Fintechs folding in

It’s the QR code. The 25-year-old square of black and white pixilations which look like a close up of a Super Mario game.

"Fintechs have innovation, pace and venture capital on their side but lack scale, regulatory imprimatur and broad consumer trust”

While the latest Sibos international payments confab in London focussed on fintech/bank partnerships, social media giants in China, India, Africa and, increasingly, more developed countries are looking backwards as an efficient way to move payments forwards.

QR codes may not be the future of payments – although given their ubiquity in China and India who knows? – but they are a salutary reminder the future of banking is never obvious.

Ready to trust

Sibos this year picked up on a theme which has been developing for several years now - the growing interconnection of the disruptors and disrupted in financial services.

As ANZ’s managing director Transaction Services and Sibos delegate Mark Evans says “for years we heard how fintech was pushing banks to the precipice. It’s now clear something different is happening”.

“There will be innovative solutions society wants that banks can’t or won’t provide,” he says. “That’s where fintech will play a vital role – with the help, of course, of banks.”

The broad symbiosis is clear: fintechs have innovation, pace and venture capital on their side but lack scale, regulatory imprimatur and broad consumer trust. Banks, still, have trusted brands, huge customer (and data) bases and regulatory wherewithal. Bigtech, such as Facebook or Google, do have customer and data bases but also lack trust and regulatory oversight.

And it’s also worth bearing in mind Swift, the organisation behind Sibos, long the steward system for cross-border payments between banks, is itself under threat of disruption by rivals like Ripple using distributed ledger technology - aka blockchain. (Swift itself is part of a rival blockchain consortium.)

So what about fintech?

According to CB Insights, at their 2019 “Future of Fintech” conference, in 2018 VC-backed fintech deals and funding set an annual record: In 2018, VC-backed fintech companies raised $US39.57 billion across 1,707 deals globally – up 15 per cent year-over-year while funding surged 120 per cent.

Investors too reached a record 2,745 – significantly a figure boosted by an influx of corporate investors. For example, banks buying fintech innovation.

{CF_INFOGRAM}

As this evolution in disruption plays out, the CB Insights conference pulled out 10 broad themes:

1. The battle for deposits
2. Fintech firms up focus on regulatory compliance
3. Southeast Asia sees hotbed of fintech activity
4. The next Ant Financial and WeChat Pay
5. Unbundling the pay check
6. New investment platforms and asset classes
7. Fintech meets real estate
8. Rise of impact fintech
9. Lack of fintech mergers and acquisitions by banks continues
10. No-go for fintech IPOs

There’s been muggings by reality on multiple fronts as fintechs have normalised.

Returns and hope

Digital banking scrutineer Chris Skinner noted recently: “I hear two regular laments from bank CEOs. First, why aren’t we valued like fintechs? And second, why aren’t fintechs regulated like us?”

Skinner makes the important point “the banking sector is measured by real returns whilst the start-ups are measured by hope”.

“Banks have shareholder return, return on equity, return on investment and so on and so forth. Real measures against real results. A start-up has a million customers, some of whom are active. It’s all about how you dress it up.”

Quite. As returns become more predictable, investors become more precise in valuations. But they are willing to bet high on potential – oil exploration follows the same pattern from wildcat to producer.

Skinner cites the Goldman Sachs experience:

As Goldman Sachs CEO David Solomon put it, the bank is “getting absolutely no credit from anybody else in the investing community” on the firm’s digital banking efforts. Monzo gets two million customers in the UK and gains a $A1.3 billion valuation; Goldman Sachs launch Marcus, get four million customers, $A1 billion in deposits a month, launch a credit card with Apple, and its share price falls almost 20 per cent. As Solomon states it: “If we were out in Silicon Valley and made 20 per cent of the progress that we’ve made, we would get a lot of credit and people would be throwing money at us to own a piece of this business. But nestled inside little old Goldman Sachs, we’re just going to have to prove it over time.”

Adaptation

On regulation, the simple answer is if a fintech becomes significant it will be more regulated.

Buy now, pay later schemes are already on the regulatory agenda and, in all likelihood, will be more heavily regulated if they become significant in a systemic sense.

Skinner dissects this nicely, apropos a lament from Bank of America:

“You’re not a technology company wrapped around a bank; you’re a bank wrapped around technology… And that’s why the regulator and shareholder view you differently. Regulators and shareholders look at banks as depository firms under Basel regulations dealing with capital and risk, and using technology to manage those issues. It’s nothing to do with innovation, vision, disruption, change. It’s all about stability, resilience, reliability and security. If it did cause change and risk, then the investors and regulators would come down hard.”

There is massive change and disruption taking place in financial services and fintechs are one of the climate change forces at work. But they’re CO2, not a meteor. The world will have to adapt.

And the incumbents are not standing still.

American data analytics and risk assessment firm Verisk Analytics recently argued global payments are moving away from the infrastructure which has prevailed for the last half a century or so, whether that be payment schemes like Visa, MasterCard or American Express or wholesale payments like those managed by Swift.

“American Express has now put its weight behind a new Pay-by-Bank service in Britain, a development which comes in the wake of both Mastercard and Visa's enthusiasm, as demonstrated through investments and partnerships in recent years, for alternative networks from instant payments to cryptocurrencies,” Verisk reported.

“Mastercard announced a “Request to Pay” solution, also in the UK, that works with either real-time payments or cards. One thing is for sure: as long as the global networks can afford to fund these platform-hedging tactics, the possibilities for any disintermediation of their core proposition should decline.”

Verisk’s conclusion is “the brand trumps the infrastructure”. Funnily enough, back in 1996 the theme of Visa’s annual board meeting was “Valued Partners, Valued Brand” and then chief executive Ed Jensen argued if he was forced to choose between the brand “Visa” and Visa’s global payment authorisation infrastructure he would take the brand.

It’s that brand value that incumbents have and must preserve – which will involve partnerships with other firms and start-ups. It’s that brand value disruptors are yet to build.

As Jensen said more than two decades ago "to consumers the brand 'works' because it is a trusted third party and universally accepted”.

Andrew Cornell is Managing Editor of bluenotes