What is FinTech?
Let’s start in the trickiest way possible – by trying to define what we mean by ‘Fin Tech’? I mean it’s a term that cool, digital types (I like to think I’m in this camp) throw around pretty liberally in a manner which suggests we know exactly what it means. It’s not just FinTech…there’s EdTech and MedTech and FoodTech, which are entering common daily vocabulary, maybe because they’re reimagining sectors we’re all affiliated with in some capacity or because it’s more accessible than BioTech and other scarier kinds of <insert something sci-fi sounding here> ‘tech’. Yet despite being in vogue, it’s a term that remains elusive in terms of a concise, Oxford English dictionary kinda definition. Thankfully, it’s not the name of a Scandinavian software company.
So, back to the question it would appear I have been avoiding. What is FinTech? After some Googling around – and a career admittedly working in the finance industry (though my Linked In will soon refer to it as the FinTech industry) the most Wikipedia’esque answer I can provide is that it’s the emergence of a technology based financial services sector. FinTech companies are generally startups founded with the purpose of disrupting incumbent financial systems and corporations that rely less on software. Startups and ‘FinTech’ go hand in hand, however I don’t want you to think that the big banks and incumbents are technology illiterate – not at all, incredibly powerful technology powers them but technology that hasn’t needed to change for years or which is so complex and vendor/off the shelf based that many traditional finance services companies have fallen victim to their monolithic systems (many are keeping IBM’s mainframe business in good health).
Chris Miller describes FinTech as:
“A whole new industry. It’s a little like talking about retailers, and saying that Amazon is a retailer. Are they a retailer or an ecommerce company or both? I would claim that they are a digital service provider of fulfilment, but that’s purely because they fulfil consumer orders as well as cloud-based service delivery through AWS. In other words, they’re not a retailer at all but a company in a whole new market place.”
FinTech companies are disrupting sectors (and creating new ones) such as mobile payments, money transfers, loans, fundraising, traditional banking, peer to peer payments, foreign exchange, investing and even asset management to give but a slither of examples. A recent report from Accenture found that global investment in FinTech has skyrocketed from $930 million back in 2008 to over $12 billion by the beginning of 2015. Europe experienced the highest growth rate, with an increase of 215% to $1.48 billion in 2014.
Traditional Financial Services
The financial services sector has long been considered an industry with high barriers to entry, strong monopolies and debilitating rules and regulations. It’s an industry that:
- Is underpinned and at the mercy of complex electronic payment schemes and networks (you may have heard of ACH in the US and BACS in the UK to give two examples). These standardised ways of formalising how money moved around organisations were put in place with good intentions but also constrain the financial services industries capacity to innovate quickly.
- Is a complex web of companies with different roles such as issuers, acquirers, payment schemes, processors and merchants. It’s almost impossible to begin to truly simplify the roles each of these play in the way payments are processed and money is moved around. Even more confusing is the fact a number of terms and labels are often used interchangeably despite meaning different things.
- Practices the good technology principles we see of FinTech’s today i.e. prizes stability and availability, has a bias towards security and practices being serviced oriented, however a lot of this is done in ways and using technology a few steps behind the curve…is it worth the risk of using some fancy new ‘No SQL’ database to store sensitive customer data such as credit card balances? Is moving 1,000,000 bank account numbers to the cloud from tried and trusted IBM mainframes (with back up centres in Fort Knox’esque style offsite premises) really something a large finance company really felt it made sense to be the first mover on? After all, until recently who was challenging them?
Financial services was a profitable industry with very little slack to be disrupted. It was stable. It was a stock market safe haven. However, PayPal happened and the rest has been a history in the making.
It’s been about two decades since a financial company really changed the world. Inc. 500 entrepreneurs are leading a pack of disrupters, raised in the shadow of PayPal, who will change your business relationship to money forever.
FinTechs & Challenger Banks
PayPal set a precedent – they hacked an industry ripe for change and they reaped the reward. Hell, I don’t even really know what PayPal does or is that’s any different from a traditional financial services company other than more convenient and they offered digital tools that felt more modern and akin to the kind of website you’d expect to use for sharing social media posts, which was a big deal and something we hadn’t seen before. I mean their slog is, “The safer way to pay, receive payments for your goods or services and transfer money to friends and family online”, which you could argue is pretty much the mainstream of a financial services company in 2016 – the kind I’ve been giving a hard time to so far.
