Fintech: all the way to the bank

Like the Internet of Things and autonomous cars, fintech — which stands for financial technology — has emerged in recent years as one of the hottest technology-related areas. Essentially it is about the convergence of new technology on the financial sector, so that the upstarts of Silicon Valley are now rubbing shoulders with the denizens of Wall Street and the Square Mile. In this binary image it does the high-tech sector the world of good to be depicted as the brash hipsters tearing down some of the financial world’s biggest players. The reality is a lot more nuanced.

One sign of fintech’s growth is the zeal with which many financial institutions are patenting their inventions. In the United States, Bank of America sits on a portfolio of just over 1,000 fintech patents, while JP Morgan Chase has over 500. More and more financial giants also lead the way in Blockchain, the Bitcoin-related method of executing and settling transactions without using a middleman, which could revolutionise large parts of the banking industry.

“People forget, when they look at banks, that they’re really big tech entities,” Sean Reilly, general counsel of banking industry body The Clearing House, told IAM. “They have always had a lot of technology under the hood, the difference now is that it’s in people’s faces.” 

That has led to a profound shift at businesses that may not always be associated with transformational change. “Financial services is changing like most other industries in that we’re increasingly digital, which means that software innovation and related protection has become a real focus,” Barclays head of intellectual property Calum Smyth commented to IAM. “Financial service companies need to stay at the cutting edge of how they interact with customers and clients, and there are two sides to that from a software perspective — first, offering client-facing services that are digitally based and second, the infrastructure piece, which relates to how we run our business on the back end.”

Thanks to the rise of the smartphone, people can now perform a growing range of tasks that once required a visit to the bank or a conversation with a financial adviser. In some senses the payment giants like MasterCard, Visa and American Express have been leading the way in the adoption of technology in their businesses. Talk to a senior executive from any of those businesses and it’s not unusual to hear them refer to their employer as a tech company. In 2010 MasterCard launched MasterCard Labs, a technology hub located among New York’s burgeoning start-up community which aims to foster new inventions.

The likes of the payment giants have been both the most enthusiastic developers of fintech solutions, and among the leaders when it comes to collaborating with the tech companies that are starting to eye up the sector. Apple, for instance, worked with all three of the largest payment companies on its Apple Pay service.

And there are other examples of greater collaboration between banks and the tech community. In 2017 JP Morgan, Intel and Microsoft were among a group of more than two dozen companies who announced that they were joining forces to develop standards and technology to enable easier use of the Ethereum blockchain code. Ethereum is the network on which the digital currency and main Bitcoin rival, Ether runs.

Banks enjoy a huge advantage over any newcomer looking to break into the sector. For one thing there’s the large number of regulations — which have only increased since the 2008 financial crisis — that make operating in the sector particularly onerous. But that has not stopped new players from entering the space with the likes of Lending Club and SoFi in lending, Credit Karma in personal finance and investment management, and Qapital in savings. Publicly the behemoths of finance might be welcoming the tech parvenus as potential allies, but privately banks are said to be worried by the growing threat they face from these nimbler start-ups. But the real threat may ultimately stem from further afield.

Despite the best efforts of the United States’ and Europe’s largest banks and tech players to jump onto the fintech bandwagon, it increasingly appears that fintech’s leaders are in China.

As with so many parts of the world’s most populous country, Chinese banking has developed from a relative backwater to a technologically advanced state at breakneck speed. That has been helped by the widespread adoption of smartphones, the fact that there are 700 million Internet users in the country and the way in which some tech giants such as Alibaba and Tencent have incorporated payment systems into their online offerings.

As an article in The Economist explained, “By just about any measure of size, China is the world’s leader in fintech”. Not only does it dominate in payment services, it also accounts for three quarters of the global market in online lending while a ranking of the world’s most innovative fintech firms gave Chinese companies four of the top five slots last year. According to The Economist, the country’s largest fintech player, Ant Financial, is valued at around $60 billion, which is on a par with Switzerland’s UBS.

Despite some of the giants emerging in China, most fintech businesses remain relatively puny compared with high-street banks and it’s far too early to start writing off the likes of Barclays and Citibank just yet. But there’s no doubt that fintech is helping to fuel an evolution in the competitive landscape for the world’s largest financial institutions as developments in technology help lower barriers to entry and attract investors only too willing to back the next disruptive start-up. Silicon Valley may not be taking over Wall Street, but it’s clearly making its mark.  

Richard Lloyd is the North America editor of IAM magazine.