In this second instalment of our Fintech A to Z, we look at financing alternatives, government supports, hacker culture and the internet of things.
Get to grips with the exciting world of fintech through our alphabetised explainer on all the key trends and terms.
Here you’ll find details on alternative financing for people and businesses, the competition across governments to build fintech-friendly nations, the double-edged sword of hacking, and the impact IoT (the internet of things) will have on financial services.
A loan from a bank or a credit union is no longer the only way for people or businesses to access money. The likes of Irish start-ups Linked Finance and Grid Finance, which are engaged in peer-to-peer (P2P) lending, give potential lenders the opportunity to invest in prospective borrowers. This enables people to access finance outside of the traditional banking system while offering investors the opportunity to raise a higher rate of return than they would if they left their money sitting in a savings account.
According to PwC, P2P platforms in the US issued around $5.5bn in loans in 2014 and it is forecast that the P2P market could reach $150bn or more by 2025. However, with such a nascent industry, variables such as the threat of increased regulation plus the potential rise of general interest rates and the effect that may have mean it is hard to make any solid predictions.
Crowdfunding is another financing alternative, and one which some entrepreneurs have used with great success. Sugru, led by Irishwoman Jane Ní Dhulchaointigh, raised £3.3m on crowdfunding site Crowdcube, for example.
Crowdfunding is now being used by businesses to raise money to not only start up but also to scale up. Standard crowdfunding doesn’t necessarily lead to backers owning any part of the business, though equity crowdfunding allows businesses or people to invest and receive part-ownership in return.
Fintech is an area of future economic growth that governments around the world – and in Europe, in particular – want to capitalise on, especially as the debate about Brexit rages and nations begin to fancy themselves as the new ‘city’ of London. Ireland is no slouch in this regard, ready to leverage its position as the only English-speaking member of the eurozone.
Last year, the Irish Government drafted the IFS2020 strategy for Ireland’s international financial services sector. In 2016, a new action plan is expected to be drafted.
A report released by Deloitte last March suggested that the fintech sector could create as many as 5,000 new jobs by 2020, and IFS2020 has job creation etched into its goals. “Employment in the IFS portfolios of Enterprise Ireland and IDA has increased by 2,608, up from 35,448 at end-2014 to 38,056 at end-2015, representing 7.4pc growth in the sector, keeping us firmly on track to reach our ambitious growth target by the end of 2020,” said Minister of State Simon Harris in an update on the strategy.
State agency Enterprise Ireland’s fintech portfolio includes companies such as Fexco, Taxback, Fineos and Fenergo. The entire portfolio employs more than 8,000 people, of which 40pc are located outside Dublin. Inward investment agency IDA’s portfolio of fintech companies includes global giants like Citi, MasterCard, IFDS, Aon, Munich Re, Zurich, Liberty Insurance, Fidelity and Pramerica, to name but a few.
Last September, the Fintech and Payments Association of Ireland (FPAI) was launched to unite all fintech and payment companies from start-up level to multinationals. The FPAI is trying to offer focus and stability to a sector that has proven to be one of Ireland’s shining lights in the tech entrepreneurial world.
The word ‘hackers’ can have different meanings for different people. To most people and most companies in the finance world, hackers are the bad guys who are trying to break in and steal your money, and the business of securing transactions in terms of cryptography, biometrics, blockchain technologies and cryptocurrency is fuelling innovation in fintech. Companies such as MasterCard and Amazon are coming up with new methods such as fingerprint scanning and authentication by selfie in order to keep hackers and thieves at bay.
Conversely, hacker culture within the technology world has an entirely different meaning, indicating a talent or mentality of using software engineering to break products and make them better and even simpler to use. This methodology is at the heart of the culture in Silicon Valley companies like Facebook.
Fast-moving fintech companies from Stripe to TransferWise and eToro have embraced hacker culture to disrupt the traditional payments ecosystem and offer new choices in the market.
IoT (Internet of Things)
Simply put, the internet of things (IoT) is made up of connected devices – anything and everything that can connect to the internet, from smartphones and tablets, to buildings and household appliances. Supported by the global adoption of IPv6 – which expands the number of usable IP addresses by magnitudes on IPv4 – the IoT is expected to include tens of billions of devices by 2020.
But what have these billions of connected devices got to do with fintech? At the simplest level, we can look at the pairing of banks and mobile technology, and particularly the recent rollout of contactless payments. Contactless technology is now prevalent, with payment cards already enabled, but mobile devices are getting in on the action too with the introduction (albeit not in Ireland) of Apple Pay and Google Wallet.
We’re also seeing contactless payments transitioning into wearables. Companies are embedding payment technologies into watches, clothing and jewellery, ensuring you’re always connected to your finances. And the connections go far beyond that. The ubiquity of Wi-Fi makes it possible to make financial transactions fully mobile, and available in many forms in many places.
Beacons – tiny devices with a range of uses, from gathering information on customers to actually extracting payments, reading coupons or scanning codes – are a logical progression of this technology. Wi-Fi-enabled businesses can deploy beacons to enact seamless financial transactions without the customer even having to take a device out of their pocket.
In this highly-connected world, of course, security becomes an issue. How do you control what these beacons can access, and how do you prevent them being used nefariously? With so many devices accessing your finances, the risk of those finances becoming compromised increases. Some suggest that using blockchain as an alternative to passwords and as a means of tracking who actually owns what money could make the IoT-fintech crossover safer for users.
The complete fintech A to Z
Complex connections image via Shutterstock