The most difficult thing I could possibly do is try and sum up what Fin Tech is because as I mentioned earlier – there’s 1000’s of different start-ups and even incumbents doings 100’s of different things across an ecosystem of possibilities. They’re creating sectors and building an ecosystem that’s is almost impossible to keep complete abreast of – if you thought it was difficult keeping track of all – a frankly overwhelming exposure of new technology.
I would suspect there’s 100 more prevalent examples I could have used in the image above and 100 better category names or categories I’ve omitted altogether in the above too, but it serves to give an idea that even off the top of my head there’s a diverse group of Fin Tech’s that I’m a user of if not quite familiar with and I would argue that I’m not an exception to the rule (in that a lot of people are probably familiar with many of the Fin Tech’s listed above if not more).
Perhaps the sector in the media most at present is that of ‘challenger banks’ – which interestingly has a definition that is actually on the English dictionary web page that reads details a challenger banks as, “A relatively small retail bank set up with the intention of competing for business with large, long-established national banks”. It’s interesting to note that many of these newer banks have an online presence rather than a physical one, so don’t expect to see many of them on the high street (the likes of Metro Bank and Virgin Money being the exceptions). Additionally, many of these banks are ‘mobile first’ in that they understand their most typical user will primarily be a mobile savvy, on the go individual comfortable using their mobile device to manage their finances.
Less like Natwest more like Netflix
When bankers were asked how fintech may disrupt the banking industry, more than 90% of bankers believed that fintech firms will have a significant impact on the future landscape of banking, with more than a third believing that fintech will win an equal share (24%) or even dominate the market (20%). When asked about banking’s response to the fintech challenge, a majority of bankers (54%) believe that banks are either ignoring the challenge or that they “talk about disruption, but are not making changes”. Interestingly, an even larger percentage of fintech executives (59%) agree with them.
Before diving into which Fin Techs…or more specifically challenger banks are ‘doing it right’ it’s worth mentioning that the FinTech ecosystems that are most prevalent and the capacity to innovate in the financial services space varies quite significantly by geography. For instance, in the US peer to peer payments are common place, the phrase “let’s Venmo this meal” in reference to splitting a food bill is quite commonplace in the states but not a common practices in the UK. Likewise, automated savings tools such as Digit and Acorns and others are only available in the US but not the UK.
A part of the lack of cross borders rollout of many FinTech products and services is down to the technology that underpins that payments and money processing platforms within each individual country. There’s some movement going on to make how you manage your money as easy cross border as it is within the confines of a single country but there’s always going to be added complexity with FinTech’s having success across many geographies.
With regards to the UK and rise of challenger banks and in the words of Tom Carey – as the dust settled on the 2008 financial crisis, the Bank of England started a process that would eventually open the door for a new type of bank to enter the market. In an attempt to introduce more competition into an industry that was seen as a black box from the outside and which had lost touch with its customers, the Bank of England revealed a simplified two-step process with lower capital requirements for setting up new banks in 2013.
“These new banks can start afresh from a reputational and technological standpoint. Not only have they not been tarnished with the financial crash but they can build their IT systems from scratch, saving on the costs of maintaining sprawling legacy systems, not to mention a network of expensive brick and mortar branches on the high street. Fast forward to 2016 and this new breed of bank is starting to get licensed. These banks are looking to appeal to modern customers with an entirely mobile, digital banking experience, with greater transparency around where your money is going and how they operate internally.”
They promise to offer digital products that live on your phone, with potential features like real-time balance information, deep-dive spending data, biometric security, open API integrations, no foreign exchange charges, simple money transfers and artificial intelligence layering for more predictive banking.
Who’s Doing it Right?
Well it’s heard to know where to start – but there’s a few notable callouts and FinTechs to watch. First let’s begin with the challenger banks. There’s a number of players in the race for a banking license – Atom, Tandem, Starling, Mondo, Final, Simple and Monese. To be quite honest – a few of these banks still don’t have licenses and their offerings are still immature but based on what I’ve seen so far the stand out leader in this space is Mondo.
David Tongue has already done an excellent write up on why Mondo will blow Atom out of the water (both banks recently launched their beta apps at similar times). David summed it up pretty well…”Atom is just UX’ing it and Mondo is re-imaging it”.
