Disruptive forces are reshaping the financial services landscape. Fintech and insurtech are at the top of the agenda for many big businesses, but how are they dealing with the pressure from new challengers? And what are the risks as innovative ideas move from the sandbox to the open market?
These were the big questions discussed by a panel of industry leaders at Bond Dickinson's event `Disruptors: from sandbox to stocks?' held at the London Stock Exchange on 3 November.
Chaired by technology broadcaster Rory Cellan-Jones, the event charted a disruptor's journey from concept to fundraising to maturity. It explored the threats and opportunities technological innovation presents to insurers, banks and others, asking how they can partner successfully with start-ups, while staying on the right side of regulation.
From smartphone apps and consumer wearables to claim acceleration tools and online policy handling, insurtech includes a wide range of technologies which are forcing incumbents to rethink how they do business.
Jonathan Drake, partner and insurance specialist at Bond Dickinson, explains that this mature industry is being doubly challenged.
"Insurers have been quite aggressive in looking to invest in fintech, whether it's buying in the expertise or partnering with it," he said. "But the real challenge is that they are not really innovative organisations. They have grown large through legacy acquisitions, they have many different networks, arms and product lines and suddenly nimble new competitors are snapping at their heels. The larger ones are having to reorganise the way they work to face these challenges and understand the risks as well."
Richard Williams, Founder and CIO of Innovatively Digital, noted big insurers are going for scale so they can "absorb the body blows from these disruptors".
Strategic alliances are also forming. Williams gave the example of a project by insurtech startup Neos and established insurer Hiscox to monitor customers' connected homes with app-controlled security cameras, smoke alarms, and moisture sensors. The data can then be used to prevent household incidents occurring. "This kind of thing challenges insurers to think differently," he said. "The insurer proposition is to pay when there is a loss, but this can reduce loss and reduce risk."
Ariel Berman is Vice President at insurance giant AIG. He said his firm has been "taking stages to survive" including launching innovation bootcamps to nurture new ideas, and acquiring technologies by partnering with other firms. For example, AIG has moved a team from the City to London's creative hub, Shoreditch to work with a startup. "We realised some companies can deliver better solutions faster than we can," he said.
Access to funding
A big problem startups face is getting the right financial backing to reach the next stage of growth. Gavin Littlejohn, Chairman of the Financial Data and Technology Association, noted venture capitalists and angel investors are a typical route for early stage fintech funding, but may not be the best option. He argued the industry needs to find more efficient methods of funding and "deeper pools of capital to be able to fund business models where tax issues are not quite as prevalent as in the early stages."
Berman suggested there might be a shift in future from angel investors and VC funds to banks investing in those fintech companies which can make their businesses more efficient. He also raised questions about the amount of money indiscriminately flowing into startups.
"Are we looking at another dotcom bubble? A lot of money is going in to fintech these days," he said "Some of the ideas are great, but many companies with poor products and poor ideas are still getting market share and finance because we are being blighted by the gold rush."
Profitability: The elephant in the room
"Profitability is the elephant in the room in the fintech space," noted Gary Conroy, Managing Director of Realex Payments. He said companies like his face a search for scale in order to attract the attention of larger partners. However, he added it is becoming easier to set up a new business, which is good news for industry competition. "People now have the ability to start new and disruptive businesses more cheaply, easily and quickly," he said.
Martin Cook, UK General Counsel at Funding Circle, added that in the direct lending space, there are businesses which are already profitable and some which are not. Often this will depend on how companies decide to grow and invest, and whether they value future growth or more immediate rewards.
Big Data, trust and consent
One theme which captured our panellists' imagination was the future of `Big Data', and how companies gain consent to use it. Gavin Littlejohn said: "The future is socialism, giving consent for the use of data. Companies that don't get consent will struggle to gain traction, and this will give power back to customers." Underpinning all this is a relationship of trust, something which the industry has struggled to rebuild since the financial crisis.
Martin Cook said reputation is vital to how young companies build trust among customers, and this is something his firm takes very seriously. "Having worked through the credit crisis, one of our key goals is sustainability. We're prudent, we're regulated. Yes, we are high growth, but high growth doesn't necessarily equal high risk.
and regulators have to drive this because banks are almost systemically not designed to innovate from within."
What will financial services look like in 2020?
Richard Williams predicts a closer relationship between insurers and their customers in future, with a greater focus on relevance and trust. He thinks insurers will remember they insure things and people "in the real world", and will harness technology to do that, far beyond in-car telemetrics and wearables.
In the banking space, Mark Mullen tips
roboadvice to gain greater market
share, while technology will put control
of banking back into the hands of
customers. "Fintech has the potential
to shift the focus of control from
manufacturer to customer. That's what
is so fantastically exciting about fintech
it absolutely destroys the universal
banking model and, the sooner it is
A far-sighted regulator
dead, the better off the customer will be."
Mark Mullen, CEO of industry challenger Atom Bank, believes the right regulatory approach will be crucial for innovators, with safe spaces like the FCA's `sandbox' needed to test new ideas.
Nick Page, chairman of Bond Dickinson, noted that for fintech innovation to continue, it will be vital for Financial Services professionals to work together: "We see people at both ends of the spectrum those with new
Atom Bank was recently granted its ideas they want to sell to the big guys,
banking licence, and Mullen has
and the big guys wanting the new
nothing but praise for the regulator.
ideas in order to develop their services.
"The FCA is one of the most far-
Professionals like us can bring those
sighted regulators on the planet. The people together and open up new
direction of travel is pretty encouraging markets for both."