Why Fintech Banks Will Rule The World

Whilst debating whether new fintech startups would eat the banker’s lunch yesterday, I stumbled across a really interesting read by Philippe Gelis, co-founder and CEO of FX firm Kantox.  It was so good that I asked Philippe if I could put it on the blog and he kindly agreed.  Read and enjoy …

Why Fintech Banks Will Rule The World, by Philippe Gelis

Last week, I had the opportunity to present Kantox and my vision of Fintech in front of around 150 bank executives from Northern Europe. After my pitch, we had a Q&A round, and one more time I had proof that bankers are not expecting at all what will happen in the next 10 years.

The financial industry is one of the last large industries that have not been already really disrupted. Nevertheless, it seems that bankers do not have much of a different approach to the people who ran the press, hospitality and airline industries some years ago.

Every industry will be “uberized”, but it seems that most bankers still think it will be different in their case, probably because they consider that the heavy regulation will protect them and limit the growth of Fintech at some point. Bankers simply do not understand that tech companies are agile enough to take advantage of any piece of regulation.

They also still believe that customers still trust banks, while since the 2008 financial crisis and due to the never-ending financial scandals (Libor-gate, the FX fixing scandal, etc.) customers (both individuals and businesses) have a huge appetite for alternative finance. Banks are not seen any more as partners, but rather as pure providers only looking after their own interests and short-term profits.

It is a first step for banks to open incubators or to create VC funds to invest in start-ups, some of them Fintech, but it is definitely not enough. Most banks look to fund fintech start-ups that create products to be added on top of banks products, that will make the user experience better, but they almost never invest in products that directly compete with them, that cannibalize them.

Let me explain why I think bankers are completely wrong.

We are now experimenting with the first wave of fintech, which sees companies competing with banks on specific products:

  • Loans and credit
  • Payments
  • Foreign exchange and remittance
  • Wealth management
  • and many more

Lending Club is far and away the global flagship fintech company. The success of its IPO has been a game changer for the entire fintech sector.

So, banks are getting pressured by newcomers but –and the “but” is really important– these disrupters are relying on old-school banks for banking services and banking infrastructure (bank accounts, payments, compliance, brokerage, etc.). In other words, they are re-inventing the user experience, the user interface or the business model but not “the whole thing” (to steal a quote from Marc Andreessen). And by relying on banks to do business, fintech companies are clients and so generate revenue for the bank. Let’s say it is a co-petition (co-operative competition) model in which fintech stays at the mercy of banks, they disrupt banks on one side but they bring them business on the other side. In the end, banks still win.

It is important to note that many fintech businesses have evolved from pure “P2P models” to “marketplace models” where the liquidity can come from peers or from financial institutions.

Lending Club is known for getting up to 80% of its liquidity from financial institutions and not from peers. Here we have a clear example of banks considering it to be more efficient and therefore more profitable for them to lend money through Lending Club than through their outdated branches. Anyway, the challenge is more in having deep liquidity than in locating the liquidity.

The second wave of fintech, to come in two to five years’ time, will be “marketplace banking” (or “fintech banks”). This will be a type of bank based on five simple elements:

  1. A core banking platform built from scratch.
  2. An API layer to connect to third parties.
  3. A compliance/KYC infrastructure and processes.
  4. A banking license, to be independent from other banks and the ability to hold client funds without restrictions.
  5. A customer base/CRM, meaning that the fintech bank will have the customers, and a customer support team.

 The products directly offered by the fintech bank will be limited to “funds holding”, comprised of:

  1. Bank accounts (multi-currency).
  2. Credit and debit cards (multi-currency).
  3. eWallet (multi-currency).

All other services (investing, trading & brokerage; wealth management; loans, credit & mortgages; crowdfunding (equity and social); insurance; crypto-currencies; payments; remittances & FX; this list is not exhaustive) will be provided by third parties through the API, including old-school banks, financial institutions and fintech companies.

Slide1

Imagine that you are a client of this “marketplace bank” and that you need a loan. You do not really care if the loan is provided to you by Lending Club or Bank of America, what you look for is a quick and frictionless process to get your loan, and the lowest interest rate possible.

So, through the API, the “marketplace bank” will consult all its third parties and offer you the loan that best suits you.

We can imagine both a process in which conditions offered by third parties are non-negotiable but we can also imagine a competitive bidding process to get the best offer for each client at any point in time.

I have been asked several times about this business model and I think it is a no-brainer. It is a simple mix between an access fee to the “marketplace bank” and a revenue sharing model with the third parties providing additional services.

