Eye on the Markets Summer 2016: The Iteration of Money
The man on the street may not be familiar with the term “fintech”, but he is already reaping the benefits of its functionality. Wherever there is an Octopus card, a smart-phone financial application or bitcoin transaction, fintech is at its core.
Financial technology, or fintech, is one of the hottest topics in financial circles these days. That is because it crosses so many levels of businesses. Most often, fintech solutions are invisible to the end consumer: they are often about transforming business models, streamlining processes and helping simplify systems. They can be technological changes to the back office that no customer will ever care about but could end up saving everyone money. Every once in a while, fintech is noticeable to the customer, like when new apps are developed.
While fintech firms have been around for the past decade - many weren’t calling themselves as such. They were simply innovating. They weren’t yet a part of a trend. But the more consumers and businesses started embracing digital services, the more there became a need for digital solutions. So more fintech firms were founded. Nowadays, no financial institution can afford not to be focused on fintech. Most are supporting external incubators (such as Accenture’s FinTech Innovation Lab Asia-Pacific, which in 2015 had 12 supporting banks), developing their own fintech programmes internally, and looking to acquire businesses or teams of fintech startups.
There is good reason for the fixation on fintech. Think about it: a decade ago you probably weren’t planning on using your Octopus card to pay for a beer at the 7-Eleven, or expecting to see your United Kingdom bank statement on your Hong Kong mobile phone. But now, as a customer you expect such services and more. Throw into the mix social media, vast amounts of data, ever-smarter technology and processing power not restricted by legacy systems, and you’ve got an environment where fintech firms are not only flourishing, they are needed to keep pace with the changes.
According to a recent report by Accenture, venture capital backed fintech investment in Asia-Pacific skyrocketed from US$800 m in 2014 to US$4.3b in 2015. According to the report, the volume of deals is set to increase slightly - at 122 as of October 1, compared with 117 for all of 2014 - but the value of deals has increased substantially due to larger investments in and from China. These include investments from Alibaba Group Holding and its Ant Financial Services Group subsidiary into Paytm, a mobile payment and commerce platform in India, as well as fundraising efforts by Ping An Insurance Group venture Lufax, which has been developing multiple alternative financing and investment platforms, including peer-to-peer and business-tocustomer platforms. Indeed, payments and lending-related fintech accounted for 40% and 24% of total investment deal value.
A combination of improving but still weak investment banking return on equity (and therefore a need to innovate to grow or cut costs to stay ahead), increasing support from regulators globally for fintech, and an understanding that technological changes are occurring at unprecedented pace, has led to a greater level of acceptance of fintech. It also doesn’t hurt that a number of fintech entrepreneurs were former investment bankers themselves.
Various fintech innovations will have different degrees of impact on investment banks. Blockchain’s influence may be further down the pike, but innovations in behavioural analytics, social collaborate trading, and crowdfunding are all happening now. Some pose moderate levels of disintermediation.
In Britain, the FCA established the Innovation Hub, which has a stated aim of “encouraging innovation in financial services in the interests of consumers by supporting innovator businesses with a range of services.” The hub helps new or non-regulated firms understand more about the regulatory framework and what it means for them, as well as firms (they partner with) that are already regulated.
In Hong Kong, a government fintech steering committee is working on a policy blueprint to support Hong Kong’s development into a fintech hub, where the right balance needs to be struck between facilitation (i.e. less regulatory constraints) of fintech firms introducing disruptive technologies, competition in the financial services industry, consumer protection and systematic risk, and Hong Kong’s role in the regional and global economy.
Given that fintech innovation is blossoming globally and shows no signs of slowing, such regulatory assistance is welcome - it will help all parties feel confident in developing new ideas that ultimately are beneficial to the end customers.