Future of FinTech - Keynote Speaker on FinTech Innovation - Impact on Banking, Insurance and Personal Finance

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Futurist Keynote Speaker: Posts, Slides, Videos - Banks, Banking, Mobile Payments, FinTech, BitCoins

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I have worked with many of the largest banks and insurers in the world over the last 20 years, and all of them are focussed right now on the threat and opportunity of FinTech innovation.

That's one reason why FinTech is now one of the fastest growing areas of IT innovation with over $18bn invested a year.

In the first 3 months of 2017, Global FinTech startups raised $2.78n of investment from global venture capital firms, in 226 separate deals. 

In London alone there are probably over 5,000 FinTech startups, many of them very new and very small - it is hard to keep track of the frenetic pace of change in this sector.

PwCs FinTech Report for 2017 suggests that 82% of banks expect to increase their FinTech partnerships in the next 3 years; 77% expect to adopt BlockChain as a key FinTech innovation and that these banks expect 20% return on investment per year, from FinTech.  Over 80% fear that standalone FinTech companies could seize some of their business.

BlockChain is just one key example where investment is growing - $450m in 2017, up 45% in 12 months, with 70% of large banks planning to use BlockChain in at least one application by 2020.

Why is FinTech so important?

Very simply: FinTech will cause as radical changes to banking and payments as the web has caused to the whole of society.

FinTech combines all the power of the web, the potential of mobile transactions, the capabilities of cloud-computing, of Artificial Intelligence and Big Data analytics, a host of other tech like BitCoins and BlockChain, and all the potential of mega-sized IT platforms, to completely transform how money is stored and transferred, globally.

In the late 1990s we saw the dot-com boom - as our entire world began to embrace the power of the web.  And with that came the explosion of e-commerce, together with massive growth in companies offering ways to sell online more efficiently, and to process online payments.

In the mid 2000s we saw a huge shift in web access globally from desktops to mobile devices.  Part of the reason was massive growth of smartphone owners in emerging markets, who had never used a desktop to go online previously.

And the latest techno-boom is FinTech - anything and everything related to IT that enables banks to cut costs, act faster and earn more money.

FinTech allows many new companies to compete with banks

Meanwhile the same FinTech boom is driving radical changes in telcos and larger retail chains with astonishing growth in their own versions of banking and payment, using things like e-Wallets.  

So these non-traditional banking competitors are invading the banks' own territory, using low cost, highly innovative approaches, and making many banks look like dinosaurs.

FinTech reminds us that banking is basically about data

Technology has always been fundamental to banks, insurers and the rest of financial services.  So there is nothing new about IT partnering with finance.

If you think about it, money in bank accounts is basically data, and when money moves, it does so by data flowing from one place to another in secure transactions.  So you could argue that banks are in some ways little more than very large IT companies.

For these reasons, banks (and insures) have always invested very heavily in IT systems - which are often highly complex, unique and very difficult to combine with other bank systems.

The big question is how banks and insurance companies make money from Big Data - that's one reason why 30% of large banks are investing in Artificial Intelligence.

Legacy IT systems paralyse many of world's largest banks

The truth is that most large banks that I have worked with will typically take up to five years or longer to combine the IT systems of two or three different banks after a big merger - the so-called curse of Legacy Systems.  Often neither IT system is fit for purpose, and the combination is even worse after all the merger integrations are completed.  

Post-merger paralysis is often the result - where an entire bank's IT department is effectively wiped out for more than half a decade, resolving problems, bugs, data conflicts and IT chaos generally - all caused by the merger.

That is because the rest of their time is already consumed by other vital things such as compliance and regulatory issues, basic reporting on day to day activities, and other urgent issues like cybersecurity.

So very little indeed is often left over for real innovation, data analytics, biometrics, identity management, improving customer experience, natural language searches, chatbots, developing new mobile Apps, improving call centres and so on.

FinTech fills gap - 100,000 startups bring innovation to banks, telcos and insurance companies

The net result of all this has been a huge gap in the market between what customers expect and need, what banks need internally, and what banks are able to develop with their own limited resources.

Three examples are call-centres, mobile payments and security.

Call-centres and mobile apps - keeping pace with customers

SalesForce is a cloud-based, highly innovative company that invests over $3bn a year into software development for customer databases, call centre tech and so on.  

But even the largest banks or insurers would struggle to spend 1% of this amount on their own equivalent systems.  So traditional banks and insurance companies working on their own are being out-run by their customers who are changing behaviour at great speed, leaving them ver far behind.

A logical answer is for such banks to start using services like SalesForce, or to turn to Fintech companies that may be providing all kinds of tools to improve customer experience or save internal costs.  

Outsourcing to FinTech companies is also a fast and low risk way to innovate.  Banks can buy or rent software that is proven, stable, reliable and world-class in every respect.  

If they start developing similar things internally, it could take tens of millions of investment and the end result could take several years to go live, by which time both technology and customers have moved on yet again.

Mobile payments - boom time for telcos and threat to banks

Expect at least $200bn of payments on mobile phones / smartphones and i-watches etc, by 2019, and 90% of smartphone users to have made at least one payment using their device by 2020.

40% of Kenya's entire economy is traded using mobile payments - on one platform alone called m-Pesa.

The speed of change in mobile payments is remarkable in some regions - but varies a lot between nations.  We can debate how rapidly the shift to mobile payments will be, but not the inevitability of the transition.

And government are taking bold steps to encourage this.  For example, India has introduced a national biometric system with over 800m identities already added, while at the same time discouraging the use of cash with steps such as withdrawing lower value bank notes.  The demonetisation of India is an official government policy with radical impact on the whole of society.

Few banks can keep pace with the way customers are changing their use of mobiles for financial reasons.  Just keeping Apps up to date can be a real headache with multiple changes in operating systems and new phone models.

Cybersecurity risks - keeping pace with criminals

The same applies to cybersecurity.  There is not a bank in the world with enough global expertise and budget to develop new defence mechanisms against gigantic criminal gangs, often backed by funding from hostile governments. 

Banks just have to collaborate like never before, to survive safely, working with the best experts in security, supported by government security agencies, using the very latest cybersecurity techniques and tools.

Of course, using off-the-shelf solutions is worrying for banks that wish to stay ahead of the pack because the same software is available to all their competitors.

So in some cases, FinTech partnerships with major banks may include undertakings that the same company will not provide similar services to a major competitor in the same region etc.

How far will the FinTech boom go?

So how far could this FinTech boom go?  Some banks are now abandoning their entire legacy retail systems and transferring their whole retail bank operations onto new platforms which have been bought in from FinTech companies - with customisations.

Others have replaced their entire trading platforms or wholesale banking functions.

Now these radical steps are easier to take, the smaller you are, so we can expect many of the greatest FinTech innovations to be built into non-traditional banking competitors entering the market for the first time, or into the smaller banks.

So we can see why it is that there is so much excitement about FinTech startups among international institutional investors as well as private equity investors.

So what is the downside of investment in FinTech?

While some FinTech companies have already achieved valuations far north of $1bn and many more will do so, it is the fact that most FinTech companies will fail.  

Nothing unusual in this.  

Most new companies across all industries and services in Europe will go out of business within the first three years.

And FinTech, as a highly competitive area, in a rapidly changing sector, is likely to see an average overall failure rate of at least twice this figure.

Part of the reason is low entry cost for new companies.

How much does it take for a couple of App writers to develop an interesting new capability for smartphones?  But how much effort to ensure they do not get wiped out by all the noise of thousands of other new Apps developed every few weeks, all offering similar things?

The core message is that all investors in early FinTech companies should have a similar attitude to investors in other highly innovative and risky sectors such as BioTech.  

- Research carefully before you invest

- Take a close look at the leadership team - genius, management skills and accountability

- What is the competition and why are they different?

- Only invest what you can afford to lose

- Spread investments across a number of companies in the sector


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