Global private financial technology (FinTech) companies raised nearly $3 billion last year, which equates to more than triple the $930 million that was invested into them in 2008, and indeed, given the drastic technological changes in financial services, combined with consumer behaviour and the ever-pressing need for cost reduction, this global trend seems set to continue over the coming years.
This new digital landscape of FinTech operators are in fact rapidly leaving banks and their old legacy systems behind. They simply cannot evolve fast enough to keep up with the changing processes, and without collaborating and investing into FinTech companies, they will find themselves helplessly outdated and outcompeted in the rapidly digitizing global financial market.
The banks, though, are acutely aware of this. Back in 2010 we saw collaboration between FinTech entrepreneurs and banks emerging with the FinTech Innovation Lab in New York, which has now expanded across Hong Kong and London. Venture funding by banks has also started springing up to invest in the FinTech sector, with HSBC and Santander being the latest to get involved.
In July of last year, Santander announced a $100 million venture capital fund to invest in global FinTech start-ups, and, prior to that, HSBC allocated up to $200 million for investment in start-up tech companies. This shows the promise for adoption and on-going innovation, not to mention maturation, which have been much needed to be taken seriously by banks. Mark Beeston, founder and CEO of Illuminate Financial Management, said in response to the news: “Anything that brings additional capital to the sector is, by and large, a good thing. It represents a strong vindication that the banks are recognizing they need disruptive technology models, and launching a fund is the strongest possible endorsement of this need to the marketplace. The challenge is really about implementation.” (WSJ.D)
A Culture of Distrust
Indeed, the problem that banks inevitably face in this time when the financial crisis of 2007-2009 is still fresh in our global memory, is their own negative reputation. FinTech companies are poised to capitalize on this distrust, and are actually set to be bolstered by not only globalization, but also the increasingly sophisticated demands of the modern consumer, who wants mobility, transparency, and instant access at their fingertips.
The Millennials Disruption Index provides a rather devastating report on consumer trust in banks. Out of 10,000 respondents to the survey conducted:
- 53% don’t think their bank offers anything different than other banks.
- 71% would rather go to the dentist than listen to what banks are saying.
- 68% say that in five years, the way we access our money will be totally different.
- 70% say that in five years, the way we pay for things will be totally different.
- 73% would be more excited about a new offering in financial services from Google, Amazon, Apple, PayPal, or Square than from their own nationwide bank.
- 33% believe that in five years they won’t need a bank at all.
UK FinTech Hotbed
Indeed, it seems that the general consensus is that banking is at the highest risk of disruption. And while this disruption is taking place, FinTech companies are swooping in. The hotbeds of activity are taking place in the UK and Silicon Valley. According to research carried out Accenture, the UK and Ireland accounted for more than half (53%) of Europe’s FinTech deals in 2013, and for more than two-thirds of its total financing (69%). But although London may carry the FinTech flame for Europe, its actual share of the global market is in fact relatively small. 32% of all FinTech financing actually took place in Silicon Valley in 2013, while the whole of Europe combined accounted for only 13%.
However, what is remarkable is the rate at which the FinTech activity is growing, especially in the UK, and indeed this is something that the banks need to be keeping their eyes on. Combined, the UK and Ireland have seen their FinTech deals triple since 2011, and the FinTech financing growth rate being twice that of the global average and twice that of Silicon Valley. What is more, the amount of deals closed in the region was three times above the global average and more than five times above Silicon Valley.
So, as the financial services sector is experiencing a structural change through the FinTech digital revolution, the London banks are beginning to realize the benefits of their proximity to such a promising FinTech cluster.
Silicon Valley-based companies have always managed to acquire higher valuations than those based in Europe, but this simply means that the time is now to grab a bargain in Europe and London before they come completely of age, and the differences become gradually eroded.
And this won’t take long. Already in ‘FinTechCity’ Frankfurt there is the ‘Between The Towers’ initiative, launched in October last year, where FinTech startups can convene, communicate, and benefit from one another while getting funding at the same time. At the launch event, Traxpay CEO John Bruggerman presented to the emerging FinTech innovators Traxpay’s pioneering B2B Dynamic Payments Platform, and discussions followed concerning whether there is still even a need for banks or their services.
Collaboration and Adoption
Although funding remains scarce in London compared to those in the U.S., and commercialization of such initiatives are slightly less focused than their U.S. counterparts, the rising figures are proving that the FinTech segment is making some serious noise all over the important financial hubs around the globe.
Indeed, banks are taking a huge range of varying approaches in trying to keep up with the technology innovations that are disrupting their sector. From innovative new start-ups looking to compete with them on services such as electronic and online payments, to other emerging companies trying to develop solutions aimed at making financial institutions more competitive, there are many routes that banks can take to try and invest in small players in the market as a means of gaining insight into the technological advances in the financial sector.
Unlike those well-documented other sectors that have in the recent past been disrupted by new technology – book retail, music, and travel, for instance – financial services do indeed have a higher barrier for entry, due mainly to the heavy regulatory fences and need for the time it takes to build a strong sense of trust with consumers.
However, the FinTech revolution is nonetheless upon us, and the recent moves of the likes of HSBC and Santander, and of course Commerzbank’s recent investment in Traxpay, are testimony to the fact that the financial sector feels the threat, and are beginning to wake up to the need for innovative change and technological partnerships moving forward.