FinTech is bringing tech that you see and use everyday to financial services. The focus has been on solving pain-points, building great user experiences, and building the missing trust in the financial services space. Banks were at one time trusted, but following the 2008 financial crisis and the extent of the banks’ involvement, that trust plunged. Fintech is trying to shift the power from a faraway institution to the customers’ hands.
Investing in the stock markets has been very complicated – you have to spend weeks, months, or sometimes even years to figure out how things operate. Regulators have realised the lack of trust in the financial services space and are supporting FinTech companies to go-to-market faster than ever before. There are FinTech companies also being set up to help other FinTech players with compliance, KYC, etc., which allows companies to focus on disruption rather than being overwhelmed with mundane tasks.
Based on almost daily interaction with FinTech companies in London and across the world, these are the general themes and impact we see which will define the future.
Anyone will be able to invest in anything or anyone
Investing in private companies and start-ups have been restricted to institutions and wealthy ‘angels’, but equity crowdfunding is already allowing investors to invest from small amounts in interesting businesses. The peer-to-peer investing space is just getting started.
Imagine that when you see a great product or meet a talented singer, you realise that they could be worth investing in, but today it’s very difficult for you to invest in them. Often artists are just trying to make some money and follow their passion. They aren’t interested in the investment side of it. However, now, there are very interesting FinTech companies and models evolving which will not only make it easy for you to invest in them, but there will also be a secondary market for you to sell your stake later if required.
Companies that are taking the lead include CityFALCON who provide relevant and personalised news for doing research for your investments; SyndicateRoom, which have recently launched their ‘Watchlist’ product allowing private investors to invest in smaller AIM-quoted companies; Crowdfunder, which allows even bands to raise money for launching albums; equity crowdfunding platforms such as Seedrs and Crowdcube; and finally, other peer-to-peer (P2P) platforms such as Octopus Choice, Zopa, Funding Circle, and Ratesetter. The UK government is also supporting such companies which are generally considered higher risk investments. Government support often comes in the form of tax incentive schemes such as SEIS, EIS and ISAs.
In the past, while platforms like eTrade and Scottrade were able to open the high-volume markets to individuals, and electronic trading has allowed OTC trading through a browser, the new generation of fintech companies will allow investors to invest in almost anything, often through their smartphones. Moreover, the decisions will be completely controlled by the user, so investing in the next big thing, before it is even out of the garage, will be possible.
Customers could be your investors
Capitalism, as we know it, differentiates the investors who are looking for a return and the consumers who are looking for products and services to improve their lives. With P2P investing, entrepreneurs can reach out to their customers first, instead of breaking their heads with potential investors, who may or may not understand their businesses. Also the right kind of businesses are likely to be funded compared to what we see today.
These companies are often financed today by venture capital. Venture capitalists and angel investors tend to have a lot of excess cash on hand. The average individual does not. Therefore, sometimes entrepreneurs who can see a niche market among their peers (i.e., among average citizens) cannot adequately or sufficiently convince investors of their idea. However, with fintech those entrepreneurs can reach out directly to their customers in a sort of democratization of investment. This leads to not only better revenues, it also fills a need that society may have lacked if only the wealthy decided who received investment.
Optimum utilisation of capital
For those of us who have dealt with venture capital and private equity firms, we know that such investing model is broken. Instead of supporting innovation and growth, several of these firms usually push companies to indulge in behavior that focuses on maximization of profit for themselves at the cost of jobs, innovation, etc. That is where the democratisation of investment comes into play. If customers are investing, they do not require only profit maximization, because they are the same people paying for the product. They may be interested in doing good for society with their investments, too, instead of solely maximizing profit.
Also, with most governments not being able to deploy capital effectively for social good, they rely on VCs and PE firms resulting in less optimal deployment of capital. With all the innovation in the P2P space, we’ll see that investors in VC and PE firms, as well as governments, will find better ways to deploy their capital. The finTech firms are filling that gap in the market.
APIs will integrate services like never before
Imagine if you could access all your bank accounts, credit cards, insurance, and pension accounts in one place. With regulators requiring financial institutions to open up consumer data, this dream will become a reality. In general, FinTech companies focus on collaboration rather than greed, identify their core businesses, and work with other companies to solve customer pain-points together.
