How will FinTech change financial services?
In a sector hit hard by the global crash of 2008 there’s a technology phenomenon that’s making millions. Nick Huber investigates FinTech.
The UK’s financial services sector has had a rough time in the last decade, but one part of financial services has grown fast and looks likely to transform how many of us bank and manage our finances.
As KPMG’s The Value of FinTech report notes, financial technology or “FinTech” has grown due to technological advances, changing customer expectations, availability of funding and more support from governments and regulators.
It’s now a multibillion-pound industry, “disrupting” traditional banking. So how will FinTech change financial services? What are the most promising services and technologies? Will worries about data privacy, cybersecurity, or lack of scale and regulation slow the spread of FinTech? Has its potential been exaggerated?
Banking on change
UK consumers are unhappy with the service they’re getting from their banks, research suggests. More than half (53%) of UK consumers want their bank to provide them with better services and more choice, according to research published in March by the Emerging Payments Association (EPA), an association of payment companies whose members make more than £6tn in transactions each year. The EPA questioned 2,000 UK consumers.
In March the UK Government published its strategy to make the UK the “best place in the world” for FinTech businesses. The strategy includes the possibility of reducing the cost of regulation for FinTechs by using “machine readable” regulations, encouraging industry standards so that FinTechs can partner more easily with banks and appointing “regional envoys” to help spread FinTech across the UK.
How we bank is changing. Since January, UK banks must share customer data with other financial providers (with customers’ consent), to comply with “Open Banking” rules, aimed at improving competition and service in banking (of which more below).
FinTech businesses are making life easier for consumers and SMEs by introducing new services and intelligent financial management tools.
- Tom Bull, EY
Kent Mackenzie, Director with Deloitte and a FinTech expert, says he’s seeing more FinTechs in credit scoring and affordability, and financial “concierge services”. He says: “Castlight and ASAPP are great examples of these I have become familiar with over the last few months. [They] definitely offer something I think the industry has been missing for quite some time.”
One FinTech trend, Mackenzie says, is account aggregation, summarising a customer’s finances in one digital place and linking this to other finance providers to create “lifestyle apps”. Starling, a mobile-only bank account, is one example.
Tony Craddock, Director General at the EPA, whose members include Visa, Banking Circle and Kompli-Global, gives three examples of how FinTech is changing banking:
- Modulr, a “game-changing” business-to-business payment platform.
- FLEETCOR, which helps businesses pay for and manage their car fleets (for example, track employees’ mileage and reimburse employees for fuel costs).
- Ethoca, which makes technology to reduce card fraud for card issuers, ecommerce merchants and online businesses.
There are thousands of FinTech businesses globally, in almost every aspect of financial services, says Tom Bull, Director of the FinTech practice at EY. “They are making life easier for consumers and SMEs by introducing new services such as easier ways to make payments, new sources of debt and equity capital, and intelligent financial management tools.”
The barriers to entry in financial services are lower than at any point in recent decades, creating perfect conditions to create and grow FinTech companies, Bull says. “Availability of technology, capital and talent are driving this trend, and it is being supported by policymakers and regulators,” he says.
Accountants are also getting into FinTech. Gareth Lewis CA started his own FinTech business, Delio, in 2015. The business, which has offices in the UK, Brussels and Sydney, is a technology platform that helps financial institutions find investment opportunities for their clients. Last year, Delio raised £1m in a fundraising round led by the Development Bank of Wales.
Lewis advises young CAs to trust their instincts about opportunities in FinTech: “It’s changing every day as we are growing quickly and aggressively. I love doing business.”
Open Banking opens doors
Open Banking rules are expected to further boost FinTech and encourage co-operation between FinTechs and banks.
The rules aim to increase competition in banking and create personalised services. They should also give customers a clearer view of their finances by letting them see their bank accounts, broadband, mortgage etc in one place online, and make it easier to compare or switch products.
The rules were introduced by the Competition and Markets Authority (CMA), the UK’s consumer competition regulator, on behalf of the UK Government.
“As a lender, Open Banking is something we’re particularly excited about,” says Darvish Heshejin, Head of Partnerships at MarketInvoice, a start-up that lets companies sell their invoices and get money upfront, instead of waiting to be paid by their customers.
MarketInvoice has made more than £2bn of invoice finance and business loans to UK companies since it was established in 2011. But delays in accessing customer information held by banks can limit how quickly MarketInvoice can arrange finance for its customers, Heshejin says.
“Open Banking will democratise this information and make it more accessible to authorised third parties,” he says. “You’ve got the customer in the middle and around it you have the banking provider, the funding provider, the accounting provider … and all of these are talking to one another. That’s where we’re headed.”
FinTech is sometimes described as a threat, or “disruptor”, to banks, but this is too simplistic. Banks and FinTechs compete. Increasingly, though, they’re also co-operating. Banks benefit from new technology and new ideas. FinTechs get access to investment and a larger customer base.
We’re constantly looking at how we can best use these technological developments to improve our products and services
- Kent Mackenzie, Deloitte
The large banks are working with FinTechs, using “incubators” and “accelerators” − a “financial boot camp” offering advice, mentorship and office space to help start-ups survive the tough first few years and grow.
