The fintech revolution is here and disrupting banking, Bitcoin not so much…

I have just returned from Money2020 in Copenhagen, effectively Disneyland for anyone interested in the fintech space. Themed “The Centre of the Revolution”, the conference brought together the leading lights of the financial service industry, VC funds and also technological innovators.

Just under 4 000 delegates from 70 Countries heard from 422 speakers including leading lights such as Sir Michael Morris, Chairman of Sequoia Capital, Carlos Torres Villa CEO, BBVA, Nicolas Huss, CEO Visa Europe, Blythe Masters CEO Digital Asset holdings as well as the head of Mastercard, the VP of Amazon payments, the CEO of Visa, The COO of HSBC, the President of Alipay and the Global Head of Samsung Pay. The best FinTech start-ups in Europe also presented their products and pitches to the delegates.

Continuity for the event was provided by DJs who managed to dredge up every money-themed song published in the last few decades and The Rudimentals kept us entertained on the side-lines with their up-tempo brand of music which set the tone for the pace of the conference.

It is clear that the digital revolution in financial services is well underway but the impact on current banking main players is not yet fully understood.

My top ten insights from Copenhagen were:

1. The future of FinTech is already here and it is in China. AliPay (Alibaba’s mobile payment wallet) already has 450 million active users.
2. UX matters and it’s all about the customer experience.
3. If you cannot scale your FinTech start up beyond your home market then it’s more likely to fail. MPesa was widely regarded as a failure by speakers at the conference.
4. Banks view 95% of FinTech start-ups as enablers not as a threat.
5. Not all banks are going to make the FinTech transition beyond 2020, some are not doing nearly enough to win the customer relevance battle. Consumers have more trust in their Tech Company than their bank. Tech Companies can do what banks do, more cheaply, more conveniently and with much greater transparency
6. VR banking is coming, if Samsung has anything to do with it.
7. The biggest FinTech opportunities for start-ups are:
   • Insurance Tech (Top of the pops);
   • Bring the bank to the customer;
   • Human Interaction with the machine;
   • AI;
   • Reaching the unbanked; and
   • Robo Advice.
8. Bitcoin is not the future of banking but Ethereum may well maximise the use of Blockchain technology.
9. Future trends:
   • AI/Machine Learning (Payment Routing and optimisation, risk and fraud detection)
   • Core Tech (biometrics, secure payment and digital identity), we heard about Selfies becoming a key component of KYC (Know Your Client).
10. FemTech is strong, the President of Alipay International, CEO of Digital Asset Holdings, Global head of Samsung Pay and the head of the FinTech circle are all female
11. The Coffee Collective in Copenhagen makes the best flat white in the world, after Rosetta Roastery at the Woodstock Exchange

Banks

The move away from bricks and mortar to digital channels is accelerating at an unprecedented pace. A recent survey revealed that most consumers prefer a trip to the dentist than to visit a physical bank branch. Banks which are unable to rapidly innovate and switch their customer engagement channels fast enough will become obsolete.

It’s all about the culture and the ability of banks to become agile. ING and Rabobank have encouraged experimentation and for executives and teams to “fail fast” and they have removed hierarchy, they treat failures as learning. Banks need to decide, do you want to be the tracks or the train? Great UX is seen as a critical component of a successful banking offering. Many believed that a special physical space is needed to enable innovation and to escape the traditional culture of the bank.

Slide Credit – Ralph Hammers CEO ING GroupThe way banks tackle FinTech innovation will be critical to their future relevance and success, locally and internationally.

The banks which are leading the way in innovation have a mix of their own internal incubators/accelerators and strategic FinTech Investment, some are partnering with FinTech Hubs and external accelerator/incubator’s.

Many are investing directly in start-ups which can fit into their value chain. Locally, Rise created by Barclays, sets a high standard in South Africa. At the conference ING, Spain’s BBVA and Rabobank in Europe demonstrated a committed approach to Open Innovation and collaboration. The executive leading innovation in any bank needs to form “a coalition of the willing” and ensure that they get out of the office as much as possible.

It was widely acknowledged that banks which fail to acknowledge the impact of FinTech are putting their entire business at risk.
On the upside for banks however is that overwhelmingly, consumers want their financial solutions to come from their bank. Research presented on payments revealed that trust in the entity which is providing financial services, is very important for the consumer.

Will banks survive the new wave of FinTech innovation? The majority opinion in Copenhagen was that they would and that established banks would simply acquire the new players, however they would need to embrace open innovation and become collaborators. Doing so may stress the prevailing culture. Co-innovation and Open API’s are also likely to be a critical success factors.

Here are some recommendations for banks to come out of the conference:

• The window of opportunity is open – for now
• Invest in protection capabilities, for both banks and customers.
• Clearly define transformation and innovation agenda and road map.
• Innovate internally and through extensive partnerships with FinTech’s.
• Maximise POCs/Pilots while minimising customer risk.
• Make customer access/trust a foundation of innovation and partnership strategy
• Don’t let your accelerator become a Zoo for the banking Execs.

What do consumers want from Banks?

Consumer’s fears are driving their desire for protection and millennials are just as fearful of the top risks as older consumers. The majority of consumers expect their bank to address these top four fears in the next two years:

• Data theft
• Identity theft
• Fraud/Money theft
• Cyber attacks

FinTech startups

Founders should always do a strong due diligence on investors. Ensure a culture fit and clarify expectations in advance especially around acceleration. A focus on the “exit” is bad for everybody. FinTech start-ups need to ensure that they are sufficiently capitalised to enable a true scale up. Allow for a long time line before success, usually well beyond five years due to the regulatory environment and complexity of the financial services environment. Good corporate investors give credibility to start-ups too. Take corporate funding as late as possible.

