FINTECH ARTICLES OF THE WEEK 05/1/17
Data and analytics are the tactical drivers of FinTech, the heart and muscle moving the digital transformation of financial services. The strategic brains of the business lie in the prenatal business logic that will create new financial pathways.
After attending two FinTech conferences in Chicago last week, I gained a greater appreciation of the data and systems powering FinTech and how they relate. The presentations also gave me reasons why FinTech themes have shifted toward artificial intelligence and machine learning this year from last year’s primary focus on blockchain and its potential.
The FinTech Network, sponsored by market-data provider Barchart, took “data” as its theme. FinTech firms and exchanges focused their presentations on new ways of delivering the market data that trading organizations require to power their strategic decision making.
Northwestern’s Kellogg School covered “FinTech and the Future of Finance” in panels on the market forces leading to the latest advances in financial services and the desire to make them work for everyone. Regulators and entrepreneurs discussed how new financial services, built on high-quality data and mobile computing power, can be more open, inclusive, and competitive.
“We will see the fundamental deconstruction and reconstruction of this entire industry,” said Gareth Jones, managing partner at FinTech Collective, a New York-based venture firm with investments in payments, wealth management, capital market, and cryptofinance FinTech market segments.
The deconstruction of the industry is becoming apparent, for one, in the way exchanges and FinTech firms are making data sources more transparent and data distribution less costly. They are moving to cloud-based services to provide a better customer experience, anytime availability, and, ideally, variable pricing, where a company pays for data they use, when they use it.
One of the things that struck me is the elimination of fixed timeframes and geographic boundaries in FinTech, which conference speakers stressed is a global business. Regulators are taking this time and geographic elasticity into account.
The U.S. Office of the Comptroller of the Currency, for instance, is in the midst of a “lab experiment” on FinTech regulation, with its proposal to grant FinTech firms limited banking charters. Such experimentation will help the agency as it rethinks existing regulations like the Community Reinvestment Act “when its geographic base is becoming less and less relevant,” said Thomas J. Curry, who heads the agency, after his remarks (PDF) at Kellogg.
Federal Reserve Board Governor Lael Brainard’s speech, “Where Do Banks Fit in the FinTech Stack?”, covered another FinTech data theme, in which once solid financial-services notions are turning out to be more fluid. In her exceptional summary of application programming interface (API) technologies and related data-aggregation techniques technologies that provide access to banking data to FinTech firms.
The ownership of data and the right of consumers to decide who is using it is shifting in the U.K. and Europe. That debate is moving in the U.S. as well and will accelerate throughout the year.
The competitive lines are not only between banks and FinTechs but also between large and small financial institutions. “We want to make sure that the community banks can give their customers access to these apps that can help them manage their finances,” Brainard said. “We don’t yet feel the guardrails are secure to make sure this entire ecosystem can flourish.”
Both of Chicago’s large FinTech lenders, Enova and Avant, participated in the conferences. Both see business opportunities in addressing technology needs throughout the ecosystem. Enova is selling its decision management system to incumbent firms while Avant is providing its lending engine to regional banks.
“The ability to use analytics and decisioning horsepower is the next generation way of providing credit,” said Avant CFO Suk Shah, who spoke on a Kellogg lending panel.
The legacy systems used by incumbent firms cannot handle the data required for analysis and decision making. “When we offered our next-generation data product, FinTechs like Avant used it immediately. Some banks are still trying to incorporate those data into their products four years after introduction,” said Steve Chaouki, executive vice president, financial services, at TransUnion.
The greatest value lies not in the data and how it’s delivered or in the services and how they are provided. It lies in the new possibilities innovators can add to financial services through their own systems, algorithms, and business propositions.
The FinTech reconstruction of financial services that Jones mentioned is only beginning in that regard. As Jones put it, “I worry about the direct-to-consumer businesses because the underlying product has not fundamentally changed.”
Caitlin Long, who heads capital-markets startup Symbiont, made this point as well on the Kellogg conference’s blockchain panel. As in earlier iterations of the digital transformation of finance, the latest technologies will become commodities. Fundamentally, blockchain is a way of storing and accessing data, and it eventually will become commonplace.
“The distributed ledger layer will be commoditized like the matching engines of the 1990s,” she said. “It’s the smart-contract layer, the business logic, where the value will be built.”
Now for this week’s links.
State banking regulators sue feds over FinTech charter proposal
Following the Office of the Comptroller of the Currency’s announcement to issue special bank charters for FinTech firms, state bankers have decided to sue the agency, Stephanie Forshee reports for The National Law Journal. The Conference of State Bank Supervisors (CSBS) filed a complaint claiming that the attempt to create a national non-bank charter will harm markets, innovation, and consumers.
Recognizing how FinTech companies are making banks better
As FinTech firms continue to cooperate more with banks, FinXTech hosted its 2nd annual Best of FinXTech Awards to honor collaborative efforts between banks and FinTech firms, choosing three winners from a pool of 10 finalists. This year’s honorees include Green Dot Corp. and Uber Technologies; Scotiabank and Sensibil; and USAA and Nuance.
How banks can compete against an army of FinTech startups
To compete against FinTech firms, they can concentrate on developing digital banking products for small and medium sized businesses, simplify the lend application process, and tap into technology to lower their underwriting costs, writes Karen Mills for Harvard Business Review. “Banks must focus on areas where they can build a distinct competitive advantage, and find ways to partners with or learn from the new innovators,” Mills concludes.
A fast-growing Wall Street startup has made a ‘game changer’ hire
trueEX, an interest rate swap firm, nabbed former Deutsche Bank exec Chris Yoshida to oversee the company’s sales, marketing, and strategy, Matt Turner reports for Business Insider. The company currently has 24 international dealers that provide liquidity with 80 investor clients.
Real-time payments incubator lets banks get started without big investment
FIS and the Clearing House Payments Company announced the launch of a Real-Time Payments Incubator service for early-adopter financial institutions in the U.S., which will allow them to test real-time payments in a secure, verified environment without having to put up a large investment, Tom Groenfeldt reports for Forbes.
Loan payment processing by debit card
For state-licensed lenders, getting payments for installment loans can be cumbersome. That’s where a firm like LoanPaymentHero comes in. The FinTech startup focuses primarily on state-licensed lenders; it speeds up overall the settlement process. “You can use a bank card, debit card transactions, credit cards, margin-based, or consignment cards to be repaid,” said LoanPaymentHero co-founder and CEO James Celli. “We’re built by lenders for lenders“.