The numbers don’t lie – the future of Fintech is now. Investment in the sector has increased massively over the last five years – from $520 million in 2010 to $2.8 billion so far this year
Much of this investment has come from the US, but Europe has recently leapt into the fray, with investment in the sector seeing a 35 per cent growth compared to 2013 figures.
At StrategyEye’s The Future of Fintech is Now event earlier this week, two major players in the industry, Funding Circle and Azimo, discussed how their companies have changed the face of P2P loans and international transfers respectively.
Funding Circle has processed more than GBP390m (USD614m) in loans on its platform for small businesses in the desperately looking to access finance.
“While banks exist and are still a major part of the process, the tide is very much turning now,” said head of coms David de Konig. “In the next few years we will see London start to dominate the fintech space. We’re going to start seeing the billion and multi-billion dollar companies that the press has talked about for years.”
Startups have led the way in this sector, with banks struggling to keep up as consumer trust in their antiquated systems falters. But as Fintech begins to mature, some startups are collaborating with banks in a bid to transform the finance industry.
Barclays Accelerator ecosystem manager Simon Taylor highlighted the role that banks can still have in financial innovation, as long as their main goal is to support startups, and learn from them.
“If you’re a bank, as a large established business it’s often hard to break the door down and really sell a B2B with banks,” he said. “This space is designed to enable and foster that.”
“If you think about why banks were set up in the first place, they were set up for a reason – to help the economy. That return to supporting economies and supporting entrepreneurship, supporting innovation is something we’re very keen to do,” Taylor added.
In turn, it can be beneficial for some startups to work in tandem with banks and other financial services, Taylor said.
“There are two models for success – you don’t have to define yourself as not being a bank,” he Taylor said. “It can gain a lot of ground but it’s not the only way – there are a lot of problems that require you to work hand in glove.”
Barclays accelerator members Squirrel, Aire, Market IQ and Clause Match are supported by Barclays as the work to transform the financial technology industry.
“Can you imagine living on £8 a day of disposable income?” co-founder Emanuel Andjelic. “For half the UK population that is the reality. In an ideal situation people would get paid and manage their cash smoothly until the end of the month. The reality is, people end up hitting the red, and they get into debt.”
“Well why is that? Firstly it is very difficult to budget on £8 a day. Secondly, life throws curveballs at you – your car breaks down, your boiler goes bust – it’s very difficult to budget for that on £8 a day. Seasonal events – birthday, holidays – are also very difficult to handle if you have low disposable income.”
The payday loans market is at £4 billion, and the overdraft market is double that size at £8 billion. Borrowing £100 from Wonga will cost you £35 a month. An unauthorised overdraft with a bank like Natwest could cost you £35 a week.
“It is no wonder than people get into debt,” Andjelic said.
Squirrel tackles this debt spiral by posing a significant question to employers: What does financial distress cost employers? Research has found that 20 per cent of the UK work force is affected by financial distress, which cuts performance and productivity by the same percentage.
“Squirrel is the only solution out there that plugs directly into and employer to provide budgeting and bill management services,” Andjelic said.
With Squirrel, employees can set savings goals by having the service remove a set amount from their pay each month so that when an expected even occurs – a child’s birthday was Andjelic’s example – the money is waiting. When an unexpected even occurs – such as a car breaking down – Squirrel can give an employee early access to their wages so they don’t need to get a payday loan. The service also negotiates bills for those unable to find the time to manage them alone, and staggers monthly salaries into weekly chunks.
Andjelic was keen to point out that Squirrel will always be free to employees. Employers pay a £10 fee per employee per year.
The company is working on an £5k investment and is 80 per cent there, and is currently in trials with a logistics firm with 500 employees. Squirrel believes it can save employees £1000 per year.
“Our mission has been really simple,” said co-founder Aneesh Varma. “We really care about people getting access to credit. The fundamental problem which I share with the majority of the world – nearly 4.5 billion people –is that there is no credit data about customers like me. That’s because I’m a migrant. But students, people in the army, and those who are divorced have the same problem.”
“What does this mean for people?” Varma asked. “They’re locked out of the financial ecosystem! They cannot access credit, or credit based products. Things like WhatsApp is not available to you. Things like contactless pay on the bus doesn’t work for you. Forget about Apple Pay.”
Nearly one in four people in the UK, US and EU struggle to access credit, despite the fact that 46 per cent of them are very good at credit.
Aire is aiming to solve this problem by building new credit algorithms, using data from the customers themselves, such as a C.V, professional and academic background, and a survey of the customer’s knowledge of finance and how they treat credit. From this information, Aire provides a true-to-life credit score.
“We are always going to be free to the consumer,” Varma said. “We never want to sell their data, and we give consumers complete control.”
Aire is now working with one of the largest telecom providers in the UK to provide phone contracts for those without credit data. The company has also opening up its API in 2015 to allow P2P lenders to start using their platform and building solutions on top of it so they can allow new customers to access credit.
“Do you guys remember the Magic 8 ball?” co-founder Shah Warraich said. “What if we could make it real?”
Market IQ ingests structured and social data from Facebook, Twitter and blogs, only to ‘eight-ball’ it to help businesses predict business outcomes. The company focuses on sentiment analysis, mapping the change in consumer sentiment using three metrics – size, duration and confidence.
“Earlier this summer a high street bank had their ATM service go down,” Warraich said. “They knew about it and they fixed it. But what they didn’t realise, what they didn’t feel in time was the anger of the people. People were ranting on Twitter, crazily tweeting, and 6 hours later BBC picked it up and everything blew out of proportion. The reputational damage to the bank was close to a couple million dollars. Now the key here is, to identify the problem in the first 20 minutes so everybody can take preventative action.”
This situation is not exclusive to banks. Fortune 100 companies face this problem on a daily basis. Today, Market IQ helps Barclays monitor their global conversations using the same three metrics to map how often certain conversations happen, how long it could potentially go on for, and simply how likely is it that this conversation will blow up into a global crisis situation.
The service can also be used by hedge funds to map sentiment alongside stock movements, predicting where the price is likely to go next.
Market IQ is well on its way to making its first million, the company said.
Clause Match is transforming a key part of any commercial transaction – the contract.
“1995 was an exciting year exciting for the legal industry,” founder & CEO Evgeny Likhoded said. “Microsoft just introduced track changes to Word, and finally learned how to use emails instead of faxes. That revolutionised the way that lawyers negotiated legal agreements.”
“But in 2014, we are still using the same tools – 20 years with no development.”
Lawyers are still making changes on multiple draft contacts, which are then signed in paper of PDF form, so the data is impossible to search. Clause Match is moving this process to the cloud, allowing legal departments – the company is targeting in house legal teams – to edit the same contract as their external counterparts, search for terms, and make the process interactive by having the system notify them of an emerging date or if something in the contract is triggered.
When it comes to the remittance market, however, banks and the likes of Western Union are quickly being eclipsed by startups that know, in Azimo’s co-founder and head of operations Marta Krupinska’s words, that the industry is “not only about money”.
“The key is that we’re in the relationship business,” she said. “Every transaction connects people. Our mission is to disrupt a half a trillion dollar industry by focusing on the customer need and using technology to break down the price. By doing that we believe we can build a billion dollar business.”
Fintech is coming of age – startups pop up almost daily, with investors happy to foot the bill for the each new company. But why now?
“There are a number of factors making it a conducive climate for Fintech, but a chief driver is a genuine desire for innovation,” said StrategyEye’s head of head of editorial and analysis Tom O’Meara. “Traditional finance definitely remains ripe for disruption. The financial crisis damaged the image of banks and traditional finance institutions. People want a change.”
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