Here we have a completely different approach regarding the relationship with incumbents. Fintech banks, thanks to their banking licence, will not rely any more on any bank to be and stay in business, and so will not be at the mercy of incumbents. What is even more powerful, through the marketplace, incumbents will become “clients” of fintech banks, so the system will be completely reversed.

We will see banks pay a commission to Fintech banks to serve their customers!

The beauty of “marketplace banking” is that it competes directly with banks on core banking services without the need to build all the products.

Now the question is, what is really needed to launch a “marketplace bank”?

Technology/API/Compliance/KYC: building the technology is a complex part but many people have the skills to do so. So it is definitely not the main barrier.

Banking license: in Europe, the budget to get a banking license is estimated at approximately €20 million, though it could cost less or more, depending on the country. But it is not only about money.

To be in business you need strong and experienced board members, without them regulators will probably not give you the green light. So this means that you need to be able to convince investors and board members to trust you based on a Powerpoint presentation and to bet big on you. I think that we need the first wave of fintech to be successful, with some exits and big returns, to have people betting a lot of money on “marketplace banking”.

As an entrepreneur you need to have demonstrated that you are able to execute and scale a fintech business to lead that kind of new venture.

Customer base/CRM: here is the most complex part. How do you attract a critical mass of customers based on a simple offering (accounts + cards + eWallet) that relies on third parties for additional services? You cannot only rely on marketing and having a cool brand to attract hundreds of thousands of new customers if you have nothing really different to offer.

You also need some kind of focus: will you target individuals or businesses? Lower end or high net worth individuals? Small, medium or large businesses? Will you focus on one single country or several ones?

As always, it is all about customers and revenues, so you need a clear sales and marketing plan to quickly scale the customer base. I have some ideas how to do it but I will keep it for another post.

I have been asked several times if the first “marketplace bank” will be launched by an old-school bank (an incumbent) or a fintech startup? I definitely think the latter. It is too disruptive and the risk of cannibalization is too high to see a bank assuming the risk.

Anyway, most bankers are not already worried enough by fintech to react to its coming second wave. I remember a pool during a fintech panel where almost 90% of people answered that a fintech bank was improbable and, if it happens, it would be build by an incumbent.  This creates a fantastic “window” for us fintech entrepreneurs, to build it, and once it’s done, it will be too late for them to react.

Fintech banks are inevitable!

This is just a blueprint. To pull it off requires a lot of hard work. But given that the elements are all already available, it’s not a question of if but when the first pure fintech banks appear. They will be lean, flexible, and unhindered with legacy systems and a bad reputation due to never-ending scandals. 

They will eat the lunch of the current bank dinosaurs and could well eventually rule the banking world. 

 

About Philippe Gelis

Philippe Gelis is co-founder and CEO of the foreign exchange marketplace, Kantox.  Philippe has led Kantox’s growth to serve over 1,500 corporate clients from over 15 countries, carrying out over $1 billion in total trades.  Kantox was founded in 2011 with the goal of bringing transparency, efficiency and fairness to the FX market for SMEs and mid-cap companies.  Philippe is a regular columnist and commentator in the financial press, and has appeared in Forbes, the Financial Times and Business Insider, among many other publications.

 

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Is the Fintech bubble about to burst?

I recently recorded a video for Meniga to show at their conference in London for Next Bank Europe.  We had to do this as I was in New York on the day of the conference, and the organisers wanted me to present so badly they agreed to come to my house to do record my presentation. A bit unusual but, there you go.

So, to my house.  I recently moved into a museum.  Seriously.  I spend every night in the museum (beats Ben Stiller any day). 

The museum is the Royal Historic Dockyard Museum in Chatham, Kent. This was one of the first dockyards built specifically to make warships under Henry VIII and dates back to the 16th century.

The real growth in naval warfare occurred during the 18th century however, and George III specifically invested in the Dockyard, which is why so many buildings here date from the late 1700s. 

The Dockyard built the HMS Victory (Battle of Trafalgar) and we have a lot of history here.  For example, my house dates to 1830.  In its heyday the Dockyard employed 7,000, and my grandfather worked here during the War, building ships.  Then, after the Falklands War, Margaret Thatcher made the decision to shut it down.

Now, it is a museum and one of the top attractions in Kent.  It’s also a film set, with movies like Les Miserables filming scenes here along with TV series like Call the Midwife and Mr Selfridge being regular visitors.

Here’s a film that shows you the beauty of where I live:

Chatham Historic Dockyard by Sam Biddle

And here’s the movie we made asking When will the Fintech bubble burst? (nothing beautiful about this 🙂

For those who can’t watch it, the question I asked is whether there’s a Fintech bubble and is it about to burst.  With $12.7 billion raised for over 1,000 start-ups in the past five years, there’s a huge amount of people buzzing around this market and some say a further $20 billion is going to be invested in just this year alone.

