Follow the Money: The Rise of Mobile Technology
Momentum Public Relations
The phrase “follow the money” has been used to suggest that finding the truth behind a political scandal can be achieved by investigating a series of financial transactions that will point directly to the main perpetrators. However, this phrase can have a much more positive connotation. If investors are seeking a good bet (and who isn’t) following the money often leads to opportunities for superior returns. Financial technology, or fintech, is an opportunity that needs to be explored in 2016.
Business segments that are profitable are frequently suitable targets for disruptive startups. This situation is most certainly the case in the Canadian financial sector. The major players are justifiably proud of their heritage, stability, and profitability. The worldwide financial crisis of 2008 was barely a blip on the radar screen of Canada’s financial institutions. They did not suffer a liquidity crisis. Profits soared again post-2009. The major Canadian banks recorded net profits 31.7 billion dollars in 2014, a slight increase from the total of 29.2 billion in 2013. The trend continued in 2015.
So why are the big banks, and a wide variety of other related financial services companies, preparing for waves of technology based disruption in 2016 and beyond? Simply stated, their profitability and relatively stable position exist in combination with an absence of agility. Large legacy companies have a hard time becoming agile despite rousing speeches from the C-suite. The opportunity for startups that bring new technological approaches to financial management is enormous because the potential audience is large. The early adopting customers alone, 2-3% of the market, can generate revenue and profits that are too large to be ignored. Groundbreaking financial technologies are increasingly robust, and they are beginning to change the expectations and demands of consumers. Consequently, there is a high degree of likelihood that the entire sector is about to undergo a redefinition. Smart investors will follow the money and profit from the disruption!
Several emerging realities are at the core of the revolution in financial technology. There is an abundance of startups challenging the accepted norms of this highly regulated and traditional industry. The threat of disruptive entrants is forcing cautious organizations like banks and insurance companies to change or adapt their processes at a speed that may prove to be uncomfortable. Additionally, these startups are creating new products and services that are defining new market spaces.
Expect two significant financial technology trends to dominate the conversation in 2016. They include the need for increased data security coupled with a rise of mobile technology. Both trends have significant implications for the financial sector given that mobile transactions, while still nascent, are likely to grow exponentially over the next five years.
Entrepreneurs and investors have been quick to seize on this movement. Markets like Japan and Korea provide some early indications of how the field may sort itself out. Yes, the first wave of adoption has been dominated by the under 30-year-old cohort, but this is just the beginning of the wave. The fact is that over 2/3 of smart phone users have more than one shopping app on their device. However, there is a perception that using them is either a hassle or potentially not secure. Soon everyone’s grandma will use these apps along with a digital wallet. The challenge, for the moment, is to ensure that this technological change is easy to use and 100% secure. Most experts contend that the development of blockchain is a seminal event that will have broad implications for both challenges in managing mobile transactions. It has certainly grabbed the headlines and is celebrated as the functional dimension that makes Bitcoin usage possible. However, the Bitcoin phenomenon is likely more sizzle than steak. The real opportunity for blockchain lies in its potential to transform the way all financial transactions occur.
What is “a blockchain”? It is just a record, or ledger, of digital events. It is openly shared among many different parties and can only be updated by consensus of a majority of the participants in the system. And when data or information has been entered it can never be erased. It makes data manipulation and transactional fraud close to impossible because of the disparate and shared nature of the data. The result of secure transactions is that they lead to improved functionality and drive more usage. If the process is totally secure and incredibly easy why not use it?
Increasingly, everything is connected, and every connected device is becoming a commercial device. This connectedness is setting up an opportunity to develop superior tools to protect and secure the information that is being sent and stored. Financial institutions have historically been reluctant to make process changes because of legitimate security concerns and a variety of regulatory imperatives. Many of the things that look like changes have merely involved automating long-standing manual processes. Blockchain could change the paradigm completely. Once it is fully commercialized, it will provide opportunities to the financial sector. Startups are embracing this technology. They are seeking to invade traditional markets by offering new options and services that banks have been hesitant to embrace.
Several innovative fintech start-ups have been trumpeting marketing messages that threaten the existence of traditional banks. However, many of them are relying heavily on underlying infrastructure that banks provide to conduct their business. Some are beginning to operate as banks themselves and are free of dependency on other players. Building independent structures is a slow and expensive process, but the potential rewards may justify the strategic risk. In the meantime, the big banks are sending signals of “willingness to partner” with startups that have begun to carve into their traditional territory with new innovative products and services.
How does this impact the savvy investor? Just follow the money! The most likely scenario for many disruptive startups in fintech is that success and growth will result in an opportunity for their shareholders to cash out by being acquired and merged into the operations of existing financial institutions. Yes, there will be some fintech startups that won’t make it, and there will be some that emerge as stable standalone businesses. 2016 looks to be a watershed year in fintech – one to watch carefully for sure.