FinTech: what is it, and why now?
This post is first in a series navigating the FinTech landscape, with a focus on the UK.
This month London played host to a number of large events focused on FinTech. The Innovate Finance Global Summit, “the world’s biggest celebration of achievement in FinTech”, kicked off a government-backed “FinTech Week” of speeches, panels, workshops and showcases, with ministers, CEOs from companies big and small, professional service firms all sharing the limelight.
I’m often asked by those that don’t occupy this FinTech bubble, what is FinTech, and why all the fuss?
The term FinTech has been on the rise in the UK for the last 5 years, as this plot of Google search activity shows. We’re also beginning to see the term migrate from industry news into the mainstream media. Various people have attempted to define what is at first glance a simple abbreviation of two words: financial technology. But the use of technology within financial services has been around since the abacus. Others have defined FinTech as the point “where data meets money”. That’s also deficient for me: data and money have been intrinsically linked since the beginning — arguably money is simply a subset of data.
For me, it turns out Wikipedia does a pretty good job (emphasis my own): “an industry composed of companies that use new technology and innovation with available resources in order to compete in the marketplace of traditional financial institutions and intermediaries in the delivery of financial services.”
This definition works for me because FinTech in my mind is about using new technology and innovation to challenge the status quo in financial services. I’m less precious about whether FinTech constitutes a distinct industry, or manifests itself within a company construct. For me FinTech simply captures a mindset: “we can do this better by using new methods that weren’t available before”.
I chose the word ‘methods’ deliberately. While the name FinTech labours the technology element, for me it underplays the political, economic and social changes that explain why FinTech is entering the zeitgeist now.
Post the global financial crisis, there is a clear desire to do things differently and avoid repeating the same mistakes again. Governments and regulators have been working to encourage more competition, and prevent a reoccurrence of a few financial services players that are too big to fail. Low interest rates and a low growth environment have encouraged investors to eschew traditional investments and look for better returns elsewhere, particularly venture capital and small company private equity. Individuals too are looking for alternatives to the traditional financial services providers given a post crisis loss of trust.
That’s not to say technology isn’t a factor in why FinTech is of interest now. We have entered a post-PC generation where mobile devices are the prevalent consumer technology. The costs of computing processing power, data storage and networking speeds have fallen to a level that has unlocked applications that were previously uneconomic. And the internet is simultaneously providing the opportunities for intermediation and disintermediation of traditional businesses that would have otherwise been impractical without it.
As a result there has been a FinTech explosion, particularly in the last 5 years. According to KPMG almost $38BN in venture capital was invested globally in FinTech over that period, representing almost 3,700 deals. As a result consumers and businesses are now being offered an increasing degree of choice, with new entrants offering different ways to transact, invest, raise finance and insure against loss. FS institutions are exploring ways to change the way they do business in response.
In this series I will explore these innovations further. In the first instance I will map out the current landscape of FinTech in the UK, before focusing on different categories and exploring what is happening and why.