What’s going on?

Well what is happening is a re-architecting of financial services with technology.  Today, it is the integration of technology with money; the digitalisation of money; and the move from local to global exchange.  That’s what I blog about every day but my claim in the video is that this is just what we’re talking about today, and it’s a transitory moment as the picture long-term is far bigger.  It is far bigger because we are completely rethinking how we exchange value.  It is why bitcoin is a big deal, because that is the most likely form of the digitalisation of money.  It is far bigger because the old bank model of the physical distribution of paper in a physical network is turned on its head when we are moving to the digital distribution of data in a global network.

Our world has changed thanks to the internet, and the most likely outcome is a new value exchange ecosystem of value tokens, value exchanges and value stores.  I’ll blog more about that another day but, meantime, this explains why (a) there is no Fintech bubble and therefore (b) it will not burst.

There’s no Fintech bubble because we’re re-architecting our world to digitise value exchange.  This will therefore morph our world into something different and new.  It is not until the different and new is finished that any bubble will burst.  For example, it is noteworthy that we talk about the internet bubble and burst of the 1990s, and yet we should note that the internet bubble burst in 2001 and then came back because we moved from Net 1.0 to Net 2.0.  As I’m saying we have another five generations of internet to go yet, there’s no bubble here.  Just a rise and fall of innovation as we move through the internet age.

That’s why there’s no Fintech bubble bursting.  Just a re-architecting of finance through technology that, until it finishes, will see us moving through waves of innovation and change.

 

Postscript:

This video was filmed very quickly in under two hours for 15 minutes of edited finished product.  It was completely unscripted, although I did make a few notes to think about beforehand so, just in the interests of completeness, here are those notes:

Why there’s a bubble:

  • Money2020 predicted that venture capital deployment in FinTech will top $20 billion in 2015
  • Silicon Valley Bank state that FinTech is one of the top five investment areas today with investments in over 2,000 startups between 2009-2013 and over $10 billion invested

It’s also an area that is being changed by technology itself.

For example, investments in FinTech start-ups saw crowdfunding platforms as a key component of developing this market.

But banks have responded:

Accenture note that FinTech investments by banks would reach at least $8 billion by 2018 in New York alone, around 40% of total

Barclays has The Accelerator, SWIFT has The Start-up Challenge, Finovate highlights the hot new guys and BBVA challenge them all to show their capabilities using APIs and so on.

Many of the largest banks are creating corporate venture capital firms.

SBT Ventures — the venture capital arm of Sberbank, the largest bank in Russia — led the $8 million seed round for Moven, as part of its $100 million investment fund.

HSBC’s fund runs at $200 million and Santander’s fintech fund has $100 million in capital.

Who are these new fintech firms?

If you look at the FinTech50 that came out at the end of January, the firms are mainly based around cryptocurrencies and mobile apps for retail banking and payments, P2P firms, wealth management, trading and even a few bank innovators like mBank in Poland.

Names you would recognise like Traxpay, Nutmeg, Crowdcube, Transferwise, Currency Cloud, Funding Circle.

And names of people you know are clever as backers like Richard Branson, Marc Andreesen, and Reid Hoffman.

These guys are in there because they see reformation.

And bitcoin, or rather cryptocurrencies, are reformational as is mobile.

Meantime, P2P replaces core banking products like loans, mortgages and insurances.

EGs Zopa, Funding Circle, House Crowd and Friendsurance.

It’s not just P2P though – as bitcoin is that – it’s replacing expensive physical infrastructure with digital infrastructure.

In code we trust.

And the banks are not ignoring this.

Just look at the size of the deals from bank funded venture capital groups and that banks like BBVA , Bank Inter and the NYSE and USAA are investing in cryptocurrency firms and buying businesses like Simple and you know there’s a big deal here.

Is it a bubble though?

This dockyard has seen plenty of bubbles, the most famous of which was perhaps the South Sea Bubble of the 18th Century.

In 1711, a war with France left Britain millions of pounds in debt and the government had its hands tied as the Bank of England was a private bank and the sole lender to the government.

As a result, a British joint-stock company was founded, the South Sea Company, as a public–private partnership to consolidate and reduce the cost of national debt.

To sweeten the deal, the government gave the company a monopoly for all trading in the South Seas along South America, an amazing gift people thought.

Because of their monopolistic position and strength with government backing, shares in the South Sea Company rose to ten times their initial public offering price.

