FinTech: catalysing change in the financial services sector
Future of Fintech During and following the financial crisis you would have been hard pressed to find a sector with a worse reputation than financial services. But, there has been, post crisis, an emphasis on stabilisation.
There has also been a great deal of uncertainty and, in that context, perhaps unsurprisingly, not much investment in innovation.
Outside of those inwardly focussed institutions and taking advantage of the UK’s role as world leader in financial services and technology – a cluster of new firms have developed and secured investment, many in London but also spread out across the UK and Ireland. A view highlighted by a recent Accenture report which noted that fintech start-ups in the UK and Ireland attracted investment of around $700m between 2008 and 2013. So, while the big financial institutions have been in crisis mode, there has been a lot of innovation going on outside of them.
New world leaders in FinTech
Undoubtedly, the growth of the UK fintech sector has been exciting - catching the attention of entrepreneurs, investors, established firms and the government alike. And arguably, being a world leader in fintech is paramount for the UK’s financial sector because fintech helps to increase competition whilst driving further innovation, which is not just good for consumer choice but ultimately, the whole UK economy. Chancellor George Osborne recently announced a range of measures to support the growth of the sector and stated, "I want the UK to lead the world in developing fintech. That's my ambition – short and sweet".
These disruptive firms, unencumbered by outdated legacy systems, are harnessing new technology, which lower costs and the barriers to entry, and are starting to chip away at the dominance of the big banks in some important areas (payments, lending, fx) and are starting to lead in others (data analytics). Companies such as Funding Circle, Zopa, Transferwise and Nutmeg are reaching out to customers either overlooked and underserved by the established banks or dissatisfied with the price and product on offer. And there is clearly space for further disintermediation.
With this pressure, the UKs established financial institutions may finally be energised and compelled to provide the solutions to satisfy greater consumer demands in an increasingly competitive and evolving sector.
That dynamism, however, has not just been evident in ‘disruptive’ firms but also in those firms that can provide innovative tech solutions to incumbent financial institutions. Technology unpins all of the financial services sector; enabling new business models but also providing an open frontier for improving financial services right across the board.
Improving the rate of FinTech development
Nevertheless, fintech innovators alone will not solve all of the challenges facing financial services. In a paper earlier this year, techUK called for digital modernisation strategy and outlined the need for the financial services sector to address the limits that outdated technology platforms impose on modernisation and innovation. The fact is that legacy systems, way past their sell by date, are holding back profound change across the sector. This means that a large proportion of technology spend is allocated towards ‘keeping the lights on’ and maintaining those outdated core systems; restricting the resources available to invest in new technologies that deliver real customer (and systemic) benefit.
Given the continued development of new technologies, the rejuvenation of core banking (and insurance) systems need not involve a programme of ‘rip and replace’ but could look to the cloud and existing e-infrastructure. Technology is not a barrier and the supplier community can provide the solutions. However, in the absence of a compelling event, this may not be a programme that the incumbent institutions will undertake under their own volition. Perhaps the growth of the fintech sector can be viewed as that compelling event because these innovative firms are catalysing change across the entire sector. With this pressure, the UKs established financial institutions may finally be energised and compelled to provide the solutions to satisfy greater consumer demands in an increasingly competitive and evolving sector.
A resilient, competitive and more transparent financial services sector, which better serves the needs of consumers and businesses across the UK is a worthy end game, and with continued investment and innovation, home-grown technology firms will play a central role in achieving those goals.