You can’t “UX” an existing product, you need to be able to completely re-imagine it. Stop making banking better. Use banking to make people’s lives better
His main argument is that the features Mondo have developed have provided needed functional utility and met user needs, solving problems that customers actually have and need solutions for. Need to freeze your card because you don’t trust yourself on a night out…one tap away. Forgot to check out on the London Underground, Mondo will handle that automagically. Want to be alerted when your card is used in case of fraudulent spend…yeah they’ve got that covered too. Not only that, they’re down with millennials and not in the ‘face recognition to login’ gimmicky way Atom does. They use emoji’s when they text you, they have chat servicing that feels like your Facebook messaging a friend vs. chatting with some disgruntled call centre worked trying to meet unrealistic call handling targets. It’s not perfect and has some rough edges but they know that and they hold a host of Hackathons and publicly make their API’s available so the community can build a better bank – not just the bright brains that they employ. I’m pretty smitten with them.
Mondo, set up by Tom Blomfield following his controversial exit from rival challenger Starling (which he co-founded) is build from custom technology all from scratch right from the ground up. Unlike many of the other challengers with the exception of Atom which are built on commoditised banking software with a fancy front end over the top – Mondo is different and for good reason which Tom gets and I can completely relate to.
“If you just want to see the same old products then go ahead and buy the pre-existing products, but if you want to be adaptable and deliver 21st century expected experiences, then you need to own the stack. If you were to ask Google or Facebook if they could have delivered on a generic backend and built a nice front end they would have laughed.”
There’s two standouts in this space. One is Acorns. Acorns rounds up your spend – so let’s say you paid for a StarBucks on your American Express for $3.29 – it will round that transaction up to $4.00 and invest the $0.71 for you. The beauty as a user is a few fold:
- It’s invisible – when you save you normally put a portion of your monthly salary to one side each pay day and try not to tap into it. Acorns realises this isn’t always realistic. It automates savings…it’s takes each transactions you make and makes a micro investment. It does the grunt work for you with you realising. It let’s you forget about saving and handles it for you. I moved to the US for 2 years – I signed up for Acorns not long after I arrived. When I left to go back to the UK I was deleting some apps and fired up Acorn’s to take some screenshots to show my new employers back in the UK…I had ~$3000 invested in stocks and shares and had completely forgotten I’d authorised Acorns to do this. They’d literally taken $3000 of my money without me realising and invested it for me. Amazing.
- Investing – it takes something scary, complex and hard and basically asks you to give it permission to handle investing for you. I’ve always wanted to invest but never knew where to begin. Acorns had me covered, I literally told the app how risky a portfolio I wanted to invest in and they did the rest for me.
Digit does the same thing – minus the investing. What I loved about Digit though is that it’s not fully autonomous. It texts you and has an asynchronous chat with you. Are you sure you want to withdraw savings? It looks like you have some spare funds in your account this month – can I save $50 for you? It’s pretty neat. It makes your feel like it’s trying to earn your trust which is a nice way to humanize the bot powering it.
In the UK credit scores are a little more complex. There’s different credit bureau agencies charging different fees to give you scores that don’t in any way relate to the score another agency may give you. To a typical person trying to build or improve their credit score it’s complex and confusing. However, a couple of FinTech’s have made a go of bettering credit. Credit is a very abstract concept, however credit scores provide people with a tangible value to make sense of this abstract notion of financial health and ‘borrowing worthiness’. The FinTech’s simplify this tangible value further.
ClearScore as the name implies provides you with a clear credit score. It gives users a credit score. It’s free. It’s UI is simple and informative. It provides tips for improving your credit score. Simple. Friendly Score is similar – however it supplements credit bureau data with social media data to provide your credit score – Friendly Score is only powerful and indicative if adopted by credit lenders but it’s a nice step in the right direction. Who say’s finances can’t be social?
I don’t think there’s enough time or words to cover all of the FinTech’s killing it in the payments space…PayPal, Braintree, Venmo etc. However, my personally favourite is Square. As a product manager it again does the basics rights and solves the needs of it’s users well.
Square realised a couple of things – why do merchants need to have clunk ‘Point of Sale’ terminals to be able to take payments? Why do these terminals need to cost lots of money? Why can’t a small pop up street vendor no accept card payments? Why can’t your iPad – this ubiquitous technology and interface be your till/checkout? Well it realised it can. Their $cashtag is pretty neat too!
I think it’s safe to say that FinTech is a pretty liberal term used increasingly to describe and industry that’s been ripe for change for some time and currently undergoing rapid reinvention that modern technology brings with it. There will be a lot of failed start ups on the scrap pile but in the same vain a number of unicorns will emerge – in Tom Blomfield’s words, this decade we will see a bank born that will be as big or as Facebook or Google and I believe him.