Monday 20 April 2015
Disruption in financial technology: friend not foe
Monday 20 April 2015
As technological services develop at an exponential level, industries are feeling the pressure from 'game changers' like Uber
KPMG released a report Unlocking the potential: The Fintech Opportunity for Sydney discussing how fintech financing activity, currently estimated at $US3 billion, is expected to double by 2018.
We talked to Ian Pollari, National Sector Leader for Banking at KPMG, to learn why everyone's talking about financial technology (or 'fintech') right now and just why there is so much expected growth.
What is fintech?
There's always been a strong connection between financial services and technology. What's different now is a shift in focus from innovation occurring in middle and back office IT functions (to deliver resilience, security and operational efficiency) to the delivery of the consumer experience. Frontoffice activities, like payments, sales and wealth management, are rapidly evolving as technology is increasingly prominent in our day-to-day interactions with the modern interconnected global economy.
We now have a well-established funding culture, like in Silicon Valley. We see many 'serial entrepreneurs' now, like Jack Dorsey setting up Twitter and then Square. Success is leading to more investment which, in turn, is leading to new success; a chain reaction of rapid growth.
Why is there so much buzz about this at the moment?
The rapid growth in the internet, social media, data and mobile devices has led to reduced 'information asymmetry', where consumers are more powerful in their decision-making than ever before with the ubiquitous nature of information availability.
Fintech start-ups are capitalising on consumer desire to hold on to this power. At the same time, the cost of computing and software development has plummeted, opening up industries that previously had high technical barriers to entry. Dealing in fintech is much easier and cheaper than five years ago.
Within the industry, we're seeing two types of ventures emerging across the financial services spectrum: those seeking to dis-intermediate or develop new business models that challenge the traditional forms of finance, and those looking to provide products and services to established firms to act as partners improving existing business models together.
What's driving the change?
At the moment, it's quite simply supply and demand. In the US and the UK, particularly London, which are the fastest growing fintech centres, negative consumer sentiment rose against large institutions during the global financial crisis (GFC). Consumers started looking for alternative ways to handle their money and achieve their financial goals, like peer-to-peer lending or social funding.
During the turbulent economic climate, we also witnessed many talented people exit the industry and look to do something different. With limited options, the majority of fintech innovators were driven to start up their own organisations through frustration with the status quo and recognition that key parts the economy were just simply not well served.
Why are large institutions getting involved?
They recognise they need to invest in initiatives that sit outside their regular corporate culture, and are empowered to explore innovation while avoiding legacy processes.
At KPMG, we describe a 'safe to fail' environment, a large-scale version of trial and error. While we understand risks involved with our operations, we recognise that failure can happen; but it should be fast and cheap, and allow for the quick accumulation of experience.
The world has changed, and a bolder new approach is needed to keep up. Products developed internally over a long period of time are a notion of the old world. We need iterative processes which engage the consumer and promote creation and creativity to deliver a more 'frictionless' customer experience.
The new world is about an ever-changing product which develops on the go, according to real-time consumer feedback. This 'minimal viable product' mentality is the underlying idea of fintech today.
'Game changers' appear all the time. Isn't it likely that something unpredictable might drastically affect the industry?
Uncertainty and risk are quite high, but it all comes down to 'strategic optionality'. It's very hard to pick the 'winners' per se, so corporates and venture funds are putting down money in a series of small bets to manage risk across a breadth of opportunities. They hope their portfolio will breed some key successes. Of course, they are not just dumping money blindly into start-ups. These financial decisions are always coupled with a set of networks, capabilities and expertise. Most large institutions also provide tacit support like regulatory guidance to their venture partners to make their investments viable.
Why would institutions want to partner with services challenging existing operations?
The most important point I can make is: digital disruption is not solely a competitive threat. Originally, it was believed that digital enhancement was going to fundamentally alter the industry. Any panic was based on fear of change rather than a deeper understanding of how the system at large can grow. Digital innovation is about fostering collaboration more than anything.
Most fintech start-ups want or need to partner with existing institutions. They recognise that large organisations have expertise, capital, data, distribution, and consumer and regulatory knowledge that is vastly superior to their own.
It's in the collective interest of the industry to develop our financial services offerings together, for all clients and service providers.
