In 2013 fintech was a sleepy backwater; now it's a thriving metropolis. But where next for this fast-moving industry which thinks it can turn the finance world upside down?
We spoke to the CEOs of some of the most prominent fintech startups globally. These were their predictions for the most disruptive technologies between now and 2020.
Blockchain technology – the distributed record of any bitcoin transactions ever traded – isn’t exactly a new concept, but it’s only in the second half of 2015 that big financial organisations have started paying it much attention. 22 banks have recently invested in New York-based fintech firm R3 with a view to create a framework for blockchain technology in markets, for example.
“The blockchain is going to change everything, especially financial markets,” says Leigh Drogen, founder and CEO of Estimize, a website that crowdsources financial earnings estimates.
“We believe these technologies could have as great an impact on financial services industry as the internet has had on the media world. I know that is a big statement, but we believe it’s true!,” says David Rutter, CEO of R3. “If done well, the development of a financial-grade ledger could fundamentally change the very fabric of the financial services infrastructure. These technologies could transform how financial transactions are conducted, recorded, reconciled and reported – all with additional security, lower error rates and significant cost reductions.”
Rishi Nangali, CEO of trading technology firm REDI, adds: “I would be surprised if some of the blockchain-based initiatives have not taken hold in a variety of securities processing and transactional capacities.”
There’s a danger, according to some observers, that the proliferation of retail banking products in the fintech sector is leading to saturation and that some fall out is inevitable.
However, while some start-ups will fade away, large retail banks cannot continue as they are.
“Revenue ATM charges, cross-border transaction fees etc will all be eroded as technology like bitcoin and mobile payments surge into the mainstream. This will force institutions to look for new revenue streams or to charge more for basic services,” says Alastair Paterson, CEO of cyber-security start-up Digital Shadows.
“The ‘bank’ as we know it will die,” says Andrew White, CEO of FundApps, which provides compliance software to the buy-side. “A generation who are used to "mobile first" will kill the branch banks and will cause those banks who don't have a good online presence to bleed customers. Fintech start-ups will eat the overpriced bank services for breakfast.”
"A new generation of customers, technology natives, are not going to comply with the outdated legacies of the banks. These are likely to go straight to fintech,” adds Philippe Gelis, CEO and co-founder of foreign exchange platform Kantox.
Large banks have been hiring thousands of people for their cyber-security divisions, often ex-military personnel skilled in uncovering expert hackers. This is not only expensive, but there’s a limited amount of talent.
“As security becomes ever more critical and the skills harder to find, most financial institutions will struggle to build this will lead them to increasingly outsource security functions to specialist, cutting-edge providers,” says Paterson, with full faith in his product.
When it comes to Big Data, banks are comparative newbies and when it comes to unlocking this data for predictive analytics on the trading floor, they’re even slower. This presents an opportunity.
“Predictive analytics are going to change the way every trade is made, by humans and computers,” says Drogen.
“Banks are still sat on huge data sets that have a lot of value yet to be unlocked in terms of driving business performance but also reducing fraud and security incidents. New companies will continue to emerge in this space,” adds Paterson.
Despite all the funky projects going on at Google, it still makes most of its money by targeting ads at people based on their browsing habits. This, says Huy Nguyen Trieu a managing director at Citigroup and mentor to fintech entrepreneurs, is the business model of data monetization and something the financial sector has still to realise the value of.
“A big interest for me is data monetization – put simply, the approach that a Google would take if they were to enter finance - and that is heavily centered around the concepts of credit scoring,” he says.
For all the talk of fintech firms creating products that will disrupt large banks, there’s still value in creating products that will ultimately save them money.
“The other phenomenon that we believe will disrupt the traditional players are the various consortium-based initiatives that are seeking to leverage utility models to mutualize non-core functions like reference data, collateral management or messaging,” says REDI’s Nangali.
There are numerous firms out there utilising the power of crowdsourcing in financial services. Quantopia – a platform for wannabe quants – and Estimize are good examples. So is eToro, a ‘social trading’ platform that uses the power of crowd consensus in an attempt to reduce the risk of investing.
Not surprisingly, the leaders of these fintech firms think there’s more to come.
“Crowdsourcing is going to reinvent and produce a ton of new data sets that completely change what humans and computers use to make decisions with,” says Estimize’s Drogen.
“I think we will see many more people willing to share their portfolio and trading information on the internet, and we’ll see more people making their trading positions based on social media and on copy trading,” says Yoni Assia, CEO of eToro.
The big data providers will struggle to adapt to the new tech environment over the next five years, believes Stu Taylor, CEO of bond trading initiative Algomi.
“New content will lead to the dismantling of the established financial model terminal offerings - the lot will be too slow, too encumbered to compete with the ‘app’-style models that will flourish,” he says.
Around 60% of the start-ups in fintech now are offering services directly to banks and other financial services organisations. Banks are notoriously slow to innovate and get new products off the ground. A small, focused firm tapping into a pain-point for large financial institutions could provide solutions much faster and this, says FundApp’s White, is where the opportunity lies.
“We will see the glacially slow incumbents losing huge market share to agile start-ups who use cloud technology and are focussed on customer satisfaction rather than just on the bottom line,” he says.
Robo-advisers in fund management is a classic example of commoditising a role in financial services. By taking stock of someone’s investment profile, feeding it into an algorithm and coming up with recommendations, the job of financial advisers can suddenly be done quicker and more efficiently by a machine.
Maybe the ‘trusted’ private banker to ultra high net worth individuals will remain in demand, but those serving mere affluent people could soon find themselves out of a job.
“Wealth Management for the mass affluent is one area of fintech that remains uncovered,” says Bert-Jan van Essen, founder & CEO at Dragon Wealth Asia, Singapore.
“I think it’s conceivable that robots will be able to provide investment advice to people by 2020,” says Feng Yue, CEO of Chinese fintech firm Stockradar. “The fund management industry is now charging something like 2.5% for management fees. A robot can do it by charging only 0.5%.”