Michael Backes, co-founder of innovation laboratory Liquid Labs, discusses how FinTech development is stepping up a gear and tackling regulations
If you had started a FinTech company five or six years ago your principle concern is likely to have been how to access the wealth of information banks and other financial instructions hold. It is probable that your pitch to investors would have upsold just how good your new platform was at mining information and using it to pioneer a new segment, such as online payments. Fast-forward to today and this is no longer a compelling pitch. The majority of banks are fully online and the market is saturated with companies that have managed to comply with regulations to gain access to this data. The question of how to get data has been answered, FinTech has moved on to ask what innovative things can be done with this data.
Plenty of companies are seeking to answer this question by building services or software which leverage the readily available data to disrupt new market segments, surpass current regulations and resurrect old business models.
To put the change the FinTech sector has undergone in such a short time into context, consider the hurdles start-ups had to overcome to create a simple online payment app in Europe only a few years ago. The sheer number of online banking standards in each country would have required a large enterprise project to gain access to the data needed to power the app. This project would have been led by backend-financial software experts. As this is largely no longer needed, the development of the app can be led by people who know how to design great apps. FinTech companies can also focus more, thinking of ways to leverage data in more innovative ways.
For example, say a start-up has created software for banks to improve customer retention through incentives. This start-up will employ data analysts and developers that have created algorithms identifying patterns from a large data set. A good illustration of this would be looking at a stream of purchases at hardware stores and inferring that the account holder is undertaking a large renovation project. Discounts can then be offered to that customer every time they spend money on their debit card buying hardware or decorating products.
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Generally, with speedy innovation comes an inevitable clash with slow moving legislation. However, in relation to FinTech, companies have actually pushed current legislation out of the equation. I do not mean that FinTech companies are ignoring regulations, quite the opposite, many have developed systems which are more stringent than current regulations. The rationale behind this is simple, innovative financial products can carry inherently greater risks. Whether these risks are merely perceived risks or actual ones is immaterial – FinTech companies have sought to pre-empt any question marks over the safety of their products.
An illustration of this is how P2P online money transfers have sought to tackle ‘know your customer’ regulations. This is where the identity of the customer has to be known in order for them to do things such as transfer money or use prepaid credit cards. As the usage is increased, the more data the bank is required to have on each person. Consequently, it is simpler for banks to ask for information, such as proof of address and different forms of ID, up front when customers open an account. What this means is that a lot of personal information is needed from customers, even if they are undertaking activities which do not require it.
However, a FinTech start-up can build in these thresholds and guide the customer through the process in a much less intrusive way. As the start-up does not use banks, customers can undertake the activity they require without providing unnecessary information and if they do reach the threshold the entire ‘know your customer’ process can take place on an automated platform.
This has the added advantage of allowing the start-up to identify potential problems much more quickly than a bank. Data about the device, the context of where the money is going to and behavioural components can all be integrated into the process. It allows the start-up to identify patterns for fraud above and beyond what regulations currently require.
Faster innovation, better apps and services and strong compliance with regulations have seen FinTech companies visit seismic changes on the financial sector in the last five years. With the speed and quality of innovation set to continue to increase, and new sectors becoming ripe for disruption, the next five years will see the FinTech sector manifestly change the way we all do business.