Seeing the success of the first issue of shares, the South Sea Company quickly issued more.  Again, the stock was rapidly consumed as investors saw that the stock was going to the stratosphere and they wanted in.

Equally, many investors were impressed by the lavish corporate offices the Company had set up.

Soon, most of the members of the House of Commons and House of Lords had some sort of stake in the South Sea Company.  Everyone bought into the stock – the MADNESS OF CROWDS.

Then the ‘bubble’ burst because people discovered that the South Sea Company had yet to actually deliver any goods or produce from the South Seas.  The shares had been valuable on paper, but worthless in reality.

Hence, the herd mentality that caused this madness of crowds suddenly sobered up and everyone pulled their money out.

Is that’s what going to happen to FinTech?  Like the internet boom and bust of the 1990s, or the Mortgage Securities boom and bust of the 2000s, is fintech next?  I don’t think so and here’s why.

Fundamental shift.

Banking is dead because banking banked money.  It banked physical goods and services.  We are now supporting digital exchange.

PewDiePie.

Fidor Bank who bank gold –both physical and digital (world of Warcraft)

Value exchange: Move from the physical distribution of paper in a localised network to digital distribution of data in a globalised network.  That’s what the book is all about.

The recent announcement of BBVA, NYSE and USAA investing in Coinbase articulated more of what I mean about Value Exchange. For example, BBVA Ventures Executive Director Jay Reinemann said: “at its core, Bitcoin is a decentralized protocol that enables exchange of value among parties around the world, giving it the potential to alter the financial services landscape.” 

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Is the Fintech bubble about to burst?

I recently recorded a video for Meniga to show at their conference in London for Next Bank Europe.  We had to do this as I was in New York on the day of the conference, and the organisers wanted me to present so badly they agreed to come to my house to do record my presentation. A bit unusual but, there you go.

So, to my house.  I recently moved into a museum.  Seriously.  I spend every night in the museum (beats Ben Stiller any day). 

The museum is the Royal Historic Dockyard Museum in Chatham, Kent. This was one of the first dockyards built specifically to make warships under Henry VIII and dates back to the 16th century.

The real growth in naval warfare occurred during the 18th century however, and George III specifically invested in the Dockyard, which is why so many buildings here date from the late 1700s. 

The Dockyard built the HMS Victory (Battle of Trafalgar) and we have a lot of history here.  For example, my house dates to 1830.  In its heyday the Dockyard employed 7,000, and my grandfather worked here during the War, building ships.  Then, after the Falklands War, Margaret Thatcher made the decision to shut it down.

Now, it is a museum and one of the top attractions in Kent.  It’s also a film set, with movies like Les Miserables filming scenes here along with TV series like Call the Midwife and Mr Selfridge being regular visitors.

Here’s a film that shows you the beauty of where I live:

Chatham Historic Dockyard by Sam Biddle

And here’s the movie we made asking When will the Fintech bubble burst? (nothing beautiful about this 🙂

For those who can’t watch it, the question I asked is whether there’s a Fintech bubble and is it about to burst.  With $12.7 billion raised for over 1,000 start-ups in the past five years, there’s a huge amount of people buzzing around this market and some say a further $20 billion is going to be invested in just this year alone.

What’s going on?

Well what is happening is a re-architecting of financial services with technology.  Today, it is the integration of technology with money; the digitalisation of money; and the move from local to global exchange.  That’s what I blog about every day but my claim in the video is that this is just what we’re talking about today, and it’s a transitory moment as the picture long-term is far bigger.  It is far bigger because we are completely rethinking how we exchange value.  It is why bitcoin is a big deal, because that is the most likely form of the digitalisation of money.  It is far bigger because the old bank model of the physical distribution of paper in a physical network is turned on its head when we are moving to the digital distribution of data in a global network.

Our world has changed thanks to the internet, and the most likely outcome is a new value exchange ecosystem of value tokens, value exchanges and value stores.  I’ll blog more about that another day but, meantime, this explains why (a) there is no Fintech bubble and therefore (b) it will not burst.

There’s no Fintech bubble because we’re re-architecting our world to digitise value exchange.  This will therefore morph our world into something different and new.  It is not until the different and new is finished that any bubble will burst.  For example, it is noteworthy that we talk about the internet bubble and burst of the 1990s, and yet we should note that the internet bubble burst in 2001 and then came back because we moved from Net 1.0 to Net 2.0.  As I’m saying we have another five generations of internet to go yet, there’s no bubble here.  Just a rise and fall of innovation as we move through the internet age.

