Will FinTech roar in the 20s?
Predictions can often be a tricky subject. Not only are they hard to get right but often those you feel the strongest are the ones that you don’t want to see play out. With lots to be bearish on in the global economy there are a few rays of hope that shine brightly. One of these is the world of FinTech. We count ourselves lucky to have a number of FinTech clients who are living proof that our industry has never been more interesting or influential. What started the 10s as a niche industry unknown to all but a few, is starting the 20s as the one of the most important growth sectors in the global economy. Growth that can be measured by the number and size of FinTech businesses but more importantly by the growth that comes from the services that FinTechs provide to the wider economy. The latter is far harder to quantify but it is the big draw for companies and investors who are vying to capture market share. With the future of the financial services market up for grabs, we believe FinTech shows no signs of slowing down. Capturing all trends would make for an extremely long article so here’s a few that we’re going to be keeping a close eye on.
Square pegs in round holes
The challenge of breaking new ground aside, it was much easier to launch a successful FinTech a decade ago than it is today. First movers like TransferWise or Funding Circle have enjoyed enormous success eating into the incumbents’ profit margins with the simple promise of faster, cheaper or more convenient. With an abundance of FinTechs and some incumbents now offering similar services, faster and cheaper is no longer a differentiator. This is especially so in the SME market. The 20s will see the rise of sector specific solutions where banking is just one component of a complete package that will ease the administration of running particular business models. We believe consumers will adopt these offerings because they feel reassured that the package has been designed specifically for them and therefore their banking partner understands their business. A lack of understanding is a still a common grievance that SMEs have with their banks.
Death of the marketplace
Although not a new trend, the 20s will see a continuation and increase in partnerships and acquisitions between FinTechs and incumbents. 2019 saw several moves by large FIs acquiring stakes in FinTechs and already we’ve seen major moves like Visa acquiring Plaid for $5.3 billion!
One trend and phrase we expect to see less of is the marketplace model. Offering consumers multiple choices of the same service doesn’t improve their experience. To use an example outside of FinTech, Aldi and Lidl have enjoyed enormous success because they have very simple but efficient offerings. We expect financial services to move in that direction, with firms establishing lightweight partnerships that allows their customers to connect to additional services via an in-app widget. Of course, this widgetisation of finance is only made possible by Open Banking.
Open for business?
No longer just an esoteric buzzword for FinTech geeks, Open Banking began to reach the lips of the wider world in 2019 with the growth of consumer propositions providing data aggregation. This is providing the groundwork for a personalised finance eco-system.
It’s almost two years since some lenders have been using Open Banking data to make decisions. We all anticipate that this facilitates better lending decisions, so the only question is how much better? We are looking forward to seeing the results of lower default rates and increased access to credit for customers.
The biggest Open banking opportunity lies in challenging the dominance of the card schemes in the Point of Sale (POS) market. The UK POS market is overwhelmingly dominated by card payments so even gaining a small fraction of market share will be a big win where others have failed. It will be interesting to see how businesses incentivise consumers to switch to Open Banking payments. Old habits die hard after all.
No ‘trends’ article in the second half of the last decade was produced without a section on blockchain and we expect no change in the foreseeable future. The 20s will see a continuation of B2B finance solutions being moved onto blockchain. Trade finance and asset management is already leading the charge with companies like Marco Polo trading billions every month. HSBC recently announced their intention to shift £15 billion worth of assets onto a blockchain system by March 2020. These initiatives will become increasingly prevalent as belts in finance continue to tighten.
The promise to revolutionise access to capital for SMEs is the sexier side to security tokens compared to cost savings for large financial institutions. Technological advantages mean that raising money should be cheaper and easier than ever. On the other side, consumers should see benefits from increased efficiency in secondary trading markets. Adoption of security tokens will be fastest in industries with high ongoing costs or barriers to entry. Property portfolios, commodities and niche markets like art will see significant interest from investors that are prevented accessing through traditional channels. Regulators & licensed financial services firms will be keeping a close eye on this fractional ownership model as it opens new markets to potentially uninformed consumers and money laundering.
The not so Wild West
On balance, 2019 was a positive year for Crypto. Of course, it contained the usual volatility (albeit the less volatile year yet), scandals and hacks that we know so well (not that they are unique to crypto) but there was a number of significant steps by regulators. The FCA published their (probably not so) final guidance along with approving their first Crypto EMI, Koine, since mid-2018. Whilst BaFin announced that they will be regulating Crytoassets in 2020 to allow banks and other financial institutions to sell and store cryptoassets. From a fundamental perspective, as Central Banks show no sign of turning off the printing press, the hard money characteristic of Crypto will continue to attract the attention of conservative economists and macro-investors.
Decentralised Finance or DeFi, is another space to watch in crypto. The promise of accessing financial services without middlemen or gatekeepers is attractive to people all over the world in equal measures as it is concerning to the regulators. Whilst the current generation of solutions are too complex to achieve widespread adoption, some of the brightest minds in Crypto are working in this space so it’s one to keep an eye on.
There’s all to play for in FinTech
From products to payments, and lending to blockchain, the 20s are already roaring. Whilst not mentioned above, there are also exciting developments in infrastructure (cough ClearBank®), InsureTech, WealthTech and many more. At ClearBank® we’re excited to see what our clients and the market deliver for consumers and for the growing role that we play within the eco-system.