The Fintech Revolution: The Big Banks Joining the Technological Arms Race
On the 23rd of last month, just a couple of weeks ago, a new bank was quietly launched in the United Kingdom by one of the largest investment banking firms in the world. Marcus, a new digital customers savings platform, was released by Goldman Sachs to its own staff in Britain ahead of a wider roll-out to the general public which, according to an internal memo[1], is scheduled for the coming weeks.
While the digital bank represents a unique foray into a novel sector for the huge multinational firm, it is one that represents a growing trend that has reached all four corners of the globe. Many would argue the future of banking is already here in the present day; the formation of London’s “Silicon Roundabout”, surrounded by growing eager fintech companies like Monzo (900,000 current account customers at the moment), Revolut (2 million customers since launch in 2015) and Starling (hinted at having “tens of thousands of customers” and growing by founder Anne Boden[2]) has already attracted a huge market of smartphone users and tech-savvy millennial. These are what is known as “fintech companies” (short for financial technology).
What makes Marcus different is that its not a member of this group of upstart challenger banks. Its an offshoot, albeit a relatively small one currently, of an incumbent big bank with the support and investment to match. It does not have millions of pounds of cash from a venture capital ready to burn through ahead of an IPO in a few years time, nor the patience of such investors who are just happy to gain a share of the market.
What Marcus is however, is a sign that the people’s attention has been grabbed, people who are now understanding what fintech is and what it could become.
From the 1950s to Now: The History of Fintech
The term “fintech” itself, while largely describing digital banking and savings services in the context of this article, is a reference to a very broad sector that has existed for over six decades. Technology has always played a key role in the financial sector in countless ways that are easy to take for granted and forget when looking at the recent explosion in these new fancy mobile apps. Examining the timeline of technology in finance yields a picture of amazing innovation and evolution.
The invention of the credit card in 1958: relieved countless customers the problem of carrying cash around for goods and services. The 1960s brought about the ATM, which came to replace tellers and branches. The innovation continued over to the trading floor, where electronic stock trading began to flourish in the 1970s. The 1980s was a period of great change as banks developed mainframe computers and database technology, along with greater efficiency and sophistication of record-keeping. Even looking at the rise of the Internet and e-commerce in the 90s, where online business models took over from phone-based brokerage.
The maintenance of the financial systems and infrastructure we live under is in no small part thanks to these changes in technology and, one could say, wholly dependant on it for the world to function as it does today. Plus while it is not apparent to the average retail customer, a multibillion-pound industry has been entirely formed from fintech companies like Bloomberg, Thomas Reuters, SunGard, and Misys who have taken advantage of and used the advancements in risk management, trade processing, and data analysis, to cater to the needs of the financial sector.
“While 2008 was catastrophe for many, it was a boon for some”
2008: A Crisis for many while a Boom for fintech
So what began the boom in fintech startups, a global phenomenon that has seen the likes of New York to Singapore flooded with services offering tech enables banking services at the tip of one’s fingers? Well to understand where the growth came from, one has to look to when the financial sector was at its lowest point.
The credit crisis of 2008, and the global financial crash that followed, resulted in heavy levels of regulation that hit the banks with a laundry list of financial service regulation, huge fines, and penalties for non-compliance. Regulators forced banks to contain their risk by imposing new compensation rules including requiring the holding of more liquid assets and Tier 1 capital; consequently, banks had to turn their focus to and spend more on bank-office management than ever, with compliance and risk programs. The resulting vacuum in innovation in banking created the perfect environment for new companies to thrive.
While the management structure of banks changed, their previously employed (and very well paid) front-office client-based talent pools began to shift away and move to the growing technology and startup scene. Fintech companies used their status to develop ingenious business models designed to leverage themselves away from the traditional structural formality, and thus regulations, of banks. One example is marketplace lending, where players like Prosper in the United States., have used of the lack of capital stringent capital requirements to their advantage, providing far better returns for these new upstarts compare to traditional banks.
In fact, many other sectors have seen rapid growth and innovation in the years following 2008 including at data analytics, SaaS (Software-as-a-Service) and on-demand services. But what makes fintech companies unique the industry that they step foot in; the world of finance as it currently stands is one that’s heavily regulated and dominated by a few, well-established, big name firms. After all, the handling of people’s assets, savings and hard earned money is their domain. It is for this reason that fintech founders tend to be older and have many years experience in banking, bringing deep knowledge and understanding.
