With Izabella Kaminska (FT), and Tom Graham (Accenture).
FinTech for Breakfast – November 2, 2016
Another month, another lively session with the FT’s Izabella Kaminska – this time joined by Tom Graham, head of Accenture’s Financial Innovation Lab in London. As ever, we tried to answer the most pressing questions in FinTech. So for the benefit of those who missed it, here’s what we covered:
Who’s buying all the croissants?
We may not have reached “peak incubator”, but the last few weeks have seen announcements of new regulatory sandboxes in Hong Kong, Switzerland, Malaysia, Abu Dhabi, Canada and (possibly) Kenya, along with countless privately funded incubators and accelerators.
With so much (lavishly appointed) funding for innovation – and with an expert on incubators on the panel – we asked where all of the private funding for incubators is coming from, and what the return model for private funders is.
- For VCs and angel investors, the model is an evolution of the traditional approach – putting seed companies into a single location aids monitoring and may produce some cross-fertilisation benefits.
- For professional services firms, it makes introductions and builds advisory relationships (as well as enabling acquisition of talent and technology).
- For companies, there are additional cultural benefits, particularly in FS: incubators attract non-traditional talent and expose risk-averse managers to innovation within a controlled environment.
- For real estate companies, incubators are a possible marquee tenant, pulling financial and professional footfall to properties, acquiring tenants that may demand further fixed or variable space, and allowing some experimentation with new office concepts.
InsurTech in the US
Over in the US, Financial Technology Partners (FTP) released a doorstep of a report on the US InsurTech market. If their figures are correct, three-quarters of all InsurTech capital raisings have happened in the US. Amid the corporate finance jargon, they pulled out a number of key disruptive themes: online, social and mobile distribution; telematics and the Internet of Things; Big Data/machine learning in underwriting, customer retention and fraud prevention; and self-service and automation in policy administration. Where are the big opportunities or threats for UK insurance?
- When a technology radically shrinks the cost base of an industry, the revenue pool most often shrinks dramatically too. For insurance, Big Data is potentially a radical technology, reducing premiums to the wire on prime risks and creating affordability issues for non-prime customers.
- Whether Admiral would acquire access to social data was a serious concern – a move Facebook blocked later in the day. Still, the threats of self-censorship due to privacy erosion or unsanctioned (or unrealised) financial use of data history remain.
- Wider ‘behavioural engineering’ got an airing, although the use of charitable giving to promote positive behaviours attracted some scepticism.
- From the perspective of big insurance, ignoring InsurTech isn’t an option. Incubators may be more Hoxton than traditional underwriting, but fundamentally there’s a risk pricing exercise going on – bringing in the technical and cultural perspectives required to evaluate the opportunities and threats presented by technology and social change.
gig contractually employed economy
Round one of Uber vs the GMB went to the unions. The ruling has broad implications beyond FinTech – notably for couriers and cleaners – if it stands (and an appeal looks likely). The issue certainly seems to have piqued HMRC’s interest, and our regular panellist Izabella is on the record with her views on this one.
But within the narrow ambit of FinTech, what’s really at stake?
- Some suspicion was expressed about ‘gig economy’ firms that blur the lines of traditional employment, and there was a sense that anything resembling labour arbitrage – avoiding costs like employment rights and taxes – was in for a contest from both legal and tax authorities.
- Whether a regulatory solution was welcome split the room – some felt Adam Smith’s invisible hand ought to swing the pendulum back towards labour, others felt Adam’s hand hadn’t had much success in pushing against the dominant platforms.
- Whether every ‘gig economy’ firm can adjust its business model to more traditional legal forms seemed doubtful – particularly for those that had outsourced capital-intensive elements of traditional business models onto ‘contractors’.
Keeping up-to-date with consumer banking isn’t easy. As the BBA’s “Way we bank now” report showed over the summer, consumer behaviour in the UK is shifting in a staggering way. Highlighting the pace of change in payments, VISA released a survey note on mobile payments and contactless in the UK and Europe – along with a nice infographic. But no ‘winning model’ for integrating mobile payments with other value-added propositions has emerged and the experimentation continues. (Mastercard just announced ‘selfie’ identity checks, while Verizon’s portfolio company SimplyTapp launched a social messaging integrated payments app – with chatbots).
- With great convenience comes greater fraud costs. At least one of our guests had been digitally pickpocketed (gentlemen are advised not to keep their cards in their back pockets, or at least be suspicious when a stranger gooses them). This is hardly new – another guest had droll recollections of the mafia installing ATMs around Rome to circumvent EMV security.
- Whether biometrics or selfies present a secure identity solution or are simply another round in the ongoing cat-and-mouse of fraudsters and security is uncertain – although each round is definitely requiring greater investment in black hat IT skills.
- Beyond the immediacy of mobile payments and statements adoption, we’ve yet to see a real breakthrough app unifying higher value services with core payments services – although that doesn’t make it unfeasible.
Lord Turner and P2P lending (Vol. II)
Back in February, Lord Turner made some remarks about Peer-to-Peer lending, which sparked controversy.
At this month’s LendIt Europe conference, Lord Turner gave a more refined opinion. He reminded us that banks are risky too, that direct lending isn’t new and that – provided it is done well – marketplace lending has the opportunity to harness Big Data and provide protection for investors through credit intelligence.
But he did lay down a marker on where he sees the greatest prudential interest in marketplace lending: at the wholesale end of the spectrum, where (in the US at least) institutional supply of funds has been growing like topsy and new banks are entering the competition to provide warehousing lines to marketplace lenders.
- Representatives from the marketplace lending industry were quick to stress not only the credit intelligence side of their businesses, but also the speed of the feedback loops – P2P funding books are far more transparent than bank balance sheets, so investors can see rapidly when issues start to occur.
- Interestingly, while European P2P lenders have started to enter the securitisation market as loan servicers, Funding Circle’s securitisation didn’t involve any directly owned loans (the assets were accumulated by a third party investor, KLS).
- Broadly, the panel were positive on securitisation and marketplace funders. Basel III (and perhaps IV) are pushing banks ever more into secured lending, while growth companies are increasingly likely to be capital-light, so something needs to help capital flow in the right direction.
If we had more time
As ever, there were plenty of things we didn’t get onto:
- We covered (some of) the risks of InsurTech, but we didn’t get into the opportunities.
- We missed RegTech – particularly its scope to change compliance costs and behaviours.
- SoftBank and broader FinTech investment got parked until we’ve greater clarity on any Brexit effect (the signals are mixed).
- This year’s Web Summit has moved to Lisbon and Izabella will report back from it next time.
…there’s payments. If, like me, you sometimes get lost in the recesses of payments, here’s our own navigational aid for the UK system (all mistakes our own):
Sources: "Bank of England’s Real-Time Gross Settlement Service: Service Description" (July 2016), Payment Systems Regulator "Market review into the ownership and competitiveness of infrastructure provision" (July 2016), artistic license. Mastercard omitted in preference to showing incorrect linkages - suggestions welcome.
Note: this map will be out of date very soon (if it isn't already). More on that another time.