Barclays, for example, has its own “accelerator”, run with Techstars (an investor that runs accelerators), in London, New York and Tel Aviv.
Barclays’ Edinburgh accelerator is Eagle Labs. The bank works with established FinTech businesses, such as Float, an Edinburgh-based online cashflow and forecasting tool.
“We’re constantly looking at how we can best use these technological developments to improve the products and services we offer to businesses,” says Jamie Grant, Head of Region Scotland and Northern Ireland at Barclays.
One thing to come from the accelerator is a SmartBusiness Dashboard, which uses application programming interface technology to bring a company’s business apps into one dashboard, helping them manage their own data which in turn will help them to run their business.
Barclays is also partnering with Flux to trial technology that enables retailers to give customers itemised receipts via a mobile app. Benefits include helping consumers get a better picture of their spending habits, Grant says.
Challenges and sceptics
FinTech is common in many countries. According to global research by EY, one in three consumers who use digital technology are using FinTech services.
FinTechs are at a “tipping point” and are “poised for mainstream adoption” in the countries surveyed, EY said.
“The use of FinTech worldwide could increase from about one in three consumers now, to more than one in two in the next couple of years,” says EY’s Bull.
Other experts say FinTech has been hyped. In a speech in March, Michael Mainelli, who co-founded Z/Yen, a think tank for the City of London, described the UK’s FinTech industry as a “three-year-old government mash-up”, which is smaller than Berlin’s FinTech industry.
FinTech propaganda hides three decades of wholesale finance automation. Our real strength is more than 500 years of wider technology and open trade. Sell trade in tech not FinTech.
- Michael Mainelli, Z/Yen
“Profound changes would be needed to even start to be a standalone FinTech centre. Silicon Valley, in total, is still only half the size of London,” Mainelli said during a debate about FinTech. “FinTech propaganda hides three decades of wholesale finance automation. Our real strength is more than 500 years of wider technology and open trade. Sell trade in tech not FinTech.”
Technologies including artificial intelligence (AI), voice-activated services and blockchain (the encrypted digital ledger behind bitcoin could store 10% of global gross domestic product by 2027, according to the World Economic Forum) will shape the future of FinTech.
We will continue to see new financial services for consumers and back-office services between businesses, says Deloitte’s Mackenzie. “I expect, in the next few years, voice-based service and AI-enabled chat service and support tools will become fairly commonplace to address our end-to-end needs far more intuitively to services through linking technologies and platforms.
"For example, ‘I want to buy a house.’ The successful companies will be the ones that guide a customer through this entire experience (finance and otherwise) rather than just helping with parts of it.”
Robotics technology and AI will increasingly be used to “streamline” back-office processes, such as trying to work out the impact of regulation, Mackenzie adds. He says blockchain will be used to verify ownership and transaction for mortgages, insurance and asset management sector. “I am aware of and working with some early forays in this space.”
The use of “smart contracts” in blockchain (instructions for completing a complex transaction once certain conditions have been fulfilled) is likely to mean the technology could be used for sectors including accounting (automating parts of audit and compliance), healthcare (controlling access to medical records) and public services (tax collection).
In the longer term, FinTech may be used to address some of society’s big challenges, Mackenzie says. “We are exploring some exciting proof-of-concepts around how data and FinTech can help in reducing homelessness, [detecting] and helping to reduce financial distress.”
Like any new technology, FinTech faces challenges. The biggest is probably IT security. Seven in 10 (71%) financial businesses say cybersecurity is the biggest risk of partnering with a FinTech, according to research published last year by law firm Simmons & Simmons.
The same percentage of financial institutions surveyed said “greater visibility” of FinTechs’ cybersecurity controls would make them more likely to partner with them.
Customer education is needed if Open Banking is to be a success.
- Tom Bull, EY
Gaining a critical mass of customers is another challenge for many FinTechs.
“FinTechs are realistic about the potential challenges, with the ability to achieve customer adoption ranked as the biggest obstacle,” says EY’s Bull. “In terms of what could be done to help ensure Open Banking is a success, customer education was identified as the most important area, followed by agreed industry standards outside the nine banks identified by the CMA.”
Many consumers are also worried about how their financial data and personal information is used so banks and FinTechs must reassure consumers that they can be trusted with their data.
Consumers are wise to be cautious with monetary matters, says the EPA’s Craddock, but he also says that “fear of the new” could prevent them from having full control of their finances.
FinTechs can only access consumers’ personal information after a “rigorous” certification process by the Financial Conduct Authority for a licence to access consumers’ personal information – and accessing it can still only be done at the customer’s request, he says.
Also, the General Data Protection Regulation, which became UK law on 25 May, gives consumers control over how their personal information is used.
Five or 10 years from now, today’s FinTechs may be part of the financial establishment and facing a new wave of challengers. The sector needs to work out how to harness the ideas and technology coming from this growing industry, while agreeing standards for data privacy, security and regulation.