The fintech sector makes a lot of noise in London.
There’s an endless stream of news about open banking and challenger banks, while the traditional finance sector watches on with a mixture of admiration and suspicion.
Banks have come under attack, not only from the hype-machine, but more meaningfully from startups. Traditional finance providers that assumed they could weather the technology storm on reputation alone are quickly being proved wrong.
None of the old guard is safe, because the fintech revolution is not a revolution at all. It never has been.
“Fintech” is not a moment of traumatic change that will pass; it is an evolution that will sweep away the companies that do not evolve. And if you think we are nearing the end of this wave of change, think again.
Before we look to the next generation, we should consider how we got here.
Historically, a bank has been a place where consumers deposited their cash, and a trusted partner in buying a car or a home. Banks also provided other useful services: current accounts, savings accounts, investments, trading, credit cards, loans, and mortgages.
And while banks were promoting a wide range of products, other providers sprung up to offer extra services. Do you want a new card with a zero introductory rate? Fill in a form. Want a better mortgage deal? There’s a mortgage broker, or an online comparison website for that.
Fintech has not fundamentally altered these dynamics. Instead, it has democratised the processes behind them, and made everything easier for the consumer. It’s the kind of change we have seen throughout history as markets evolve, only playing out faster and more dramatically than the old guard was ready for.
There are the three factors that usually bring about mass change in consumer behaviour: price disruption, state-of-the-art products, and network effects. And they are all at play in fintech.
Price disruption came first. In foreign exchange, for example, banks were taking egregious margins from huge volumes of transactions. That left open the opportunity to share some of that upside with the customer as a saving.
The beneficiaries – aside from the consumers – were new finance companies like Transferwise, Remitly, and Ebury Partners.
Next came state-of-the-art products. In recent years, the services traditionally offered by banks have been effectively unbundled by digital providers that do one thing cheaper and better.
There is now a best-of-breed provider for every conceivable financial need. Moneybox and Nutmeg are doing this to great effect with investments, while Revolut and Funding Circle are making great strides in currency services and peer-to-peer lending.
This is a great step forward for consumers, but it risks becoming unwieldy. If you want the best of everything, your phone home-screen quickly becomes a patchwork quilt of finance apps.
And so finally, we come to network effects, helped by the huge amount of data now being generated and processed. New banks like Monzo, Starling and Atom don’t want to offer just one great fintech product – they want to be the one app that replaces the patchwork of alternative financial providers.
We have an investment in a company called Curve which is a different take on the same theme: a single brand and interface through which you can interact with all of your best-of-breed providers. By offering this, companies can garner access to more data on customer habits and can try to tailor financial services to their specific needs.
Open banking and the availability of data are making business models like these possible. Truly open banking, where customers can seamlessly switch between financial providers which compete to offer increasingly personalised products, may not be a reality quite yet, but it is a matter of when, not if. So expect more players to get involved – including some familiar names.
Alternative lenders like Zopa and Funding Circle will soon be able to use their scale to lower their cost of capital, and keep prices low. The Asian retail giant Alibaba is already dipping its toe in these waters. I expect Google, Amazon, and Facebook to jump in too. Banks should take this threat very seriously.
In the financial services industry, change is getting faster. Data is becoming more readily available, and has the potential to improve banking dramatically – at least from a consumer’s perspective.
We are not even midway through the “fintech” era, we are just at the beginning.