2015 was arguably the year of financial technology – digital ways of delivering financial services offering a faster, more convenient and more useful experience to customers by combining platforms, channels and technology. Terms such as Unicorn, Blockchain, APIs and Accelerators became part of everyday conversation, companies such as TransferWise in the UK and OnDeck in the US began to eat into mainstream markets such as remittances and lending and capital rushed to embrace the investment opportunity offered by start-ups attempting digital disruption of financial services. For example, the UK, according to figures from London and Partners, had attracted $554 million of fintech investment by September 2015, compared to $487 million for the whole of 2014.
So, in a year where there was more focus than ever before on fintech, what were the highlights of 2015? And what should you be looking out for in 2016? Jay Reinemann, Managing Director of BBVA Ventures, BBVA’s $100m fund investing in the brightest and best fintech disruptors, and 15 years as a venture capitalist in this space, shares his thoughts.
1- Banks discovering the Blockchain
According to Reinemann, banks’ discovery of the Blockchain was one of the big fintech stories of the year. “Banks woke up to the potential of the Blockchain,” he said.
“They realised that a decentralized computer network could be as effective at authenticating ownership as existing shared solutions – and much cheaper”.
As if to prove his point, 42 of the world’s leading banks, including BBVA, got together in 2015 as part of the R3 project to work on common standards for Blockchain use in global financial markets.
Reinemann also felt that the growth in interest in Blockchain from banks had been met with a corresponding cooling around Bitcoin, the currency layer on top of the Blockchain platform. “It’s got quieter around Bitcoin, I think mainly because of a misunderstanding about its application and the related bad publicity about its illegal use”.
BBVA Ventures is an investor in Bitcoin wallet and exchange, Coinbase. Coinbase, using bank-like KYC (Know Your Customer) processes, allows buyers and sellers to safely trade bitcoins as well as allows merchants to accept bitcoins as easily as they accept card payments online, at less than half the cost.
What’s going to happen to Blockchain in 2016?
The year of the Blockchain app, according to Reinemann. ‘The blockchain infrastructure was reinforced in 2015, with strengthening involving mining, exchanges, wallets and processors. 2016 is about innovating on top of it,’ he said. He gave some examples of start-ups to look out for: “Abra.com is building a low cost remittance product and Stem is trying to fix how royalty payments are made to content owners (artists and musicians, for example). One Name is building identity tools to enable services like password-free logins.”
He added: “While the banking industry may not adopt the blockchain in 2016, existing rails will need to reduce the costs, timing or other friction to move money or they risk real competition from the Blockchain.”
2- The growth of the fintech ecosystem
Start-ups, VCs, accelerators, challengers, corporate innovation and investor teams – Reinemann believes that the ecosystem -the network of players that is powering the growth of financial technology – has grown exponentially in 2015.
“The growth in investment is a clear sign of the health of the financial technology ecosystem,” he said. According to Warren Mead, global co-lead of KPMG’s fintech practice, global fintech investment will top $20 billion in 2015, up from $12 billion in 2014. Private investors are encouraged by the public market’s appetite for fintech as evidenced by the IPOs of companies such as Square, TransUnion, Aldermore, Shopify and even FirstData.
However, Reinemann sounds a cautionary note.
“With so much capital in the marketplace, there’s no doubt that there’s too much cash chasing too few quality opportunities,” he says.
What’s going to happen to the fintech ecosystem in 2016?
Having been there himself, Reinemann see parallels between the dotcom bubble at the turn of the century and the growth of the fintech ecosystem. “There will definitely be a shakeout at some point – some clear winners, in the way that Amazon changed the retail commerce and book industry, and some losers.”
However, he doesn’t see the shakeout as being as brutal: “I can’t see it being the same as 2000 -2001, with as many spectacular fails – the main reason being that today it’s so much cheaper to set up a technology business. For example, you can run your business in the cloud versus running your own servers. Social media has also changed the game, enabling marketers to efficiently reach the right ‘eyeballs’.”
Even though he thinks the market is overheated, Reinemann believes the direction of travel is clear: “The battle between digital financial services companies and the incumbent financial services industry is nascent but the public markets will continue to shift value to the challengers.”
3- Closer links between alternative lenders and banks.
