This report was jointly produced by Above & Beyond and Belatrix Software
To prepare for the emerging FinTech ecosystem, we highlight 4 trends for 2017 and beyond to inform your digital transformation strategy
Developing a strategy for an interconnected FinTech ecosystem
In the past few years we have seen the rapid evolution of FinTech from generating novel ideas which solve customer problems, to offering core financial services. We have seen the shift from digital startups, characterized by a lack of financial wherewithal and which operated on the edge of tightly regulated markets, to the emergence of mature financial digital organizations at the heart of the traditional financial world.
We can describe the development and maturing of FinTech in 3 main waves:
- The early emergence of digital startups helping consumers. Originally FinTech solutions were the preserve of B2C markets which solved specific customer problems such as offering home loans faster and easier. They used new technologies such as mobile and cloud computing, and were characterized by a laser focus on the customer with all the hall-marks of a digital Silicon-Valley style start-up.
- Transition to B2B markets. Today FinTech plays a role at the core of B2B innovation in financial markets, and industry observers widely expect B2B FinTech revenues to dwarf those in consumer markets within the next couple of years. Organizations such as Currency Cloud (cross border B2B payments), Payoneer Escrow (escrow services), and Hummingbill (B2B invoice platform) all reflect a maturing industry.
- The creation of an ecosystem between FinTech and traditional players. FinTech organizations are realizing that the required go-to-market investment, economies of scale, and regulatory needs, means it makes sense to partner with traditional financial institutions. On the other side, established players recognize the value, innovation and potential of FinTech in a world which is increasingly mobile-first. These financial institutions are also adopting many of the methods that FinTechs use so successfully, from a focus on the customer, to using Agile software development, to holding hackathons, and forming accelerators and innovation programs.
Therefore, in 2017 and beyond we will see the coming together of FinTech and established financial players to form an ecosystem which will transform the world of finance. The strategy for how to best to do this however, is still emerging.
While many large institutions, such as Bank of America, have developed a digital transformation strategy, have a digital team in place, and clearly recognize the shift in the industry which is underway, many mid-size, regional financial institutions are still missing the ball. In 2017 this has to change.
Therefore, to help organizations in their strategy development efforts we have put together 4 predictions for the future of FinTech and financial services, which we believe need to underlie the strategy of every financial organization.
1. Millennials squared – a parable of a digital wallet and beer money
Earlier this year Sam Crowder stood up at a televised baseball game, and held a sign asking his Mum to send him “beer money”. He included his Venmo account information. Thousands of people sent him money, as his sign went viral. Beyond sharing this story as advice in case you ́re ever thirsty and leave your wallet at home, what it reflects is how the use of new technologies may start with digital natives, but then rapidly spread to other generations. It reflects the inter-generational adoption of, and use of, FinTech technologies.
So, when looking at the potential of new services, it is important not just to consider the young people who will adopt it. But what will happen when they introduce the technology to their friends and family. Millennials are the earthquake that shakes companies, and adopt new tech and services at lightning speed. The rest of us are the tsunami of adoption that follows and lead to exponential growth.
2. Facebook, Amazon, Google or Ant Financial will become the largest retail bank in the world
It’s 2020 and to apply for a loan, instead of going to your local bank branch, you quickly ask Facebook for approval. This is far from fanciful thinking. Even as of today, PayPal is arguably one of the largest retail banks — it has more money in deposits than all but the largest 20 US banks, and offers services from payments, to loans and credit cards (albeit currently via partners). But we believe that one of the major tech companies, whether that is Facebook, Amazon, Google, or Ant Financial (the financial arm of Alibaba) will not only transform retail banking, but rapidly become the largest retail bank in the world.
These major tech companies have the platform and the scale to upend retail banking. They already have a digital wallet which underlies the services that enable users to buy and sell on their platforms, such as Google Wallet and Amazon Payments. Facebook Messenger Pay is already available in the US while it recently received an e-money license from the Central Bank of Ireland. This means European users will be able to store and transfer money, and make online purchases. The transition to becoming the largest retail bank in the world will be swift and brutal for traditional banks.
3. Regulators finally make the pivot to supporting the FinTech ecosystem
BitX, a bitcoin startup in Singapore, was looking to enter the UK and European
markets. Instead of having an arduous journey gaining the required licenses and approvals as it would have expected in the past, BitX was accepted into the regulatory sandbox of the UK’s Financial Conduct Authority. This enabled it to test its services and build its product with the backing of the regulator. This kind of thinking reflects how in the past few years we have seen regulators move from hindering innovation and new services, to proactively supporting and strengthening the FinTech ecosystem.
It is a challenging line to take, particularly in the world of finance – to help create the framework and environment for innovation, while also protecting consumers and businesses. However, increasingly we see regulators getting this blend right.
For example, the European Union’s Directive on Payment Services (PSD2) will create an EU-wide single market for payments. This will drive new opportunities and innovation in the payment sector, because it will force financial institutions to provide secure access for a third-party service provider to a customer’s online account. Meanwhile, we have seen regulatory sandboxes emerge not just in the UK, but in locations from Singapore to Australia. The US Treasury meanwhile recently announced it will start issuing special purpose national bank charters to FinTech companies.
In the future, expect to see the emergence of “RegTech”. This will enable real-time interaction and analysis between regulators and financial institutions. Indeed, this is already happening in Austria, where the central bank, the Oesterreische Nationalbank (OeNB), developed a software platform between itself and the banks, so it can view and analyze information in real-time.
4. Look beyond the hubs to find innovative ideas
Across Kenya, mobile money has become ubiquitous – being used by at least one person in 96% of Kenyan households. But what is the real impact of mobile money in such countries? One study estimated that M-PESA, the Kenyan mobile money system which enables money to be stored on a phone and be sent via text, has helped lift 2% of Kenyan households out of poverty.
What this example demonstrates is that the impact of FinTech innovation is often created and experienced outside of the usual hubs of finance such as in New York, London or Singapore. So, although the UK dominates the world of fintech (generating an estimated £6.6billion in FinTech related revenue), leading organizations are looking for inspiration among the innovative services, products and ideas being created from Guadalajara, to Laos, to Kenya.
In many cases we can see that the unique financial environment of these locations is resulting in novel ideas. For example, Guadalajara based start-up Kueski uses a person’s digital footprint to assess their credit worthiness – a particular challenge in Mexico where credit is not available to large swathes of the population. In Latin America Tigo Cash is a mobile financial service which already handles more cash than many financial institutions in the region. We will see markets and services emerging which are currently not on anyone’s map, and become some of the most important financial organizations in the world.
Final thoughts…In case you’re not yet convinced about the FinTech revolution
If there was ever a time to realize the impact of FinTech and how transformative it will be, then look no further than the Singapore Fintech Festival which took place last month, and where Jorge Ruiz, CEO of above & beyond, was a judge in the Hackacceletor. More than 12,000 people from across 50 countries attended the event! Organized by the Monetary Authority of Singapore (MAS), in partnership with the Association of Banks in Singapore (ABS), it brought together much of the FinTech community to demonstrate the innovation and potential of the sector. Alejandro Nino, COO of above & beyond, was part of the U.S. Delegation that participated in the festival. These kinds of events make us realize we are just at the tip of transformational change in the financial sector.