In early December EDC once again joined the debate at the Fintech Connect Live event in London. This is an event that has grown considerably since last year and it was interesting to see what those start-up organisations have been up to recently.
In one of the very first panel discussions an analogy to the electric light was made. It was something along the lines of: “The light bulb was not invented by gradually improving candles, but through a transformational shift in thinking supported by new technology.” Does Fintech provide such transformation for financial services and payments in particular? Not to date, one would think. Clearly there is a lot of activity in this space but it has equally become apparent that many new solutions are still at beta testing or proof-of-concept stage.
Listening to the debate over the two-day event, it was noticeable that a number of common themes really stood out.
Consumer convenience wins over Regulation
Not just because of the presence of many law firms, regulation and the role that regulators play was arguably the most discussed topic at the event. Was this because fintech start-ups wanted to demonstrate that they are aware of all on-going regulation and act accordingly, or was there more of a need for further education amongst start-ups? Difficult to say, but we couldn’t stop thinking that it was the latter. The ability to act quicker and be more effective in implementing new solutions was continuously quoted as one key advantage that fintech start-ups have over incumbent banks, culminating in one statement that ‘consumer convenience and therefore usage/adoption is more important than regulation’ (presumably with the latter being addressed afterwards). This is potentially a dangerous game. According to one lawyer, today the regulatory pendulum has swung to the side where it is deemed most permissive. There almost seems to be an expectation that some incident will occur and as a consequence of that regulators will become much more stringent in their approach, potentially closing the quick route to market for new players.
However, it should be said that the FCA sandbox is a great approach to test out ideas before going through the full process of compliancy. The diversity of nationalities represented at the conference is a credit to the FCA which has helped establish the UK as one of the leading countries to start a fintech.
Cooperation is desired – both from fintechs as well as banks
Throughout the event the interaction between new fintechs and the old guard (i.e banks) was all too harmonious. Both parties consistently talked about differences in business models but ultimately for the need to work together, referred to as “coopetition”. With hindsight this shouldn’t come as a surprise. Most fintechs do need to work with banks to test their business models and reduce customer acquisitions costs by tapping into the vast pools that banks can provide. On the other side working with fintechs allows banks to learn what works and what doesn’t without committing internal resources too early. And if something proves to be successful, one can always invest through the in-house venture fund or buy the start-up outright.
Only one day after the event Chase announced that they would work with Level-Up on an integrated mobile payments offering.
Blockchain is not Bitcoin
The difference from last year’s blockchain discussions to today has been remarkable. 2015 was all about Bitcoin but most interested parties seem to have come to the conclusion that this is probably not the most sensible application for blockchain in payments. The discussion has moved on and we are now talking about asset registers and smart contracts in areas ranging from insurance to travel. Whilst micropayments have also been mentioned as an area of opportunity, from a payments perspective blockchain for KYC seems a genuinely interesting idea. The ability to develop a depository with previously authenticated documents that banks and other payment providers could access looks like a model that increases efficiency with reduced cost and time for the on-boarding process.
Blockchain is clearly at a nascent stage but the number of potential applications demonstrated by the start ups, albeit not all useful, was eye opening. We can expect a host of “trial and error” blockchain experiments in the coming years, and whilst many will prove meaningless, we can expect a few breakthroughs. It was interesting to hear the famous Bill Gates quote on multiple occasions throughout the day: “We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten”. With all the hype around the blockchain, you get the feeling this quote could be spot on.
The Impact on Brexit on UK Fintech is unclear but probably not positive
The UK has become a nation of start-ups. In 2015, more than 600,000 new companies were founded. In many instances these businesses rely on the flow of capital as well as the availability of resources and skills. Fintech start-ups are no different in that sense. The free flow of funds and people is an essential element of their success. What makes their situation even more difficult to judge are the rules around passporting. Does their respective business model need to have the ability to passport any license into continental Europe? This summary is clearly not the place to discuss politics but you could feel the concerns in the room that the implications of Brexit might bring.
Contributors: Volker Schloenvoigt, (Director and Head of the Merchant Acquiring Practice) with input from Tim Mason (Consultant).