Over the last decade, however, a new source of innovation in financial services has emerged from financial technology start-ups and technology companies. These new firms have been quicker than banks to take advantage of advances in digital technology, developing banking products that are more user-friendly, cost less to deliver and are optimised for digital channels. This relative success is unsurprising. These new players are unburdened by the demands of regulatory compliance which banks are subject to and which have increased dramatically since the financial crisis. They are unencumbered by the clunky legacy systems that banks struggle to maintain. They can focus on creating single-purpose solutions, designed to offer an improved experience within just one product or service. They are more in tune with the peer-to-peer (P2P) culture engendered by the explosion of social media. And they have agile corporate cultures, motivated employees, and organisational environments conducive to rapid innovation.
Capital has flowed into the fintech sector: $23.5 billion1 of venture capital investment in 2013/14. Of this investment, 27% has been in consumer lending, 23% in payments and 16% in business lending. Fintechs have two unique selling points: better use of data and frictionless customer experience.
But to date these have been limited to relatively simple propositions such as e-wallets and P2P lending.
After a slow start, fintechs are now capturing a growing market share in these areas. Yet their overall effect on the banking market has been minor. Banks have not crumbled in the face of this new competition. We characterise this first phase of fintech as Fintech 1.0. Yet the conditions for significant change are present: policy shifts towards open data and APIs2, the emergence of enhanced technologies such as cloud computing, changing customer dynamics and intense pressure to cut costs in banking. We believe that by extending the use of data and frictionless processes Fintechs can and will expand well beyond the confines of payments and consumer credit. It willmove deeper into middle and back office processes providing new, richer propositions for end customers. Fintech 2.0 is just around the corner. It will deliver fundamental changes to the infrastructure and processes at the core of the financial services industry.
In this report we consider some important banking innovations based on the “Internet of Things” (IoT), smart data, distributed ledgers and frictionless processes beyond payments and consumer credit.