Fintech is short for financial technology, but there is nothing short about it. Rather, it will set the tone for the 21st century, as it has for the last decade. Constantly moving, growing, expanding—it is first and foremost a dynamic being. The natural question is: what’s next for Fintech?
Let’s start at the beginning with ‘Fintech 1.0’. In 1866, the first transatlantic telegraph cable was laid between London and New York, after two failed attempts in 1858 and 1865 respectively. This made possible instant communication. What took upwards of 10 days now took less than 10 minutes. This paved the road for 1918’s Fedwire—the United States’ proprietary method of electronically transferring funds through Morse code and telegraphy. By 1950 we had the first modern credit card thanks to Diners Club. By 1966 we had Telex, or ‘telegraph exchange’, implement many improvements to the now-old and plainly standard telegraph.
The following year, 1967, brought us the first automated teller machine by Barclays bank. We can call this the first ‘robo-cashier’ and the beginning of Fintech 2.0. Quickly moving forward in time, we have the ‘Clearing House Interbank Payments System’ in 1970, NASDAQ in 1971, SWIFT in 1973, E-Trade in 1982, the world’s first online shopper in 1984, the Financial Services Technology Consortium in 1993, the dot-com bubble in 1999, and the global financial crisis in 2008, marking the beginning of the next era, Fintech 3.0.
We prefer to call this the era of disruption; of start-ups, new ideas and paradigm shifts. Betterment and Wealthfront became the first US-based ‘robo-advisors’ in 2008, using exchange-traded funds and complex algorithms to replicate human advice. In 2009, we saw the launch of Bitcoin, or digital gold, and Square, a mobile payment provider. In 2011, we had Google Wallet take it a step further, allowing consumers to ‘tap’ their smartphones at retail point of sale devices to make payments without cards. In 2015, Jack Ma’s Alibaba introduced ‘Smile to Pay’, which enabled consumers to pay through facial recognition.
As of September 7, 2020, Betterment and Wealthfront both manage at least 20 billion USD; Bitcoin has a total market capitalisation of over $188 billion USD; and there are several ‘cashless societies’, such as China, South Korea, Estonia, Norway, Sweden, Australia, the Netherlands, USA, UK, while Russia, India and Brazil are making clear efforts. According to Capgemini’s 2019 World Payments Report, they expect the number of non-cash transactions worldwide to grow from 539 billion in 2017 to 1,046 billion in 2022, led by Emerging Asia (1st), Europe (2nd) and North America (3rd). This represents our current era, Fintech 3.5.
Source: Capgemini 2019 World Payments Report
Keep in mind that this report was drafted before 2020 and the arrival of Covid-19. The pandemic has affected all of us, big and small, no matter where we are in the world. It brought great tragedy to many, a few of whom we know personally. We are acutely aware of our current crisis—which is why we have supported and will continue to support our employees and clients everyday.
But as a growing business, Deltec recognises the great opportunities ushered in by a world which much more than ever must be digital, contactless and innovative. Put another way, coronavirus easily survives on cash.
A recent study by Square tracked the growth of businesses accepting 95% or more of their payments through cards at Square terminals after the following countries experienced the peak of their pandemic-related levels: Australia, Canada, UK, Japan and USA.
Source: Square, ‘Making Change: Payments and the Pandemic’
Cards are a precursor and enabler of contactless and online payments. To date this year, at least 50 countries have raised the limits on contactless transactions, such as Canada (by 150%), New Zealand (150%), Spain (150%), Belarus (400%), Mauritius (400%) and Qatar (200%). Apple Pay, a service providing biometric security and the ability for customers to pay with their cards through ‘tapping’ their smartphone, accounts for approximately 5% of all global card transactions. According to Quartz, it will handle 10% by 2025. According to Statista, it had 441 million users as of September 2019. Competitor Alipay, based in China and using QR codes instead of proximity tapping, has over 1 billion users.
So when we understand payments as a surface barometer of how the fintech industry is growing, the staggering value of venture capital investment is no surprise. In 2019, we had $53.3 billion against 2010’s $1.89 billion, a compound annual growth rate (CAGR) of 44.9%. In Q2 of this year, fintech funding was $9.3 billion, a 17% increase over Q1 as we began the recovery from peak pandemic levels, and 1% over Q2 2019, according to CB Insights. Fintech has already bounced back. What’s more, we had 28 mega-rounds ($100 million-plus) of financing in the same Q2 2020, an all-time quarterly high.
