Friday, December 27,
2019 / 03:59 PM / by Lawrence Wintermeyer, Forbes / Header
Image Credit: Alvexo
'Tis the season for predictions, as we close the last
ten years and head into 2020 and a new decade of bold technological innovation.
I am not a huge fan of predictions, here are three of
my favorite past ones:
1. "I think there is a world market for maybe
five computers," - Thomas Watson, chairman of IBM, 1943.
2. "There is no reason anyone would want a
computer in their home," - Ken Olson, president, chairman and founder of
Digital Equipment Corp., 1977.
3. "Everyone's always asking me when Apple
will come out with a cell phone. My answer is, 'Probably never," - David
Pogue, New York Times, 2006.
More than ten years following the financial crisis
fintech has produced a breathtaking number of megatrends with products and
services that make our lives better.
Let's have a look at the fintech megatrends emerging
from past ten years and what they reveal about the next decade of innovation in
the global financial services sector.
Digital Payments
20 years ago PayPal and WorldPay kicked off the first
wave of fintech making it easier for consumers and merchants to do business
together on the internet. In the last decade digital payments has raced ahead
thanks to RFID and mobile apps and there is much to play for in this growing
market expected to be worth $2 trillion by 2025.
Market leaders include Ant Financial, Stripe and
Square. Klarna has transformed consumer retail purchasing through services for
merchants in the "payments as a service" market. Mastercard and Visa dominate
the global card market for payments, a point not lost on Apple who has
partnered with Mastercard and Goldman Sachs to launch Apple Card. Payments is a
lucrative market Facebook will attack through Libra.
M-Pesa is the poster child for mobile payments and
deposits in Africa, has 17 million customers in Kenya and has expanded to South
Africa, India and Eastern Europe. The Nordics have Swish (Nordea) and VIPPS
(DnB) that allow peer to peer money transfers between consumers and to
businesses, popular apps with high consumer adoption rates, delivered by
incumbents.
Money Transfer
An early fintech play in the $600 billion remittances
market that has revolutionized the cost of sending money abroad for workers
from counties such as the Philippines, Mexico and India. Fees have dropped from
high rates of up to 17 percent of the value of transaction, to zero.
No huge tech innovation here but great business model
innovation. Apps are built on legacy infrastructure using customer bank
accounts for KYC / AML and benefit from the legacy infrastructure, the fintech
takes its margin on the foreign exchange spread.
Big players include XE, OFX and TransferWise. The
Facebook team will have noticed this market when planning for Libra.
Alternative Lending
P2P Lending is an early fintech play that has focused
the globally fragmented lending market. Estimated at over $200 billion P2P
lending grew substantially following the financial crisis when big banks were
not lending. P2P lenders often deploy more sophisticated data driven credit
models than traditional banks and have much lower operating costs with no
branches.
Big players include Lending Club, Funding Circle and
SoFi. OakNorth, one of Europe's highest valued fintechs, is taking on the P2P
segment with an alternative lending model and a third party data driven tech
offering. The opportunities for retail and SME lending have not been lost on
traditional players with new entrants such as Goldman Sachs Marcus offering
loans and Amazon re-focusing on its next wave of business lending solutions.
Bitcoin, Cryptocurrency,
Digital Assets, the Blockchain and Distributed Ledger Technologies
This mouthful of a megatrend cluster wins my prize for
the fintech megatrend of the decade. Bitcoin was launched on the blockchain in
2009 following Satoshi Nakamoto's 2008 whitepaper and the rest is
history-blockchain sent a thousand projects sailing across all sectors although
it took some time getting noticed. A decade in and we are only just getting
started.
Forecasts that this sector will cross the $25 billion
mark by 2025 seem grossly inadequate to me. Libra has awoken central banks, policy
makers and regulators with the likelihood that a dominant global industry led
stablecoin may emerge. The FSB, BIS, and IOSCO are all focused on analysing the
market impact of stablecoins and central banks are reviewing their plans for
digital fiat currencies. Libra may have fumbled in the early days with its own
narrative, but its impact has been sensational.
Following the ICO crash and pullback of the bitcoin
price in 2018 the sector has regrouped with an enterprise focus: new digital
assets and derivatives, and a focus on exchange, custody and settlement
infrastructure. Market leaders include R3 with its Corda platform and Six the
Swiss stock exchange, who will partner to platform digital assets; a JP Morgan
Coin for client payments; and Fidelity Digital Assets platform for
institutional clients.
