Blog article
See all stories »

FinTech enters a new phase

FinTech has come a long way in the last five years. The segment moved from a few players tackling problems that financial institutions were slow to recognise, such as online payments, to disrupting the entire banking and financial system. Now, the way in which FinTech companies disrupt the financial space is itself changing. No longer is it all about which company can develop the best way to access financial data or move the fastest to comply with regulation. It is all about which company can leverage readily available data, and build software or services that surpass current regulations and create new business models.

The main driver of FinTech development has traditionally been which company can raise the most money to invest in ways to obtain data from financial institutions. Now, 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. For example, in the past, the sheer number of variations of the German online banking standard would have required a large enterprise project to gain access to the data needed to create a simple online payment 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. The result is a higher quality of app.

The ready availability of access to this data also allows FinTech companies to focus on leveraging data in more innovative ways. A traditional bank mentality would usually only look at the data in terms of what can they optimise for current customers, such as new loans or better mortgages. However, startups generally don’t employ people who think traditionally. Consider a start-up that 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 example of this would be looking at a stream of purchases at a toy store and deducing that the account holder is now a parent. Discounts can then be offered to that customer every time they spend money on their debit card buying childcare related products.

Generally, with rapid innovation comes the inevitable clash with slow moving legislation. The FinTech sector is oft-cited as an area that has been hindered by outdated regulations. However, this is not exactly true. FinTech companies are developing faster and more efficient ways to comply with financial regulations. These new processes are often more stringent than current regulations because 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.

Currently, banks don’t allow people to have an account and pursue business unless the ‘know your customer’ regulations are followed. Essentially, customers are allowed to do certain things such as anonymously transfer money or use a prepaid credit card, all up to certain thresholds. As the usage is increased, the more data the bank is required to have. 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. The bank can then subsequently check a box that they ‘know’ the customer if they reach the regulatory threshold.  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 specialising in P2P online money transfers 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, has also opened up new frontiers in FinTech development. Businesses models that were thought to have become obsolete or side-lined at the advent of the digital age can now be resurrected with innovative products.

Supply chain financing is one sector experiencing this renaissance. Originally, supply chain financing required a complex paper trail, contracts and agreements duplicated and faxed to multiple partners after multiple meetings. It was a time consuming and admin heavy process that required a large staff, glaringly at odds with the rapid-fire deal making technology enabled by the internet at the turn of the millennium. As a result, the minimum transaction for these deals remains near half a million euros. This left the sector the preserve of a handful of car manufacturers and airline companies. Now, FinTech start-ups can access the data companies in the supply chain hold, place it online and leverage it in real time. A buyer can then create the terms of an agreement with a seller in a matter of minutes without having to involve someone at the financier’s office for approval. This reduces the size of the team required to execute a deal drastically, and the minimum size of deals to one thousand euros, opening up the market to much smaller companies and giving it a new lease of life.

The last five years have seen FinTech companies visit seismic changes on the financial sector. With the speed and quality of innovation increasing and new sectors becoming ripe for disruption, the next five years will see the FinTech sector reshape nearly every way we do business.


Comments: (0)

Now hiring