Are fintechs helping banks evolve – or planning a revolution?
New regulations are dragging finance into a digital world. Fintech startups are taking advantage but are they disrupting the old guard or helping them into the digital era?
Delegates at the recent Money2020 Europe conference in Copenhagen are under no illusions that the financial sector is rapidly changing. Recently, there’s been an explosion of new technology companies entering finance – commonly known as fintechs.
As a result, the event is a diverse affair with some of the world’s biggest banks rubbing shoulders with businesses founded less than a year ago. But, in many cases, it’s the fintech entrepreneurs doing the talking while the “old” heads listen.
Until now a combination of regulations and public uncertainty has enabled the financial sector to avoid the upheaval and collapse experienced by other industries as a result of the digital revolution. However, new EU regulations are paving the way for fintech entrepreneurs to get a lot closer to customers. The Payment Services Directive II (PSD2) obliges banks to open their APIs (application programming interface) to trusted third parties if the customer gives their consent. In practice, this means that online platforms can use personal banking data to create a whole new raft of financial products and services, which before were unimaginable.
Simon Redfern, founder of the Open Bank Project, which works with the financial sector encouraging them to embrace open data and technology, told delegates that PSD2 has changed the outlook of traditional banking. “We’ve had phones ringing from the banks ever since PSD2 was announced. In 2010, we were talking about open APIs but people were saying the regulators aren’t going to allow that, but now they are,” he says.
London is the HQ of many of the new fintech businesses present at Money2020 and is attracting entrepreneurs from around the world to set up there. Among them is serial Israeli entrepreneur Shachar Bialick who has founded his latest venture Curve in Shoreditch, East London, to take advantage of the talent available and the UK’s financial regulations. The business only began trading in February this year but has gained 12,000 sign-ups and backing from a series of high profile investors, including Ed Wray, Betfair co-founder, and TransferWise co-founder Taavet Hinrikus.
At its core is a new bank card, controlled by an app, which syncs “all accounts into one”. In practice this means a user only needs to carry one card but can select a payment type from their mobile wallet. But Bialick says this is just the start for the creation of a very ambitious platform. “Today it enables you to handle all your transactions, credit cards and expenses on the go. But in the future, we see a platform that connects you to all your money, insurance, foreign exchange, different services and goes with you wherever you go,” Bialick says.
Bialick says his vision will enable the majority of people to take advantage of new online products and services, who currently fail to do so. “The user is confused and they can’t use all those services. That’s why the banks are still winning and aren’t really concerned by the fintech revolution. The revolution is fragmented. So what we are doing is connecting everything to one place.”
One of the big questions at the conference is does fintech mean “revolution or evolution” for the banking sector. Certainly, the financial industry is all too aware of how digital wiped out the record industry. But there is a view that the banks might well survive, but end up as little more than piggy banks as consumers buy all their products and services from new platforms sitting on top.
Tony Craddock, director general of lobby group the Emerging Payments Association (EPA), says the risk is real and new companies are poised to take advantage. “The risk for the banks is that they turn into ‘dumb pipes’ and will become a place where you put your salary and out of that will come payments one for leisure, utility and saving and they will go into different sorts of accounts run by much more progressive, value adding businesses.”
However, despite the perceived threat posed by new fintechs to banks, entrepreneurs at Money2020 with revolutionary business models tend to avoid using the word “disruptive”. Craddock says the industry tends to play a long game and avoid confrontation. “There’s something unique about this industry, unlike any I know. That is today I’m your customer, tomorrow your partner, the next day your competitor. So you cannot afford to fall out with anybody, or make your competition too overt. Because if you do you’re going to cut off your opportunities for tomorrow.”
Rich Wagner is CEO and founder of Advanced Payment Solutions, which offers prepaid cards, accounts and other banking services for small businesses and individuals. He is also chairman of the EPA and a veteran of the payments industry. He says he is struck by the number of new players in the fintech space and how “narrowly focused” many are. He also believes that consumers will increasingly be interested in the offers of new fintech but that this isn’t likely to undermine traditional banks anytime soon. “The death of banks will take a very long time because the finance directors of Fortune 500 and corporate businesses will stick with retail banks for many years to come. They aren’t going to trust a new company to handle a billion dollar payment,” he says. “However, the consumer proposition is being very much disrupted and that’s where the niche players [fintechs] will thrive in the next five years.”
But if there is one vertical that is being openly disrupted it is surely international money transfers and foreign exchange (forex). Here, a number of big names have emerged such as TransferWise, World Remit and World First. For years, banks made a lot of money charging fees from payments abroad and hedging against exchange rates. But the aforementioned have all used web platforms to slash these costs and both businesses and individuals are taking advantage.
Jonathan Quin, CEO of World First, worked in banking before establishing his business in 2004. He says he realised smaller businesses were getting a bad service from banking on foreign exchange and set out to offer them a better one. “I used to work with clients like GE and they used to get great rates and service, but the smaller sized clients did not. We wanted to democratise that. We wanted to give the rates and products that the big guys were getting to the smaller guys and technology enabled that,” he says.
His business has rapidly grown and is now expanding into China. Quin happily admits World First is a disrupter and appears confident that the banks aren’t going to be able to respond. “We are better at looking after customers than the banks are. They aren’t very good at building agile technology,” he says.