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‘You have to, to serve these markets, reimagine how money can be managed and moved because there’s going to be more change in the next five years in financial services than what has happened in the past 30,’ – PayPal chief executive, Dan Schulman.
Financial services form the backbone of the global economy. They facilitate the billions of payments sent around the world every day, provide the vital capital needed for economies to grow, manage our increasingly complicated assets and supply the comfort-giving insurance we need to protect it all.
These are just some of the crucial services that the industry provides and the international nature of the market has meant financial services has long been dominated by big traditional banks and financial institutions that over centuries had cemented themselves as the money managers of the world.
But rapidly developing technology is turning the sector on its head and dragging financial services into the digital age as a flood of new entrants try their hand at taking a different approach to how financial services work and offer us all a much needed alternative to the long-standing monopolies.
Depending on what stance you take, fintech represents the biggest opportunity or threat to the global financial services market. With new rivals entering apace, incumbents have been trying to snap them up to get ahead in the digital game and data shows fintech has become invaluable. A report by PwC last year showed eight out of ten financial services firms felt vulnerable to the rise of fintech, with a similar amount intending to strike partnerships and other deals over the next three-to-five years to help mitigate the threat. The majority of the sector now has disruption at the heart of their strategy.
Fintech represents the natural course of development for financial services and its importance will only grow going forward. Major investment in fintech has broken beyond the traditional hubs in the likes of the US, UK, China and India, with other nations such as France, South Korea and Japan all seeing an uptick in fintech deals.
London has long been a finance centre of the world but the expansion and divergence of its banking industry has allowed the UK to carve out a leading position in fintech. There are almost three times as many UK banking and payments companies now than there were in 2005 while the rest of the world has seen theirs fall by around one-fifth on average. UK Chancellor Philip Hammond has previously described fintech as the country’s key to the ‘fourth industrial revolution’.
The momentum behind fintech is only building and the UK is leading the charge. So how is UK fintech performing and what is on the horizon?
What is fintech and how is it disrupting financial services?
There is no universal definition of classification of fintech but it is widely regarded as technology applied to financial services. Fintech is all about innovation that disrupts and transforms the existing market, birthing new companies that test the traditional models used by banks and other financial institutions such as Transferwise or online challenger banks like OneSavings, and building entirely new infrastructure to bypass the current financial system like blockchain and cryptocurrencies.
Read more: what is blockchain technology?
There are four common themes occurring within the financial services industry that is driving the fintech sector, which are:
Fintech trends: replacing infrastructure
Building new infrastructure for financial services is nothing new. Companies like Visa, Mastercard and PayPal all revolutionised the payments industry by using technology and new infrastructure to become leaders of their industry but even they now find themselves exposed to the emergence of new innovative rivals, demonstrating how much development has picked up in the fintech space.
Read more about where’s next for PayPal
At the centre of new digital infrastructure is blockchain technology, the digital ledgers which are known for facilitating bitcoin and other cryptocurrency payments but in fact have a multitude of other uses.
Fintech trends: introducing new business models
With the rapid change in the industry presenting new opportunities many have taken an entirely different approach and adopted different business models to the existing players, demonstrated by the rise of firms such as Funding Circle, the peer-to-peer lender capitalising on the high street bank’s retreat from small and medium-sized enterprises (SME) lending which is joining the London Stock Exchange (LSE).
Find out more about the Funding Circle IPO
Fintech trends: monetising data and improving analytics
Heightened competition, the digital transition and a change in revenue models has created an increased need for quality data. More consumers are securing financial services for free, meaning companies are having to source more revenue from selling advertising and flogging the consumer data needed to attract new custom.
Read more about the challenges WPP and the wider advertising industry are facing
Data is becoming better in quality and larger in size, and the ability to understand this data is of equal importance.
Fintech trends: technology requires better security and governance
All of these trends place more weight on the digital sides of business, creating a need for better cybersecurity and fraud prevention software. The emergence of regulation technology (or ‘RegTech’) demonstrates how big the opportunity in this area has become as firms are thriving off supplying the tech businesses that need to handle the swathe of new regulatory and compliance laws.
Automation is also playing its part too, with artificial intelligence and software being increasingly used in all types of firms from brokers and trading houses to insurers and payment processors.
UK helps push global fintech investment to record highs
Fintech is attracting growing amounts of investment. The total value of all the venture capital, private equity and mergers and acquisition (M&A) deals within the global fintech sector during the first half of 2018 has already exceeded the total for the whole of 2017 and this year is expected to surpass peak investment levels seen in 2015, according to KMPG.
The UK plays an overweight role in the global fintech space – with investment of $16 billion in the first six months of this year surpassing the $15 billion figure for China and $14 billion for the US, and accounting for well over half of Europe’s total.
There have been major deals, however, that skew both first-half investment figures for the global market and that of the UK. Ant Financial, the affiliate of Chinese conglomerate Alibaba that primarily offers mobile payments through its app Alipay, raised $14 billion in venture capital to boast a staggering value of $150 billion and payment technology firms Vantiv and Worldpay completed their $12.9 billion merger in what is one of the largest fintech deals of all time. The impact of the deal, with Worldpay dual-listed in London and the US, is evident looking at UK fintech investment data: