I keep trying to define and delineate more and more of this fintech wave. It’s no longer fintech, but paytech, IDtech, insurtech, wealthtech, regtech, Gulftech, and more. The thing that strikes me the most is that there are two fundamentally different fintech camps: those attacking existing business structures and those creating new structures.
For the folks creating new structures, it’s somewhat easier, because there’s no market there today. They’re starting up to serve the needs of the unserved (or underserved), and that’s a huge opportunity. Whether it be creating a mobile wallet, to enabling low-cost remittances, these are market areas that have been crying out for a service, and finally they can have one. Low-cost and cheap, it’s down to the reach of digital technologies, and was best illustrated to me when I recently went to Pakistan – a country with a population of 200 million people, yet only 20 million have bank accounts. One in 10 people are banked, so technology provides the possibility to reach millions more and is already doing so. Since 2013, the country has seen the rapid spread of 3G and 4G data services, with almost 50 million people now using mobile data services. One in four people in Pakistan have mobile data services, while one in 10 have bank accounts. Now, there’s an opportunity.
This is the market for financial inclusion being addressed by Ant Financial, who are forming partnerships almost every day to service these needs, from Paytm in India to GCash in Indonesia. For governments in these economies, this is also a force for positive change – McKinsey reckons that global GDP will rise by $3.5tn per annum by 2025 through financial inclusion – so they are encouraging and supporting the movements of firms focused on financial inclusiveness.
They are not as keen generally to support those that focus on breaking bank monopolies, however. I heard a regulator in an emerging market talking today, and saying that they will force fintech startups to collaborate with banks. They also said that it’s an option for banks to partner with fintechs. The example then used was for peer-to-peer lending, which the regulator states can only take place through a bank. What? That’s not going to create much innovation, is it? – as the banks don’t have to offer such a service or collaborate with such a service and, as such as service is going to decimate their profit line, why would they?
Strangled by existing players
I find it unbelievable that in 2017 there are so many markets where regulators continue to build barriers for fintech startups, but then it’s not so unbelievable because most regulators are puppets of governments who, in turn, are the puppets of banks.
Sure, that’s a cynical view, but when I heard Elizabeth Warren talking about Jamie Dimon ringing all the congressmen prior to passing Dodd-Frank, and threatening to ruin the economy and their voters’ support if they didn’t water the regulation down, you know that governments are the puppets of the big banks.
This is the real conundrum: how to innovate in an economy strangled by the existing players. It’s easy to innovate in areas where the existing players have no interest – most banks think financial inclusion as charity – but when the new startups threaten a banks’ basic business, then that’s a different matter.
It’s why I see the FCA, the UK regulator, doing some interesting things in its sandbox. But the companies getting a fast-track to market through the sandbox tend to focus on one of three major areas:
- taking inefficiencies out of the existing banking system by, for example, improving customer onboarding and KYC
- taking friction out of the customer experience by making it easier to plug-and-play software between banking services
- innovating the banking system by using technological capabilities to enhance services, such as robo-advising.
Where a startup truly threatens a banks’ core margins and products, most regulators fear to tread.
– This article is reproduced with kind permission. Some minor changes have been made to reflect BankNXT style considerations. Read more here. Photo by Daan Huttinga on Unsplash.