“In Q2 of this year, fintech startups raked in a total of $19 billion in funding, pushing the overall category to well north of $100 billion in total funding raised.”
Original source: New Tech Spotlight: Fintech Investments Reach All-Time High In Q2 2018
Thus far, it seems like the large banks are fending off digital disruption, perhaps embracing some of it on their own. The Economist takes a look:
- “Peer-to-peer lending, for instance, has grown rapidly, but still amounted to just $19bn on America’s biggest platforms and £3.8bn in Britain last year”
- “last year JPMorgan Chase spent over $9.5bn on technology, including $3bn on new initiatives”
- From a similar piece in the NY Times: “The consulting firm McKinsey estimated in a report last month that digital disruption could put $90 billion, or 25 percent of bank profits, at risk over the next three years as services become more automated and more tellers are replaced by chatbots.”
- But: “Much of this change, however, is now expected to come from the banks themselves as they absorb new ideas from the technology world and shrink their own operations, without necessarily losing significant numbers of customers to start-ups.”
- Back to The Economist piece: “As well as economies of scale, they enjoy the advantage of incumbency in a heavily regulated industry. Entrants have to apply for banking licences, hire compliance staff and so forth, the costs of which weigh more heavily on smaller firms.”
- Regulations and customer loyalty are less in China, resulting in more investment in new financial tech in Asia:
- As another article puts it: “China has four of the five most valuable financial technology start-ups in the world, according to CB Insights, with Ant Financial leading the way at $60 billion. And investments in financial technology rose 64 percent in China last year, while they were falling 29 percent in the United States, according to CB Insights.”
- Why? “The obvious reason that financial start-ups have not achieved the same level of growth in the United States is that most Americans already have access to a relatively functional set of financial products, unlike in Africa and China.”
- There’s some commentary on the speed of sharing blockchain updates can reduce multi-day bank transfers (and payments) to, I assume, minutes. Thus: ‘“Blockchain reduces the cost of trust,” says Mr Lubin of ConsenSys.’
Fixing legacy problems with new platforms, not easy
- The idea of building banking platforms to clean up the decades of legacy integration problems.
- Mainframes are a problem, as a Gartner report from last year puts it: “The challenge for many of today’s modernization projects is not simply a change in technology, but often a fundamental restructuring of application architectures and deployment models. Mainframe hardware and software architectures have defined the structure of applications built on this platform for the last 50 years. Tending toward large-scale, monolithic systems that are predominantly customized, they represent the ultimate in size, complexity, reliability and availability.”
- But, unless/until there’s a crisis, changes won’t be funded: “Banks need to be able to justify the cost and risk of any modernization project. This can be difficult in the face of a well-proven, time-tested portfolio that has represented the needs of the banking system for decades.”
- Sort of in the “but wasn’t that always the goal, but from that same article, Gartner suggests the vision for new fintech: ‘Gartner, Hype Cycle for Digital Banking Transformation, 2015, says, “To be truly digital, banks must pair an emphasis on customer-facing capabilities with investment in the technical, architectural, analytic and organizational foundations that enable participation in the financial services ecosystem.”’
- BCG has a prescriptive piece for setting the strategy for all this, from Nov. 2015.
- A bit correlation-y, but still useful, from that BCG piece: “While past performance is no guarantee of future results, and even though all the company’s results cannot be entirely attributed to BBVA’s digital transformation plan, so far many signs are encouraging. The number of BBVA’s digital customers increased by 68% from 2011 to 2014, reaching 8.4 million in mid-2014, of which 3.6 million were active mobile users. Because of the increasing use of digital channels and efforts to reconfigure the bank’s branch network—creating smaller branches that emphasize customer self-service and larger branches that provide higher levels of personalized advice through a remote cross-selling support system—BBVA achieved a reduction in costs of 8% in 2014, or €340 million, in the core business in Spain. Meanwhile, the bank’s net profits increased by 26% in 2014, reaching €2.6 billion.”
- And a more recent write-up of JPMC’s cloud-native programs, e.g.: ‘“We aren’t looking to decrease the amount of money the firm is spending on technology. We’re looking to change the mix between run-the-bank costs versus innovation investment,” he said. “We’ve got to continue to be really aggressive in reducing the run-the bank costs and do it in a very thoughtful way to maintain the existing technology base in the most efficient way possible.” …Dollars saved by using lower-cost cloud infrastructure and platforms will be reinvested in technology, he said.’ JPMC, of course, is a member of the Cloud Foundry Foundation which means, you know, they’re into that kind of thing.
Commonwealth Bank of Australia, for instance, replaced its core banking platform in 2012 with the help of Accenture and software company SAP SE. The job ultimately took five years and cost more than 1 billion Australian dollars ($749.9 million).
Being conservative, multiply $500m across the top 20 banks, and you’ve got $10bn, using $749.8m directly, you get much closer to $15bn.
Better start planning.
Source: Banks scramble to fix old systems as IT ‘cowboys’ ride into sunset
You can get a sense of the types of projects and applications of cloud native banks are interested in by looking over these Capital One startup contest winners:
– Credit Kudos – an alternative credit scoring platform that measures credit worthiness using real-time transaction data captured automatically from the borrower, providing a transparent and up-to-date view of a person’s credit profile. Freddy Kelly, CEO of Credit Kudos, said: “Our aim is to change the way credit scoring works, from an opaque black box system to something that allows individuals to get the most value from their data. As a pioneer in lending, we believe Capital One is the perfect partner for us to bring Credit Kudos to the market.”
– Multisense – a secure end-to-end solution put together as a user-friendly mobile platform which includes face, voice and fingerprint recognition which can be combined with GPS and NFC. Aviram Siboni, CEO of Multisense, said: “Being part of this accelerator programme is an amazing opportunity. Not only to get the chance to join forces with Capital One, but also to bring our biometrics authentication platform a step closer to the UK market – it’s such an incredible time for us to innovate alongside Capital One.”
– Pariti – a mobile banking app enabling users to take control of their money, reduce interest payments and start saving. The app connects to separate bank accounts and credit cards and automatically identifies income and bills so users know what they can safely spend each week. Matthew Ford, CEO and Founder of Pariti, said “It is extremely exciting to have been selected to go forward in this process and I look forward to working very closely with Capital One to further develop Pariti and enhance the future of banking.”
– Warwick Analytics – a provider of automated predictive analytics that can remove the 80% of time data scientists need to organise and process data prior to analysis. Dan Somers, CEO of Warwick Analytics, said: “We’re delighted to be part of Growth Labs and working with Capital One – one of the most innovative financial services companies. We are looking forward to collaborating to develop disruptive solutions for them and for this sector.”
– WealRo – a real-time assistant for savings and investing that aims to use AI technology and machine learning to find areas of a user’s budget where savings can be made. Owen Haggith-Khonje, WealRo’s founder, said: “Growth Labs presents a fantastic opportunity for WealRo to receive world-class mentoring, with the hope of building a long term relationship with Capital One that positively shapes the financial landscape.”
There’s a mixture of optimizing existing services (better authenticating, credit scoring, improving data analysis), but also analytics-drive services that encourage customers to keep more money in the bank (savings).
Source: Capital One announces finalists for startup accelerator