| Hello, I hope you enjoyed our webinar last week. If you missed it you can find it here: Five Ways Fintech Is Shaping The Future Of Financial Services. I received many excellent questions from webinar attendees, but due to time constraints, I was unable answer all of them. Together with Managing Analyst John Heggestuen — who leads our new Fintech coverage — I've answered a few more here: | Partnerships or acquisitions? What makes more sense to you in order to maintain a competitive advantage as a fintech company? | | | The market is moving toward partnerships. What fintechs are finding is that customer acquisition and compliance are expensive, and with pressure from investors to scale, partnering makes sense. It provides an opportunity to gain access to a large customer portfolio without needing a banking license. For legacy players it's an opportunity to give their customers the option of a better user experience without having to build it themselves. These partnerships could certainly turn into acquisitions. For example, BBVA has made a handful of fintech acquisitions over the last two years. We think the "try before you buy" model is key. Legacy institutions tend to be risk averse, and there are also huge barriers that must be overcome in order to make a partnership work. For example, banks and fintech startups have very different cultures, and it takes time to figure how to work together effectively and build trust. Once it becomes clear that these barriers can be overcome, then an acquisition becomes more likely. The best implementation of this model is for legacy institutions to set up an accelerator; that way, partnerships start at inception, and fintech business models can be developed specifically for partnerships. | | | What is your vision about open vs. private blockchains? How do you think the ecosystem will move forward? | | | The blockchain was originally developed as an open network for facilitating Bitcoin transactions, but we expect private blockchains to be the dominant implementation of blockchain technology. Financial institutions are interested in blockchain because it can reduce costs; it removes the need for centralized authorities to verify transactions. Instead, it uses a ledger system to keep track of transactions, and this ledger is kept and distributed among the parties that use it. As the network grows in size and ubiquity, it becomes more valuable. Existing financial institutions offer the fastest route to ubiquity since a relatively small number of firms manage that majority of assets that could be transferred using blockchain, and they already have established relationships with one another. These institutions want private blockchain implementations for security and privacy reasons. | | | How are fintech companies going to be regulated? | | | This is one of the most significant questions for the industry. Regulation is the biggest barrier to entry and scale for fintechs. That said, fintech regulation is looking pretty supportive around the world. This is due in part to the 2008 financial crisis. Regulators are keen to introduce more competition, reduce system risk, and protect consumers, and fintech is providing a vehicle to achieve those goals. The UK is leading in terms of creating a supportive regulatory environment for fintech — that's part of the reason our fintech team is based there. The Financial Conduct Authority (FCA) and the UK government have made a number of moves to make it easier for fintechs to get regulated fast, and a number of countries, including Australia and the US, seem to be following the UK's lead. These moves include things like fast access to regulators and reduced compliance burden for firms testing products in beta or that are under a certain size. The big question is whether supportive regulation can be achieved across national boundaries to enable fintechs to scale. A number of industry and government groups have voiced a willingness to put together a framework, but whether a solution can actually be implemented effectively and how long it will take is unclear. The complexity of regulation is actually creating an opportunity in an area of fintech called "regtech," which stands for regulation technology. Regtechs use technology to make it easier for firms to comply with laws. We will likely see regtechs jumping in to help fintechs and legacy institutions where regulators leave off. | | | What role do you think biometrics play in fintech disruption? | | | Biometrics already play a significant role in fintech. From the consumer's perspective, biometrics offer a low-friction method of authentication for payments and accessing account information. It's easier than remembering and entering passwords, which is where consumer demand is going to come from, and firms will naturally attempt to meet that demand. So, we will likely see biometrics as the dominate form of authentication technology, but it's too early to predict what form of biometric technology — fingerprint scans, iris scans, etc. — will account for the greatest share of the market. As a point of reference, the biometrics market is forecast to be worth more than $117 billion by 2020, according to Acuity Market Intelligence. The biggest problem area for biometrics is going to be security. The security of biometric technologies is a double-edge sword. The complexity and uniqueness of biometric information makes it difficult to mimic for fraud, but if that information is stolen, it can't be regenerated as unique. And it's naive to think that hackers won't find a way to crack these security methods in the long term. | | | Given all the money that has flowed into fintech the past two years, where is the hype not backed by reality, in your opinion? Put another way, in what areas are fintech attempts least likely to be successful? | | | Most of the hype is built around a misconception that fintech is going to replace all banks. It's more nuanced. Any process that relies on a transactional transfer of information is going to be disrupted by fintech. And that has big implications for banks — it will likely mean that many jobs inside banks are no longer necessary. But that doesn't mean that banks themselves are going away. We are more likely to see them overhauled. As a general rule, the more dependent a business is on complex human relationships, the harder it is going to be for fintech to have an impact because technology can't yet handle that type of nuance. Investment banking and corporate banking will be more resistant to fintech. | |
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