Source: CB Insights
As at June 30, 2020, there are 66 fintech unicorns (a start-up valued at more than $1 billion), collectively valued at $248 billion. We have Stripe, payment processing software provider, valued at $36 billion; Robinhood, a wealthtech firm enabling commission-free trading of even fractional shares too, $7.6 billion; Lemonade, an insurtech firm paying home-related insurance claims in minutes using artificial intelligence, $2 billion. Outside the USA, we have Brazil’s Nubank, a digital retail bank, $10 billion; India’s Paytm, a general payments, e-commerce and financial services provider, $16 billion; China’s Lufax, a retail peer-to-peer lending service matching lenders with borrowers, $39.4 billion.
You may have noticed terms such as ‘wealthtech’ or ‘insurtech’. In fact, there are many kinds of ‘techs’, each representing a new innovation, a new sub-industry. Wealthtech is the category of Betterment, Wealthfront, Robinhood, among over a hundred others. Insurtech is the category of firms using big data, machine learning and artificial intelligence to digitally serve retail or corporate clients in insurance. We know of Lemonade, but the greater potential is clear after reviewing China’s Zhong An which raised $1.5 billion in its initial public offering, sold over 9.5 billion insurance policies, yet has taken less than 1.0% of China’s overall insurance market.
BigTech, or the ‘Big Five’, refers to Amazon, Apple, Facebook, Microsoft and Google of the West; in the East, ‘BATX’ refers to Baidu, Alibaba, Tencent and Xioami. Each firm possesses an extraordinary budget for research and development. Each firm capitalises on data. The how is fascinating.
Focusing on the Big Five: any new user is asked to create an account, input basic personal data, and use (often free) services. Google has Google the search engine, Google Cloud, Google News, Google Maps, Groups Groups, Google Hangouts, Google Ads, Google Scholar, Google Finance, Google Earth, Google Voice, Google Assistant, Google Wallet, Google Pay, Gmail, Android, YouTube, Chromebook, Pixelbook, and so on. This is what justifies their $1.06 trillion market capitalisation as of September 9, 2020. For further perspective and also as of September 9th: Amazon’s capitalisation is $1.64 trillion, Apple’s is $2.01 trillion (the world’s largest), Facebook’s is $779.78 billion, and Microsoft’s is $1.60 trillion.
So how have they done it? Not only bigtech, but the rising stars of wealthtech and insurtech too. We’ve broken it down to two pillars: data and personalisation. Using data to create personalisation is what makes disruption.
The formula: collect as much data as possible, and use it to give clients what they want, or don’t even know they need yet. In global private banking, we have predictive analytics and regtech.
The spine of wealthtech, it collects data from all possible sources for modelling future scenarios and recommending solutions. Personal Capital, which announced in June it is selling itself to the United States’ second-largest retirement provider Empower for $1 billion, champions the hybrid model of combining robo-advising (ie Betterment) with access to trained human financial advisors. They also offer a slew of digital services to clients, but most notable is their retirement planner providing a probability of retirement success.
This business model collects data from several seemingly independent sources to form a single cohesive service. For example: credit history, spending, saving, income, family, real estate, net worth, employer, employer’s industry, the global economy, the US economy, stock markets, debt markets, commodity prices, news articles, consumer trends…among many, many more factors. The ultimate point here is that an artificially intelligent programme synthesises data faster than executive even with 20 or 30 years of experience.
But financial services is still centred around humans, and will continue to remain so. In May, Franklin Templeton Investments acquired AdvisorEngine, a digital provider of wealth management tools to over 1,200 financial advisory firms in the United States which themselves manage more than $600 billion in assets. Wonderful yet simple: Franklin Templeton, a powerhouse player, knew that to achieve personalisation in a scalable form it had to acquire a unit specialising in ‘advisor experience, business operations experience and client experience in one place’.
Regulatory Technology applies the same principle of utilising ever-limitless quantities of data for refined, definite goals. It’s all about effectively understanding the data to see how well compliance and management departments are confirming to or preparing for the recent or upcoming regulatory changes respectively. Doing this all in-house without bringing in the latest technology is not only unfeasible, but irresponsible.
According to Deloitte, there are currently 378 regtech firms, spanning five different categories: regulatory reporting, risk management, identity management & control, compliance and transaction monitoring. Seems excessive yes, but also necessary, as BlackRock dubs the decade of 2009 through 2019 as the ‘decade of financial regulatory reform’ arguably beginning in earnest with the Dodd-Frank Act of 2010. Between 2015 and 2019, FinTech Global reports a CAGR of 66.7% of regtech-related investments, peaking at $8.5 billion.
Source: FinTech Global
…is the point. I’ll explain.
Ally Bank joined the financial services scene of the United States in 2009, feeling somewhat ahead of their time. As a digital-only bank, they offer chequing or saving accounts, self-directed investing, managed portfolios, mortgages, auto loans and personal loans. In the time of coronavirus it is a modern and timely institution—which is why currently nine out of ten equity analysts recommend it as a ‘buy’.
Enter Revolut, headquartered in the UK, present in 37 countries (USA included), and recently valued at $5.5 billion. This fintech startup, like many, began in the frustration felt by the founders with traditional banking incumbents. That is: minimal digital solutions, maximal transaction fees, and a (thankfully) now-defunct maxim of ‘the customer is secondary to the supplier’. Revolut offers like the name implies, revolution. It intends to replace all traditional banking services for retail clients.
Will they be able to? Very likely yes. A Statista forecast anticipates 16.5 million Revolut customers by December 2020, a 1,000% jump over the 1.5 million they announced in February 2018. Their premium (‘Metal’) offering at £12.99 per month includes: limitless foreign exchange for 30 fiat currencies at the interbank exchange rate (usually a 0.5% markup), access to five cryptocurrencies, overseas medical insurance, winter sports coverage, device insurance (extra) low-limit credit cards (Lithuania) and personal loans up to €8,000 (Lithuania).
More recently they launched Revolut Business for small and medium enterprises desiring something of a cloud management tool. It covers the basic services, such as multi-currency accounts, minimal-fee transfers, expense management, API support, accounting software integration, priority customer support and a network of business support service providers at sizable discounts. Coming soon: loans, overdrafts, invoices, online point-of-sale support, among other features to come. However, their best product is their digital omnipresence using mobile devices. They are there whenever you need something done, 24/7.
The Internet-of-Things (IoT) and Augmented Reality (AR)
In other words, what we used to see in science fiction films. Revolut and Ally show us the absolute requirement of having engaging banking apps on client smartphones. IoT brings us further and refers to small, connected devices like Apple Watch and Samsung Galaxy Watch. The next stage is designing a one-finger interface for trading, tracking spending, managing accounts, sending payments, reading concise notifications, and so on, while ensuring biometric authentications.
AR means an advanced heads-up display immediately presenting the highest-value, personalised information relevant to each unique client. Most of us have already heard of it through military-grade flight helmets or Pokémon Go. Within banking, our goal is to extract the sheer immersiveness of this technology and create digital environments facilitating everyday banking, trading, or reviewing Deltec’s latest research. Our goal today is to be at the forefront of what our high-net-worth clients will want tomorrow.
And as we see it, this is all achievable. None of it is conjecture nor theory. If there’s something we can think of which needs to be done faster, more efficiently and at a fraction of the cost—we can say, ‘there’s a fintech for that’. With CB Insights’ Fintech 250, we see today’s landscape of the industry’s most promising players.
Source: CB Insights
Some may partner with us, some may compete with us, some may inspire us. At Deltec, we already have the necessary projects underway to transport our leading relationship managers to your smartphones, and eventually, your watches. It is an extraordinary time to be in banking, and as a CEO I am proud of how quickly Deltec is already developing.
Going back to our eagle’s eye view of the 21st century, the 00’s brought us 2008 and established mistrust in the obtrusive banks avoiding competition and regulation; the 10’s brought us Europe’s second Payment Services Directive (PSD2) which mandated banks to share their data with client-approved third parties. The goal was competition, and competition we got. With the above infographic there are 19 different categories of fintechs representing distinguishable niches.
Our niche is to see ahead, move forward and stay in front of the competition which serves like us the global high-net-worth individual. After 2020’s coronavirus we forecast a gradual exodus from major cities to rural towns or emerging areas offering better qualities of lives at far lower costs. We are in the time of Zoom, TeamViewer, Trello, Microsoft Teams, Google Documents, or simply put, the worldwide cloud. We see the pressing demand for a global bank capable of providing the white-glove service of tradition through this cloud, to everyone, everywhere.
Disclaimer: The author of this text, Jean Chalopin, is a global business leader with a background encompassing banking, biotech, and entertainment. Mr. Chalopin is Chairman of Deltec International Group, www.deltecbank.com.
The co-author of this text, Robin Trehan, has a Bachelor’s degree in Economics, a Master’s in International Business and Finance, and an MBA in Electronic Business. Mr. Trehan is a Senior VP at Deltec International Group, www.deltecbank.com.
The views, thoughts, and opinions expressed in this text are solely the views of the authors, and do not necessarily reflect those of Deltec International Group, its subsidiaries, and/or its employees.
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