FinTech Predictions 2018

From a Fintech perspective 2017 has delivered some surprises. Bitcoin’s almost 1500% (though this figure is bound to be inaccurate by the time you read this article) surge, close to $4bn being invested via unregulated Initial Coin Offerings (ICOs); and a continuous litany of hacks, data-thefts and cyber crimes have conspired to maintain market fears of asset bubbles. In the traditional economy, regulators continue to crack open the banking system to new players; use regulation to reduce the systemic risks banks represent to the overall functioning of the economy, and finally glimmers of growth beginning to return to Europe. 

In this context, we look forward to 2018 and consider some of the macro-trends that guide our thinking.

Bitcoin , Blockchain and ICOs

Despite a regulatory clampdown in China and extreme volatility, Bitcoin valuation has rocketed driven by a combination of speculation, fear of missing out and a narrative that continues to capture the imagination of investors. Bitcoin’s meteoric rise during 2017 leaves many questions. With significant aspects of the system leveraged on the strength of bitcoin itself, questions remain about the sustainability of the current rally.

ICOs, unregulated offerings that effectively generate capital, are creating companies whose value will be external to the blockchains they are based on, can act as value-anchors by creating real companies tightly coupled to non-bitcoin blockchains and new coin systems. The opacity and ownership concentration at the back-end of the bitcoin ecosystem continues to generate concern. We expect to see more regulation around this as it matures, as well as some high-profile failures. 

The market has seen blockchain proofs of concepts being launched in multiple industries, testing some ideas which would be perfectly served by databases, and others which represent new ways of doing business. Next year should bring more real-world use-cases - possibly in situations where cliff-edge trust mean that the intermediary model currently in place breaks down when under pressure. Settlements are an early low-hanging fruit here, and we look forward to seeing the first systems go live.

Demand for globalisation in financial services is continuing, the growth of bitcoin as an extrinsic value transfer mechanism was apparent during periods of instability in Zimbabwe this year, and highlights the need, if not the mechanism for a government-independent holder of value.  

AI, Data, and the customer journey

With the ongoing commoditisation of the tools and infrastructure to drive deep-learning, AI went mainstream in 2017. At the moment the focus is on cyber-assisting humans and improving productivity, but as AI based capabilities become more integrated into back-office functions, cannibalisation of human roles seems inevitable. We have seen the beginning of this with relatively unsophisticated robotic process automation, and we expect to see material advances in the complexity of tasks that can be carried out.

Areas we see this having significant impact, is in the scaling of high-quality customer-service experience. Currently, high-touch services are constrained to more profitable clients. The growth of increasingly sophisticated natural language processing is improving the ability of these platforms to support more sophisticated use-cases and scale out a higher quality of service.  Similarly, in the back-office, increasingly sophisticated statistical analysis enabled by next-generation tooling will allow better credit risk analysis and superior decision-making driving up returns for those businesses capable of leveraging them.

Key to AI is data - the effectiveness of the algorithms used by these systems is a function of the proprietary information firms hold, and increasingly proprietary data sources will help firms deliver more powerful customer experiences.

Legacy players remain under pressure

Despite procrastination by many financial institutions, PSD2’s inevitable deadline moves closer. Firms that will benefit from API access to back-end payments capabilities, but have struggled with the banking industries token responses will gain renewed vigour, and start eating into banking revenues here.

In parallel, banking remains under pressure. High regulatory costs, ongoing low interest-rates and low return on equity have driven consolidation, and increasing pressure on payment revenues risks eating further into distressed businesses. We expect the ongoing trend of financial services consolidation to continue as the benefits of scale are too powerful to ignore. Additionally, we are beginning to see early FinTech players reach significant milestones.

Whilst we do not see major European FinTech IPOs yet, as early FinTech players continue to grow – with companies like Revolut and Transfer taking significant funding rounds, the possibility of material M&A that can disrupt the landscape, and reinvent incumbents remain on the horizon.

Globalisation

No look-forward will be complete without considering the impact of China. Whether it is the one-belt-one-road project, the clampdown on bitcoin, or its continued international expansion; its impact on financial services will be felt for the foreseeable future. 2017 saw a 41% decrease in foreign investment out of China amidst a tightening of capital controls that appears set to continue, but with a shift from the US as a key area of investment, strategic investments in European markets looks likely to continue, albeit at a lower rate.

Cybercrime is an international phenomena. With a multitude of state, criminal gans and individual players, cyber-defence remains a critical area of focus. With the leak of significant government backed offensive tooling onto the Internet, the barriers to attack continue to fall. As systems open-up further through APIs, we expect to see more security problems. De-novo banks may present a low-hanging fruit from a threat-surface perspective, and we would not be surprised to see a high profile compromise here. Similarly, we must all remain on alert for suspicious emails, phishing attempts and things that do not make sense, as firms like ours will always be targets.