By Yann Ranchere, Partner at Anthemis Group, the leading digital financial services investment and advisory firm
2016 will prove to be a pivotal year for financial services. In many ways, we are coming to the end of the most significant financial crisis since 1929. While banks are still experiencing the effects of the crisis, notably through restrictive regulation and a continuing string of financial scandals, their public messaging is one of innovation and change. For the raft of new players in financial services, the funding environment has never been as good, and some striking successes are showing the way forward. A new wave of technology, from blockchain to AI and omnipresent sensors, is shaping a brave new world.
The evolution of the bank
2016 will see a strong competition in the pure banking arena. In Europe especially, a crop of new banks and alternative banks will push strongly into the market. European digital banks such as Fidor are expanding beyond their core market. The UK regulator’s move to lower the barriers to entry for new banks will be capitalised on by players such as Atom Bank, Tandem and others, establishing themselves as new, customer-centric brand for customers. Alternative solutions based on prepaid born in various European countries are also expanding beyond borders, with SEPA as a core foundation to propose bank-like services. With PSD2 also looming, traditional banks have the an added incentive to expand more easily and collaborate with startups.
What about the alternative lenders, roboadvisors and other digital financial services players? Having spent the last few years building trusted brands and consolidating customer bases, they will most likely start leveraging their footprints to expand horizontally into other markets, whether collaboratively or by launching their own services. For example, blended remittance and multi-currency current accounts are highly complementary services for clients with attachments to multiple countries. This collaboration between emerging players will most likely extend beyond end customers, towards balance sheet management, especially for emerging banks looking at matching assets to their new found deposits.
Looking beyond the capital markets context, the developing world is increasingly interconnected thanks to expansive diasporas and large economic regions. The winning arena for these markets in the coming decades appear to be the messaging platforms. Wechat, Line, Facebook Messenger and WhatsApp are all showing significant growth, engagement and increasingly, financial services integration. 2016 may be the year where we will see Facebook becoming more integrated with financial services, leading with a seamless blending of messaging, commerce and payments first, and potentially P2P transactions next.
If 2015 was the awakening of the entrepreneurs, investors and incumbents to the potential disruption of insurance by digitally native players, 2016 may well be the year a few powerful, game-changing challengers start to gain real traction. Most of the investment and company creation to date has focused on making distribution more digital, with two main trends: the modernization of broker-first markets, such as the German or Swiss markets (following the UK market), where digital acquisition is seen as a cost efficient, scalable way to attract customers; and the reorganization of health insurance in the U.S. market, following implementation of the Affordable Care Act. What perhaps is more interesting is the next wave of startups looking to challenge the core business models of insurance companies, an early example of which is Oscar. These new players are leveraging lower costs, scalable infrastructure and (sometimes) mutual insurance mechanisms. Increasingly, a smart use of the full insurance stack including innovative insurance companies and nimble reinsurance players will allow new entrants to succeed at lower scale. Another trend that will shape 2016 in the insurance space is the shift from insuring people for their things to insuring things for people. This will be driven be in part by the increasing importance of the internet of things, and the fact that objects are blending more and more with the underlying services they provide.
Blockchain and smart contracts
2014 was seemingly the year of Bitcoin, with its pricing topping above $1,000. 2015 was the year of the momentum and buzz shifting from alternative currencies to infrastructure. 2016 will be the year of blockchains as infrastructure for smart contracts. Financial services use cases in clearing and settlement will continue to dominate the headlines in 2016, with an increasing number of pilots and low scale production releases. Financial services are multi-party by definition: they are a prime market for decentralized, trusted software. But the use cases go well beyond pure transactional financial services, and the coming year will see an increase in large scale, multi-party projects that can benefit from a smart contract infrastructure. And let’s not forget the elephant in the room: our civil infrastructure needs to reinvent itself for the digital age.
Look out for…
Finally, taking a longer view, two complementary trends will also emerge in 2016: artificial Intelligence and omnipresent data. Financial services’ core functions are based on managing scarcity and information asymmetry. With the amount of data increasing at high speed, notably through widespread, cheaper and more detailed sensors and the capability to process it progressing in parallel through the use of machine intelligence, the core market of financial services will be dramatically affected.
We are already seeing the early signs of this revolution. Several hedge fund investment committees now include algorithms as members to provide that vital, non-emotional voice to the decision making process. Algorithms for example, understand retail customers’ financial patterns and can therefore set aside money in savings accounts or investment vehicles. To take application a step further, in health insurance for example, quantified self data collated from wearable technology is being leveraged to shape better outcomes for both customer and insurer. New economic data is increasingly readily available, whether it is leveraging users with smartphones to obtain on the ground detailed information on the price of certain goods or analyzing satellite data to derive agricultural output of fields.
Perhaps the autonomous car is the perfect metaphor for it: what is the insurance market for a sensor-full, crash-avoiding vehicle? And similarly, what new markets will this create for financial services?