Fintech: A renaissance in finance

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finRenaissance – What’s in a name?  Below is an article written way back in 2014.  Yes, almost two long years ago.  In FinTech timeline, that’s a very long time ago.  The speed of change can be blinding at times, and we can expect even faster iterations of evolution of new ideas, concepts, technologies, solutions and products.

As we embrace this space, how do we have a name that best encapsulate our vision of a true renaissance in finance.  Even as we went about seeking a name, and we had Renaissance pretty much in mind, but settled on finRenaissance to better describe our focus in the financial services space.

Having decided on our name, we stumbled upon the write-up below, which articulates quite well the kind of things that we are working on.  Our name finRenaissance was conceived independent of this article but seeing this article just illustrate how apt and relevant the name finRenaissance is.

The article below – “FinTech: A Renaissance in Finance” is a great read.  I must qualify though that I personally may not fully agree with the writers’ views that technology firms’ attempts to disrupt without regard to legacy understanding of intricacies in the financial services industry may not quite cut it.  To some extent, their lack of historical attachment to such intricacies give them space to dream beyond traditional boundaries.  A creative mind focused on imagining consumer/ customer needs and the advances in mobile solutions can hatch out ideas that are a whole lot more disruptive.  Something that remains to be seen…and we will get a chance to see history unfold, and know if we have been right on-the-money.

Enjoy.

Steven P. Lee, Co Founder, finRenaissance

 

 

 

 

 

 

 

 

 

 


Fintech: A renaissance in finance

Online peer-to-peer and crowdfunding portals are springing up as alternatives to the traditional lending, foreign exchange and equity capital markets.  New electronic trading venues are introducing all-to-all networks and competition to fixed income trading.

Scale in processing power, cloud computing, and big data, along with new tools in customer analytics, is bringing the worlds of Amazon and Google to bear on the human sales and trading force.  Meanwhile Apple Pay aims to replace the notes in our wallets and Bitcoin’s blockchain technology is challenging the very notion of central bank currency control.

These dynamics signal a new trend in an industry dominated by doom and gloom.  It’s as if we are emerging into a new world, one where technology has evolved to a state of genuine enablement.  At the same time, global regulators have opened the door to new alternatives by systematically forcing banks to withdraw from markets they traditionally have controlled.

The opportunity is not lost on fintech pioneers.  Global investment in fintech ventures reached nearly $3 billion last year, triple its level just five years ago.  It will grow to an estimated $6 billion by 2018, according to a report by Accenture and the Partnership Fund for New York City.  According to VentureSource, investment in fintech soared 177% in the first quarter of 2014, compared with a year earlier.

Where do such developments leave banks?  The disruptors would suggest that technology has the power to cannibalise banking businesses entirely, much as online retailers predicted the demise of physical stores at the height of the dotcom boom.  And some ideas do indeed appear revolutionary. There is an air of the gold rush to the latest trend.

But banks are not shrinking from the latest Silicon Valley challenge.  Large banks, in particular, are sparring with the start-up environment by setting up technology incubators, accelerators, and venture funds.  Such vehicles are designed to help banks understand how to use technology to preserve scale and strength, as well as help them develop real estate in promising new ventures. Recognising their own inefficiency, banks want to stay current on what is entering the marketplace.

Banks also want digital technology to help them manage risk, reduce complexity, and cut costs, while simultaneously using big data – the science of mining vast databases for meaningful insights – to better serve their clients. They clearly see that pioneering software developed by imaginative start-ups has the power to bring about vast improvements in their traditional businesses.  Goldman Sachs in particular has been focusing its efforts, with chairman and chief executive Lloyd Blankfein recently noting in a Bloomberg interview that “we’re a technology firm”.

The issue is how and where to invest. Just as with the dotcom boom, failures will be many. Innovation and risk go hand in hand.  We have already witnessed the high-profile collapse of one fintech, the MtGox Bitcoin exchange that went from handling 70% of global trading in Bitcoin to bankruptcy in 12 months.

This situation places banks in a difficult strategic position.  Clearly they cannot afford to remain idle.  At the same time, a scattergun approach will only lead to half-hearted investments in a range of businesses they only half understand.  Just as important, private equity and venture capital firms have a heritage of investing in start-ups.  They are in a better position to capture the best offerings, leaving banks in a less than ideal position from which to capitalise on the new wave. Valuations are already becoming extreme, as many competitors vie for the same tiny niche.

The solution for the banks is therefore to invest in fewer businesses – ones in which they already have traditional knowledge and inside strength.  For example, we have seen banks increasingly turn their attention to the technology culture of open-architecture systems.  Notable examples include Perzo, the alternative chat service; Open Bank Project, which allows banks to develop their own apps (leveraging their own core systems); and Standard Treasury, which permits businesses to integrate their systems with banks using open application programming interfaces.

Banks are also learning how to attack open markets, leveraging their scale and technological advantage to place orders in the P2P lending market the moment loans become available, leaving less opportunity for the slower retail investor.  According to peer-to-peer lending website LendingMemo, 25% of US credit marketplace Lending Club’s loans are offered through a whole loan program before they are made available to retail investors.

In the big data sphere, some firms are deploying web crawler technology to capture client data and metadata from all possible sources, both internal and external, to glean evidence of behavioral patterns.  If certain payment types and amounts are originating from one location and going to a certain destination it could be evidence of the launch of a new business, or it could be money laundering, or it could be evidence that the customer is transferring his or her business to another institution.

In short, the banks of the future will have assimilated technologies that talk to the businesses they are naturally strong in.  The benefits of the investment can sometimes be hard to perceive, especially when constrained budgets and cost cutting prohibit strategic risk taking.  Indeed, Silicon Valley disruptors are counting on bank paralysis to win.  But the longer banks struggle to understand their new economics, the wider the window of opportunity becomes for disruptors.

The key thing for banks to remember is their natural position of strength.  They understand their own businesses better than anyone.  Meanwhile, the technology firms that look only to disrupt with scant regard for the historical legacy and intricacies of financial markets are more likely to fail.

Philippe Morel is a senior partner and global leader of BCG’s capital markets practice.  Will Rhode is global head of capital markets research at the Boston Consulting Group

This comment was first published in the print edition of Financial News dated December 8, 2014