The fintech revolution, which many expected to transform the financial services industry, has appeared to stall.
Traditional banks and insurers are still standing, and we haven’t seen the mass movement of customers from incumbent banks to the fintech challengers that some experts had vocally predicted. The rate of adoption of revolutionary technologies such as bitcoin has been slow, the improvements that artificial intelligence can bring to the likes of risk management haven’t yet been fully embraced, and where success has been achieved, for instance in peer-to-peer lending models, the truth is that the bank and insurance sector only make light use of new technology.
Last year, venture capital investment in fintech declined by a third in the UK, down from $1.1 billion in 2015 to some $700 million in 2016, according to the Accenture group’s analysis of CB Insights data.
Yet, notwithstanding this, the overarching structure of the financial services markets continues to change, driven by economics, customer needs, regulatory responses to improve the market, and fintech. Despite the lack of unicorns on the horizon, fintech will remain at the heart of the industry’s future success. Technology is advancing in financial services, however it is a question of when and how, not if, fintech will help deliver the transformative benefits and savings it promises.
Consider the findings of Accenture’s international survey of consumer preferences, which reported that over three quarters of Generation Z and Y respondents in mature countries said they would trust an entity other than a bank for the provision of banking services (compared with zero per cent of other segments). Incumbents might put this down to the wisdom of age – but it should act as a warning that customer acquisition could be about to hit a low point.
Consider also that there are around two billion “unbanked” people around the globe who can benefit from the fintech revolution. Most either live too remotely to have access to a bank or are excluded from participating in traditional banking because of the cost of holding an account. This includes approximately 90 per cent of the migrants around the world (approaching 300 million), many of whom are in great need of financial services and are often highly financially educated.
The World Bank and its partners are aiming to provide financial transaction services to approximately half of the unbanked population by 2020. Mobile and internet-based services are clearly one way of doing this – while only about 20 per cent of the populations of UN-classified “least developed” countries have access to a financial services account, over 60 per cent have access to a mobile phone or the internet at home.
As a consequence, one of the conclusions of our latest report, Fintech – Did someone cancel the revolution?, is that the export of fintech expertise will be pivotal to its future success. If the UK takes the lead, not only could it help the nation to continue to punch above its weight in the financial sector, but it also makes sense for individual banks to help further monetise their innovations.
At a time of uncertainty, fintech could be a counterpoint to the risk of isolation in the Brexit era. Any limiting of free movement and/or the ability to trade is likely to impact UK fintechs directly. It will certainly hurt the sector if we see banks move operations abroad as it reduces the market fintechs have to work with on the home front.
UK banks, however, have recently announced significant investments as they look to truly become digitalised. From our calculations, this will lead to a fivefold increase in spending for the largest banks on just a few years ago.
If they were to then export this R&D expertise, it could increase revenues against the backdrop of Brexit as well as help build up their digital reputation.
The path forward will not be an easy one. Governments and regulators across the globe are competing to attract fintech investment and talent, but the goal is worth it. World-class technological insight that is exported globally can help move the UK to the high-tech economy we need to compete in a global market. The revolution may have stalled, but it still has the potential to transform banking, benefiting not only banks, but also customers and the economy as a whole.
In his Mansion House speech last year, the governor of the Bank of England said of fintech: “Revolutions are not always abrupt, and sometimes their origins remain obscure”.
The revolution could still be achieved – the underlying technologies are real and, if deployed in the right way, they can still have a transformative effect on the financial services industry. We are simply entering the next phase of the fintech era.
Embrace the concept of exporting our fintech R&D, and the UK could become the global fintech leader.
• Stuart Chalmers is a managing director in Accenture’s banking practice based in Edinburgh