by Collin Canright exclusively for IZALE Financial Group
FinTech is a shorthand for technologies, ranging from mobile financial transactions to digital securities clearing, that are bringing about the digital transformation of the finance world. As financial services converge with internet-worked, mobile, and massively databased systems, FinTech has become a wildly explosive area in financial services.
The tools developed by innovative FinTech firms are empowering individuals to gain greater control over their financial destinies and enabling smaller, incumbent financial institutions to compete with large global institutions and technology firms. They are also, in the traditional technology-focused narrative, set to disrupt and disintermediate banks from their customers or credit unions and their members.
Financial Technology (FinTech) has been one of the hottest areas of global venture investment for the last two years and shows no signs of stopping, despite highly publicized problems. A recent Accenture survey, for instance, puts global investment growth at $5.3 billion, a 67% increase over last year. The report puts 2015 total investment at just over $22 billion.
There is a threat, and financial institutions of all kinds do need to respond. Yet few analysts see the situation in disruptive terms, nor do many technologists I know. Banks and Credit Unions need the technologies that the FinTech firms can supply, and FinTech firms need bank experience and access.
In one of my FinTech webinars, a comment from panelist Matt Ford, Founder and CEO at the London-based FinTech startup Pariti, struck a chord with me for a workable future: "We want to have a hand-in-hand relationship (with financial institutions), where we can unbundle and provide personalized, low-cost services to consumers at exactly the right time. That absolutely involves collaboration."
Indeed, partnerships between traditional financial services organizations and FinTech firms was the most mentioned trend among the 100 global financial services influencers surveyed by Jim Marous, publisher of the Digital Bank Report. “The reason for this paradigm shift is because new Fintech start-ups lack the scale, capitalization, reputation of security, ability to navigate complex regulations and the product scope of traditional financial firms. Alternatively, traditional banking organizations are hindered by legacy operating systems, capacity to innovate, agility and technology expertise,” he tells Accenture.
The leading FinTech markets and the trends I’m tracking this year follow along those lines. Payments, lending, and capital markets lead in FinTech investments, according to a McKinsey & Company report. Here are the FinTech market trends I’m tracking for 2016:
Bank & Credit Union Cooperation: From good idea to emerging trend. Banks and Credit Unions increasingly are partnering with startups. Banks seek new technologies while startups need customers and data to scale.
Market Development: From VC investment to consumer use cases. Retail FinTech focuses on the consumer while Business FinTech focuses on back-office systems.
Payments: Mobile adoption, “faster” development. Mobile payments increasingly are gaining traction as applications become easier to use and more prevalent. Meanwhile, the U.S. Federal Reserve is guiding development of a “faster payments” system in the United States.
Cryptofinance: From bitcoin to blockchain to smart contracts. Tests of distributed ledger technologies, which track transactions in a public and secure ledger, have been announced by nearly all global financial institutions, with the backing of large technology firms. It’s the hottest area of investment so far this year.
Regulation: The Empire strikes. Federal regulators in the U.S., U.K., and Australia in particular began in the first quarter of 2016 to develop regulatory frameworks for the largely unregulated FinTech businesses.
A slow-down in investment may occur after recent and highly publicized allegations of misconduct at peer-to-peer lender Lending Club, based in San Francisco, and the failure of mobile payments startup Powa Technologies, London. Yet the inevitable transition of financial services and money itself to the internet, and the emerging cooperation between banks and startups are good signs.