Familiar Faces, Different Settings: The Role of Big Banks
The boom of fintech and the challenges it poses begs the question of how banks are going to respond to this revolution. Today there are around sixteen bank-backed corporate accelerators around the globe[3] who are investing in fintech startups. Unbeknownst to many, the banking sector has always been a leader in open innovation and the set-up of accelerator programs, with the strong notion that the threat of disruption by newer startups must be engaged. But this willingness to be involved and influence in fact extends across the financial sector.
One only has to look as far back as the sudden and exponential explosion in innovation on the Artificial Intelligence (AI) platform, one of the most transformational technologies in our history, to see how banks have been influential and key to this development. TensorFlow, one of the most popular open-source libraries for data flow programming and technology used as a backbone to machine learning and AI projects, began life as a collaboration between Google (specifically the Google Brain team) and McKinsey & Company. The latter then sold their stocks and the enterprise was “spun-out”, giving us the end product we see today.
Marcus
Taking a deeper look into the launch of Marcus in the UK, it’s important to note that Marcus launched in the US two years ago, and has already garnered 20 billion USD in deposits[4]. Across the pond, the digital banking service offers easy access savings accounts, that can be opened with just one dollar, which Goldman claims to pay four times the average interest on than at other US banks. The personal loan rates provided are among the lowest in the country, and they have even shown interest in the less-than-prime market with the offering of credit card consolidation deals for those deep in debt.
While on the other side of the Atlantic, details about the UK product are scarce as of now, but if reports of a 1.5% easy access interest rate[5] are true, then Marcus will immediately be among the top of the savings tables, ahead of popular British mainstays such as Virgin and Sainsbury’s Bank. It remains to be seen whether these are just teaser rates to bring in interest and customers as a way of muscling their way into the market by taking a small financial ding, before being lowered later on.
Looking at the move from Wall Street to the High Street there are many interesting facets to be analysed like the differences between ours and the American markets, and what the enterprise means for international investment in a post-Brexit Britain. However the most striking is the fact that Marcus is not a Goldman-backed fintech startup; it was born deep in their head offices, fed and nurtured by their shareholders, and grown with acquisitions like of personal finance app Clarity Money, helping create its mobile shop front. This makes the startup, named after Marcus Goldman (one of the firm’s founders), a risk.
“I am convinced that there are only two types of companies: those that have been hacked and those that will be”
The Challenges facing Fintech and the industry
As such Marcus will have to tread carefully. The UK is more highly regulated than the U.S., and these regulators are not happy with huge behemoths pushing in and squeezing smaller start ups out of the market; BT was forced to open its broadband network to other competitors, while the energy giants were effectively ordered to subsidise their smaller rivals. In fact, the biggest challenge for Marcus will be how they will bring their profit margins into the black, something many tech-based startups don’t manage for years if not their entire lifespan. While their venture capital owners will continue to finance them, Goldman Sachs will not be so indulgent.
This is a problem perhaps unique to the likes of Marcus however, as on the other hand most smaller fintech startups face a whole host of barrier before they even begin. The legal fees to file and apply for licenses just to operate outside of one’s home country, an expansion necessary for the likes of cash transfer and mobile payment apps, can be overwhelmingly high. The U.S. alone has ten regulating bodies overseeing the financial sector, with state-by-state rule differences posing a challenge not seen by start-ups operating in Singapore for instance thanks to the encouragement of their growth by the Monetary Authority of Singapore or MAS[6].
Finally, there is the risks involved in relying so heavily upon online operation; the issue of cybersecurity and the possibility of cyber attacks. Fintech startups at the beginning of their life cycle may not have the funds to afford to provide a dedicated function and staff to provide the same level of protection as larger financial companies and banks. While a large-scale data breach has not occurred yet potential lulling some into think its not to be addressed urgently, startups should heed the warning given by FBI Director, Robert Mueller that “I am convinced that there are only two types of companies: those that have been hacked and those that will be.” [7].
Conclusion
There is no doubt that the speed and efficiency of their services which fintech startups are using to capture market, has been nothing short of remarkable. But the reality remains that banks are the place where cheques are deposited, providing an insured secure place for deposits that get too large for mobile wallets. When people look to buy a car, or a house, or provide for their children their financial needs become too much for the likes of fintech companies.
The point being that growth of fintech companies is not going to lead banks to disappear for the foreseeable future. Banks, and the financial sector as a whole, are an invaluable part of economy and society as a whole. If anything, as much as they could be affected by these fintech startups, both parties stand to benefit as strategic collaboration partners. One can only hope this will enable success and healthy growth for years to come.
[1] – Reuters
[2] – Verdict
[3] – Forbes
[4] – The Guardian
[5] – The Guardian