Introducing Simon Cant, Co-Founder and Managing Director of Reinventure Group. Simon recently shared his thoughts on the evolution of the financial services industry through new technology, and the core trends that make up the FinTech advantage.
Globally, the financial services industry is a few years into a massive transformation. This revolution is being driven by the increasing number of financial technology, or FinTech, startups emerging around the world that are harnessing the opportunity of digital disruption to the sector. More than US$12.2 billion was invested in FinTech startups globally in 2014 alone, up 205% from the previous year. But what is driving disruption of financial services at this scale? The foundations upon which the incumbents are built are not defensible against the digital revolution, which gives FinTech startups an upper hand.
The FinTech Advantage: Unbundling Financial Services
At the simplest level, banks are built around four key competitive functions - they apply know-how to data in order to facilitate transactions between parties with which they have existing trusted relationships. These interactions all occur through platforms owned and controlled by the bank, whether through online technologies or offline at a branch. Through emerging FinTech, the privileged position banks have enjoyed in these areas are being undermined by four core trends that make up the FinTech advantage.
- Technology and machine learning are displacing human knowledge in financial services.
Through artificial intelligence technologies, robo-wealth advisors like Stockspot (AU) and Wealthfront (US), spending advisors like Pocketbook (AU) and Moven (US) and rich natural language interpreters like IBM’s Watson, which is being applied by ANZ in its Wealth arm, are beginning to codify the unique know-how that made educated and experienced bankers a scarce and sought-after resource.
- Data is becoming ubiquitous and mobile.
Companies like Facebook and Google know substantially more about our preferences and behaviours than has ever been previously known. Alongside that, companies are beginning to share data. As a result, the unique lens that banks previously had on individuals can either be substantially replicated, or even improved upon, using alternative data vectors from a variety of alternative sources. Australian lenders such as SocietyOne, Moula and Prospa are leveraging the availability of data, emulating the success of US companies such as LendingClub and Ondeck by offering risk-based pricing. It’s also being leveraged by new insurance platforms such as US-based Metromile to offer drivers insurance pricing based on their actual driving behaviour.
- Trust is shifting away from financial institutions to peer networks.
Peer-to-peer networks are challenging banks’ and financial markets’ privileged position as managers of capital and facilitators of payments. Peer-to-peer, or marketplace, lenders like SocietyOne remove the need for the bank balance sheet as an intermediary between depositors and borrowers. Equity crowd-funding platforms like Equitise (AU) and AngelList (US), and donation or pre-purchase crowdfunding platforms like Kickstarter are disrupting both banks and traditional equity capital markets. At the same time, consumer technology brands such as Apple and Google, which ‘own’ their customers through pre-existing trusted relationships, are making their own plays in the payments space, while crypto currencies like bitcoin are pursuing the full payments stack.
- Financial services are just ingredients in a ‘full journey’ customer experience.
With the digitisation of customer experiences in all walks of life, financial services are becoming an ingredient in a broader customer journey, such as finding a ride or accommodation, or managing a company’s finances. These ‘full journey customer solutions’ often have strong network effects and, as a result, emerging platforms such as Uber, HeyYou (AU), Xero and Zenefits (US) stand to take a significant share of the customer surplus, potentially rendering financial services providers as commodities within the end-to-end process.
The end result of these trends is ‘unbundling’ – that is, the targeting of niche use cases with a tailored or more ‘full journey’ offering that peels customers away from the broader, one-size-fits-all offering. We have seen this throughout the web over the last decade or so: Google unbundled search from Yahoo, Facebook unbundled friend searches from Google, Twitter unbundled status updates from Facebook, then Instagram unbundled photo posting from it. Similarly in retail, big box retailers have faced a competitor in every virtual aisle – pet specialists, nappy specialists, even razor specialists. In the same way, we can expect to see the continued unbundling of financial services, with new players tackling specific niches with a more tailored offering. As an example, we are already seeing this in SME lending as it is being unbundled by specialist invoice lenders such as Timelio.
The Next Wave of Disruption
There is no doubt financial services are evolving due to technology, with capital being directed toward startups in the space only expected to increase. While some key markers have been laid in robo-advice, risk-based pricing, crowdfunding and platforms incorporating financial services, there is more to come as we see the continued unbundling across financial services and adjacent markets. By understanding and leveraging the major trends of improving artificial intelligence, more ubiquitous and liquid data, peer-to-peer networks and financial services embedded as ingredients in other service platform, entrepreneurs will be able to capitalise on the FinTech advantage and contribute to its rapidly growing global ecosystem.
Disclosure: Reinventure Fund is an investor in SocietyOne and HeyYou.