2018 will be the year Financial Services Technology (Fintech) will come of age. This write-up focuses on various sub-segments of Fintech. The discussion centres on how these segments are impacting mainstream Banking and Financial Services.
This a beginning of a series of blogs where each sub segment will be analysed from a value-to-process perspective, along with Fintech company value-to-process analysis.
There is a barrage of regulation descending, starting from MiFID, PSD2, IFRS, Open Banking to GDPR. For the uninitiated, these are regulations that require hefty technology spend to comply. Regulation as a theme is often over-played but these are impacting technology changes, one that will take the current mainframe’s to the next phase.
Regulation will drive data sharing and data security standards which has opened doors and created opportunities for the technology start-ups, regulation technology (Regtech) is the word.
Trend: Data and infrastructure related innovation and efficiency ideas can have an impact. Investors should look at projects where teams have banking tech experience.
Digital Banks have thrown the gauntlet. The mainstream banks are bringing products and apps to compete. The idea that a current account with a well-known traditional bank is the most secure thing is slowly diminishing. Globally this segment has garnered investments and licences from regulators. This is an ever-growing segment and with no legacy tech baggage, GDPR and PSD2 could be well-integrated, a good service model can drive up customer demand.
Trend: Technology development and managing the license costs will drive delivery of services / product development will create impact and value.
Robo-advisors are yet to find their feet or will they ever is the question. The jury is out on that. This is likely to be the year where we will see consolidation. The key nuance in this segment is geographic impact. North America is a very mature and accepting market for robo-advice and Asia with the digital revolution is a massive opportunity whereas Europe and UK are a mixed bag and the revenue along with customer acquisition strategy is yet to be cracked.
Trend: Acquisition of good models and technology and consolidation within this segment likely path in Europe and US.
Lending is a mature business. It is ripe for two things i.e. consolidation and further product development. This segment has developed and has posed a true competitor to the banks. Globally, this segment has had most exposure to the clients and regulators. The next stop is GDPR. Lending mishaps and technology errors will not quantify to much in this segment but it fits in nicely with regulation technology (regtech) as an ingredient of the upcoming sector of the industry.
Trend: This segment will likely struggle to grow customer base which may drive product creation and partnerships within fintech lending and banks.
Insurtech was supposed to be the next big thing. The drive and acceptance of slow disruption is indicative of the lack of knowledge outside the industry to disrupt and lack of consumer acceptance (also pertains to an average person’s knowledge of insurance products) demonstrates there is some way to go for insurtech to become a mainstream offering.
A kin to digital banks this segment’s biggest competition is the incumbent process of trust despite the fact that there is a universal agreement of the lack of quality and service provided by the traditional insurers. This segment needs some heavy lifting from an investment and disruption perspective to make in roads in the different customer segments.
Trend: Automation, use of AL and ML will drive products to cater to customers.
Payments as a segment is saturated. It is now a matter of survival of the fittest. The ease of coming up with a payments start-up to do all and sundry has led to n-th degree of slicing and dicing. Investments have flown in more because of fashion than real substance.
The payments segment has been one of the flagship segments within Fintech and has provided the concept of Fintech the right impetus. Payments as technology outside emerging markets is dead. There is little or no room for innovation or disruption as it is but what there is, is still room for plenty of efficiency and optimisation of processes.
Trend: A mature segment that is likely to see customer building and value-creation.
Cryptocurrencies, its one of the those where it is a known unknown or an unknown unknown. In other words, if you understand this then you possibly know why Bitcoin is up or down but how this integrates into mainstream is a conundrum. Plenty has been said and written on this topic but an unregulated segment with no accountability this is a punters game.
Central Banks and Governments have potential issues in giving recognition. ICOs is a unique concept for start-ups to raise money, it can be used for many other purposes but the lack of regulation creates an aura of fraud like situations. This is a complicated segment and till the point when there is no regulation and control per the norm this could be anything.
Trend: A boom or bust year, we are already witnessing application of crypto in the institutional banking space with utility settlement coin and likely more niches to come into development during the course of the year.
Blockchain is not a segment and not specific to Fintech but it certainly has use cases. The use of blockchain in the institutional space (within Financial Services) is well documented. The idea that this technology can enable back office automation, cost savings, less reliance on cash, instant settlement, private blockchains is all plausible but yet to be implemented.
The investments via consortiums such as Digital Assets, R3 and others have yet to demonstrate that these will change the banking infrastructure and make an impact. May be it is too soon? But is it? The technology is here to stay is it in financial services or elsewhere, remains to be seen. Trade finance, Settlements and Identity are the areas currently being tackled by blockchain technology in the financial services space.
Institutional startups outside blockchain have not quite established themselves yet. Data is one area that can be tapped. MiFID and PSD2 enable that. The challenge really is one of knowledge and access. The active startups in this space operate within a niche and specialisation counts as it brings anchor clients.
This is a segment that can create solid inroads. The use of Artificial Intelligence and Machine Learning is a solid foundation that can be developed in this space be it Asset Management, Trading or even Derivatives product creation.
Trend: Practical application and its usage in mainstream banking for both Blockchain and Institutional segment.
Fintech is primed to have an impact. There are pockets of efficiency that could significantly move the needle in mainstream banking. Data, Security, Analytics, Regulation are the four key areas of action. Partnerships and consolidation will drive an attractive commercial and client acquisition model.
It is not about how Banks will impact Fintech but more importantly how Fintech will make inroads and make an impact and drive efficiency.
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