2018 has seen a series of marked advancements towards the growth, maturity and consolidation of the fintech market, in its many facets – but it is in our view still only in the early stages of its overall growth curve.
Incumbent financial institutions are starting to see fintech as less of a threat and more of either a necessity if not a definite advantage to their existing business, and embracing it from the highest levels of management. Open banking is slowly becoming a reality in some jurisdictions rather than a theoretical construct, albeit that there is still significant room for development and innovation in this area. A sizeable proportion of the feverish enthusiasm for cryptocurrencies and blockchain has died down, making way for the development of more considered and long-term viable solutions that really do make use of the advantages of blockchain technology that have featured so heavily in the press over recent years. Regulators in many jurisdictions have started to take a firmer line on aspects of cryptocurrencies, in particular the banning by some regulators of initial coin offerings. Insurtech has started becoming a reality as incumbent insurance companies start to engage with the many possibilities, efficiencies and even new business lines that the effective use of technology can bring to their existing models. The payments market has continued to diversify, grow and digitise, moving away from cash and cheques and further into mobile payments, contactless cards, digital wallets and payment initiation services. Ease of onboarding and digital identity are rising up the agenda for incumbents and fintechs alike, and are becoming credible options as the number of digital KYC providers grows, their proliferation bringing with it a significant opportunity to improve financial inclusion. The use of data is becoming more heavily regulated, at last catching up to a greater or lesser extent with the seismic changes in data usage that the last few decades of technological advancement have brought with them. However, we are on the verge of another paradigm shift in the way data is used, as artificial intelligence – combined with greatly increased computing power – begins to effect an exponential increase in the complexity, volume and potential opacity of data manipulation in our day-to-day lives. Investment in all these areas continues apace, largely at the lower end but with an increasing number of “graduating” start-ups becoming significant players in the financial services sector. Perhaps most importantly, improvements in the range and quality of financial tools and facilities available to small businesses and individuals, whether directly by fintechs or indirectly through partnerships with incumbent institutions, are helping economies grow and improving the lives and businesses of millions of people.
As for what we expect to see over the next 12 months: more of the same level of change. Open banking, in its many forms, will continue to develop on the technical side, although it may well take far longer for it to become fully embedded in everyday services such that it is materially in the public eye. It is likely that more regulators will either take steps to bring more cryptocurrency-related activities into the scope of existing regulatory regimes, or will create new regimes to deal with them. This is likely to be a greatly positive step for consumer protection, and a continuance of the threshing of the wheat from the chaff in this area, but if not handled with care also risks slowing or wholly impeding the development of solutions which are genuinely useful. The insurance industry will continue to engage with the fintech community and improve its offerings as a result; there is even a chance that entirely new insurance business models will arise that directly challenge the market share of the incumbent insurers. The payments market will, especially in Europe, have to get to grips with the full gamut of evolving regulations on authentication and fraud monitoring, creating a larger market for providers of authentication solutions, many of which may well revolve around the functionalities that mobile devices offer. Related to this, KYC and customer onboarding solutions are likely to become more “digital as standard”, as incumbent financial institutions become more comfortable with digital solutions and the level of certainty of identification they can offer. In parallel, more countries will embrace digital identity at a regulatory level, whether through the deployment of national digital identity schemes, or through guidelines on acceptable forms of digitally-provided KYC evidence. These developments will continue to improve access to basic financial services that currently sit outside the reach of many people, and to improve competition between providers of financial products as it becomes easier to move from one provider to another. Regulation on the use of data and in particular the ethical use of artificial intelligence will continue to develop across the world, as the technology becomes more widely used and the need to legislate against some of its more negative effects rises up the political agenda. Most significantly for many fintechs, incumbent financial providers will continue to increase the rate at which they partner with providers of innovative solutions in order to improve efficiency, retain their share of existing markets and possibly reach new ones. The process of partnering with a small fintech will correspondingly become a more well-trodden path for both sides of the table, thereby making it easier for future partnerships to be established and to thrive. Incumbents will get closer to relinquishing the commonly held but wholly untenable notion of “owning” a customer, and may begin to see that they stand to gain more by sharing customer contact and helping to distribute other providers’ products, than they ever will by clinging to an entirely siloed approach. All this points to continued rapid growth in the fintech market, which in turn means that investment is likely to continue, not only from private investors but also from those incumbent institutions who recognise the potential return that strategically important innovation can bring.
As with any raft of change, what all this means for clients – whether fintechs or incumbents – is a mixture of threat and opportunity. Those who stay ahead of market and regulatory trends are likely to thrive as they make the most of the surety and access that regulated status entails, or the competitive advantage that well-implemented technology can afford. Those that take no notice of these trends are likely to suffer as a result of the normal operation of market forces, as the widespread use of technology starts to break down the inertia that has arguably stifled innovation and competition in financial services for decades. Fintech adoption is still in its early years, but as newer brands gain traction and older financial brands start to partner more, we do not think its rise is likely to slow any time soon.