FinTech developments and the ‘Uber’ moment

December 2016 | PROFESSIONAL INSIGHT | BANKING & FINANCE

Financier Worldwide Magazine

There have been a number of exciting FinTech developments this year, including TD Bank’s app which incorporates chat into banking services, the use of biometric authentication, including retinal and fingerprint scans to assist with data security, the introduction of voice recognition systems into banking services such as Capital One’s system which enables clients to access their finances through their voice, the development of wearable devices – such as smart watches – which permit payments and the development of the blockchain, which will reduce costs and prevent fraud.

FinTech is making consumer finance faster, more user friendly and more flexible; it is challenging established banks and financial services with the offer of services including robo advice, online execution only dealing systems, crowd funding platforms, banking and payment initiators and settlement systems. It is also plugging gaps in the market which traditional financial institutions are struggling to fill – something which is proving popular with millennials and is providing much needed credit to SMEs.

However, there is still a long way to go. A recent Citi report estimated that only 1 percent 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. SMEs still receive around 85 percent of their funding requirements from traditional lenders but in the US, this figure is only 20 percent. Constraints on traditional lenders, in terms of regulatory capital and Brexit concerns, should provide continuing opportunities for alternative lenders – the pioneers of FinTech.

In the UK, the government, the Bank of England and the FCA are doing much to make London the centre of the FinTech world. The Bank of England has recently set up a FinTech incubator similar to the FCA.

Prior to the Brexit vote, the UK had been attracting huge investment from US firms looking for opportunities in the UK’s less developed market; this investment is now uncertain given the fact that London may no longer be able to provide these firms with a European financial passport. However, as long as Brexit does not divert assets away from FinTech, the government fosters an attractive enough climate to invest and do business in the UK and is able to agree a favourable trade deal with the EU, FinTech firms should continue to see London as their natural home.

Potentially, the most disruptive of all FinTech developments is the growth of personalised advice and tailored recommendations on mobile phones based on data collected on social media sites. This could potentially be FinTech’s ‘Uber moment’. Facebook is currently an authorised electronic money institution in Ireland and Google Payment Limited is a UK authorised electronic institution. Should these firms 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 will no doubt be equally disruptive.

The reason why this is potentially so disruptive is that currently traditional banks lack the IT infrastructure, the flexibility and ability to attract the important millennial or 18-25 age group which is required to be truly innovative, while FinTech companies lack the customer base that the banks have. This is the reason why FinTech companies are often willing to partner with banks.

Tech giants, such as Google, Apple and Facebook, on the other hand, have the best of both worlds – they have a huge customer base and modern infrastructure already in place with which to target that core demographic. Importantly, they also have access to vast reams of personal data, which they could use to make financial services recommendations based on customer behaviour.

These potential disruptors may decide to link up with existing FinTech companies and operate on a white labelling basis, or develop these services organically in-house. The latter would prove a challenge for existing FinTech companies and traditional financial services firms which could find themselves squeezed out of the market.

Generally, consumers trust the traditional banks with their money, more than any other institution. The fear that they do not have the same levels of trust is conceivably why Facebook, Twitter, Google or Amazon have not entered the market already.

However, it appears that customers are beginning to trust them more. A recent survey suggested that consumers would be prepared to buy financial services and products from tech firms. In particular, possibly at least until there is a huge security breach, customers are generally becoming less concerned about data privacy, believing it is a price worth paying for the benefits offered by such sites as Facebook, Google, Twitter and Amazon.

As a result, and combined with the huge technological advances made in data capture, it is conceivable that we will see these firms offering financial services and banking services within the next 24 months. Maybe, then we will witness FinTech’s Uber moment.

Jacqui Hatfield is a partner at Reed Smith. She can be contacted on +44 (0)20 3116 2971 or by email: jhatfield@reedsmith.com.

Jacqui Hatfield

Reed Smith