2018 was a remarkable year for FinTech companies, with a record-breaking $39.57 billion in venture capital being raised. As you can see below, global investment activity in the industry continued to grow and resulted in an extraordinary year-end result.
When it comes to exciting industries, FinTech is about as good as it gets.
The constant shift of consumer needs is the main driver of innovation within this rapidly evolving industry.
2018 was a remarkable year for FinTech companies, with a record-breaking $39.57 billion in venture capital being raised.
As you can see below, global investment activity in the industry continued to grow and resulted in an extraordinary year-end result.
The immense amounts of money being invested in the industry led to the birth of 16 FinTech Unicorns (a privately held company with a market valuation of $1 bn+). The global investment activity did not stop at the beginning of the new year, because in 2019 we have already seen the birth of 2 new Unicorns in the first month of Q1. As this industry will continue to grow, it is certainly beneficial to know what will come next. That’s why we’d like to introduce you to some key trends that will define the FinTech industry in 2019.
I believe that we will probably not yet see the end of cash, even though the Netherlands has seen an incremental decrease in the amount of cash money in possession of the banks and an immense shift towards digital money. I think we will see an increase in a variety of ways to pay for our goods. My eye is on the loyalty points of products. Companies like Loylogic make it possible to pay with saved-up loyalty points as an alternative payment method.
Moving on to the blockchain, this will be again an interesting year for the use of cryptocurrencies and Blockchain. Currently, the hype of blockchain-primarily rests on the value/trade aspect of the coins, but the utilization of the coin is becoming bigger and bigger. Bitpay is making a great step towards the utilization of Bitcoin by issuing a debit card in collaboration with VISA. This enables customers to pay with their Bitcoin Wallet in all stores that accept VISA. Besides their utilization, there is the issue of speed. The time it takes to complete a transaction has to improve massively in order to compete within the current payment landscape. As a technology, however, it has its advantages and disadvantages. I just believe that right now, we are still not being critical enough.
FinTech companies will look to head toward more lucrative Megarounds of investments (investment rounds in excess of 100 million). We have seen this last year with companies such as CreditKarma & Stripe and I don’t think we have seen the last of this kind of investment behaviour. Interesting players to keep an eye on this year are the larger incumbent banks. 2018 was an interesting year because many incumbents started to acquire FinTech business, which they haven’t done as aggressively in the past. In 2019 banks will keep investing in their FinTech strategies, together with building this in-house. For FinTech companies who aren’t only focussed on selling at a major profit, it is critical to keep focussing on the pain points of the users and solving these issues. This is the only way to maintain costumer loyalty and ensure future growth. (Source: Bloomberg)
Realtime banking/payments have proved to be an issue for the legacy systems of banks, whilst FinTech startups are more agile and empowered by the latest technology. This, among other factors, will give them a competitive edge over traditional banking institutions. Before Payment Service Directive 2, banks had the exclusive rights to access the payment information of their consumers. Nowadays, with PSD2, third parties can access the banking infrastructure and the data of the consumer. To explain their far-reaching implications, here is a look at the current payments value chain:
When the consumer wants to buy a product from an online merchant, the payment goes through a third party payment provider, such as WorldPay or VISA, both acting as a middle man between bank and merchant. In the new landscape created by PSD2, the merchant is enabled to directly communicate with the bank via PISP’s (Payment Initation Service Providers). Due to these changes, the payment value chain could potentially be altered:
In addition to the new communication between merchant and bank there is another development, the creation of Account Information Service Providers (AISP’s). As discussed above PSD2 makes it possible for third parties to access data from payments infrastructure. AISP’s can consolidate all the payment data of the consumer in such way that consumers gain an overview of all their spending patterns and general financial needs. (Source: Aon)
It is important to note that these changes could only be relevant to the larger players in the industry.
To tap into this opportunity for FinTech it is important to improve security on their services. This is the point where opportunity for Regtech on PSD2 comes in to play.
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Regtech is bringing together three main elements: regulation, data and people, in order to enable firms be compliant. It is technology that brings these elements together in a more machine learning cloud based solution. (Source: insure-tech rising).
Strong authentication is mandatory in the PSD2 landscape. To authenticate a person there needs to be 2 of the following three elements:
- Something the costumer knows: this can include a password, a pincode or the answering of a personal question
- Something the costumer has: a piece of hardware like a phone or a token
- Something the costumer is: this can include fingerprint or face ID
One company that took smart advantage of PSD2 is “Nice”, who are able to do a real-time authentication check over the phone by letting a costumer read out their bank account number and using a smart voice recognition software to approve it.
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This brings me to “know your customer” (KYC) regulations. The phrase KYC might not mean a lot to people, but in the financial business world, this is a significant term. In the process of KYC, businesses verify the identity of their customers. This can happen before or during the time of business. When these procedures were introduced, there weren’t any standards in place. The lack of guidelines has been a deliberate choice due to the assumption that banks would otherwise do the bare minimum to reach those standards. This plan has failed somewhat as banks and financial institutions were not able to implement sufficient KYC and AML (Anti-Money Laundering) practices. On 1 September 2018, Dutch authorities imposed a €900 million fine on ING for a lack of KYC and AML. As a response, the European Central Bank, the European Banking Authority and European Commission took strong action against the current KYC and AML regulations.
A strong KYC process has the following best practices which a financial institution should follow:
- On-board high-value clients during a client-present situation.
- During the initial on-boarding process, ask clients to use multiple ID’s for KYC and AML checks and request these IDs randomly.
- If someone matches as a politically exposed person (PEP), place a higher risk score on that person during on-boarding and while his or her account is active in the institution.
- Perform seamless but random identity checks throughout the lifespan of client accounts.
I think 2019 will be the year we see more and more developments which enable FinTech businesses to secure higher customer loyalty.
As in 2018, the FinTech is looking forward to an exciting year. We imagine seeing a lot of investments, change in currencies and the further development of the RegTech business which will enable the FinTech sector to grow its customer loyalty. But who knows?… Maybe the year will take an unexpected turn.
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PSD2 and Open Banking are transforming the industry. They require the implementation of strong customer authentication (SCA) for online financial activities. Its purpose, along with many other things, is to reduce the risk of fraud and to increase security through additional authentication factors.