Digital-first banks, ICOs, conversational AI, robo-advisors and more in our look at the trends to watch in 2018
2017 has seen the FinTech sector once again drive technology innovation around the world. As an industry traditionally heavy with process and systems finally catches up, it is now where the most exciting technological breakthroughs can be found.
Now that innovation is gathering pace we’re going to see unprecedented change over the coming years in the way that both consumers and businesses work with money, assets and commerce. Here’s a glimpse of what’s likely to come in 2018.
Blockchain - Beyond the Bitcoin hype
Much misunderstanding still lingers around the business applications of blockchain technology, such as smart contracts and ICOs (initial coin offerings). 2018 looks to be the year that may change. Platforms such as BlockEx (a client of ours) are making ICOs an accessible funding route for any startup, even those without a deep understanding of blockchain.
There is still however much skepticism around ICOs and this hasn’t been helped by recent scams, whereby a new altcoin is created for investors to buy but is either engineered in a way that is inherently unfair to those outside the company (see Paycoin, which transpired to be a scam where most tokens were reserved for the developers) or is simply a take-the-money-and-run scam (see Confido - the smart contracts start-up who raised $375,000 through ICO platform TokenLot before disappearing). Handily, TechCruch recently published a guide on spotting ICO fraud and it’s relatively easy to stay safe.
But as understanding and adoption grow, ICOs are here to stay - in the third quarter of 2017 alone, they raised more than $1.3 billion for startups. That’s around five times more than funding raised through venture capital in the blockchain space.
PSD2 - Collaboration between banks and startups
Bill Gates famously said “ Banking is necessary, banks are not” in 1994, as the age of the internet dawned. Over 20 years later and we are now seeing the banking landscape undergoing its biggest ground shift in history. Financial products and services are becoming more instantly and effortlessly available, and hitherto this development has been due to disruptive startups offering truly customer-centric services, but also to banks who have had that pressure put on them to innovate and remain relevant to an increasingly digital customer base.
In January 2018, PSD2 (Revised Payment Service Directive) will require banks to make their customer data and payment initiations available to third parties through APIs. This will finally allow (and encourage) startups and banks to work in harmony and multiply the value to the end customer.
Banks remain a crucial foundation of finance - holding the infrastructure, customers, data, real estate and trust that keep the fiscal world going round. 2018 and the implementation of PSD2 will revolutionise our relationships with them, which will increasingly be mediated by the tools and services set to proliferate after the regulation comes into force.
With a bank’s customers, capital and credentials; the start-up’s ideas, vision and passion the future is rosy for consumers and businesses wanting more insight, flexibility and convenience with their banking.
This year saw French startup Yomoni raise $5.4 million for its automated portfolio management service, showing the sector is growing in Europe following success in the US with services such as Wealthfront and Betterment. In the UK Nutmeg, Moneyfarm and Scalable Capital are among those leading yet another industry seeing algorithmic automation outperform human expertise.
A recent report by Business Insider forecasts that AUM (assets under management) by robo-advisors is likely to reach $4.6 trillion by 2022. They do also note however that startups are now struggling in this space due to overcrowding, and it’s likely the traditional players in the market who will succeed as they roll out their own products.
2018 looks set to be the year that this concept pierces the mainstream consciousness and the benefits become clear to consumers, which in turn will only make the marketplace all the more fiercely competitive.
Funding of FinTech startups rising
Year-on-year growth has been dramatic for fintech startup funding, from $2.6B globally in 2012 to $13.5B in 2016. This year looks like it will see more than $16B in funding and that’s set to grow further in 2018. This is great news for everyone, constantly bringing fresh ideas and innovation to the market. The hottest areas for funding so far have been blockchain, insurance and wealth management products with the former being meteoric with no signs of slowing down as of mid-December 2017 (whatever we write about blockchain will of course be out of date by the time you read this).
An interesting fact featured in our previous newsletter, is that of 86,034 blockchain projects on GitHub, just 8% are actively maintained today. The research by Deloitte that we pointed to aims to shed light on the makeup of blockchain projects - where they are, what they do and how successful they are, through the lens of data from Github - the leading software collaboration platform. The question it throws up is whether blockchain projects are even higher risk than we thought, and that looks to be the case given the sheer volume that have fallen by the wayside.
Bitcoin hitting the mainstream (again)
Whatever we write about Bitcoin will probably be obsolete, or just downright incorrect tomorrow but suffice it to say that 2017 has been an extraordinary year for the most widely known and traded cryptocurrency. As of writing it appears to have settled around the $17k mark for several days now, with investors mulling over their inner conflict between bull and bear.
