Fintech Talk: August 11, 2016
On Thursday, the Bank of England (BoE) cut its base rate for the first time in more than seven years. The decision to slash it from 0.5 per cent to 0.25 per cent comes after weeks of speculation that the central bank would act. While it may not seem like much, the change in the base rate is likely to have a significant impact on the financial services and fintech sectors, as well as having reverberations around the world.
To compensate for the record low base rate and the, subsequent, lower income and profit margins, retail banks and lenders are planning to make aggressive cost cuts, with Lloyds Banking Group revealing that it would close a further 200 branches and cut 3,000 jobs. It’s a shame that such cost cutting comes hand-in-hand with extreme job cuts but banks have little choice. In an interview with The Financial Times, former CEO of Barclays, Antony Jenkins, notes, “It is incredibly hard for incumbents to change their business model. It’s a combination of things. You’ve got many generations of technologies layered on top of each other, and those technologies need to be maintained.”
However, as the saying goes, every cloud has a silver lining – with a prolonged period of rock-bottom interest rates on the horizon, savers are more likely to think outside the box for alternatives in their hunt for yield, with some suggesting that this will push more money into fintech. For example, Ella Rabener, co-founder and chief marketing officer at robo-adviser Scalable Capital, said “While [the rate cut] might make investors aware of the economic uncertainty the BoE is preparing for, it will also add to their frustration over not making money with products such as Cash ISAs. So we believe many savers will start looking for alternatives, making them more likely to consider investing with a robo-advisers...” This view is also shared by many in the P2P lending space, with Stuart Law, CEO of Assetz Capital, saying that he expects investors to continue to turn to the alt finance market to improve returns on capital.
While London is considered a fintech hub – for the time being at least – a lot has been going on around the rest of the world. Alongside governmental and institutional influences, consumer habits, particularly those of the younger members of society (millennials), have a profound effect on the adoption of fintech and its success to disrupt the financial services sector. According to the 2016 World Retail Banking Report, millennials have a clear preference for accomplishing tasks through digital applications and services, with 62% in North America using products provided by fintech companies. This attraction to fintech is also reflected in the fact that only 45% of millennials in North America planning to stick with their current bank, compared to 85% of respondents from all other age groups. To, therefore, cater for and retain this increasingly important demographic, banks should embrace new technologies, such as blockchain or Artificial Intelligence, which will speed up processes and offer convenient alternatives to traditional services.
On the topic of alternatives to traditional services, the Wall Street Journal reports that Prosper, a leading marketplace lending platform, is in the midst of negotiating a huge $5 billion deal with some pretty prominent names, including Soros Fund Management, Fortress Investment Group and Jeffries, to purchase Prosper loans. Prosper has already started to sell loans to the Spanish bank, BBVA, with its VC arm of the company already holding shares in Prosper.
As is evident in wider media discussions, fintech is, more often than not, seen as competing with traditional financial services and incumbents. However, our view of this debate is often limited to the most developed nations, with developing parts of the world being overlooked. Quartz, last week, reported that African fintech is not disrupting existing financial services providers, but, rather, is helping to establish it. As a result of the high cost of rolling out the necessary financial infrastructure to rural areas, many low- and middle-income families are left without the necessary banking services.
This vacuum has, however, led to the development and uptake of mobile money across the continent, which allows users to use their mobile phones to take out insurance and loans. One such example of groundbreaking, innovative fintech is MFS Africa, which has connected 80 million mobile wallets in Africa, enabling cross-currency, cross-border, cross-network payments through entirely new infrastructure.
In spite of MFS Africa and other companies’ successes in, there is still an estimated 330 million adult Africans - approximately 80 per cent of the continent’s adult population – who lack access to formal financial services and are unclaimed. This opportunity will no doubt lead to an influx of investment across the continent from regional and international players, as well as seeing an increasing number fintech companies emerge over the next few years.