One of the most common pain-points is the requirement to have data spread out all over the place. You may have a pension with one company, a credit card with another, and your bank is yet another institution. There are some apps already available to gather all this information in one place, so you don’t have to go to many different places to find it. A major upside to this is the ability to take all of the individual’s financial information into account to come to a conclusion. Some believe that the major downside is that, with most of your financial identity gathered in one place, it is more susceptible to attack but unfortunately this is a risk we’ll have to live with; it’s no different from shopping online.
Simplicity will drive customer traction
The financial services space has a habit of building complicated products of course to generate more profits, but this mentality has to change if they want to be able to complete with tech companies disrupting financial services. We’ll see investment products with simple pricing, easy-to-use products, and clear, honest messaging. Companies such as Robinhood in the US and FreeTrade in the UK are offering unheard-of-before commission free investing. Products such as CFDs allow users to buy into the upside of a company by saying how much they want to invest instead of complicated trading forms, e.g. it could be as simple as – I want to hold £1000 of Facebook. Or maybe you want to own some Google, but the price of a single share is too high for you.
Pooling and ETFs have opened up the field to investing partially in companies with small amounts of capital. Those have been around for quite a while. But the difference now is that small, quick-to-adapt tech firms are moving into the space, and individuals won’t have to think about the complex processes behind the pooling.
Your mobile phone will be your personal banker, financial advisor, wealth manager
Machine learning, chatbots, and other types of Artificial Intelligence are replacing the need to rely on humans for advice, and by 2025, we’ll be asking questions to our devices loaded with integrated third-party services that could answer those questions. E.g. How much did I spend on groceries this month? What’s the ideal portfolio components for me? What are the pros and cons of buying property on mortgage for me? Companies to look out for include personal finance companies such as Ernest.ai and Squirrel, plus the robo-advisors such as Moo.la and Wealthify. For those who don’t want to rely on robots, companies such as Advicefront are also helping financial advisors serve more customers and digitally.
As for the implementation, machine learning is one of the most promising areas of research and development. Machines can access and process much more data much faster than humans ever could. Hence, inputting all your information (or, better yet, having the program scape the data out of your central data repository) will let you make better financial decisions without the need to hire an accountant, broker, and lawyer. They will also likely be much cheaper as the software becomes more widely available. This is not some distant future tech, this is happening now.
Good asset managers will be working for themselves instead of for funds
‘Copying’ an investor / trader has never been easier. The concept is simple – you trust someone, and when they trade, the same trade happens from your account at the same time. The follower might have to pay a small commission for this service and most of it goes to the investor who initiated the trade. What this cuts out is the high admin fees that funds charge and also allows users to access high risk high return asset classes such as foreign exchange. Social trading and investing companies leading the way are eToro, Ayondo, etc. If you’re a good asset manager, you could make enough money not only by investing your own capital but also by allowing other people to ‘copy’ you.
Pace of Innovation will be unprecedented
AI and FinTech are starting a new chapter in financial services. The “singularity” is likely still pretty far away, but machine learning and the research into general AI have accelerated in the recent past. A general AI is probably also quite far away, but specialized AI, developed for finance, is not. Machine learning will play a huge part in this area.
Machine learning is basically looking at “training data” and calibrating the program to provide the correct outputs. Once the program is outputting the correct results from the training data, it can be tested against real world data. After several iterations of this process, a program that can learn from its inputs is born. You can imagine the implications for financial data processing. No human can scan and process the billions of data points generated every second the global market is open. A machine, however, can. Moreover, machines predict better with more data – the financial markets are absolutely rife with data.
But let’s not discuss world-dominating AI. How will it be implemented for you? Aside from your information being all conveniently located in one place, the programs will be able to analyse your habits and interests plus your financial situation and give you proper outputs. Facebook already does this to an extent, but it lacks your financial information. Many banks already use a very weak form of AI that checks every credit card transaction against your spending habits and will notify you if something seems out of place.
There are plenty of startups trying to get in early (maybe you can invest in some of them through other startups mentioned above), and some offer advice. These robo-advisers do not have brokers trying to give you advice. They have robots. For the time being, the technology is nascent, so take the advice with a healthy amount of skepticism and do your due diligence, but there’s no reason to resist. This is the future.