After Chinese President Xi Jinping's comments expect
the Chinese government to push the development of blockchain technology, ahead
of the application of cryptocurrencies which are banned in China. Traditional
cryptocurrency exchanges such as Binance, Coinbase, and Huobi are now trying to
better understand the implications of their requirement to adhere to the FATF
travel rule, requiring them to do KYC checks on customers.
Blockchain is also leading the sustainable finance
world in areas such as impact coins, refugee crisis, migrant workers, and
financial inclusion. Blockchain for green and blue bonds is positioned to take
off, due to the efficiency of issuing and cost of administration. This follows
blockchain bonds launched by the World Bank and the Commonwealth Bank of
Australia.
Whilst the debate between decentralized public
networks and private permissioned networks evolves, most commercial players are
seeking interoperability between blockchain and distributed ledger protocols
and would like their digital assets and smart contracts to "work" across the
Blockchain, Ethereum, Hyperledger, Corda, EOS, etc. Decentralized Finance
(DeFi) has emerged as the ultimate tool for the disintermediation of financial services
in a world where many of the intermediaries are jurisdictional based entities
with statutory mandates–high friction territory.
Love or hate bitcoin and the blockchain, Satoshi has
helped to change the world by combining two technologies that have been with us
for over 40 years: distributed data storage and cryptography, into new
innovative applications and use cases whilst taking on the fractional reserve
banking system with a new digital currency not controlled by a central
authority.
While the first generation of this technology is
energy inefficient and slow relative to the traditional transactional payment
system, it is highly innovative, has many practical use cases and newer
generations are improving performance. It is Nobel prize thinking, not like
he'd ever win, whoever he or she is.
Challenger Banks
More challenger banks have popped up in the past few
years than you can shake a stick at. A greater flexibility in the licensing
options for new banks along with a new generation of banking infrastructure
partners has reduced both statutory and working capital requirements to get
their plays to market.
Most of the plays focus on delivering outstanding
brand driven customer services on mobile and internet technologies. These
include savings and current accounts, payments, cards and loans, and many are
moving into share trading and investments, connecting up the "wealth account" to the "current account."
Market leaders include Chime, Revolut and Monzo, and
while most are a long way from making a profit they are attracting new
customers, an outcome not to be discounted in an often fickle and inert
consumer marketplace. Demographic changes are on the side of challenger banks,
baby boomers in the West are heading to the rock and roll retirement home, and
half of the planet is under the age of 30.
In an era of zero to negative interest rates, arguably
the traditional banking model is broken, so it is unlikely we will see
challengers focused on delivering better savings rates, though customer charges
should be lower than traditional banks with no physical branches and legacy
tech. In any event, the customer experience and getting the job done in real
time and cost effectively is the value add.
Challenger banks are transforming banking in the same
way low cost airlines transformed the service proposition of national air
carriers. Low cost airlines did not put national carriers out of business, but
significantly expanded the air travel market with customers that did not (as)
regularly use airlines. Let's see if challenger banks can deliver this market
expansion, demographics are on their side.
Low Cost Stock Trading
and Investments
Whilst Robo Advisors have not lived up to the
expectations of gaining a large share of the investment market, they have
delivered technological solutions for investing in stocks and funds that is now
being deployed across the market from challenger banks to larger wealth
managers.
Robo Advisors in the U.S. include Betterment,
Wealthfront and Robinhood, the latter leading on commission free investing. In
Europe Scaleable Capital is a Blackrock backed quant and tech team partnering
with big banks to distribute investments. Nutmeg, the U.K.'s Robo poster child
attracted investment from Goldman Sachs in their 2019 funding round leading to
rumors of an investment account offering to accompany Marcus.
Wealth managers have responded and firms like Vangard
and Schwab, with its recent acquisition of TD Ameritrade, have delivered new
robo tech tools to their investors. With the rise of passive investments and
the race to the bottom on fees, technology is the best lifeline strategy for
wealth managers.
Offering free share trading in history's longest
secular bull market is a winner. Offering a proposition for customers to
self-help their way to a risk adjusted passive investment plan has been largely
positive, though surveys indicate many people would still appreciate (human)
advice when it comes to investments.
Innovative Financial
Services Regulators
Following the financial crisis, the Financial Conduct
Authority (FCA) in the U.K. was given a competition mandate. After the failure
of two of the four universal banks in the U.K. serving 80% of the market, the
government wanted to promote greater competition in financial services.
