The future of fintechs is not world domination – despite the advent of open banking, non-bank ecosystems, platform economics or superior customer focus.
Rather those fintechs which emerge from the frenetic, fertile environment of venture funding and brilliant ideas with a true business case will either partner with established players or be taken over.
It’s an endgame which has been emerging for some years although often missed in the headline-drawing epic tales of empires crumbling under a rebel onslaught.
The truly interesting twist is whether those established players will be traditional or non-traditional – banks or platforms, Citibank or Alibaba, Lloyds or Facebook.
The latest douse of, at best, tepid water came from Australia’s Productivity Commission in its report Competition in the Australian Financial System.
"The truly interesting twist is whether those established players will be traditional or non-traditional.”
“Fintechs are not, on present indications, likely to have the kind of competitive disruptive effect that would alter the market power of major banks in the foreseeable future,” the PC found.
“In the long term, lowering barriers to entry and growth, including greater access to consumer data, may lead fintechs to favour competition against incumbents over collaboration.”
The commission added gnomically we “must look further afield for substantial offsets to current market power.”
While global technology companies have been creating bigger waves internationally the PC acknowledged it was not the case in Australia.
The best overall snapshot of where fintech is at is the biannual KPMG Pulse of Fintech report, the latest edition of which finds overall global fintech investment “roared ahead at a record pace” in the first half of 2018, reaching $US57 billion.
For Australia the key stat was not as loud but still a rise to $US63.7 million from $US56 million in the first half of 2017 – albeit lower than the second half of 2015 and the first half of 2016.
KPMG noted much of the investment in Australia was concentrated across a small number of deals – just seven compared with 12 in the second half of 2017 and 16 in the first half of 2017.
"Significant outliers still dominate the Australian fintech ecosystem, propelling the majority of this growth, such as the Rubik Financial deal in the past and, most recently, the acquisition of financial data analytics provider Hometrack Australia for roughly $US97 million by REA Group," according to KPMG.
There was a similar concentration in deal numbers globally with the two biggest being the record-setting $US14 billion raise by Ant Financial in the second quarter of 2018 and Vantiv’s acquisition of WorldPay for $US12.9 billion in the first quarter.
While the overall prognosis for fintech remains healthy, particularly around blockchain, there is not the preternatural energy and growth the hype might suggest.
As veteran financial services entrepreneur and fintech analyst Grant Halverson of McLean Roche notes “you know fintech is in trouble when four real estate startups raise almost as much money as the entire Fintech sector”. He was referring to the $US8 billion raised by WeWork, Opendoor and Compass.
KPMG Australia’s Head of Banking and Global Co-lead for Fintech Ian Pollari is more sanguine: "With a significant amount of capital waiting to be deployed, a growing diversity of fintechs hubs across the globe and more corporates looking to seize on larger M&A opportunities, investment in fintech is expected to remain strong heading into the second half of 2018.”
Not so much
Pollari noted growth could be expected in individual technologies like artificial intelligence and sectors like regulatory technology (regtech) but “we will also see efforts to combine fintech capabilities and to embed them within broader service offerings, through different commercial structures, particularly in areas such as open banking and digital mortgages”.
That is, not so much a fintech revolution but an incorporation into existing structures and institutions.
The question is whether those incumbents will be the traditional banks or pure platforms like Alphabet, Google's parent.
ANT Financial, an offshoot of Chinese platform giant Alibaba, is just as interesting. Technically it is a fintech startup – albeit one coming out of the stable of Jack Ma.
One recent report noted Ant handled “more payments last year than Mastercard, controls the world’s largest money market fund and has made loans to tens of millions of people. Its online payments platform completed more than $US8 trillion of transactions last year, the equivalent of more than twice Germany’s gross domestic product”.
Ma’s Alibaba empire already includes a massive payments business, AliPay.
According to digital banking authority Chris Skinner, the average employee of AliPay generates $US16 million per year of revenue. An average Barclays employee? $US400,000 a year.
In Skinner’s view, this is the difference between a tech company getting into finance and a financial company getting into technology.
“The aim of AliPay is to have two billion users by 2025,” he told New Zealand’s National Business Review. “There are only 1.2 billion people in China, so the rest will come from all over the world. AliPay is already on its fifth-generation architecture. That means every three or four years it throws away its system and starts again from scratch.”
The critical nuance is that between revolutionary technology – which fintech startups are generating at great pace – and an actual revolution.
What Google and Alibaba have is scale – even greater scale than major banks. What they don’t have is the security imprimatur of being regulated by financial services authorities. That’s good when it comes to being a revolutionary, bad when the state recognises your importance to the economy.
Chinese authorities are already taking actions to rein in Ant. Other platforms have been carefully structuring their operations to stay outside the regulatory tent.
So one possibility is the platform giants seize the market from traditional players. The other is they become “traditional” players themselves and accept the regulation that comes with it. Meanwhile, the traditional players do what Amazon does and buy in fintech revolutionaries.
This is the future Australia’s Productivity Commission foresees.
“This overall trend towards collaboration between fintechs and incumbents may improve efficiency of operations and reduce transaction costs for both fintechs and incumbents,” the PC reports. “It could also result in a greater range of consumer-oriented products which are complementary to those on offer by incumbents.”
“But such collaboration would also likely reduce the potential for these new entrants to be a source of competition.”
Andrew Cornell is managing editor at bluenotes