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FinTech, or the Uberization of Finance

Giuseppe Donvito, Partner P101 | December 9th, 2015

Silicon Valley is coming” warned JPMorgan Chase CEO Jamie Dimon in his annual letter to shareholders, pointing out at the increasing number of startups working on various alternatives to traditional banking. He was referring especially to the lending business, whereby institutions or people can lend to individuals and small businesses very quickly and effectively by using, for instance, Big Data to enhance credit underwriting.

In a recent speech, former Barclays CEO Antony Jenkins said that a series of Uber-style disruptions in the finance industry could shrink headcount at traditional big banks by as much as 50%, while profitability in some areas could collapse by over 60%. What is causing this? Financial technology, better known as FinTech.

Born in London a few yers ago, “FinTech” is defined as the use of technology and innovative business models in financial services. FinTech is a segment of the so-called digital disruption creating new financial models: the range of services offered by FinTech is already broad and includes payments, virtual currencies, wealth management, peer-to-peer (“P2P”) lending and crowdfunding. It is a real financial revolution that sees a number of startups disrupting the uncontested power of banks. In one of its equity research reports, Goldman Sachs estimated that $4.7 trillion in revenue for financial services firms is at risk of being displaced by new FinTech company entrants. We’re already seeing it happen with startups like Lending Club – the largest tech IPO in 2014 – and Funding Circle (lending), Square (payments), Nutmeg (wealth management), and TransferWise (international payments). Not to mention their “forerunner” PayPal, which (after separating from EBay) listed on NASDAQ in July 2015 and has by now reached a market capitalization of about $50 billion.

Like other disrupters from Silicon Valley, “FinTech” firms are growing fast. The Swiss private bank Pictet estimates that global investment in FinTech ventures tripled to $12.2 billion in 2014 from $4 billion in 2013 (+201% versus the average +63% growth of investment globally). Even though the US has absorbed the majority of this investment, Europe has shown the highest growth in 2014 (+215%). Credit for this goes to the FinTech axis between the UK and Ireland: these two countries channel the 42% of European investment, even if they grow less than the average (+136%). And Italy, too, has its crown jewel: the FinTech startup MoneyFarm, which has recently received a record investment of € 16 million.

Undeniably, the revolution triggered by the new companies operating in FinTech has boosted innovation and has somehow “democratised” financial services in order to meet the expectations of the new generations, who are looking for fast and low-cost digital solutions. Financial services is one of the most mediated industries on the planet, and that is precisely what is about to change. According to The Wall Street Journal, over the next decade, the familiar 20th-century modes of banking and investing will give way to something very different as we are on the verge of the Uberization of finance. Uberization also means using vast amounts of data to make those connections feasible.

Like in other “digitally-disrupted” industries, one of the reasons for the growth of FinTech is the diminishing cost of starting a technology business thanks to the cloud computing, that lets you pay for space as you go, and the rise of APIs, which let you buy tools you can just connect together to make your product. For example, robo-advisory is the science of managing savings through automated algorithms. It is a promising revolution: instead of going to a counselor, customers answer some online questions, such as how much they want to invest, for how long, to what end and how much they are prepared to risk.

In the large FinTech cosmos, another space for growth are P2P lending services – the practice of lending money to unrelated individuals or businesses that takes place online through digital matching platforms. P2P lending will likely make up the largest portion of the FinTech sector. Speed and simplicity are benefits of peer-to-peer lending, which bypasses what can be much more complicated bank lending processes. P2P lending represents a revolution especially for SMEs (small and medium sized enterprises), which – as noted in a recent paper by the World Economic Forum – are a major driver of the world economy accounting for more than half of the world’s gross domestic product and employing almost two-thirds of the global work force. Also, in the P2P arena, it is worth focusing on the so called Peer to Business (P2B) lending – lending money to businesses – for the impact this phenomenon is having on the small and medium sized enterprises segment.

The potential effect of FinTech as a “catalyst for growth” is undeniable. Because FinTech solutions are efficient and effective at lower scale, small businesses will be one of the main beneficiaries of FinTech’s disruptive power. However, in this revolutionary scenario, incumbents (for instance banks) still have options to survive, that is, cooperating with new players, innovating from within or strategically acquiring FinTech companies.