Fintech threat: not just where you think

More than a third (36 per cent) believe neo-bank and fintech challengers will increase their market share within the next two to three years. Just 12 per cent were confident traditional players will maintain their dominance. Last year, only 9 per cent of those surveyed believed challenger and neobank rivals had any chance of that.

"Fintechs are mosquitoes compared with Pterodactyls… Meanwhile, bigtech have billions of customers, billions of dollars and brand recognition.”

Now, this audience is rich in startups and entrepreneurs so that’s one skew but nevertheless the views are not extreme.

Yet consider a report in the latest edition of The Economist reviewing the annual Web Summit in Lisbon, where 70,000 pointy heads gathered over three days for what the newspaper called “Woodstock for Geeks”. (As opposed to Davos which is “Woodstock for Capitalists” or “Woodstock 50” which was supposedly an actual Woodstock that failed to happen.)

(Note: no legitimate tech head would have been born when Woodstock actually happened.)

No longer destroyers

According to The Economist, the big threat to the established financial services order dominating Lisbon chatter was bigtech, not fintech. That is Google, Amazon, Facebook, Apple (apparently now GAFA, no longer FAANGS).

Fintechs, the mood was, are mosquitoes compared with Pterodactyls. While fintechs offer radical new solutions and interfaces, they lack scale, customer trust and regulatory imprimatur. They have taken only small links in the value chain or tiny percentages of markets.

Meanwhile, bigtech have billions of customers, billions of dollars and brand recognition. Having dabbled in recent years the GAFAs are now launching credit cards, transaction accounts, currencies, loans. Fintech, meanwhile, appears to be shifting more towards partnering with incumbents than destroying them.

Lower watt

Fintech numbers are growing. The latest Visa market scan of “Australia’s Fintech Future” identified 526 fintechs in Australia in 2019 compared with 382 the previous year.

“Fintechs are growing in diversity as well,” Visa said. “The market scan found 18 categories of Australian fintechs, highlighting the sheer depth and breadth of this community.”

However, while global stories of fintech unicorns may dazzle, the Australian reality remains vastly lower watt. According to Visa, 40 per cent of Australian fintechs are not currently recording any revenue. But they are ambitious: more than 81 per cent consider the market opportunity to be well in excess of $A100 million.

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“What gives them confidence is the growing number of consumers, investors and businesses who favour the new and innovative,” Visa said. “This includes the millennial generation with its undeniable purchasing power. Financial services are becoming a level playing field for new entrants and established players alike - a trend that will only accelerate with the introduction of open data.”

Visa concluded - drawing on its own 60 years as a “fintech” - “the power of collaboration and partnerships is increasingly critical for all businesses in today’s economy”.

I suspect this optimism was heavily in evidence at the FST conference because that survey found delegates were not seeing the “long-anticipated bigtech surge”. The GAFAs impact, they thought, was “some years off, if it happens at all, with just 15 per cent of polled delegates believing consumers will switch their trust towards the tech giants”.

Data quality

However, surveying the battle field as one between fintech, bigtech and incumbents - setting aside for the moment increasing partnerships - is to miss some of the underlying tides in the market.

Behind the battle for customers is a battle for data. The FST survey found data and AI capabilities were rated equally by 43 per cent of delegates as the biggest technology growth opportunity for financial services industries over the next year, the concern was a lack of opportunities to exploit their existing data resources and the poor quality of data at hand.

“Upwards of 40 per cent of polled delegates believed data quality, or indeed the lack thereof, remained the most significant hurdle to delivering actionable insights from their analytics, with 21 per cent stating they lack the resources to properly access and utilise their data assets - further indicating the industry's persistent struggle to source qualified data scientists and analysts,” FST said.

Here’s where bigtechs come in. Whether it be Facebook or Google or Amazon, as The Economist agreed, they are not after financial services as a business per se. Indeed, in the current environment the sector is low growth, low margin and high regulatory cost. But what the sector is rich in is data - notably payments data.

Data on websites visited, time spent on page, friends, friends’ networks, preferences: these are all valuable as proxies for money spent and money to be spent. Financial services data is the real thing - not just a proxy.

Meet in the middle

So to an extent the war is on a different plane. For incumbents, bigtechs are more likely to be existential threats while fintechs, in partnership, are actually an opportunity to improve processes, customer experience and data management.

As Daniel Wypler, Investment Director for ANZi Ventures - the bank’s innovation and investments arm – says, the bank does want to help its fintech and other investments grow and scale and “become the next big thing”.

“But at the same time we're not there to make a financial return,” he said. “That's important and we'd like to do that - but the strategic benefit between us and them is the most important thing. So if we can work with them to deliver a superior experience to our customers or we can use their technology to improve our current practices and services, that's what we care most about.”

Again, it is that partnership where the bank brings scale, capital, regulatory imprimatur and trust. The fintech brings innovation, customer experience, disruption.

Where the two sides need to be at one is trust: banks cannot afford to lose that customer or regulatory trust.

Banks not only have to secure their own systems; they must be just as confident in the security of their partners. Fintechs are not just a competitive threat or partner, they are a potential risk factor - in the sense that all third parties are.

The EY and Institute of International Finance (IIF) 2019 Global Bank Risk Management survey highlights the point that more partnerships and more data exchange means more risk points.

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“Managing these risks will prove challenging,” the firm says. EY quoted a senior risk executive saying: “With the rise of fintechs and their increased reliance on fourth, fifth and sixth parties, maintaining control is increasingly challenging. [Sometimes, banks] discover many of our suppliers have the same supplier of a core service - so actually that fourth party is probably even more important to us than the third party. So, how do you make sure they have the requisite controls, security levels, etc to make sure they don’t make you vulnerable?”

As the inevitable disruption of financial services plays out, this is the field of contest: data, risk, regulation, trust.

Not just whether bank A has a better brand then bank B. Or fintech C can take over the mortgage market. Or bigtech D can take over everything.

Andrew Cornell is Managing Editor of bluenotes