Published: 19 March 2015
Benjamin Lawsky, the superintendent of the New York department of Financial services (NYDFS), a man at the forefront of financial technology, having overseen the development of the first regulatory framework for digital currencies recently applied the metaphor of trains when talking about the evolution of payment systems.
“(Trains are a 19th century technology, of course, but they are very much still with us today. In fact, I took one to get down to today’s event this morning.) To that point, when considering the evolution of the payments system, it may be useful to think of it in the following way:
- One: You can build entirely new tracks to connect different stations to one another
- Or two: You can update the existing tracks in order to make travel faster and more reliable
Virtual currencies would fall into the former category of new tracks connecting consumers and businesses.
But there is also an existing sets of tracks in the payment world in desperate need of repair and improvement.”
The opinion that finance has not advanced at the same rate that technology is a view shared by many in Financial technology, or Fintech as it’s more commonly known is taking the investment world by storm.
What Is Financial Technology?
Fintech is a broad spectrum of technologies, including everything from mobile banking and advancements in how consumers pay, to newer more radical ideas such as Peer to peer lending and cryptocurrencies which rely less on the frameworks of more traditional financial institutions.
So many different aspects of our daily lives are now aided and even improved by technology, but finance has arguably not, stubbornly dragging its feet, relying on often archaic methods as the rest of the world rapidly progresses. It is this thinking that has made financial technology an attractive prospect for investors.
What about the banks?
It will come as no surprise to anyone, but banks spend a large amount of money on technology every year. Recently, research firm Celent released forecasts that banks in North America, Europe and Asia-Pacific will spend a huge $196.7 billion on technology in 2015, an increase of $188.1 billion on last year.
You’d think with such staggering amounts of money that the banks would be leading what is being dubbed as the “financial technology revolution” but the research found that only a small amount of that investment goes towards developing new technology.
Celent predict that only 24.6% of the money goes towards new investments, with $148.3 billion going towards maintenance of existing systems.
Who are the competition?
Financial technology looks to improve how consumers use money, encompassing all products currently offered by traditional financial institutions: from how we pay, to how we transfer money and how we lend.
Mobile wallets are not as new as many think. Paypal’s app has been available for years, Starbucks have been offering payment via their app since 2012 and Android phones have offered the ability to pay via NFC & Google wallet since 2011. It is only since the launch of Apple Pay that people have started to pay serious attention to payments via mobile and merchants have woken up to the idea of allowing mobile payments in their shops.
Hot on the heels of Apple, this month Google announced Android pay their product set to compete with Apple Pay and Samsung pay, a product produced In collaboration between themselves and Mastercard.
Unlike Apple Pay, Google pay is more open source and allows developers to build payments directly into their apps, rather than serving as a stand-alone application.
Although the mobile wallet war is already looking saturated, it would come as no surprise to see start ups developing their own wallets and with the high profile examples already gaining traction, investors will likely jump immediately on board.
The transferring of money is big business! In recent years the market has hit record highs and officially recorded remittances are in excess of $500 billion according to data from the World Bank. Traditionally, remittances are offered by banks or 3rd parties such as Western Union, often with large fees attached. These companies now face increasing competition from new challengers offering more seamless and affordable options.
Transfer Wire a company set to revolutionise the way money is transferred overseas have already garnered plenty of investment support from Venture Capitalist heavyweights, such as Valar Ventures and TAG. But their greatest (and most PR friendly) achievement came from the addition of Richard Branson to their list of investors. Overall, Transfer Wise capped off a successful round of investment with $25million (USD). The company’s success story is a perfect example of what we’re seeing in the relationship between Venture Capitalists and financial tech lately: a key process in how we handle money is being completely overhauled in a way none thought possible, attracting the attention of the public (who are often saving time and money), which motivates investors keen to support progress.
Cryptocurrencies, the Elephant in the room, the emerging technology that encompasses a broad spectrum of financial services and can offer solutions and serve as a competitor for both mobile wallets and remittance companies.
After a year of declining prices and sentiment due to regulatory concerns and high profile attacks on exchanges, companies utilising the disruptive technology still attract large rounds from VC firms hungry to invest in the emerging technology. This year alone there has been over $275 million invested in companies offering products related to Bitcoin bringing the total to over $667 million since 2012 according to Coindesk.com
Last week, 21inc a secretive start up emerged from stealth, announcing they had raised $116 million in funding, the largest amount currently raised in one round by a Bitcoin company, second to Coinbase who piqued the interest of venture capitalists earlier this year, which saw a surprising investment made by the New York Stock Exchange bringing the total raised by the company to $106 million.
With regulatory frameworks rolling out during 2015 and the launch of several publicly traded funds due to go live before the end of the year, the Bitcoin industry could easily see over half a billion dollars invested before the year is out.
So far, it seems almost guaranteed that FinTech’s good luck is set to continue into 2015, though the best way to measure whether or not this is true will come later on in the year.
Ebay & Paypal’s separation is planned for this year, with their highly anticipated public offering due to happen at some point during 2015. All eyes in the investment and technology worlds will be firmly on how PayPal performance, as their success will indicate how much support is being put behind digital financial solutions.
If 2014’s show of support for start-ups is anything to go by, an established and trusted company such as PayPal can be confident in its decision.