The start of a new decade, according to some, could herald a whole new swathe of disruption in financial services. But will we still call it fintech in 2030?
The 2010s saw the rise of a huge crop of financially-focused start-ups now valued at billions of pounds around the world, with London one of the hottest centres of ‘fintech disruption’.
At the start of the decade, many of the founders of these firms had not yet conceived the ideas that would go on to be successful firms employing hundreds of thousands of people across the UK and Europe and millions (most likely) worldwide. Nor were the trends that help buoy their efforts towards mainstream adoption well easily predictable.
So, what will the roaring 20s bring us? The pace of change for financial services seems to be speeding up with many firms looking beyond novel ideas, and snappy new branding and ethos at some of the deeper structural markets (the 'pipes' of finance) to disrupt. In this article, we take a look at some of the trends that could shape the coming year and, perhaps, beyond for fintech firms.
More and more firms have made launching in new and often far-flung geographies priorities in 2019. We closed last year with a host of UK fintechs such as Monzo, OakNorth and Revolut poised to take on the mighty US market as well as another rapidly expanding number of firms entering the UK scene such as Robinhood, Laybuy, Plaid and Bunq.
Firms have put global domination high up their list for one reason: scale. This has two parts: the first is the increasing need to turn a profit and justify lofty unicorn valuations that have become somewhat the norm for firms often less than five years old. Secondly, the increasing interest and action from Big Tech in financial services is a clear threat to fintech firms who may be leaders in their field with strong brands but vulnerable to venture capital funding drying up.
The likes of Google and Amazon meanwhile have not only very deep pools of liquidity but also an adept ability at generating free cash flows. Going global brings necessary scale to take the fight to Big Tech.
Global expansion certainly will be a theme set to dominate the next few fintech years.
A new buzzword seems to be crystalising. Open Finance. Eagle-eyed readers will note the similarity to Open Banking, of which it is an evolution, according to adherents. It’s the same principle of data portability via high-quality open APIs but extending these beyond banks to other fintechs as well as retailers, utility providers, mobile phone operators etc.
The FCA, the UK regulator, which has called for input from industry on Open Finance this year says: “By making it easier for consumers and businesses to compare price and product features and switch product or provider, open finance could be beneficial in the general insurance, cash savings and mortgage markets. It could help widen access to advice and support, boost efficiencies for businesses and access to credit, and spur innovation.
“Allowing customers to grant their adviser access to their pension and investment data could have far reaching implications for advisers and could once more open up questions on the definition of advice and guidance. Expect much more to come in this developing area.”
Equifax’s Robert McKechnie believes broadening Open Banking platforms will be a turning point in its drive to mass adoption in the year ahead.
“While the impact of Open Banking hasn’t been as immediate or as seismic as initially predicted, it has irrevocably shifted the banking and wider financial services landscape for the better, and must continue to develop and broaden in 2020.”
The ambition is a significant one and could likely be led by regulation. Open Banking launched two years ago, via a mandated regime placed on the nine largest banks, was predicted by many to spark a revolution in consumer finance. However, its full potential remains largely untapped. The direction of travel but the broadening out of the market to Open Finance could provide much needed critical mass.
A prophecy: profits
When it comes down to it, investors want to see a return and whilst we have lived through one of the most extraordinary loose times for venture capital many firms will be looking to cash in as the cycle continues to mature. Their backers, as well as original founders, will be increasingly under pressure to monetise as well as grow the businesses. One of the most likely consequences will be a focus on revenues, yes, but also the bottom line: profits.
An increasing number of firms do seem to be bucking the trend already. LendInvest, iwoca, OakNorth, Transferwise and Assetz Capital have all recorded profits in recent years although the vast majority have prioritised establishing growth milestones and evolving through funding rounds which have grown to substantially.
Economic and political headwinds appear to be the new normal and in such uncertain times one of the best life rafts for firms, even those looking to upend an industry, may well one of the most traditional concepts in business: profit.
M&A, not IPOs
In recent months IPOs seem to have gone off the boil, at least for the short term, for fintech firms but I expect that we will see a notable uptick in private sales. As mentioned earlier, we’re reaching a mature phase of the fintech story with investors and founders both keen to either run their winners and cut their losses (in the case of investors) or move on to projects new (founders).
This is likely to lead to M&A in the absence of the much anticipated public listings. I am sure that a good number of firms will choose to go down the IPO route eventually but not in 2020.
In what is an incredibly crowded market, where all firms cannot surely survive as viable and sustainable businesses it seems likely that trade sales will be a big albeit muted feature of 2020 and beyond.
Private equity, so far a minor character in fintech, looks set to massively ramp up its presence and power this trend.
Acquisition by other fintechs, large banks and outside firms also seems to be a likely part of the puzzle.
My sense is that an increased focus on if not just old fashioned profits, but making real money, will mean a heightened period of M&A as outlined above but this will sadly come alongside cost-cutting. It seems likely the latter will come via job cuts in some firms who have expanded their headcount at breakneck speed and increasingly invested in automation.
The pace of hiring, in one of the tightest labour markets for 50 years in the UK at least, cannot go on forever with scaling costs a direct barrier to profits and/or M&A.
Sadly, I think it seems likely we will see an uptick in fintechs closing doors as founders move on, funding becomes more concentrated in larger rounds for maturer firms and some business models become unreliable.
Things don't change overnight, of course, but if you compare where we were in 2010 and the exponential nature of digital change, 2030 is going to look very different from today.