It has been a fascinating 48 hours in Madrid at Moneyconf, the global gathering for fintech start-ups, innovative institutions and investors. With more than 1,000 people attending, the conference brought together those leading some of the greatest disruption seen today in the financial services sector – from mobile payments to agile investment, AI-driven security to crowd sourced funding.
The Investor Outlook
Listening to a variety of VCs and funding platforms, the overriding theme was recognition of the maturity of the space. It is clear investors no longer consider fintech as an outlier class, but instead are committing to the sector as a source of lasting, long-term return.
This confidence is mirrored by the trend for the first generation of fintech entrepreneurs to return and ‘reinvest’ in the start-up space. In the last year, this has brought both a new wave of capital but also expertise and insight that is driving many start-ups through early growth stages. It also places a spotlight on the importance of having a personal relationship with an investor so they truly become a partner involved over a period of time rather than having limited involvement at defined stages. Where the average gestation of a fintech start up is eight years to profit, taking a long-term view of the mutual benefits of working together will be vital for investor and company alike.
A New World Of Open Banking
Many of the discussions at Moneyconf focussed on PSD2 and the introduction of API standards to transform how people bank in the UK. The regulation will effectively open up the customer data that banks typically hold and is set to bring nothing less than a revolution in the relationship between customers and money. One of the new wave of entrants is Starling Bank which has reconfigured their entire system around open API in order to create a platform that will stay ahead of consumer needs. From Starling Bank to Alipay, BanQ to Checkout.com the sheer number of new payment transaction and processing start-ups at Moneyconf demonstrates the potential of PSD2. The challenge for the sector will be to ensure this new wave of innovation brings benefit not only by improving existing process but to all consumers by improving access to finance.
The Resilience Of P2P Lending
One of the poster children for fintech is the P2P lending sector which more than any other illustrates the scale of transformation possible from applying technology. Despite scepticism from industry, P2P lending boomed after the EU Referendum vote in the UK and into 2017, with the sector proving highly resilient to wider economic and political uncertainty.
Typically, P2P lenders operate by developing a platform that connects investors of every scale to SME businesses or individuals directly. In contrast to a bank, there is no requirement for a balance sheet or reserve because capital is simply matched to need. This enables, for example, Funding Circle in the UK to target distributing £2bn in funding this year with the seven-year-old platform lending more to SMEs last year than the UK’s top 20 banks while returning average 6.5-7% to investors.
In many ways, the comparison with banks is unfair with truly P2P lenders more akin to exchange or asset managers. Recognising this distinction, and also the efficiency of the funding model, could open up the potential for banks and P2P lenders to partner rather than compete as seen at Funding Circle with the UK Business Bank using the platform to lend £100mn to SMEs. This supports the insight of our recent white paper ‘Purpose vs Disruption’ and view at Teamspirit that the next stage for fintech will be driven by collaboration between start-ups and heritage providers to the benefit of both.
As a temperature check on the sector, Moneyconf reinforces that fintech is in rude health. The confidence of investors and start-ups alike indicates there is far more innovation to come which will in turn prompt further disruption in financial services as a whole. For this to bring lasting benefit, key will be ensuring that the customer, their needs and aspirations, is at the heart of this innovation.