Techfins include some of the world’s biggest companies (Facebook, Google, Amazon) using their existing technology and, importantly, the mass of data they possess to enter the global financial services market.
Amazon Lending is a small business loan service targeting Amazon marketplace sellers, with loan payments automatically deducted from the seller’s account. If a payment cannot be made, it can freeze sales until the money is received.
Considering the volume of data used to assess suitability, and that Amazon controls the front and back end of these firms, it has clear potential to be a powerful financial services player. It isn’t unrealistic to envisage Amazon starting or purchasing a UK-based bank offering attractive benefits to account holders. In a world where data arguably has greater value than oil, techfins built on the mining, storage and analysis of data reign supreme. This data stockpile often includes an individual’s social and political views, where they work and their spending habits – details traditional banks can only dream of accessing.
China’s Alipay introduced an online money market fund called Yu’e Bao in 2013. Users of Alipay (similar to Paypal) can invest leftover funds from their Alipay accounts into Yu’e Bao. With ease of use and favourable rates, Yu’e Bao became the world’s largest fund in only five years, overtaking JP Morgan.
Through their complex algorithms, techfins are often better placed to make nuanced assessments of an individual’s credit worthiness, without exhaustive manual checks or reliance on third party providers, widening the prospect of credit for those who would otherwise be excluded.
However, financial regulation and consumer protection laws will need to be realigned to accommodate techfin companies providing these services.
A starting point is to determine when techfins should fall under regulatory scrutiny. One solution would be threshold tests, allowing regulators access to financial models and scenario testing provisions if certain services are provided, or if the number of data subjects hits a certain point.
Another scenario would see techfins collaborating with established financial institutions, which could enhance financial offerings currently available to many consumers while ensuring they are properly regulated. While the likes of Amazon could become the new faces of finance, this would also ensure a bright future for traditional financial services firms.
Providing regulators can keep pace with such seismic change, there is real potential for formidable partnerships to bring truly innovative services into the market.
Stuart Gillies, associate, CMS.