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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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