Fintech — or financial technology — is one of the hottest areas of technology right now, with money pouring into the sector, startups springing up all over the place, and plenty of column inches devoted to the phenomenon.
Investors and founders hope that technology can help them revolutionise everything from lending and payments to bond trading, letting them do things faster, better, and cheaper than big banks have traditionally.
Even Barclays’ former CEO Antony Jenkins is on board, saying recently that disruption to traditional financial services from fintech startups could lead to an “Uber moment” for banks.
But at the Fintech Connect Live conference in London on Tuesday, Currency Cloud CEO Mike Laven voiced an uncomfortable truth about the sector — it’s still a relatively niche concern.
Asked about how well fintech is doing right now, Laven, whose business is a cloud-based payments platform, told the crowd:
You have to differentiate between mind share and market share. You can add up a lot of the market share of these guys and it would be pretty small. But we’ve got a lot of mind share with all the press coverage and conferences.
Laven’s point is that the fintech sector is still a minnow swimming in the ocean of financial services, it just appears bigger because of all the hype. Laven joked that if you can’t eat out at least once a week at some sort of fintech conference or event, your company isn’t doing well.
The ‘Level39 bubble’
On another panel Julian Cork, COO of peer-to-peer buy-to-let mortgage platform Landbay, called the problem the “Level39 bubble” — referring to the fintech hub set up in Canary Wharf.
Within this bubble, the narrative is that plucky startups are on course to beat the banks by offering consumers a better deal. There’s a lot of back slapping and navel gazing.
But the truth is most people in Britain still rely on traditional banks and established financial service players.
Laven said: “I am not one who believes that if we close our eyes and wish really hard, the banks will go away. They will still be here 20 years from now.
“The only question is how well institutions will respond — can they get there? Banks really have to fear smarter banks, because some will get it and some won’t.”
Banks have to fear banks — not fintech startups. Not only is this bruising to the fintech’s ego, it also presents a serious problem for the legion of startups springing up.
Consumer-facing businesses like payments, peer-to-peer lending, and crowdfunding — three of the hottest areas for fintech startups in the UK — depend on ordinary people using them for growth. Awareness and uptake of fintech and alternative finance is crucial.
A great slide deck on the online lending industry from Cormac Leech, an analyst with investment bank Liberum, highlights the problem many fintech startups have. Leech focuses on peer-to-peer lenders but there’s plenty of read across to any other consumer facing business.
Less than 45% of people in the UK have heard about peer-to-peer and only around 15% would consider lending using it, according to Liberum — far from mainstream.
Those figures are also pretty flat, Leech says, suggesting that most of the explosive growth in peer-to-peer lending in the UK has come from early adopters increasing the amount they lend over these platforms, not more people signing up.
Many big platforms are now turning to institutional investors to get cash to fuel their growth, a subtle change to their original proposition. And at the smaller end of the market, some platforms are simply throwing in the towel.
In payments, meanwhile, TransferWise has around 2% of the UK international money transfer market, sending £500 million a month over its platform. That’s no mean feat for a four-year-old business.
But Nick Day, CEO of money transfer business SmallWorldFS, made the point to me back in June that it’s still nowhere near the size of a Western Union or MoneyGram. He told me: “They put out PR about how they grew 200% last year, but it’s from peanuts to 3x peanuts.”
‘Mindshare changes consumer demand’
So why do journalists like me wastes so much oxygen on fintech? The main reason is the money going into the sector.
$50 billion has been pumped into fintech startups around the world over the last 5 years, with the amount growing every year. In the UK alone $5.4 billion has been invested between 2010 and 2015.
These VC backers are betting that fintech will be a game changer, either revolutionising systems within banks or heralding a huge shift in consumer behaviour. They may not be a Facebook or Google today, but one day they might be.
The worry for fintech startups though is that banks and existing financial service providers also see this changing wind and adopt their own in-house solutions to head off the challenge from plucky fintech startups.
There are already plenty of examples of this: around 30 banks are exploring potential uses for the blockchain, the software behind bitcoin; Goldman Sachs is launching its own peer-to-peer lending platform; and investment in digital from Western Union boosted its online revenues by 28% in the third quarter, compared to just 3% growth for revenues overall.
Laven said: “What you’ll see is that mind share changes consumer demand and prices will go down and transparency will increase.”
So where does that leave all the startups? The Funding Circles and TransferWises of the world are likely to be big successes — they have got everything going for them right now. But there’s a huge number of fintech companies lower down the food chain who will struggle to make it work and may not really understand just what they’re getting into.
There are over 70 fintech startups exhibiting at Fintech Connect Live this week. It will be interesting to see how many make it to next year.