FinTech is making consumer finance faster and more flexible with hugely improved access and user interface. The customer interface experience is key to winning business.
The FinTech sector is growing and is challenging established banks and financial services in particular in terms of robo advice, online execution-only dealing systems, crowdfunding platforms, banking and payment initiators, and settlement systems. It has the benefit that it is attractive to the 18-25 age group, which is not represented sufficiently in financial services and also has the benefit of supporting the SME market, which is having difficulties obtaining all its lending needs from banks.
There is still a long way to go though. A recent Citi report estimated that only 1 per cent of North American consumer banking revenue comes from digital models. Likewise, the UK alternative lending market only accounts for a small percentage of lending currently but this is likely to grow.
London: The centre of FinTech
In the UK, the Government, the Bank of England and the FCA are succeeding in making London the centre of the FinTech world and are continuing to do this. The Bank of England has recently set up a FinTech incubator similar to the FCA. As long as Brexit does not deploy assets away from FinTech and as long as we manage to agree a good trade deal with the EU, hopefully FinTech opportunities will still come to the UK and the market will continue to grow.
Before the Brexit vote, we had been attracting huge investment from the US, which is more of a maturing market with many link ups occurring between traditional banks, finding opportunities in our growing market. Hopefully this will continue, albeit that London may not provide them with a European passport.
Most of the disruption is likely to be in relation to the customer interface on mobiles. The customer experience is key and people want to be able to organise their lives through their mobile without needing to leave the house.
Social media has a role to play
As a result, the next major disruption to the finance industry is likely to come from the social media behemoths. Facebook is currently an authorised electronic money institution in Ireland and Google Payment Limited is a UK-authorised electronic institution. It they decide to provide other financial services such as robo advice, dealing services, and banking services, they would have the ability to offer personalised investments and banking services to consumers at the click of a button.
Likewise, Amazon is currently regulated in Luxembourg as an insurance broker and has passported throughout the EU. It has recently entered the food delivery market and will be a disruptor there. If it decides to enter into the financial services area, it has the possibility of disrupting the financial services market as well.
These potential disruptors may decide to link up with existing FinTech companies and operate on a whitelabelling basis which would be good for existing FinTech companies or provide services organically, which could be more challenging for existing FinTech companies as well as traditional banks and financial services firms.
The reason why they have the capacity to be the most disruptive is because they have the best of both worlds.
FinTech companies are innovative and have great products and services to sell but they lack the customer base of more established firms. This is the reason why some seek to link up with established banks and regulated firms, which have the customer base but suffer from legacy IT systems and are finding it difficult to attract young people who are more excited by the challenge of FinTech opportunities, which has an effect on their ability to be innovative.
Trust is key
Facebook, Google, and Amazon have a huge customer base and importantly have access to vast reams of personal data, which they could use to make financial services recommendations based on customer behaviour.
Generally people trust banks and a fear that they will not want to buy financial services from Facebook, Twitter, Google, or Amazon is conceivably why they have not entered the market already. However, it appears that customers are beginning to trust them more and a recent survey suggested that they would be prepared to buy financial services and products from them. In particular, at least until there is a huge security breach, customers are generally becoming less concerned about data privacy, believing it is a price to pay for the benefits offered by such sites as Facebook, Google, Twitter, and Amazon.
As a result, it is conceivable that we see these firms seeking to offer financial services and banking on a social media firms offering financial services within the next 24 months. This could be FinTech’s Uber moment.
Jacqui Hatfield, Partner, Reed Smith