Capgemini’s 2015 World Retail Banking Report found that, compared with traditional retail financial services organisations, many FinTech companies have a better feel for the customer experience and how to optimise it. They are also capable of using their expertise in innovation to reinvent banking in brand new ways. In addition, they are not burdened by the legacy systems or siloed businesses that tend to slow banks down.

If you can combine VR and banking then Samsung are likely to come knocking.

Ultimately this was the message for FinTech startups:

• Rethink your exit strategy
• Partner to gain access to customers
• Get deep consumer input early and often
• Educate consumers to increase awareness and trust
• Focus significant energy on partnerships which are a necessity for broad customer access.

And here’s what consumers want from FinTech startups:

• Protection
• Personal Financial Management
• Mobile payments
• Personalised digital experience

VCs

Corporate VCs investing in FinTech start-ups doubled over the last year, and now make up one in four of all investors. Investment in financial-technology companies also grew by 201% globally in 2014, compared to 63% growth in overall venture-capital investments. All in all, it’s pretty obvious that FinTech startups in the payment space are proving very attractive for VCs.

The new threat – Big Tech and GAFA are coming

This threat is best summed up by a quote from the presentation by Elle Kim who is the VP of Samsung Pay: “we can do cool stuff, we have access to the hardware”. Samsung’s ability to create native payment ability with its handsets (without the need to open or access an App) is a distinct advantage. Mobile Wallet FinTech companies are likely to be the biggest losers as all the power moves to the mobile handset makers.

Slide credit – Julian Skan, Accenture’s managing director overseeing the FinTech Innovation Lab LondonGAFA (Google, Apple, Facebook and Amazon) are seen as major players in the FinTech battlefield, the question is will they be collaborators or competitors. Traditional back-end platform support providers such as HP and Microsoft traditionally provided the platform, may become competitors.

UX

Keep it clean, simple and allow the customer to customise their own look and feel. Atom bank is an example of a company with a great approach to UX.

Image – Atom bank

Bitcoin, the Blockchain and Ethereum

Bitcoin has reached a fork in the road, its pole position is being contested for the first time as Ethereum reaches a US$1-billion market capitalisation, forcing the community to redefine Bitcoin as it seeks solutions to scale. The Ethereum projects growth is directly attributable to Bitcoin scaling challenges.

Whilst the Blockchain will have a profound effect on the developed world, title in the developing world will see a much bigger use case.

Economist and former JP Morgan exec Blythe Masters believes that the banks will use the Blockchain to create greater internal efficiency and to cut cost.

Legislation

I had the feeling that once regulation started to change then the floodgates would open for FinTech startups. If you would like to understand how regulation is going to change in the future then read this press release from the European Commission on PSD2, which suggests that new sets of rules will “protect consumers better when they make payments, promote the development and use of innovative online and mobile payments and make European payment services safer.”

According to commissioner Jonathan Hill, “this legislation is a step towards a digital single market; it will benefit consumers and businesses, and help the economy grow”.

I believe that this statement is most relevant as it is effectively legislating the use of innovation to improve the customer’s banking experience.

Commissioner Margrethe Vestager, responsible for competition policy, said: “We have already used EU competition rules to ensure that new and innovative players can compete for digital payment services alongside banks and other traditional providers. Today’s vote by the Parliament builds on this by providing a legislative framework to facilitate the entry of such new players and ensure they provide secure and efficient payment services.”

When one considers the situation in Africa and the enormous amount of people who do not yet have any access to baking, remittance or payment services then the imperative for enabling FinTech regulation becomes obvious.

Fintech: What’s next for Africa?

In closing, I believe that FinTech has a unique role to play in developing markets such as Africa. The reducing cost of smart phones and increased connectivity give us the opportunity to leverage mobile devices. The most successful applications are likely to be those which can partner with and find their way into the value chain of the big banks. Decentralised ledger technology such as the Blockchain may yet prove to be pivotal in areas requiring trust and transparency.

We have a long way to go however before we become a cashless society, cash is still king when people do not have any access to financial services. Financial Inclusion is a basic human right and digital identity enables. India has a digital identity programme which is increasing financial access, we should follow that example in Africa.

The development of Digital Identity applications offers enormous potential in Africa where KYC is constrained through lack of birth records and fixed address. However my view on KYC is that it is a big box ticking exercise with more CYA than authentication. “Current ID authentication is built on a house of cards” was a strongly held view in Copenhagen.

Anonymity will not be the trend of the future. The ship on privacy has already sailed and your personal data is already in the hands of all and sundry

Bitcoin’s inability to scale is seen as a major constraint to wider adoption and acceptance as a transactional currency.

FinTech’s ability to “bring the bank to the customer” presents a big opportunity for start-ups in Africa.

Skills are a constraint in Europe and a constraint in South Africa, especially those that evolve around the use of data and AI. Support for skills development in these areas, by big business and government are going to be critical if we are going to develop local capability.

Lastly it was evident that Strong FinTech Hubs are critical to a healthy innovation infrastructure.

This is an extremely condensed summary of some of the topics covered along with a few insights. Please feel free to contact me for a more comprehensive presentation of FinTech trends.