While start-ups are racing to innovate on financial services, regulators are trying to keep up.
Nearing the close of our Fintech A to Z, we address fintech’s spin-off sector, regtech, which is assisting navigation through the maze of financial regulation and compliance. While some start-ups are providing help, others are threatening a takeover of traditional services such as banking, while yet more are moving quickly to support the world’s unbanked population.
Heralded by Deloitte as the new fintech, regtech is the marriage of new technology and regulation. It will be the key to facilitating the delivery of regulatory requirements, such as the forthcoming Markets in Financial Instruments repealing Directive (MiFID II) that comes into place in 2018.
MiFID II will introduce a slew of new requirements relating to technologies and the relationships between service providers and users. This could bring about a wholesale change of technology in the front office of financial services firms like banks to achieve a consistent approach to services and asset classes like foreign exchange, equities and derivatives.
Areas of focus for regtech include how orders and prices are presented, the creation of APIs and gateways that will be pivotal to enabling legacy systems to talk to each other and newer systems, and a lot more besides.
The disruption posed by new regulatory practices will contribute to a boom in regtech platforms in areas as varied as algorithms, analytics, fraud detection, due diligence, authentication and verification of payments.
Emerging players in the regtech sphere include FundApps, a London company specialising in compliance monitoring; Silverfinch, which connects asset managers and insurers; and Suade, a company that has developed technology to ensure banks can achieve continuous compliance. Irish firms active in the area include Fenergo, which is pioneering new technologies to solve complex regulatory problems; and ViClarity, a Kerry-based company that helps financial services companies track and manage all their compliance in one system.
Being such a wide-ranging area, fintech has attracted its fair share of hungry start-ups eager for a slice of the investment-rich pie. One of the biggest success stories in the fintech space has to be payments company Stripe, established by Irish brothers John and Patrick Collison, which is now valued at a staggering $5bn, meaning it more than fits the definition of a ‘unicorn’.
Stripe is far from the only unicorn of its breed, however, with the list of young fintech companies valued at more than $1bn including San Francisco’s innovative loans company Social Finance (better-known as SoFi), wealth management company Credit Karma and Chicago lender Avant among others.
We also had no problem finding 30 Irish fintech start-ups last year, with the likes of Trustev and Fenergo already major success stories. The start-ups we profiled previously, and in a later follow-up, were in the areas of payments, security and authentication, funding and trading, cryptocurrency, foreign exchange and personal finance.
The sheer size of the fintech ecosystem, and people’s desire for innovation in their banking, mean that the opportunities for start-ups in fintech are vast, and not likely to fizzle out any time soon.
Threats to banks are absolutely everywhere. Taking a look at any revenue stream in a bank’s armoury – foreign exchange, payments, lending etc – there are start-ups of varying success entering the marketplace (see above).
Accenture predicts 80pc of banks’ entire revenue-generating business will be encroached upon by the end of the decade – the evidence is already all around.
Disruption in financial services has come for various reasons, including a dramatic reduction in barriers to entry for entrepreneurs with good ideas, as well as a historical disconnect between traditional banks and many sections of society. Start-ups looking at peer-to-peer lending have even popped up in the mortgages sector, with other companies that succeed in one area often leaping into another.
Some of these threats are already so big that, for banks to acquire them, it would cost an obscene amount of money (think TransferWise or CurrencyFair in foreign exchange, PayPal or Payoneer in payments). Instead, accelerator and incubator programmes have emerged all over the globe, with financial institutions backing a plethora of early-stage ideas in the hope that it pays off in the long run.
The unbanked are individuals who don’t use banks, credit unions or other formal financial institutions for transactions, and they don’t have current accounts or savings accounts. While the vast majority of the unbanked live in the developing world, those countries by no means hold the monopoly on it.
Poor credit scores, language barriers and living paycheck to paycheck can all be contributing factors to a person becoming unbanked, almost on a par with the effect location and accessibility can have outside the developed world.
The underbanked, then, do have a current account or a savings account, but also rely on alternative financial services on account of poor access to mainstream facilities typically offered by banks or other institutions.
While many would say that getting the unbanked and the underbanked to become more involved in financial institutions should be a priority, fintech could render that unnecessary. Fintech can have an equalising effect on financial inclusion, allowing hard-to-reach individuals better, faster, more secure and more innovative access to finances, and making financial transactions far easier. A lot of this is due to the global uptick in mobile banking, but has also been driven by advancements in services like PayPal, TransferMate and CurrencyFair.
The complete fintech A to Z
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