Alternative lenders – online-only companies such as OnDeck or Lending Club that use proprietary technology and algorithms to make more efficient and arguably more accurate lending decisions – have been shaking up the lending industry. However, the recent deal between JP Morgan Chase and OnDeck is part of a wider trend of banks and alternative lenders partnering one another, according to Reinemann, which has also seen BBVA Compass partner with OnDeck.
“There’s actually a lot to be gained for both banks and online lenders to work together,” said Reinemann. “Banks want to better serve their customers as well as reach new customers they otherwise couldn’t with existing products and footprint. Online lenders benefit from banks bringing customers and capital to their platforms.”
He argues that banks shouldn’t be worried about cannibalisation of their own services.
“Partnering with the right alternative lender can not only result in helpful learning for the bank but also healthy competition for its own products and more business in the long-term.”
Reinemann arguably put his money where his mouth is, with BBVA Ventures becoming an investor in alternative lender Prosper.
What’s going to happen in 2016?
Reinemann believes that it won’t only be alternative lenders from the fintech universe that are working with banks. “Collaboration will be taking place throughout the financial technology ecosystem – in payments, insurance and wealth management, for example – because the traditional players and the start-ups need one another.”
4- The Millennial Wave
2015 saw a new acronym – HENRY – enter the lexicon. Standing for High Earning, Not Rich Yet and applicable to high-earning, mainly millennials en route to joining the ranks of the affluent, this segment saw a range of companies spring up to meet their needs, such as Earnest, SoFi, Osper and Number26, and Reinemann sees this as a hugely important area.
“These are businesses that are trying to do something very different in financial services,” said Reinemann. “They’re building businesses for people that are used to doing everything online and expect a level of service they’re used to from their favourite online brands.
According to him, as well as excellent customer service, these businesses share common characteristics – they are centred around mobile, for example.
“To stand any chance of sustainable success, a new digital financial services business has to be built around the smartphone – a recent report in The Financial Brand found that for 87% of millennials, their phone never leaves their side, day or night” Reinemann said.
What’s going to happen in 2016?
The push for the best customer experience isn’t going to be confined to financial technology disrupters and it isn’t just about millennials, said Reinemann. “If you look at the success of the best online brands, it’s all about customer experience. So to win, you have to excel in this space.” To this end, BBVA purchased Spring Studio, a specialist design studio, earlier this year and invested in Atom Bank, a UK mobile-only bank with the emphasis on usability and that has been very explicit that it wants to target a wider audience than simply those that came of age in the 2000s.
5- New categories for disruption
While payments and lending continued to be the key segments for innovation in financial services in 2015, Reinemann noted the extension of digital disruption into new categories such as insurance and mortgages.
“The impact of price comparison websites on the insurance sector in terms of price transparency and competition was just the beginning,” he said. “What are really interesting are businesses such as Guevara and Lemonade, which use crowdsourcing to reduce costs and claims.”
In this model, you pool part of your monthly fee with a group to insure against claims. Not only does this reduce costs, but the psychology of crowds encourages people to think very carefully before claiming, minimising claims and fraud.
Mortgages are a challenging market to disrupt, given the amount of capital involved, regulation and the length of loans. However, Reinemann noted the innovation taking place on the edges of the market.
“Digital has proved very effective in developing new categories for investors – for example, loans to small businesses through peer to peer platforms, and this is now taking place with mortgages,” he said.
For example, the UKs Landbay allows investors to take a stake in the UK’s buy-to-let mortgage market.
Which categories are ripe for disruption in 2016?
Innovation in 2016 is going to be turbo-charged, according to Reinemann, by traditional financial services businesses opening up their platforms to 3rd parties. “The EU’s new Payments Services Directive means banks have to open up some of their core tools to allow customers to view all their financial accounts in one place,” he said.
“Forward-thinking banks will see an opportunity to go further and allow innovators access to build better services”.
He cited BBVA’s acquisition of Simple, as an early indication of the Bank’s interest to enable others to leverage its core banking technology to improve the customer experience.
One thing is for certain, according to Reinemann. “2016 is going to see innovation in financial services of a quality and at a pace that’s never been seen before – and the beneficiary is going to be the customer.”