Long seen as the next big threat to traditional financial services businesses, fintech – along with an increasing demand for more nimble, convenient services – might now be the enabler they are all looking for
Investment in fintech is breaking all records. According to industry title Finextra, the sector raised $4.9bn of capital in the UK alone last year, surpassing the $3.6bn of the previous year and moving the UK to second in the global rankings for venture capital (VC) investment – after, of course, the US.
Meanwhile, a local survey by EY, Fintech in the Channel Islands, showed that 88% of respondents viewed fintech innovations as an opportunity for their business.
Fintech is embedding itself across the Channel Islands’ core sectors. Family offices want ‘always on’ digital accessibility to advisers, institutional investors are demanding up-to-the-minute reporting, and banks and other institutions are remotely onboarding clients through digital ID checks.
This year will clearly be shaped by the Covid-19 pandemic and the associated economic impact. And Covid-19 has provided fintech with what many consider its first true test: a severe economic downturn.
The burgeoning sector has responded impressively so far, stepping up to the plate and often outperforming incumbent financial institutions.
Funding Circle, Starling Bank and several other neobanks and fintech lenders have received accreditation from the British Business Bank to take part in the UK government’s Coronavirus Business Interruption Loan Scheme (CBILS).
They are also performing well in administering the government’s financial aid programme. CBILS lending data earlier this summer showed that the incumbent banks had only approved 50% of applications, while Starling Bank had reported an 84% acceptance rate.
The reasons for this are rooted in the fact that new entrants aren’t hindered by older legacy technology and processes. In addition, they are able to benefit from Open Banking to access customers’ real-time data and make better credit decisions.
Products swiftly brought to life
Open Banking, implemented across the UK in 2018, allows banks to share customer data – with their permission – with trusted third-party providers. It has been a catalyst for progressing and accelerating fintech.
“Following PSD2 [the EU’s revised Payment Services Directive] and the UK’s Open Banking Standard, a number of fintechs have built new opportunities, both within financial services and cross-industry,” says Simeon Moss, a Director in Deloitte’s Jersey office, who focuses on digital services for operations, risk and compliance.
“Fintech is very focused on customer experience and has the mindset to exploit the benefits that Open Banking can bring to the end-consumer.”
The growing fintech movement is also creating a more fertile ground for innovation and collaboration.
According to Richard Field, Guernsey lead for Appleby’s Technology and Innovation Practice Group, it’s the collaborative nature of Open Banking that explains why things are progressing so well.
“Even the bigger institutions, which have traditionally built moats around their intellectual property, know they need to open up.”
One of the most significant fintech contributions to the fight against Covid-19 has been Covid Credit. Brought to life over a weekend by UK fintech firms Fronted, 11:FS and Credit Kudos, this platform helps self-employed workers prove the loss of income needed to claim new government benefits.
The thinking was that if the UK government could be persuaded to provide financial support to the self-employed during the pandemic, then Open Banking technology could be used to self-certify lost income, and overcome one of the main hurdles of providing compensation.
It’s not only start-ups that are making headlines for progressing fintech.
“The larger institutions have embraced agile processes and technology more in the past six months than they had in the previous 10 years,” says Martin Keelagher, CEO of Agile Automations.
“Covid-19 has forced their hand in many ways – for example, the need for better lending technology to meet CBILS demand.
“But there is a genuine appetite there. We’re seeing increased interest in robotics and automation from ‘intrepreneurs’ as they seek to keep up with new entrants and customer demand.
“We’re creating bots that can act as a go-between, pushing and pulling data between APIs [application programming interfaces] and a financial institution’s legacy systems.
“With one client, we’ve recently built a smart onboarding system based on one simple form and automated processes that check multiple sources, with bots conducting governance and risk checks in the background. This reduces costs and cuts out human error, while also simplifying the customer journey.”
Chris Griffin, a Partner at Carey Olsen, has been at the forefront of major corporate fintech initiatives in Jersey, advising both Binance and Cryptique on the launches of their cryptocurrency exchange platforms.
He sees the potential in Open Banking, but believes it’s crucial to apply it to the right cases. “One good, genuine case is leveraging Open Banking to access real-time transaction data to help lenders better assess affordability and help consumers to improve their credit rating,” he explains.
“Traditional credit rating agencies lack transparency and operate in a very analogue way – you have to write a letter to state your case if you’ve lived abroad and so have a thin credit file, or if you’re a student that misses a payment. Open Banking can provide a more accurate picture of someone’s ability to repay a loan.”
