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Entrepreneurial Research

  • The Fintech Revolution

Are fintech companies a true threat to traditional banking institutions? This article explores how financial technology startups are transforming the global economic landscape.

It's true that financial institutions have never been broadly beloved consumer brands. In the wake of the global financial crash that peaked in 2008, banks fell even further out of public favor. Subsequent revelations of legal fraud and moral impropriety – in the form of subprime loans compounded by credit default swaps – left international markets reeling and revealed investment-banking giants like Lehman Brothers and Goldman Sachs as criminals.

However, the mass economic upheaval and widespread public distrust of banking institutions fostered a unique climate for disruption. (In the legitimate, not the overhyped, sense of the word.) Before 2008, nobody would have dared – or perhaps even have considered it a possibility – to take-on centuries’ old institutional names with enormous balance sheets and banking licenses. The crash changed that.

Disrupt banking

Startup entrepreneurs, newly emboldened and perhaps inspired by a self-righteous zeal, knew a market opportunity when they saw it. Financial technology, referred to as fintech, signals the new generation of money movers, who are bypassing big banks altogether.

Fintech draws upon the power of the Web (or ‘the cloud,’ if you prefer) to create cheaper, more efficient and much faster ways for people to bank. This includes new ways to transfer cash abroad, score credit risk, loan money to individuals and small-to-medium businesses and also settle international transactions. While these tasks have traditionally been the domain of banks, startups in global financial hub London and, to an extent, Silicon Valley, are racking-up consumers and investment at a dizzying pace.

Rising figures

While the US market still dominates fintech investment value, the UK and Ireland, with its business-friendly tax laws, is currently the fastest-growing at a 74% annualized rate since 2008 – compared to only 13% in Silicon Valley. Accenture, an international business consultancy, released a recent study demonstrating that global fintech investment rose from only $928 million in 2008 to $2.97 billion in 2013 – with actual fintech investment having increased four times the overall venture capital investment rate.

Global banking has $50 trillion in assets (in US dollars), and nobody wants to be left behind in a Bloomberg terminal or local bank-branch cubicle as this historic shift takes place. Especially the banks themselves.

12,000 startups

According to a recent report by McKinsey, an international business consultancy, the digitization of financial transactions ‘accelerated markedly’ in the past year. McKinsey reports that more than 12,000 startups are building banking and banking-industry businesses, while consumers increasingly expect mobile banking services. This doesn’t necessarily indicate the demise of traditional financial institutions, but rather an urgent need for adaptation: Banks must satisfy consumer demand by delivering increased digital services to ward-off competitors (or, perhaps better, to scoop-up top-tier fintech startups), while at the same time satisfying regulators and automating back-office functions. Conversion to electronic functions, McKinsey indicates, could slash expenses by as much as 50%.

Although the writing was on the wall as early as 2010, when JPMorgan Chase & Co., Bank of America, American Express and Goldman Sachs – in cooperation with Accenture – invested in the FinTech Innovation Lab, a yearly accelerator program in London and New York.

Fintech’s rising stars

Certainly the biggest is TransferWise, a peer-to-peer (P2P) system that pools and connects people who want to send and receive money in any of 176 currencies, thereby skirting heavy transfer fees, and saving consumers up to 90% in transfer fees. Backed by former PayPal Founder & CEO Peter Thiel, arguably the pre-crash grandfather of fintech, TransferWise has transferred roughly $1.5 billion US dollars since its founding approximately three years ago. (And rumor has it that Facebook is in serious talks to partner with the company.)

Funding Circle, Marketinvoice and Zopa are all successful alternative lenders for businesses looking for loans. While CurrencyFair is emerging as a leader in currency exchange and TransferGo in P2P remittances.

Obviously, big business wants in on the action too. ‘Digital disintermediation’ will emerge as a true threat for banking this year, as Apple Pay, first launched in the US, makes its way to Europe. In the not too distant future, we’ll all be swiping our iPhone or Apple Watch instead of debit or credit cards when shopping, dining out and traveling.

 

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[March 2015]