Fintech in the new economy
Fintech in the new economy
by Stephanie Frackowiak
Managing Director, France
2001 – Google rose from the ashes of the dotcom bust to dominate the digital world.
2008 – In the aftermath of the Global Financial Crisis (GFC), we saw fintech grow as an industry, as businesses sought a non-traditional means of borrowing.
2020 – We are looking forward to a post-COVID-19 world, and perhaps, the advent of a new economy. Is there the possibility of a Google-sized fintech dominating the industry?
A question of regulation
I was working in tech in 2001, and in 2008 – and I was studying AI in the 1990s when the foundations were laid for the powerful world-changing Machine Learning and AI tools of today.
The difference between the rise of Google and the rise of fintech is that the tech industry (then and now) is almost entirely unregulated. Whereas finance is, and always will be, very heavily regulated.
Arguably, the single greatest challenge to evolving and changing the finance sector today is regulation. It is a challenge that governments, regulators, and international bodies are working very hard to address.
The potential for a global fintech?
When it comes to creating a massive fintech, valued at $billions, one could argue that we already have massive banks like HSBC that operate on an international scale and have enormous IT departments, so why not?
However, in the aftermath of the GFC, a lot of the regulations in the banking industry were tightened in order to protect consumers, investors and businesses. The intention is good, but there are consequences.
We see, for example, that Basle II and Basle III international banking regulations have evolved to try and strike the balance between managing risk and encouraging growth. We expect more changes into 2022, especially in light of the current economic crisis. So I’m not convinced that, on this basis, a pure fintech player could grow to the scale of the digital giants like Google and Amazon.
Simply put, at the outset of the tech giants, the use and distribution of the data and computer processing power that fuelled their incredible growth was previously unseen. It was pioneering, it was like the gold rush of the Wild West. Banking is anything but the Wild West. It’s heavily regulated to protect companies and consumers. Hypergrowth typically comes from exploiting new frontiers and technologies, where the rules haven’t caught up yet and so you can try anything.
The tension between tech and the banking industry
There is a tension between technology companies that are trying to get into finance and the regulators that they perceive as holding them back – because they have different priorities.
The tension is based on the tech companies needing to demonstrate a level of control and compliance that is not aligned to their entrepreneurial models or “move fast and break things” mindset.
The tech companies are obviously motivated by the lucrative opportunities presented by banking. It’s a profitable business to be in. There are always demands for funds, and there’s the opportunity to be a growth engine for many different areas of the economy. Conversely, financial services as an industry, desperately needs innovative thinking and tools to keep up with the evolving needs of their customers.
In a lot of cases, there is a high level of legacy-drag on tech in finance. These are institutions that have been the biggest investors and spenders in technology over the past 25 years, with enormous in-house IT departments and core banking systems built on mainframes with “archaic” code. These are extremely complex systems and if I have to choose between evolution or revolution, I would say revolution is more likely to carry the day (eventually).
The rise of the ‘Neobank’
The result is that we see the rise of Neobanks.
These are companies such as Monzo and Revolut, that started out as technology companies, offering light financial solutions as market entrants, and were subsequently regulated as payment institutions in specific countries- once they have proven their business model and technology. Many of these neobanks cannot offer the full suite of financial service products because they are not “true banks”. The challenge for them is that the real profits do not lie in foreign exchange fees and day-to-day banking. Much higher value is generated from investment and lending.
Others, such as Memo Bank and Starling Bank, have started out as technology-enabled banks with founders who understood the financial industry in a deep way and by clearing the regulation hurdle early – but this is more unusual.
The question of partnership
I believe that more strategic partnerships between banks and tech companies are likely to emerge in coming years. This is a complex proposition by definition.
The bank brings control and authority, while the neobanks bring innovation and speed, and brand new clients. On the one hand, the bank is a well-established cautiously-moving source of funds and typically risk-averse, whilst the neobanks and fintechs are attractive to consumers through their earnestness to serve, customer-centric digital interfaces, and their speed.
This will be a complex marriage, but the partnerships that get this right will be the companies that experience the greatest surge in growth in this new cycle of the economy.