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Fintech Talk: September 9, 2016

Adel Raslan

While fintech has been around for a number of decades – did you know the cash machine, one of the first examples of fintech, was introduced in 1969? - the discussion around the relationship between incumbents and new entrants in the financial services sector has grown considerably over the last few years, with an ever increasing number of articles devoted to the topic.

The Wall Street Journal’s article, titled ‘Fintech Start-ups Face Dilemma on Banks: Are They Friend or Foe?,’ is particularly interesting and looks at this complex relationship and the dilemma that fintech start-ups face in developing their products and taking them to market. On the one hand, start-ups that choose not to partner with banks are said to be at risk when either big banks enter their niche market or when they don’t have the necessary resources to fall back on when market forces turn against them. On the other hand, start-ups that do partner with banks are increasingly subject to scrutiny and the watchful eye of regulators.

To better understand this dilemma, it’s worth looking at TransferWise, a peer to peer money transfer company and fintech unicorn’s, expansion into the US. Expanding into any new market is difficult, but is made even more so when 47 out of the 50 US states have their own regulations and require companies to have licenses to move money within their borders. To get around this and get its service up and running quickly, TransferWise decided to partner with existing banks and use them as proxies, thereby streamlining the process and saving both time and money. However, since last year, TransferWise has come under scrutiny for these partnerships, with some states expressing the view that money transmitters should have their own direct licenses.

For most companies, going it alone would make it harder to be disruptive and succeed as the burden of know-your-customers and anti-money laundering rules will fall entirely the start-ups However, regulation – so long as it’s not too strict – can be considered a positive force as compliance is a crucial component for fintech businesses. This sentiment is echoed by Marta Sjögren, from Northzone, a Stockholm-based investment fund that raised $335 million last week, who was quoted in TechCrunch as saying that “Fintech start-ups will need a very clear regulatory and compliance strategy as well as their product and marketing strategies. The new regulatory environment is beneficial for those fintech companies that are building data-driven businesses with transparency and data-integrity as the backbone.”

As regular readers will know, political (and economic) uncertainty is another obstacle to the growth of fintech start-ups, with the Brexit result contributing a great deal to the unease felt by the industry. In an interview with The Guardian, Taavet Hinrikus, co-founder and CEO of TransferWise (again), discusses the company’s expansion plans and his thoughts on Brexit. Despite recently moving to a bigger office in London, he’s still very sceptical about Brexit and thinks “the disaster scenario is real and possible…at the best case, that means that the UK has lost one or two years for start-ups, because for one or two years during uncertainty, people couldn’t raise money.” His worries for the fintech and tech sectors in the UK even extends to the media – when asked if London-based tech reporters should start making alternative plans, he responds unequivocally that “if Brexit happens, I would assume that London wouldn’t be the centre of the tech world in Europe.”

Despite all of this doom and gloom, Hinrikus is confident that TransferWise won’t be negatively impacted by Brexit given the size of the company and its diversified business model, which would allow it to close its UK operations and open a replacement office in any of Berlin, Tel Aviv, or Stockholm. While Hinrikus’ comments may come across as arrogant, they are backed up by the company’s most recent results that show a doubling of monthly revenue and transactions year-on-year, and that the company is well on the way to kicking banks out of the international money transfer market entirely. 

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