fintech to evolve, but the growth isn’t forecasted to slow down. In the past 12 months, there has been more than $1 trillion worth of transactions processed, with more money comes potential for more learnings, the potential for more learnings must derive from intelligent software – this thirst for insight will only see the financial web grow more powerful.
With monumental funding and innovative initiative schemes, the next 12 months will only see the industry go from strength to strength as the rollout becomes commonplace for all businesses across the globe.