Whichever way the market goes, the fact remains that this run has pushed Bitcoin over the parapet and into mainstream news, gaining more users, investors and credibility than ever before. Perhaps just as an asset class for now, but it does pave the way further for it to become a usable currency in time. This all drives adoption and acceptance, making conversations about ICO funding and blockchain technology all the more palatable within senior corridors of business.
In addition to blockchain-related opportunities, Bitcoin derivatives are on the horizon with Cantor Fitzgerald and Nasdaq planning products. This week, Cboe (Chicago Board Options Exchange) launched Bitcoin futures, which debuted strongly before falling back at very low volume close to the current price of Bitcoin the following day. Whether or not these products succeed will rely on Bitcoin’s volatility, perception as a dangerous bubble and support from trusted institutions but early indications are that naysayers continue to be proven wrong and confidence is growing.
Mobile-first banking platforms
With the big players in mobile-first banking - Monzo, Revolut, Starling et al - gaining banking licences now or imminently, these disruptive startups are becoming legitimate. And adoption is booming. Revolut have revealed that they now have 1m users across Europe, signing up between 3,000 and 3,500 new users every day. Impressively, they claim to have saved their users over £120m in foreign exchange fees to date. They also revealed that over 42% of their users are aged 25-35, a clear indication that traditional banks are no longer meeting the needs of younger, tech-savvy generations. This audience has no time for clunky apps, delayed transaction reporting and lengthy setup admin.
Considering that these digital banks have largely grown through word of mouth and slick member-get-member mechanics, their user acquisition has been incredibly cheap and effective when compared to traditional banks. As they expand into the US and Asia in 2018, they will continue to disrupt the banking landscape, pushing the incumbents to revolutionise their customer experience. Money may finally become a globally portable commodity… just in time for it to be usurped by crypto.
Chatbots and voice search are growing with pace. More consumer brands than ever are handling customer interactions with automated chat primarily through Facebook, though in reality much of this is built on basic logic trees - the online version of automated telephone menus whereby a user is given limited choices to direct them to a service endpoint. Whilst this is often referred to as AI, it is in fact not. It may be artificial but it is not strictly intelligent.
Machine learning - imagine those same logic trees but with new possibilities created every time people use it, allowing the system to ‘learn’ - will change this, and get us to truly conversational technology. Early efforts in 2017 like this chatbot from Facebook, which develops its own language and also learns to negotiate and lie, will start to bear fruit next year. Expect to see banks’ retail products becoming more conversational through improved chatbots working with customer data and inputs to deliver a personalised, responsive experience.
In capital markets and asset management, already benefitting from algorithmically-driven decision making, we can expect to see platforms responding more ‘conversationally’ to user needs e.g. calling out an anomaly or opportunity with a recommendation on how to act. And if it makes trading quicker or easier it’s likely to catch on fast.
In a recent report from PwC their innovation lead Anand Rao reminds us that “[AI] can help people make faster, better, and cheaper decisions. But you have to be willing to collaborate with the machine, and not just treat it as either a servant or an overlord.” Indeed many people’s expectation currently is that AI will swoop in and do everything for us, or tell us what to do with clear authority. But that vision of this burgeoning tech is many years if not decades away and will certainly threaten many jobs. In the near term, as Rao says, AI is merely a tool for us to wield, backed up with our own insight and expertise.
Continuous adaptive risk & trust assessment (CARTA)
At Gartner’s 2017 Security Summit in June, the research company introduced a new charter aimed at transforming information security (infosec) in businesses. This methodology, as the name suggests, is about addressing an ever-moving problem with a constantly adaptive solution. At its core is the idea of going beyond basic binary security decisions within systems e.g. block/deny, as these are prone to zero-day and targeted attacks, credential theft and insider threats.
In addition to access protocols, risk and trust must be fluid too. How systems profile, for instance, a user must change with every interaction - the user being reassessed continuously. This more fluid approach to security will be powered by machine learning, and is the only way forward in preventing breaches such as the Equifax incident earlier this year.
So 2018 looks to be a pivotal year in many respects, with the opportunities in Fintech proliferating. Here at Fathom we’ll be watching these trends develop with interest and, as always, experimenting and innovating to find those new opportunities for our clients.
If you have any questions about the Fintech trends for 2018 covered here drop us a line and we’d be happy to chat. Here’s to a successful and happy Christmas and New Year for you, your business and your families.