That’s why there’s no Fintech bubble bursting.  Just a re-architecting of finance through technology that, until it finishes, will see us moving through waves of innovation and change.

 

Postscript:

This video was filmed very quickly in under two hours for 15 minutes of edited finished product.  It was completely unscripted, although I did make a few notes to think about beforehand so, just in the interests of completeness, here are those notes:

Why there’s a bubble:

  • Money2020 predicted that venture capital deployment in FinTech will top $20 billion in 2015
  • Silicon Valley Bank state that FinTech is one of the top five investment areas today with investments in over 2,000 startups between 2009-2013 and over $10 billion invested

It’s also an area that is being changed by technology itself.

For example, investments in FinTech start-ups saw crowdfunding platforms as a key component of developing this market.

But banks have responded:

Accenture note that FinTech investments by banks would reach at least $8 billion by 2018 in New York alone, around 40% of total

Barclays has The Accelerator, SWIFT has The Start-up Challenge, Finovate highlights the hot new guys and BBVA challenge them all to show their capabilities using APIs and so on.

Many of the largest banks are creating corporate venture capital firms.

SBT Ventures — the venture capital arm of Sberbank, the largest bank in Russia — led the $8 million seed round for Moven, as part of its $100 million investment fund.

HSBC’s fund runs at $200 million and Santander’s fintech fund has $100 million in capital.

Who are these new fintech firms?

If you look at the FinTech50 that came out at the end of January, the firms are mainly based around cryptocurrencies and mobile apps for retail banking and payments, P2P firms, wealth management, trading and even a few bank innovators like mBank in Poland.

Names you would recognise like Traxpay, Nutmeg, Crowdcube, Transferwise, Currency Cloud, Funding Circle.

And names of people you know are clever as backers like Richard Branson, Marc Andreesen, and Reid Hoffman.

These guys are in there because they see reformation.

And bitcoin, or rather cryptocurrencies, are reformational as is mobile.

Meantime, P2P replaces core banking products like loans, mortgages and insurances.

EGs Zopa, Funding Circle, House Crowd and Friendsurance.

It’s not just P2P though – as bitcoin is that – it’s replacing expensive physical infrastructure with digital infrastructure.

In code we trust.

And the banks are not ignoring this.

Just look at the size of the deals from bank funded venture capital groups and that banks like BBVA , Bank Inter and the NYSE and USAA are investing in cryptocurrency firms and buying businesses like Simple and you know there’s a big deal here.

Is it a bubble though?

This dockyard has seen plenty of bubbles, the most famous of which was perhaps the South Sea Bubble of the 18th Century.

In 1711, a war with France left Britain millions of pounds in debt and the government had its hands tied as the Bank of England was a private bank and the sole lender to the government.

As a result, a British joint-stock company was founded, the South Sea Company, as a public–private partnership to consolidate and reduce the cost of national debt.

To sweeten the deal, the government gave the company a monopoly for all trading in the South Seas along South America, an amazing gift people thought.

Because of their monopolistic position and strength with government backing, shares in the South Sea Company rose to ten times their initial public offering price.

Seeing the success of the first issue of shares, the South Sea Company quickly issued more.  Again, the stock was rapidly consumed as investors saw that the stock was going to the stratosphere and they wanted in.

Equally, many investors were impressed by the lavish corporate offices the Company had set up.

Soon, most of the members of the House of Commons and House of Lords had some sort of stake in the South Sea Company.  Everyone bought into the stock – the MADNESS OF CROWDS.

Then the ‘bubble’ burst because people discovered that the South Sea Company had yet to actually deliver any goods or produce from the South Seas.  The shares had been valuable on paper, but worthless in reality.

Hence, the herd mentality that caused this madness of crowds suddenly sobered up and everyone pulled their money out.

Is that’s what going to happen to FinTech?  Like the internet boom and bust of the 1990s, or the Mortgage Securities boom and bust of the 2000s, is fintech next?  I don’t think so and here’s why.

Fundamental shift.

Banking is dead because banking banked money.  It banked physical goods and services.  We are now supporting digital exchange.

PewDiePie.

Fidor Bank who bank gold –both physical and digital (world of Warcraft)

Value exchange: Move from the physical distribution of paper in a localised network to digital distribution of data in a globalised network.  That’s what the book is all about.

The recent announcement of BBVA, NYSE and USAA investing in Coinbase articulated more of what I mean about Value Exchange. For example, BBVA Ventures Executive Director Jay Reinemann said: “at its core, Bitcoin is a decentralized protocol that enables exchange of value among parties around the world, giving it the potential to alter the financial services landscape.” 

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