Griffin also highlights the downside risks of Open Banking, including data protection and cyber crime. “A consumer has a relationship with their bank, but when third parties get involved, we do need to be aware of the risk of sophisticated criminals interposing themselves into APIs.”
The agility to pivot
As well as being able to roll out new products efficiently, fintech can quickly pivot and refocus its solutions as needed.
International income management app Wagestream, for example, released a number of updates to ease financial difficulties during the pandemic.
These include immediate overtime payments for under-pressure healthcare workers. Any shift logged as Covid-19 is eligible for enhanced payment limits, and staff who complete these shifts can access 80% of wages earned immediately upon completion of work.
“Fintechs can move fast; they’re nimble, agile and tend to have the ability to refocus their solutions quickly, and as needed, to respond to market demands. In a rapidly evolving international financial services context, that’s really important,” says Karolina Pilcher, Senior Strategic Projects Manager at Jersey Finance.
And as Griffin points out, the overheads are minimal. “Fintechs don’t need to rent an office,” he explains. “They just need a good idea and a good developer, and they can come up with a novel solution to a new problem.”
A lot of fintech start-ups are successful because they introduce a frictionless process from the outset, adopting a flexible approach to test new ideas and then scaling them faster.
“Larger businesses can take six months to even get to the stage where an idea is tested,” says Field. “Good start-ups succeed because they can start with a view of what the customer wants and then work backwards to get a solution that’s truly customer-centric.”
Such agility is a big draw for incumbent organisations, and it’s no surprise that partnerships are increasing.
In a 2019 study by Finextra, 81% of bank executives surveyed said collaborating with fintech partners was the best strategy to achieve digital transformation.
“We’re likely to see an acceleration of partnerships within the financial ecosystem as incumbents combine their own benefits of distribution, access to capital, and risk and compliance infrastructure with innovative digital solutions,” says Deloitte’s Simeon Moss.
“We see fintechs and ‘traditional’ institutions as being symbiotic and complementary to each other,” agrees Pilcher. “The finance sector in Jersey has been established for almost 60 years and the fintech scene has emerged to support the incumbent industry.
“Jersey is all about connectivity and working together to find solutions, and doing so provides positive solutions in both B2B and B2C contexts."
Role of the regulator
Moss believes regulatory engagement is a critical component of how fintechs can grow and meet regulatory standards while continuing to inform the regulator’s perspective and innovation.
This has certainly been the case for the Financial Conduct Authority (FCA) and London’s lauded fintech ecosystem.
The Jersey Financial Services Commission’s innovation hub is another strong example of a local regulator working collaboratively with industry and sector bodies, in this case Jersey Finance and Digital Jersey.
“Digital Jersey operates Sandbox Jersey, the island-wide sandbox for a broad range of innovative endeavours,” explains Pilcher.
“The idea is that Jersey’s diverse combination of industries, including financial services, tourism, agriculture and digital – together with internationally recognised rules and regulations, world-class IT infrastructure, and cyber security controls – provides the perfect testbed for concepts and ideas before they are scaled up internationally.”
The aim is to offer companies a representative environment that can help them with the development of fintech solutions, to help bring high-quality products and services to the market.
Guernsey is also taking this approach, with the Guernsey Financial Services Commission keen to attract the right people and businesses.
“We’re a small island with a highly regulated business community and a limited marketplace that acts as a great testing ground,” says Field.
“Fintechs can roll out their product and get a better understanding of it, evolving quickly in an environment that provides regulatory certainty.”
Griffin also believes that Jersey is a good base for fintechs and highlights the death of blockchain vanity projects.
“The days of looking to make a quick buck are gone,” he says. “There is now more emphasis on resilience, good people and financial backing – there’s a leaner, fitter blockchain community now than there was during the initial gold rush.”
Next steps
Agile fintechs, and incumbents boosted by fintech, can more easily absorb the plethora of new data available in the Open Banking environment.
This can be harnessed to meet raised customer expectations, provide personalised services and combat the new risks thrown up by Covid-19.
It also puts them in a good position for growth, both within the financial services space and in adjacent industries.
“Our feeling is that, post-Covid, there will be an increased demand for fintechs to assist other industries and support new working patterns, including working from home and the cybersecurity considerations that go with that,” says Pilcher.
Fintech has moved into the mainstream and offers a way forward for businesses to meet the many demands and pressures of the 21st century.