The following day its share price rose over 50 per cent. It was the largest US technology sector initial public offering of 2014, and the first IPO of a new kind of technology firm: the ‘FinTech’ start-up.
According to Accenture, in 2013 UK investment in FinTechrose from $264m to $623m in 2014. These eye-watering figures illustrate the scale of the sector’s growth within ashort time. But what exactly is FinTech, and is it really new?
Financial technology is the application of digital technology to financial services; typically, it involves software, platforms, hardware and other systems. While technology firms, such as Infosys, Fiserv and NCR have been serving the financial services industry for decades, the term ‘FinTech’ tends to refer to relatively new companies that have grown from small start-ups over the last five to ten years.
With new and disruptive, business models, I believe they bring a healthy challenge to incumbent technology providers. Their dauntless approach and nimble thinking gives them Competitor Advantage. Examples of this include wider revenue sources and flexible revenue models (such as monetising data), whilst traditional players still relyon cost-per-transaction and licence fee models.
Where traditional financial technology firms tend to deliver large scale infrastructure, FinTech start-ups often provideancillary services, for example: platforms, payments, analytics and software. The current crop ranges from Zopa (peer-to-peer lender) and WorldRemit (global cash transfer) to Nutmeg (mass market investment platform) and Crowdcube (equity crowdsourcing platform).
FinTech growth is inextricably linked with other burgeoning areas: social media, analytics, Big Data, responsive technology. This wave of technological change has also brought a new breed of consumers.
They are more savvy (shopping around online); more discerning (particularly regarding customer services, with Twitter as their new weapon) and better informed. Furthermore, their expectations are higher than ever before; their purchasing habits are more active; and, due to the sheer volume of information at their fingertips, their decision-making is more astute than any generation before them. They have an army of FinTech firms helping them.
Sector-specific challenges can sometimes slow the speed at which financial institutions meet consumers’ expectations. The insurance sector, for example, is grappling with legacy systems and an ever-evolving regulatory landscape. But I am cheered by the positive energy which FinTech firms are introducing. Ironically, this often referred to as “disruptive” which has negative connotations. I encourage my sector to embrace FinTech’s new business models, original technologies and fresh ways of working.
They are certainly giving providers and brokers a healthy run for their money. For example, those offering financial intermediation services are operating in direct competition with both providers and brokers. Interestingly, providers are reacting in a number of ways: HSBC, Bank of Ireland and Visa recently launched incubators and venture capital funds aimed at nurturing FinTech start-ups. Meanwhile, others – such as Barclays and Santander - are rolling up their sleevesto get directly involved, either through acquisition, partnering or incubation.
It’s easy to say the insurance industry must embrace emerging FinTech offerings, and assess how they’ll improve our business, rather than react to them as a threat. But the truth is, although embracing new business practices is often scary and can be expensive, it’s impossible to avoid. The key to dealing with ‘disruptive’ market change is adaptation.
Insurance brokers have the opportunity to capitalise on FinTech through partnering - as many large providers are doing. Being clear about their proposition and its value in the New FinTech World is crucial. Adaption is vital if the broker’s offer is to compete against the agile transactional nature of many FinTech offerings.
Royal London, founded in 1861, is in the midst of this shift. I won’t lie, it’s complicated. But our business is adapting with help from some real game-changing FinTech companies who are making it a heck of a lot easier. The re-insurer backed start-up UnderwriteMe, is one example of a firm we have partnered with.
We were among the first UK providers to start using this platform, which lets advisers and customers compare costs from a range of insurers - from quote to buy in a single process. The insurer retains its own underwriting rules and product differentiation, while advisers selling and consumers buying protection enjoy a simple end-to-end experience. By setting expectations of prices and underwriting decisions up-front, UnderwriteMe has significantly improved the customer journey – for both advisers and their clients.
It’s hard to argue the arrival of FinTech hasn’t affected how providers and brokers operate. It’s affected everyone everywhere – on a vast global scale, from giant corporations to micro businesses.
The insurance market isn’t known for its nimble thinking, but I can already see how our current business models and ways of working are changing. Royal London is in the middle of reinventing itself, and as part of this process, we are looking to take advantage of the diversity FinTech offers. Quite frankly, it’s essential if we are to continue to successfully serve our customers today and in the future.
