Ajay Vij, Vice President. Financial Services Infosys
Jamie Dimon, the CEO of JP Morgan and the doyen of Banking Industry in one of his minor watershed moments wrote to his shareholders about the Fintech revolution, he wrote – “when I go to Silicon Valley, they all want to each our lunch, every single one of them is going to try and a lot of them will succeed”!
Something profound is happening at the intersection of finance and technology, Fintech. And there are reasons for the surging Fintech enthusiasm. In the 1990s, the post Glass Steagall act era, the banks became very big and global and we saw the emergence of what we call the Universal banks. People talked about Wall Street in glowing terms as the engine of growth, job creation and market making. However, in this environment there was not much innovation going on in the financial services industry; the industry in-fact became extremely complex and opaque. Even though it was the world’s largest industry, the industry remained largely offline. During the same time industries such as Media, Telecommunications, Retail and Technology Services, the profits started to change hands and shift to new disruptive players. We saw the emergence of Google, Amazon, Alibaba, Spotify, eBAY etc. You did not witness the same disruption in the Financial Services firms. Only a handful of VCs backed Fintech firms prior to the financial Industry crisis.
After the wake of the financial crisis something changed fundamentally! The banks became mired and bogged down under the avalanche of regulation. They had tarnished brands, Capital and Balance sheet problems. In this environment a few smart people got out there to challenge the hegemony of large institutions, the archaic banking platforms and opaque ways of making money. The number of this next generation of entrepreneurs has swelled on paper and the valuations of Fintech firms like Square, Lending club, Stripe, Liquid are soring. VCs have taken note and we have seen an 8 fold increase in venture investment in spaces where venture historically did not tread.
What is driving the growth of Fintech firms
- The Rise of Millennials – 60% of millenials feel that the financial products are not built for them. Even more radical 33% of the millenials say that they will not need a bank in 5 years. This is a audience with more than 2 billion people worldwide and a group that is commanding a growing share of financial resources.
- The Ubiquity of Mobile – There cannot be enough said about the mobile channel. Mobile is a really big thing! Specifically in the context of financial services, there are 2 billion unbanked or offline people who do not have access to the banking infrastructure. But in a few years the world will have close to 4 billion smartphones and 10 billion connected devices. This cross section of prospective customers can be reached with the new distribution channels. It opens up opportunity for new brands that can coexist with established brands, some of which are more than a century old. Venmo starting in 2009, Credit Karma in 2007 Lending Club in 2010 are competing with the well established brands like Wells Fargo for this cross section of the market.
- Trust deficit – Of the top 10 most disliked global brands, 4 were from Financial services. It is a great opportunity for entrepreneurs who want to redefine banking. Companies like Funding circle and Lending Club are already achieving net promoter scores (NPS) far in access of the established institutions.
- Disintermediation – Fintech Companies are taking advantage of the new distribution channels and exploiting the vertically integrated capabilities of the banks. Entrepreneurs are unbundling and disintermediating individual activities that the banks have cobbled and piled together over the years. They are creating new services in a user friendly, simplified and a much smarter and data driven way.
And, this revolution is not restricted to mature markets alone, it is a global phenomenon. Today the Fintech 100 includes 40 companies from The Americas (40%), 20 companies from the EMEA 20%), 18 companies from the UK (18%), 22 companies from Asia-Pacific region 22%), including 10 from Australia and NZ (10%). A case in point is China’s Yu’bao – the money market fund of Alipay. It became the 4th largest money market fund globally with 80 m users within a year. This is unprecedented, compare this to Vanguard’s Prime Market fund which took a decade to reach a similar scale. Yu’bao is entirely on the mobile platform!
While the Fintech world grows, the established firms are not sitting idle. Last year, Citigroup joined forces with lending club. As part of the partnership, Lending club will originate loans for Citigroup customers. Charles Schwab aqnnounced the launch of Algorithmics Investing Strategy, Wealthfront, the software based investing platform. We are also seeing accelerators like Fintech and Innotribe funded by banks. The Barclays Accelerator program is a similar program that helps founders with great ideas that solve real problems by providing them funding, mentorship and market access. We may also see banks starting to buy Fintech firms if they cannot beat them. This is an extremely exciting space to watch out and we expect tremendous action in months to come!