Massive growth in fintech (to a small share)

Banking will look radically different in 10 years’ time, probably even five. It will be digital – even though that means many things to different people. And financial technology start-ups – fintechs – will be behind much of the transformation.

Even central banks see this. The Reserve Bank of Australia’s chief information officer Sarv Girn, in a speech entitled “Digital Leadership in Today's Economy”, noted “CIOs are now given the quest to seek, disrupt or protect business models to keep their organisation ahead in the race”.

" Banking will look radically different in 10 years’ time, probably even five."
Andrew Cornell, BlueNotes managing editor

That entails “unravelling or shaping the possibilities from mobile, social, cloud and communities of online stakeholders”. Moreover, Girn added, the environment for disruption is global, fast-paced and open to new, non-financial competitors.

The Deutsche Bundesbank’s Andreas Dombret told a bunch of German bankers a similar thing: “the old financial value-added chain is already lying in pieces and is being reassembled by the new fintech competitors”.

A particularly thorough analysis by Ben Robinson, head of strategy for Temenos, noted “digitisation of the banking industry is making new banking business models possible. But it is the combination of regulation and technology that is making new business models a necessity”.

Little wonder than that fintech analysis is everywhere. A new survey by East & Partners, the Treasury Fintech Index, found a “dominant majority of corporate treasurers in the world’s top revenue-ranked corporations are planning to increase their spending on FinTech over the next year”.


The latest “Fintech Innovators” survey by KPMG and fintech investment firm H2 Ventures found funding has continued to rise for the firms covered with the 50 Established companies attracting an additional $US14.6 billion of capital since last year’s report, an increase of more than 40 per cent.

According to H2 Ventures’ Toby Heap the survey demonstrates the “acceleration of the disruption taking place in the global financial services industry, with more capital than ever being invested around the world in start-ups and established ventures that are creating new financial products and solutions”.

It sounds like we are approaching a fintech singularity in financial services. Yet the logical error many make is to believe because fintechs will be behind the disruption, fintechs must be a huge part of the financial services sector and/or they are good investments. They’re not and few will be.

History tells us technologies may destroy companies – Kodak and Encyclopaedia Britannica being the classic examples – but rarely individual disruptors.

Take mobile payments, a favoured target of disrupters. Banks were indeed slow to move in this market.

Now however they are. This bank, ANZ, is in partnership with Apple and Android. There are also fintech-style projects such as Zelle which promises to “revolutionise” peer-to-peer payments (presumably because PayPal and others don’t fit the definition). Late, maybe, but reacting with scale and clout.

Critically, while the colour and movement of the fintech universe grabs attention, the world is not changing overnight. While the individual efforts of incumbents may be a bit lame they still have consumer trust and inertia on their side. So far.

A survey by CGI found while consumers are indeed in the market for digital banking services, to date they would prefer to get them from their current bank and not a start-up.

The survey, ‘Fintech Disruption in Financial Services', examined market awareness, preferences and purchase trends of consumers in Singapore, Canada, Germany, Australia, Sweden, France, the USA and the UK, finding lack of trust was the biggest obstacle to purchasing across all digital financial services.

CGI vice-president and global lead for retail banking, Kevin Poe, said: "Incumbent banks are well positioned to offer digital financial services based on their trusted customer relationships. Work is now needed to reduce the complexity of these services and aid purchase".

Poe’s advice to start-ups looking for credibility? Consider partnering a bank.

But surely the huge investment pouring into fintechs will change attitudes? The near $US15 billion, up 40 per cent, in the last 12 months to just the top start-ups?

Not so big in context. Fintech remains a minor part of the venture capital universe.


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According to World Economic Forum data, total Fintech investments by VC firms between 2009 and 2015 was US$31.3 billion. Total VC investments over same period were $US476.4 billion – fintech was 7 per cent. It is growing but even the $US13.9 billion in 2015 was just 9 per cent.

(Note all these market numbers differ as definitions are rubbery but the trends and overall picture are clear.)

Moreover, when these numbers are spread over sectors, the scale looks even smaller. One potential fintech investor I speak with had done a rough analysis of the market and noted the key investment categories are P2P Lending; SME and Business Lending; Student Loans; Point Of Sale/ Online Payments; cyber currencies; digital banking; and Local and International Remittances.

“The interesting point is to look at the markets VCs are investing in,” he said. “If the World Economic Forum market scan is used that is less than $US1 Billion per segment as an average or $US2.85 billion per major sector. Which is not a lot of investment over an eight year period. You can even make the case that this level of investment is simple not enough -  especially if you look at the money it took to create Facebook, Google etc .

“How many Fintech companies are in the Unicorn list (billion dollar companies)?  Answer? Eighteen out of 176 - and 9 of those are Chinese. So 5 per cent of Unicorns are from western markets…”

Recent analysis by ratings agency supports this argument. In a report “Fintech – US Online Lenders: Competitive Advantages in Underserved Niche Market Rest on Unsteady Foundation.”

Moody’s found online lenders are most active in unsecured consumer loans, student loans and small business loans in the US.

However despite a 20-fold increase in loan volumes to $US20 billion in the five years to 2015, Moody’s noted share was still negligible.

“There is a range of online business lending models, each serving a different niche,” noted Moody’s Warren Kornfeld. “Online lenders have yet to achieve adequate profitability, and rapid growth exacerbates the volatility of their performance.”


Some fintechs and some disruptive models will achieve scale and radically change banking – just as some dinosaurs evolved into birds while darting little rodent-like mammals evolved into elephants.

And it’s important to recognise incumbents don’t have to invest in or buy fintechs, they can adopt fintech-style cultures or launch their own products.

At the latest Money 20/20 conference in Las Vegas, where any would-be disruptor who is anyone sets up a stand and rolls the dice, IBM launched a mobile payments model, using its artificially intelligent giant brain Watson.

Central banks may not be regarded as hotbeds of innovation but the RBA’s Girn provided a good sketch of the battleground.

“The internal aspect is about how you renew your approach in the way you plan, build and run systems,” he said. “This could be in the techniques you use, the technology that's chosen, or in fact the way you organise your people capability.”

He spoke of different models of software delivery, of infrastructure “whether that's in appliances, processing, networks or storage solutions”.

The East survey found corporate treasurers are directly investing in fintech, with the trend set to grow with Asia leading.

Nor must fintech disruption be all about creative destruction – it could be pure creation.  A G20 conference hosted by the Financial Stability Institute (FSI) at the Bank for International Settlements, examining the fintech revolution (it is, in its view “inevitable” and massive) believes fintech can help emerging markets as well as upend established ones.

The conference, “New frontiers in the supervision and oversight of digital financial services”, covered issues such as financial inclusion, the implications of crowdfunding for reaching unserved and under-served populations; and the implications of the data revolution for digital financial inclusion and supervision.

The fintech revolution then is inevitable and massive – but there will be hundreds, thousands of skirmishes, fakes, false starts, not one big battle.

Andrew Cornell is managing editor at BlueNotes

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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