What does 2017 hold for FinTech?

February 2017  |  PROFESSIONAL INSIGHT  |  BANKING & FINANCE

 

Financier Worldwide Magazine

February 2017 Issue

February 2017 Issue


For all the events the world over, 2016 was a mixed year for FinTech. On the one hand, innovation and the development of new technologies were given a significant fillip by the launch of the ‘regulatory sandbox’ by the Financial Conduct Authority (FCA). On the other, statistics from KPMG and CB Insights indicate that Brexit and the election of Donald Trump in the US seems to have caused many investors to pause and reconsider investing in Europe and North America.

According to their figures, less than half the amount was invested in FinTech firms in the third quarter of 2016 compared with the previous year. Much like 2016, however, the figures appear to be equally mixed, with rival data from Pitchbook and the trade body, Innovate Finance, spelling a different story. According to their data, global FinTech investment reached $15.2bn in 2016, surpassing the 2015 total of $14.9bn.

Despite the difficulties that persist when it comes to judging how FinTech truly fared in 2016, we can already see a number of potential developments that look set for 2017. For a start, mobile payments look likely to continue to grow. According to an ABI Research study, contactless cards are expected to double in 2017. There is even the suggestion that advances made in mobile payments could cause credit and debit cards to start to disappear altogether. While we can expect a decline in the use of cards, we are likely to be some way off seeing plastic disappearing from our wallets, or even our wallets themselves. After all, most of us still use cash and there are still reported sightings of cheques.

That said, 2017 will not be entirely smooth sailing for mobile payments. Rather, a number of analysts and firms, not least FICO, are anticipating Europe-wide disruption in mobile payments on account of the implementation of the Payments Service Directive 2. Aiming to create “an EU-wide single market for payments”, this directive will require banks to open their account interfaces to other parties (e.g., new payment apps) in order to encourage competition. The intention, to create greater choice for consumers, may also create an additional element of risk, as consumers may have to ask themselves whether the payment app they are using is really legitimate.

The proliferation of mobile payments in 2016 also points to another potential trend for 2017: the emergence of Africa and Asia as key centres of FinTech innovation. We are already seeing a widespread take up of mobile money and mobile payments in the two continents, with elderly people in Sri Lanka now able to receive pensions onto their Dialog eZCash mobile money account, while millions of unbanked mobile money customers in places like Ghana now receive a quarterly interest payment on their balances. As the vast geography of those continents and constituent countries is a key driver for the consumer appetite for such technology, we can expect this trend to continue. In fact, a recent McKinsey report found that widespread adoption and use of digital finance could increase the gross domestic product of all emerging economies by 6 percent, or $3.7 trillion, by 2025. It is more than possible, therefore, that we will see the next flurry of FinTech innovation emerging from Africa and Asia. This will bring opportunities for all members of the vertical chain, not least the funders of technology companies. Consequently, the increasingly sophisticated local venture capitalists and alternative asset managers may see real opportunities for investment.

We can expect to see continued innovation in UK FinTech as well, not least with the continued development of mobile payments and the potential development and incorporation of new AI technologies – encouraged by changes to the UK’s regulatory framework. 2016 was, after all, the year in which the FCA formally announced the names of the firms that had been selected to form the first cohort to enter the regulatory ‘sandbox’, a scheme designed to allow businesses to test new products and services in an environment with lighter regulatory obligations. The sandbox emerged as part of ‘Project Innovate’, a scheme launched by the FCA in 2014 to help ensure that London remains as FinTech friendly as possible. And although it is too early to judge the success of the sandbox, the fact that a number of other countries are seeking to replicate it is surely an encouraging sign. With applications for the second round of the sandbox due to close on 19 January, 2017 could well be the year in which we witness changes to the existing regulatory framework.

It is also possible that this year will see regulatory changes that will make it easier for FinTech firms to obtain banking licences. We are already witnessing this in the US, with the US Office of the Comptroller of Currency having recently ruled that FinTech companies can seek bank charters, thus allowing FinTech companies to partner more easily with existing institutions or seek their own charters to provide the same kinds of financial services as traditional banks.

2016 was notable for a number of high-profile cyber attacks, not least the recently reported Tesco Bank hack. Against such a backdrop, it seems likely that 2017 will see an increase in interest, on the part of both innovators and consumers, both corporate and individuals, in cyber security policies and prevention. Developments in FinTech will likely incorporate improved cyber security arrangements.

While consumer concern about cyber security may be growing, there is also a real risk that consumer interest in FinTech could start to dissipate if we do not see the development of products and technologies that they can actually use. At present, a great deal of FinTech development and innovation is being overseen by the banks, with research from Starling Bank revealing that one in four FinTech deals is dominated by giant corporations. Tellingly, Starling Bank also suggested that banks continue to claim that consumers need greater ‘education’ as a distraction from continued failure to deliver better products and trustworthy behaviour. This point is instructive, and 2017 looks set to be the year in which we see the development of FinTech with a greater focus on the consumer. If 2016 has been the year of development, 2017 needs to be the year of the launching of consumer facing financial technologies. If the ‘hot’ new technology remains inaccessible, promoted with impenetrable, arcane language, the initial excitement at the launch of a new product, and FinTech more generally, could dissipate – and quickly.

2017 looks set to be a year in which we see a great deal of development within the FinTech space. Mobile payments look set to grow and we can anticipate some regulatory changes to make the UK more FinTech friendly. Most importantly, however, is the likely emergence of more consumer-focused FinTech. Put another way, if banks or smaller FinTech firms are to maintain public interest, they need to keep an eye on the consumer when it comes to developing new technologies. Looking ahead to 2017, the innovators need to recognise that undertaking a highly sophisticated enterprise is at risk of becoming an academic exercise if the consumer loses interest. They will not wait forever.

 

Sam Pearse is a partner at Pillsbury Winthrop Shaw Pittman LLP. He can be contacted on +44 (0)20 7847 9597 or by email: samuel.pearse@pillsburylaw.com.

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Sam Pearse

Pillsbury Winthrop Shaw Pittman LLP


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