Think about the 'under-banked', those who can't get access to quality banking solutions, particularly in emerging markets. Large banks have only recently been able to reach these people through new payment capabilities coming from fintech developments like online transaction accounts and credit cards backed by large consumer corporates (like Woolworths).
A digital shift allowed the larger population to become more educated in financial services and slowly grow their understanding of what's available for their personal needs. These people are now aware of more traditional banking services, like mortgages and personal loans. These are positive developments for the industry as a whole.
How do you think this will apply to wealth management?
I think wealth management will mirror this in the coming years. 'Robo-advice' and online wealth solutions are growing rapidly because a big part of the population aren't getting any financial advice, for reasons like lack of reach or cost.
Online solutions are a cost-effective, simple and transparent way to disseminate wealth advice on a large scale, but this isn't a bespoke experience. I believe we'll see technology push people from a segment not currently engaged with wealth to one where clients are enthusiastic about a face-to-face personalised service. Using an automated model is great for overall wealth decisions, but it doesn't allow for someone to maximise their individual financial potential, given their exact complex situation.
The technology will 'grow the pie', as it were, showing that professional financial advice is valuable and warranted, in turn enticing those interested to seek out real advisers to discuss their personal circumstances, goals and financial aspirations.
So what can be done to support the fintech industry?
We need support from the entire community to foster a strong fintech environment. The UK aligned policy and regulators with companies, start-ups, and academic and research institutes, in both public and private sectors, to set up an excellent 'fintech ecosystem', a financial services industry that operates harmoniously to promote technical innovation and growth for all parties involved.
During our research, we had local fintech entrepreneurs meet with David Murray and the Financial System Inquiry Secretariat on the topic of innovation, policy and regulation. We found that government support can come from capital development within funding and taxation reform. For example, changes to employee share scheme taxation arrangements and the Significant Investor Visa program can free up cash flows for new ventures and attract greater levels of venture capital funding.
In Australia, our regulators are looking into this at the moment, preparing an environment for strong fintech expansion and growth. It's good to see regulators making room for experimentation. Their challenge is to support this while avoiding any systemic risks; because, as you know, finance and wealth products are very sensitive, they involve people's lifetime savings and livelihoods.
Also, most start-ups are looking for distribution. This is a great opportunity for financial planners to help introduce new products and services to your clients. In Australia, we'll see wealth used as a channel more than in other global fintech industry, given the prominence of superannuation here. I think we'll see many self-directed solutions develop, so there will be massive opportunity for financial planners to use this as a pipeline to reach new clients while providing exciting new options to their existing ones.
How does Australia's fintech environment compare globally?
From a broader financial services perspective, we have work to do. Sydney, as a financial centre, was ranked in the top 10 of the world in 2008. Furthermore, we came out of the GFC relatively well, compared to other countries, so you'd intuitively expect our ranking to now be higher. However, we've actually slipped to 23, with Melbourne following at 24, relative to other international financial centres.
We need to focus on fintech to keep up, because that's where the global economy is primarily growing. Finance is the biggest part of our economy, employing over 400,000 people and contributing over $11.5 billion in tax annually. There's a lot at stake here. If we get complacent, other countries will dominate our markets and push us further behind with their technical developments.
The good news is that right now in Sydney we're working to develop a world-class fintech ecosystem to compete with the US and the UK, called Stone and Chalk. We want to provide high-quality start-ups and innovative programs with the best opportunity to succeed, grow and go international. Our initiative launches later this year, supported by a number of government, regulatory and corporate partners, including KPMG and Macquarie. We'll provide support in the form of capital, networking and expertise for start-ups, and an open forum for large corporates to share ideas and developments. Anyone interested can look forward to a range of events scheduled to pop up later this year.
Who are the current fintech trailblazers?
KMPG with Australasian Wealth Investments Limited (AWI) and the Financial Services Council released a report showcasing who we believe are the 50 best innovators in fintech for 2014.
As a start-up, Lending Club has been phenomenally successful in such a short time. It didn't exist seven years ago, but managed to raise $US800 million in December, placing it as the 15th largest bank in the US with its market valuation of about $US9 billion. That should give you a sense of the investment and world focus fintech is attracting at the moment.
Interestingly, out of our 50 best innovators, over 80 per cent didn't exist before the GFC and 10 per cent are from our Australia and New Zealand financial network, with Xero, Society One and Stockspot being some shining examples.