This heralded a new era of regulatory innovation, led
by Chris Woolard, the FCA's strategy and competition director, started with the
(fintech) Innovation Hub and the Regulatory Sandbox. Global financial services
regulators were quick to copy this playbook, with MAS in Singapore and ADGM in
Abu Dhabi delivering a range of regulatory tools and innovations.
The Global Financial Innovation Network (GFIN),
formally launched in January 2019, is a consortium of 50 regulators
collaborating on fintech innovation and now includes the U.S. SEC and CFTC. Its
aims to produce a global sandbox to allow industry to focus on cross border
multi-jurisdictional innovations and is eagerly awaited by industry.
Regulating financial services markets is like driving
while looking in the rear view mirror. Tools and engagement models that support
industry and regulators working together to better identify technological and
financial risks to consumers, counterparties and the financial system in the
early stages should be lauded. U.S. policy makers may wish they had taken this
approach in earlier years with tech firms like Amazon and Facebook.
Financial Services
Infrastructure
The growth of APIs to obtain client data in the
financial services sector has been explosive. Open Banking in the U.K. and PSD2
in Europe offer the industry an interoperable data protocol for client data
sharing that most customers have no idea of and probably don't care about but
will change their engagement with providers, hopefully for the better. Data
growth is also driving the big data/machine learning/AI trends that are
emerging.
Clearbank, the first clearing bank to have launched in
the U.K. for over 200 years is one of my favorites for real fintech innovation.
It offers digital clearing between counterparties and is taking on the four big
U.K. clearing banks. Founded by Nick Ogden who calls himself "the plumber" and
is also the founder of WorldPay, he has gone on to found RTGS.global to take on
real time gross settlement market for central banks.
Chinese Fintech
The rise of Chinese fintech over the past decade has
been nothing short of breathtaking–we in the West can learn a lot. Ant
Financial, the finance subsidiary of Alibaba, leads the way and is the highest
valued fintech on the planet at a whopping $150 billion and Tencent is not far
behind.
While the geo-political relationship between the West
and China has stalled due to trade and technology security issues, pay
attention to Chinese fintechs growing their payments, banking and investment
businesses in China and Asian markets.
The Chinese government's commitment to blockchain over
cryptocurrency is significant, there is a big push to use this technology to
underpin further development of the Belt and Road Initiative. The U.S.
government has been noticeably quiet on blockchain and European governments are
just starting to think about policy.
Following the noise that Libra has made this year, The
People's Bank of China is rumored to have accelerated its plans for a central
bank digital currency. With little of the legacy of the Western financial
services infrastructure and a demography of digital adopters, watch this space
closely.
Industry Wide
Investment, Collaboration and Innovation
Investment in fintech has increased over 13 times in
the past 10 years from $8 billion in 2020 to over $110 billion in 2019 driven
by venture investing and crowdfunding. The U.S. and China typically account for
more than 80 percent of the total investment with the U.K in a very distant
third place with $1.5 billion. I call this the bookend investment scenario
where everything in between the U.S. and China bookends is sub-scale with
respect to (fintech) capital investment and likely sub-scale with respect to
talent in numbers.
Whether it is corporate venture capital, Y Combinator
models and labs, or joint ventures and partnerships, innovation seems to be
contagious in financial institutions. Barclays Accelerator is notable for its
partnership with Techstars, which was run by the outstanding Chris Adelsbach,
and Goldman Sachs and Citi dominate institutional fintech investment.
The trend has extended to governments and regulators
and I have lost count of the regulatory sandboxes around the world. The OECD
has set up the Blockchain Policy Forum, BIS is launching three innovation hubs
for central banks starting in Singapore, and fintech industry membership and
advocacy organizations have popped up all over the planet.
I must confess to proudly taking part in this historic
and unprecedented epoch of digital innovation in financial services. Following
my role as the CEO of Innovate Finance-the U.K. fintech hub, I went on to found
Global Digital Finance with Simon Taylor (11FS), a not-for-profit dedicated to
professional standards and codes of conduct for the crypto and digital assets
sector.
Having spent a career in financial services,
not-for-profit advocacy has become a priority for me. Following the financial
crisis and the birth of my daughter, I have been consumed with the future and
ensuring we leave the system in better shape for our children.
I maintain my day job as an advisor and investment
manager as a partner in a boutique firm and can reliably confirm I am long on
digital in the global financial services sector, for the benefit of everyone.
Credit:
The post Ten
Years Of Fintech Megatrends For The Next Decade first appeared in Forbes on December
26, 2019
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