The banking and financial services industries have been subject to significant disruption in recent years. There has been the arrival of challenger banks, new payment systems and roboadvice. The incumbents have been forced to raise their game and are now, in many instances, scrambling to replicate their fintech rivals. Today, has this disruption largely played out? Or does fintech still have new worlds to conquer?
Fintechs have certainly built scale and made a real impact, but for the most part, they still have relatively small market share. As such, we believe there is still considerable scope to take business from the incumbents. People are only just recognising that they have a choice of provider and that they can trust these new names.
With banking, for example, people tend to use accounts with the challenger banks as an addition to their main banking relationships. They may do it because it is what their children use and it’s easy to transfer money. Or they may use payments apps for holidays. They tend to be separate from their main bank account. There is room for challenger banks to become the preferred provider to do everything, disrupting these existing banking relationships.
The same is true for business banking. Fintech providers in this area are moving into accounting and tax services. They have the breadth to own the whole relationship rather than just one part of it, a process likely to be accelerated by Making Tax Digital. This brings further disruption potential.
The attitudes of incumbent businesses reflects this potential. Studies show that after a period of complacency they now feel extremely vulnerable to the rise of fintech. This suggests that they are still seeing erosion of their businesses. They are striking partnerships or, in some cases, trying to compete. They recognise that fintechs are far more agile. Fintechs, for their part, recognise this agility is their greatest competitive strength and are increasingly trying to remain independent.
We believe there are also new parts of the financial services industry that are ripe for disruption. Every part of the industry believes it can’t be disrupted, until it is. A decade ago, the banking institutions looked untouchable - huge, powerful, with a long-standing client base. The global financial crisis blew that away.
Equally, it is not always easy to see what the client wants next. Henry Ford famously said before the rise of the motor car: “If I had asked people what they wanted, they would have said faster horses.” People don’t tend to realise what they want until it is put in front of them.
That said, some areas are harder to disrupt than others. Capital markets, for example, are more resistant to change. However, there is a lot going on behind the scenes across the world, with the brightest minds striving to come up with the next big idea.
London is a fintech hotbed. This is driven by a number of different factors: a strong talent pool, successful infrastructure, funding, plus a strong financial services sector. The regulator is well respected and progressive. The tax and legal environment is very attractive.
Will this change under Brexit? Uncertainty is unhelpful and may disrupt access to funding. That said, recent fundraising cycles for TransferWise or Monzo have shown that the right businesses can still raise a lot of money in the UK irrespective of Brexit.
Fintech has many more worlds left to conquer. As society changes, financial services will need to change with it. The insurance industry, for example, needs to adjust to ‘generation rent’. This is difficult for incumbent businesses, with a raft of legacy systems. Fintech will pave the way.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.