FinTech Disruption
30% of the approximately $11bn invested in Financial Technology (FinTech) each year is currently going into the UK’s Fintech industry, so it’s worth exploring further and building upon this discussion with some scenario planning for the Financial Services disruptions that could take place.
JP Morgan’s Chairman Jamie Dimon warned, in April 2015, that “Silicon Valley is coming” - something that most banks have been aware of for several years, but some have (arguably) not yet taken it that seriously, or don’t yet know how to deal with the situation. Many banks are setting up R&D labs and Innovation centers - small teams that are experimenting with new technology, and closely befriending the startups. Some banks have created incubators, others prefer to invest small (a few million dollars) amounts in startups as a cheap way of learning and getting exposure to the cutting-edge ideas and players.
London’s Silicon Roundabout area (the area around Liverpool Street, Old Street roundabout and Shoreditch) is home to the largest FinTech community in the world. FinTech startups are offering solutions to specific problems and pain points in the financial systems, leading to faster improvements for end users. Often these solutions are cheaper (Online lending costs Lending Hub 2% to offer v’s 5-7% costs in traditional banks), (sometimes!) more secure methods, and often better experiences for customers (more personalized, one click features, etc). Overheads for startups are low as technology is relatively cheap (the main overhead is staffing), with scalability being a startups biggest challenge. When a startup gets starts to gain any traction, then often they have to face playing against the incumbents who (normally) have significantly more money to spend than them.
There’s also the issue of regulation to deal with - in place to protect consumers and end users, and also (rather conveniently) there protecting the incumbents. However, the UK’s FCA (Financial Conduct Authority) does now have an Innovation team who are open to working with both regulated and non-regulated companies and help them introduce innovative financial products and services into the markets - a positive measure that clearly needs to be emulated Globally - too many countries currently prefer to treat Cryptocurrencies as commodities or property, hence making them subject to those relevant sales taxes.
New Ways to Measure Risks: In the months ahead, we’ll likely see new ways to measure data, and hence risk. Already Kabbage and OnDeck (both small business loans) analyze lending risks through measures such as transaction history and social media engagement, integrated into their proprietary algorithms. Machine learning will soon be able to assess more effectively than humans and be able to underwrite loans to consumers - machine algorithms are not prejudiced!
Any big changes you see in the months ahead? Feel free to share below?