Who will really be fintech's winners?

November 24, 2016 23:21

Technology is finding ever more creative ways to disrupt existing business and to change our lives. The latest generation of tech ventures seeks to eliminate the middle person, cut costs and give the consumer easy access to services.

Most of us have become used to directly downloading video and music. We use the taxi service Uber in most places in the world - except Paris, where it is banned! And hotel and hospitality industries face a formidable foe in Airbnb.

The next digital frontier is finance. New entrants to the market are pushing on an open door because of the poor reputation and service of the banks. Down the centuries and decades the City of London has often been the first to embrace innovation in finance dating, from the emergence of Lloyd's of London, the London Stock Exchange and the Baltic Exchange from the coffee houses of the 17th Century.

It was fleet-footed in bringing the Eurodollar and Eurobond offshore dollar market to Britain in the 1970s. Ahead of the financial crisis, toxic securities, which blew up in everyone's faces, were created by people with rocket-science degrees in the basements of London-based investment banks.

Once again, the City is pioneering change. It is embracing new ways of moving money and letting financial technology - ''fintech'' - do the work. It is not alone. Fintech start-ups are also springing up in New York and Silicon Valley.

Much of the code and the cyber security behind the systems is coming out of Israel. A recent research report found there are already 430 fintech start-ups in Israel and more than a dozen R&D facilities working on applications for New York banks such as Citigroup.

Most of us will already have had some experience of fintech without realising it. Shop in Whole Foods Market and other outlets using Apple pay, which currently interlocks with the IT of the big banks, and you scan with your mobile app. Apple already has huge experience of what economists calls disintermediation by making the iPhone and iPads go-to devices for downloading music and film. At the moment, Apple is not directly challenging the banks but taking a free ride on their IT systems. But, over the longer haul, given the company's history of wanting to fully control everything that passes through its devices, the current piggy-backing system is unlikely to last.

Amazon is already offering businesses who sell through its market-place of smaller companies using its platform, supplier credits and loans. Paypal is the payment system of choice for many internet shoppers. Peer-to-peer lenders such as Zopa bring savers and borrowers together over the web. And crowd funding is becoming a popular choice with companies of all kinds seeking finance, from craft-brewer Brewdog to new-wave real-estate firm Property Partner.

It is no accident that the biggest flotation on the London Stock Exchange in the past year was Worldpay, spun out of the Royal Bank of Scotland by private equity firms Bain and Advent and valued at £5.6bn. It makes most of its money engineering the devices that process credit cards in shops and restaurants. But it is busy investing in new platforms and writing new code to extend its reach.

As payment systems become more sophisticated, with the arrival of biometric recognition systems among other things, established fintech firms have to become ever more sophisticated. One of the game-changers in the fintech space is the likely creation of real-time settlement using distributed ledgers. In traditional banking, all record keeping is done through centralised systems.

These systems are oligopolies, such as bacs and chaps, profit centres controlled by the big banks. By adopting so called ''blockchain'' technology (which first emerged in the bitcoin currency market) the information is shared across a network of sites each holding identical information. The middle-man is eliminated, costs are reduced, there is more access to finance markets for challenger firms and banks and transactions are speeded up.

Fintech start-ups are growing rapidly. At the last count, there were 140 in London alone. Many have based themselves at Silicon Roundabout on the fringes of the City but a recent count shows that at least 13 have chosen to go to Canary Wharf, where they are close to the banking giants that in an ideal word they might one day replace. Others can be seen clustered along London's South Bank.

As in any growth sector, picking the winners will be tricky. In the US, one of the pioneers, Square, started by Twitter founder Jack Dorsey, has disappointed investors with a lacklustre performance. The big money central banks such as JP Morgan and Wells Fargo have started to pick fintech company pockets by creating new digital platforms that offer real-time, person to person payments.

The true beneficiary of fast changing fintech ought to be the customer. There are real questions as to whether the established banks can keep up with the fast-changing technology such as the use of ''big data'', make better informed lending decisions, and measure risk.

Lumbering older systems are also much more vulnerable to cyber-attack. The demand for better defences should be good news for firms such as California-based Imperva, founded by Israeli Shlomo Kramer (one of the original partners in Check Point), which seeks to bind cyber security into fintech operations.

Finance is changing before our eyes and no one is quite sure where the pieces will fall. What is clear is that consumers and businesses will applaud new payments and lending models that eliminate costs, increase speed and remove the banks from the equation.

November 24, 2016 23:21

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