State of FinTech Innovation; Implications for Financial Institutions and Service Providers

DushyantShahrawat, CFA

POP QUIZ: SO YOU THINK YOU KNOW DIGITAL… WELL, DO YOU RECOGNIZE THIS MAN?

• 25 year-old Swede• #1 Youtube blogger on the planet• 42 million subscribers• 10 billion views

This is Pewdiepie! A 25-year old Swede

FOUR STRATEGIC CHANGES HAPPENING NOW

Customer Influencing, Acquisition and Servicing is increasingly taking place through digital channels, and often via non-financial firms

Brand Identity is being determined by the ‘wisdom of crowds’, and not your firm’s ads and marketing efforts

In the Digital World, Customers are realizing and responding much faster to conflicts of interest, price gouging, and vendors that just pay lip service

The Economics of the Internet is changing businesses and decisions

THE LONG TAILED HYPOTHESIS FOREVER CHANGED THE MUSIC INDUSTRY

CHANGE IS COMING TO THE FINANCIAL INDUSTRY TOO

“Digital disruption is shrinking the role of today’s banks… merely navigating waves of regulation and waiting for interest rates to rise won’t protect them from obsolescence.”

- Accenture

“Up to half of the world's banks will disappear through the cracks opened up by digital disruption of the industry”

- BBVA Chairman/CEO

“Silicon Valley is coming…. Online lenders are reducing traditional ‘pain points’ and making loans in minutes, which might take banks weeks.”

- Jamie Dimon, JPMorganChase CEO

“$11 billion (out of $150 billion) in profits is at risk of leaving the banking system in the next 5+ years from online marketplace lenders”.

- Goldman Sachs report

EIGHT KEY OBSERVATIONS ABOUT FINANCIAL SERVICES INNOVATION

While core financial activities haven’t changed (lending, investing, payments), 1) product design, 2) distribution and 3) pricing is transforming quickly1

Intermediation is under attack: Startups are focused on replacing intermediaries, or reducing their influence, by deploying smart technology2

Most Innovation is focused on 1) reducing cost of service, 2) unbundling products, automating processes, 4) reassessing risk3

Gleaning critical insights from large quantities of Data will profoundly change decision-making4

Alternative risk measures enabled by modern technology will revolutionize risk assessment/management, leading to big changes in insurance and lending5

Incumbent institutions are struggling to respond, weighed down by 1) legacy technology, 2) culture, 3) concern of cannibalizing current revenue6

The Regulatory impact of Finserv Innovation is unclear. Regulators are ignoring it, but it will impact 1) systemic risk, 2) fairness, 3) transparency 7

Non-financial firms (mainly high tech) are waiting on the sidelines, but will 1) enter payments, 2) influence customer behavior, 3) be a distribution channel8

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A Deeper Look Into Financial Services Innovation

TOP 100 PRIVATE COMPANIES WORLDWIDE ARE VALUED AT $450 BILLION

A VIBRANT STARTUP SCENE IS EMERGING

FINANCIAL STARTUPS ARE RIDING THE INTERNET’S EVOLUTION

Publishing

Brochureware

Ecommerce

Personalized, Contextual service

What’s Next??

1994 1998 2002 2010 2015

MAJOR CAPITAL MARKETS FIRMS ARE INVESTING BILLIONS INTO STARTUPS… LARGELY FOR STRATEGIC REASONS

INVESTOR BASE HAS BROADENED… 894 DISTINCT INVESTORS ARE ACTIVE

… AND ITS NOT JUST IN THE US

A CONFLUENCE OF FACTORS HAS DRIVEN THIS INNOVATION

Loss Of Investor Trust And

Confidence In Financial Institutions

Hi-tech Innovation (Cloud, Social Media, Cheap

Hardware)

Abundant Availability Of

Cheap VC Capital To Fund Startups

Early Startup Success In Providing

Flexibility, Transparency & Responsiveness

FSI’s Unable To Meet New Digital

Expectations Set By Google/Amazon

Regulatory burden and Capital

Constraints Force FSI’s to Abandon Market Segments

+ +

+ +

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INNOVATORS CAN BE CATEGORIZED BY WHAT THEY ARE TRYING TO DO

Replacing Brick and

Mortar with Digital

Service Model

Eliminating Friction (Costs, Convenience)

Improving Risk Assessment

Using Alternative Measures

Transforming Customer

Experience

Serving Neglected Markets or Customer Segments

Reference Startups

Reference Startups

Reference Startups

Reference Startups

Reference Startups

FIVE SECTORS ARE WITNESSING THE MOST ACTIVITY

PAYMENTS REMITTANCES LENDINGDIGITAL WEALTH

BLOCKCHAIN

• Non-financial firms most active here

• Big opportunity to reduce friction and fees

• Retail P2P, small business, alt-lending are popular themes

• Roboadvisors’ best use case of smartly using technology

• Ignore Bitcoin, think Block Chain

• Exchanges, Wallets, Merchant services

WHILE STARTUP ACTIVITY IN CAPITAL MARKETS LAGS, HERE ARE 3 SECTORS

17

SOCIAL & COMMUNITY TRADING

ALTERNATIVE FUNDING PLATFORMS

TRADE ANALYTICS

SEVEN INSIGHTS ABOUT CAPITAL MARKETS INNOVATION

• Capital markets will remain least impacted, relative to Banking and Insurance

• Wealth management will experience the greatest change, while institutional capital markets will be least impacted

• With $120bn of wealth transfer expected in next 5 years, innovators will have a window of opportunity to steal AUM from incumbents

• Struggling to survive, Investment managers will explore machine learning, social media and artificial intelligence, to exploit every alpha opportunity

• Buy-side processes that were until now untouched, will be outsourced

• Three areas startups are focusing on are 1) Social Trading, 2) Alternative Funding Platforms, 3) Trade Analytics

• Early stage private fund raising will transform entrepreneurship. Public fundraising (IPOs) will shrink, but structurally remain unchanged

9

DISTRIBUTED LEDGER BUILDS ON DECENTRALIZED SYSTEMS

Source: WEF Draft Report. Not to be Reproduced

VC INVESTMENT IN 2015 TOPPED $500MILL, 50% MORE THAN IN 2014

Q3’15

$87.5

“Bitcoin is to Block chain what Pornography was to the Internet.”

Q3’15 is an estimate

MANY APPLICATIONS ARE EMERGING IN FINANCIAL SERVICES