I have a new job that’s all about fintech. You will probably know roughly what that is if you have been reading around finance, entrepreneurship, innovation and such lately. Or, frankly, if you’ve been awake in a place like London in the last few years. My definition is ‘disruptive, technology-based businesses in financial services’.
You are also likely to be a customer of at least one fintech company, as last year an estimated 2/3rds of all banking customers were using a fintech service. For me it’s ClearScore for checking my credit score for free and TransferWise for sending money cheaply to Finland (since I have you here, have a code for a free transfer).
In short, you can’t have avoided hearing about one of the most active areas of the startup scene in London and globally. You may be asking yourself, when will all this blow over? When will there be just Jack Daniels and dating ads on the Tube again? To answer that I have analysed the main drivers fuelling the revolution using a 2×2 matrix, below – I’m not an MBA for nothing, hey. On the vertical axis is the impact or the level of disruption caused by it, and the horizontal axis shows whether a driver is likely to become less important over time or is here to stay. Spoiler: fintech is not going away.
The 6 drivers of fintech
Temporary, low-impact drivers
- The popularity of entrepreneurship as a career that began with the big tech success stories (eg. Facebook, Google) appeals also to FS professionals, and many of the fintech founders come from within the industry. I figure this is a trend that will fade in time: most new companies fail and would-be-founders are increasingly aware of this.
That’s not to say that entrepreneurship will wane and then vanish – I hope not! – but perhaps there will be a weeding effect where genuinely good ideas get turned into successful businesses but the me-toos will be turned off by the low odds.
- Low interest rates and muted returns on traditional forms of investment, such as the stock market, have meant that alternative forms like private equity and venture capital have more dry powder – uninvested contributions to the fund – than ever. Fintech is seen as a vibrant area of the market with huge potential upside, so startups have found it relatively easy to attract capital. In 2016, total global investment was $17.4bn (11% more than in 2015). This will be a passing phase because interest rates won’t stay low forever.
Permanent, low-impact drivers
- The availability of new and better technology for consumers as well as businesses has presented opportunities for agile startups to experiment and gain an advantage over the incumbents. Cloud services such as Amazon Web Services have lowered the barrier to entry, and the ubiquity of smartphones has dramatically expanded the potential customer base. Additionally, whole new forms of doing business have appeared on the scene with the advent of the blockchain and cryptocurrencies.
Technology has a tendency to keep morphing and developing, so I think it will permanently drive the fintech industry to new heights. However, I have placed this at the edge of being a high-impact driver on the rationale that technological developments alone would not hugely change anything unless there was a cultural impetus as well. But I could also see technology in the high impact box above.
Temporary, high-impact drivers
- The financial crisis of 2008 eroded consumer trust in big banks, which has made it easier for new companies without any historical baggage to build trust in themselves. This is especially the case where the value proposition is all about transparency or fairness (eg. TransferWise). This particular crisis is now a decade old and won’t stay a high-impact driver very far into the future.
- The financial crisis’s legacy, on the other hand, may have longer legs (although most regulations are still not forever). Comprehensive programmes of regulation, particularly MiFID, that aim to prevent another crisis have imposed pretty onerous obligations on banks and other large institutions. Smaller companies are sometimes exempt, which gives them an advantage in the market.
Some demands of the regulations are also better met by a company that is seen as independent (eg. best execution reporting), and some fintechs have found an opportunity in helping the regulated firms to manage and fulfil the requirements (‘regtech’).
Permanent, high-impact drivers
- This is the biggie. Changing customer preferences are probably the most powerful driver behind the rise of fintech. Bank customers, both individuals and companies, want to bank online and on their phones; receive assistance when they need it without waiting; not be charged unjustified, opaque fees; and perform actions like payments, loan applications and account management instantly and with as little paperwork as possible. The incumbents have not responded to these new preferences as quickly as desired and thus most fintech companies find their niche in providing ease and genuinely helpful banking to a new generation of customers.
Do you think I have plotted the drivers in the right quadrants in the matrix? Is there anything missing?