Finovate, KPMG, and CB Insights are all reporting on record investments in financial technology (fintech) in 2016.[i] According to Finovate, the total number of deals year-to-date stands at 737, double last year’s 371. The amount invested has more than doubled, too — from $8.4 billion raised during the same period a year ago to $17.4 billion year-to-date.
There seems to be a lot of optimism in fintech, especially when you consider this chart:
Source: Yahoo Finance.
The share prices of fintech darlings in peer-to-peer (P2P) lending, small-business lending, and mobile payments have collapsed post-IPO. And devaluations aren’t affecting only publicly owned companies. Zenefits — which offers cloud-based software to manage payroll, health insurance, and other benefits — was valued at $4.5 billion in May 2015. Since then, Fidelity, which led the funding round, has written down the value of its investment, now estimating Zenefits' share price at $5.60 — down from $14.90 a year earlier.[ii]
Exposed brick is replacing marble at many banks, insurers, and payment firms. Warehouses are deemed a better location for digital labs, digital centers of excellence, innovation labs, and innovation centers. But why are these spaces proliferating from Silicon Valley to Singapore?
A cynic could say it’s a marketing exercise aimed at making the respectable (if a little slow) financial institutions seem more innovative — and more attractive to both customers and developers. But it’s more than that. Frustration and ambition are pushing business executives out from their traditional locations.
Digital labs promise speed by unshackling product and software development from slow business, technology, and compliance processes. They embrace new approaches, such as design thinking, customer centricity, and Agile development. They can drastically cut the time it takes to develop a proof of concept (POC).
But that’s where the dream ends.While these separate digital units aim to be disruptive, they often deliver just front-end apps or proofs of concept that are impossible to integrate and scale. Why? Because software-driven innovation requires a connection to systems of record, rigorous testing, an understanding of security and compliance threats, an analysis of impact on business units and revenue, and someone with the resources to own, love, and keep developing the product — all the things that made digital innovation so slow in the first place. All that labs achieve is to postpone these reality checks.
Two weeks ago, I was lucky enough to spend 10 days in Italy on a vacation with my wife and some friends. As we walked the Path of the Gods, made our own Neapolitan pizze, and enjoyed the gorgeous views of the Amalfi coast, different people in our group would pay for a limoncello here or a glass of aglianico there. As such, our financial activity was a mix of different individuals spending various amounts for a range of stuff. But our group was often too busy having fun to carefully track who paid how much for what and when.
Enter Splitwise* a non-bank mobile app that lets groups of people easily track their spending and settle their short-term debts to each other (see screenshots below). We used it throughout our trip, and it was a breeze.
But why didn’t a bank build this kind of convenient digital offering first? Or why don't more financial providers integrate with Splitwise and other disruptors to build ecosystems of values for their customers? Many bank executives and digital banking teams say their goal is to help customers better manage their finances (and increase retention and engagement by doing so). But too few financial institutions have focused on what Forrester calls the shared finances opportunity. Forrester defines shared finances as:
Any situation in which a person acts as an observer of, partner in, or proxy for another person's finances.
Digital disruption has hit retail financial services in Asia Pacific (AP). In 2014, fintech investments in AP totaled US$880 million and skyrocketed to a staggering US$4.5 billion last year. Just as payments innovation has been a darling of venture capital investors in the US, the picture is not so different in AP as payments took the largest share of fintech investment deals at 40%. This is followed by lending at 25%. However, the next frontier of disruption doesn't lie in payments and lending. FF16, AP's first fintech competition, featured an array of fintech finalists offering a wide array of capabilities that signal what is to come in digital disruption in financial services.
We observe that the next frontier of digital disruption for the financial services sector will take place in investment, security and authentication as:
Data access, predictive analytics, and machine learning drive investment innovation. Exploding volumes of data are driving new, disruptive products and services in retail financial services. While predictive analytics isn't new, it has now entered the mass market, becoming more ubiquitous to retial investors. Smaller, nimbler players such as 8 Securities are now using algorithms to help customers derive insights from data, making predictive analytics more affordable and accessible. There are also B2B fintech companies such as BondIT and ShereIT that help financial advisors and brokers maximize their clients' portfolios.
