Wednesday, December 6, 2017

Fintech moves beyond lending

Leading financial institutions are finding they need to rethink their strategy in the age of Fintech.
For example, the profitability of one of the world’s leading investment banks, Goldman Sachs, has declined since the crisis of 2008. Its stock market value today has a ‘price-to-book’ value of 1.1 times. This means its shares are worth 10% more than its net assets.
While this is much stronger than most global banks, it’s not great when compared with the market’s view of disruptive start-ups like Lending Club. This was one of the first peer-to-peer and alternative online investment services. Even though its group share price is less than its 2015 heyday, in 2017 it’s relatively more valuable than Goldman Sachs, with a price-to-book multiple of 2.6 times.
From bank to online lender
This has been the prompt for Goldman Sachs to begin rebranding itself as a technology group and online lender, not a traditional investment bank. Its CEO has referred to Goldman Sachs as ‘a technology company with a bank attached’ for a couple of years. Is this justified? To some degree, as it has invested huge amounts in IT and most of its trading does rely on algorithms.
In September this year, the investment giant has made it clear that it sees its future in Fintech, with the expansion of its internet-based consumer lender and deposit taker into the UK. This was launched in the US in 2016 – a clear move from bank to Fintech.
Fintech market maturing
However, only $1 billion of Goldman Sach’s $1 trillion balance sheet has been put into online lending. And even this could be seen as past its prime already, as online lending is increasingly seen as old hat in the Fintech world.
The Financial Times is running the second annual Future of Fintech awards later this year. While in 2016, online peer to peer lending engines were in the majority, this year entrants show a clear shift away from this and into more sophisticated areas of Fintech.
Regtech is fast growing
One of the fastest growing areas of Fintech is ‘Regtech’. Within this there are subdivisions. For example, the increasing need to carry out data checks and Know Your Customer (KYC) checks in order to comply with regulations within the financial sector, means the cost is rising.
A lot of banks think that the high cost of every bank having to do this work justifies setting up an industry-wide service that could do the checks on their behalf.
Marketing research
One of the companies entered into the Future of Fintech Innovation award this year is RSECHXchange. Its’ one of many research marketplaces that have been developed due to the updated Markets in Financial Instruments Directive.
These rules govern certain activities within the financial sector across the European Union, including the way equity analysts are allowed to market their research to clients. This has led to the emergence of new business models. Companies like RSRCHXchange are selling a simplified, clearly defined way of accessing multiple research sources.
Compliance is booming
Following the 2008 financial crisis, and the evidence of mis-selling and market manipulation that came in its wake, much has been done to tackle the apparent lack of control within major banks.
This has meant rapid and extensive expansion across compliance. This in turn has led to a rise in tools for staff to carry out the due diligence, checks and research necessary to comply with regulations.
In particular, KYC checks were found to be insufficient at banks like HSBC, which was hit by multi-billion dollar fines by regulators in the US. While banks may want an industry-wide facility to sort out KYC for them, regulatory concerns have so far rendered this unlikely.
This has led to a gap in the market for Regtech services, as has the tougher regulatory needs relating to recording of communications. This is another area that is being tackled by Regtech start-ups.
Of course, e-lending is still a focus for Fintech, and something that more and more major banks will embrace. The future is definitely interesting!
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