There have been several advances in Financial Technology (FinTech) over the past few years. We’ve seen both traditional financial companies looking to innovate quickly, and new entrants being backed by plenty of investment cash – but which are here to stay, and what changes will the coming years bring?
We spoke to John White OBE, current chairman of ABOR LTD, ECS Group board member and previous CIO at a range of financial institutions including the Royal Bank of Scotland (RBS), to understand the impact that progresses in digital technologies will have on the banking sector.
Here’s what he had to say:
Q: What have been the main changes to the Financial Services industry over the last 5-10 years?
John White OBE: By far the biggest change we’ve seen is in global investment in Financial technology, which has risen from around 1 billion to over 12 billion over the past 10 years. It has risen in both commercial value and money being spent on it, with London leading the way.
Q: In your opinion, what exactly does Financial Technology mean?
John White OBE: Many people may know it better in its abbreviated form: FinTech. FinTech exists to support business processes in the banking and insurance sectors. This covers the provision of financial information in the payments, investments, financing and advisory industries. Examples include mobile payments solutions (like Apple Pay and PayPal).
Q: What is the current market place like for FinTech?
John White OBE: The market place is currently strongest in retail, corporate and investment banking – and to an extent in private banking. A priority for UK banks right now is to separate their retail and investment banking divisions, which is costing them a lot and has lead the industry to become extremely cost conscious. In parallel to this, FinTech is offering innovation and hope of optimising and reducing traditional IT costs. As such, we are beginning to see FinTech bypass traditional IT functions (information systems; technology functions) and offer up solutions directly to individual segments of banks.
Q: What change has FinTech made to the banking sector?
John White OBE: A big change has been a focus on innovation and efficiency. Most retail and investment banks, have begun to set up FinTech incubators. They invite small companies to work on their premises, under their guidance, with the hope that they’ll create solutions useful to them.
Q: How are advances in Digital Payments changing the banking approach?
John White OBE: In my experience, banks generally see digital technology as a great opportunity to move away from legacy systems that can be a huge burden. Managing and running legacy systems costs the big banks billions each year. Banks are traditionally risk averse, meaning that they need to be pushed a certain way to branch into anything new, but new small start-up banks are pushing banks to become more innovative with their use of technology. Right now, banks have handled mobile banking well, and there are many other technologies for banks to make the most of. But security remains a challenge.
Q: What predictions do you have for the future of FinTech?
John White OBE: Much like the huge number of companies that grew out of the late 1990s Internet boom, I would suggest we’ll see a boom in FinTech companies over the next few years. We’ll see a lot of money and rounds of capital investment being put into the creation of lots of companies and then an inevitable collapse of the companies that don’t make it either because a) they can’t sell or b) they don’t have a large enough customer base to support growth. Out of the ashes, companies with a much stronger base and experience around what will and will not work, will appear.
Q: In your opinion – which areas of FinTech will, and will not, succeed?
John White OBE: Payments (digital wall and peer to peer) investments, banking and insurance & risk management are all prospering, and I expect they will continue to succeed. For me, one of the most interesting areas of FinTech right now is big data and predictive analytics modelling. Many businesses view this as “the future” in terms of understanding who their customers are and what they want. But, very few companies make any money from big data. Amazon is the most advanced company in the world at using big data analytics. They’ve been in the game for around 14 years – and only in the past 12 months announced their first profit!
Q: Digital payments are a big area in FinTech and the Blockchain technology is also innovating that area. What do you know about Blockchain and Bitcoin?
John White OBE: Blockchain is a distributed database that contains a continuously growing list of records (or blocks) that are completely secure from tampering. That’s great, but what makes it particularly interesting to banks is the fact that each block (or record) contains a time stamp and a link to the previous block, meaning it’s practically unshakable. Bitcoin is an end-user of blockchain, It’s simply digital money, and a way of distributing money between un-clustered and global third-parties, without the need for a bank.
Q: Since bitcoin removes the need for banks, are banks wary of it – or should they be wary of it?
John White OBE: Up until now, Bitcoin has generally been ignored by the banks. There is an exception with global controllers of banks, who have been very troubled by the global currency for some time. US and British authorities are only now beginning to take an interest and recognise bitcoin as something that they can’t stop from growing. Since bitcoin fees are between 0 and 2% whereas card fees are between 2 and 3% (a considerable cost reduction for business transactions), I predict that bitcoin will grow, and banks will need to find the best way to work with the technology.
Q: Do you think there are going to be other forms of digital payments used on Blockchain?
John White OBE: Yes, I think there will be other forms of digital payment. Younger generations are starting to use their mobile phones more and more, which has so far prompted huge growth in mobile banking. Many problems - including the issue of security - come with this. I believe that Blockchain could offer a more secure method of recording these transactions.
Q: Should traditional banks be worried about smaller and more nimble challenger banks (like Monzo) – or excited that they could transform business?
John White OBE: As someone that used to sit on the executive committee of RBS, I can tell you about a word that always troubles banks: disintermediation (definition: a reduction in the use of intermediaries between producers and consumers, for example by investing directly in the securities market rather than through a bank). Because newer technologies are inexpensive (using newer and less expensive technologies) and readily available, they threaten to disintermediate banks from their customers. Yes, they might steal some customers, but even the top 5 start-up banks have fewer than 50,000 customers. Most of the smaller banks need to first worry about growing their customer base and gaining experience in managing their credits and assets before posing a real threat to bigger banks.
Q: What do FinTech companies need to do to survive?
John White OBE: The first and main concern as a FinTech should be safety and security. Whatever they do, they need to be able to provide assurances to their customer that above all, sensitive financial data is well-protected. To succeed, FinTech companies need to either enhance or add to that protection.
At ECS Digital, we’ve worked with several large retail and commercial banks including RBS, HSBC and LBG. Using DevOps and Continuous Delivery practices, we help organisations across sectors to drive innovation and efficiency, and improve security throughout their business.
Whether you’re looking to build security into your processes, improve the speed and efficiency of legacy systems or enable organisational innovation by encouraging your teams to collaborate more effectively, shorten customer feedback loops and respond with greater creativity and agility to changes, threats, demands and inevitable failures – please get in touch.