From discussions with our clients in the financial services industry (FSI) in Asia Pacific, we’ve noticed that their digital agenda has changed dramatically over the past 18 months, shifting from a consideration of acquisitions and distribution channels to a broader business transformation imperative.
In fact, leaders at banks and insurance firms are increasingly realizing that:
Customer experience is fast becoming the only competitive differentiator.
Banks and insurance have to accelerate their ability to innovate and deliver new sources of value to customers faster.
Finovate came to London again this week and I was lucky enough to attend. Here are my thoughts from the two days:
This year’s big theme was robo-advice. Every Finovate seems to have an unofficial, accidental theme with a large group of start-ups clustered around the same disruption, like PFM, mobile payments, small business banking or digital wallets. This year it was robo-advice.
Robo advice is starting to look crowded. Each of the new digital investment managers has a distinct story. Scalable Capital offers a sophisticated quantitative, value-at-risk strategy. MeetInvest helps investors mimic the strategies of famous investors like Benjamin Graham or Peter Lynch.* Investify lets investors choose themes that feel right. DriveWealth offers fractional share investing to allow low-cost access to the US markets. SwipeStox makes it easy to follow other investors through an app. Capitali.se converts ideas into trading rules. Europe has many countries and investors are diverse. Even so, the market is starting to seem crowded. Clearly the cost of managing investment portfolios is falling, which should enable firms to break even with fewer assets under management, but the costs of regulatory compliance and marketing to achieve growth have not diminished. Investment performance will sort the unicorns from the donkeys.
Games of buzzword bingo and comparisons of on-stage role-play to 1980s’ pornography acting…today’s comments on Twitter prove that it takes guts to face the sometimes cruel Finovate crowd. But if you want to measure the current beat of banking, wealth management, insurance, and startup hearts, there’s no better place than Finovate. Here are a few reflections on Finovate Europe 2016:
Robo-advice is all the rage. Just when blockchain made it into a Dilbert cartoon, it disappeared from the Finovate stage. The only mention of cryptocurrencies was during Ledger’s presentation of its “hardware wallets for decentralised applications” (bitcoins, basically). This is not a bad thing; Forrester advice is to maintain a healthy level of scepticism. Finovate isn’t the place to prove blockchain’s purported capabilities. We’ve also moved away from personal finance management (fondly called PFM), mobile payments, digital wallets. If you want to be in vogue, you now need to pay attention to digitising investment strategies, biometric authentication and contextual engagement. Apart from the international-payments startup Valuto, this year’s Best of Show winners (Capitali.se, DriveWealth, SwipeStox, EyeVerify, IDscan) all fall under the first two themes.
At least two dozen accelerators and incubators have been launched by financial services firms in the last two years. I believe that in five years’ time, most of these corporate accelerators will have disappeared. Why? A fully-fledged, multi-startup accelerator is expensive to run. The cost of searching, selecting, and providing seed investment and support for startups could easily reach $1 million a year. Many accelerators aren’t focused enough on customer problems or business objectives to deliver return on that investment.
So why are so many banks, insurance, and wealth management firms eager to loosen their purse-strings? Some want to identify and co-opt future disruptors, others are looking to startups for innovation. There’s been a palpable change of tone in discussions of digital disruptors in retail financial services. The ubiquitous stories about voracious startups that want to eat incumbents’ lunch have been replaced by tales of successful collaboration. Financial technology startups deliver innovation, established firms bring customers, and together they live happily ever after.
[note: this was written live last week while I was attending Finovate]
Greetings from the Big Apple! I’m here attending the fancy schmancy Finovate Fall 2013 conference featuring tech solutions and innovations from – and for – the financial services industry. Here are some of the offerings and presentations that stood out for me, in the order they were presented at Finovate:
Kofax offers process automation software for lenders, but the big takeaway for me was their recent expansion of mobile, cross-channel, and multichannel analytics for financial providers. Focused on how customers shop for a loan, the dashboard and data are digestible and actionable. The jury’s still out, but strong analytics and easy-to-use tools can help banks improve sales in their lending lines of business.
MoneyDesktop offers digital money management tools – also known as personal financial management or PFM – and their demo at Finovate continued to show their strengths: Nifty tools, clean design, and intuitive UI and UX. The question mark for banks, however, continues to be how well integrated – or better yet, embedded – the experience can/will be for end users.