Biggest developments in fintech in 2016
To get to grips with one of the 21st century’s biggest changes in digital – especially in regards to finance and investment – is no easy task for any business. Startups, SMEs and even multi-national corporations have discovered that it (literally) pays to explore these new methods of acquiring business and boosting revenue.
One of the spaces that these innovators have been paying particular attention to is financial technology, or ‘fintech’. An area that has seen significant expansion with no signs of slowing down, fintech is transforming banking as we know it – bringing it firmly into the digital arena where we increasingly spend more of our time. Here, representatives from international law firm Bird & Bird help break down the key trends in fintech for 2016.
New businesses in particular have enjoyed fintech’s recent boom, especially those dealing with large swathes of customers and – in turn – large amounts of buying and behavioural data. This and its uses have become known as ‘Big Data’, an area of fintech that has an astonishing value for businesses. Treena Dunlea-Peatross, an associate at Bird & Bird sees big data as “…using structured and unstructured data in innovative ways to promote efficiency, productivity and to develop new product offerings in a more meaningful way.”
Big data’s use does vary from businesses to business, especially when it comes to product offerings and company size.
“Incumbents in financial services deal with huge amounts of data on a daily basis,” she says. “However they are often encumbered with legacy systems or are unaware of the data available to them because of the sheer size of their organisations and breath of product offerings.” But what if the product offering was smaller or more streamlined, such as that from a startup?
“Startups, on the other hand, tend to be more nimble and more focused on a particular market segment or a particular service solution. Combining that focus with big data can be powerful.”
However big data isn’t a magic cure. “It’s a useful tool to help manage a business and promote revenue growth” says Dunlea-Peatross. “However, it will not do this in isolation. Innovation, good management practices and a compliant approach to business matter.” Considering objectives and legal requirements is vital in helping a business navigate big data.
Another area of fintech that has risen to prominence in recent years – again, in the startup arena – is crowdfunding. A word often synonymous with digital startups and new businesses, crowdfunding offers a new and significantly less stringent way of accessing capital, especially when compared against approaching a handful of investors. Simply, crowdfunding is a method of sourcing investment – usually through a digital platform – through small amounts of money from a large number of people.
Interestingly, crowdfunding can also be used as an effective ground-level market research tool. “It is a better proof of concept to boast 1,000 investors for any amount of funding, as opposed to a few investors for the same amount”, explains Ali Ramadan, a partner at Bird & Bird, although crowdfunding’s benefit predominantly lies within access to capital.
“It’s another example of disruptive technology changing the status quo in equity and financial services when it comes to access to capital”, he explains. “One of the main reasons we are seeing business turn to crowdfunding is because of the potential to raise funds quickly and with less stringent terms than those which may be imposed by investors outside of a platform”.
But why does it only seem to lend to those in the digital sector, rather than all businesses? Primarily, because it’s a digital product itself, that by its nature – and on the investor or crowd-member’s level – one that can yield great rewards, even with little input. “Crowdfunding itself is an example of a disruptive business model based on digital, so it naturally appeals to new businesses in the digital sector”, clarifies Ramadan. “Digital businesses are also more risky, in that they do not necessarily have any assets and – in most cases – are playing in unchartered territory…platforms lend themselves to new digital businesses because they allow them access to many investors, who may have a greater risk appetite because they can invest small amounts.”
In fact, Bird & Bird assisted Crowdcube in becoming the UK’s biggest crowdfunding platform, helping secure £6 million in investment and accelerating its growth further.
Perhaps one of the more recognisable terms in recent years, ‘The Cloud’ is an umbrella term for wireless IT services (such as storage and transferring) that help a business save time, space and, crucially, money.
“The cloud is ultimately about renting rather than owning IT services – and accessing those services through an internet connection rather than needing servers on your premises”, explains Barry Jennings, a Legal Director at Bird & Bird – who has advised and helped clients (such as the UK government) get to grips with emerging IT models and innovative and transformative solutions. “Cloud started primarily as a cost-saving tool, but companies increasingly use it to provide services to their global and mobile workforces across a range of devices. It is also seen as a good way to get best-of-breed technologies with state-of-the-art security, resilience and efficiency.”
Like big data – and as Jennings stresses – the cloud won’t solve every issue that a business can face, especially when it comes to technology. “The ability to scale up and scale down services when needed is important to companies facing increasingly uncertain futures and de-risks innovation…without heavy capex investment, [but] it is not the right answer for every problem, because of the trade-offs on risk and control that are involved.”
However, tech startups in particular have felt the benefit of cloud services, as the service is comfortable with scaling up (or, indeed down) according to the business it’s serving and its current state. “It removes one of the big barriers to market entry by removing the need for upfront capital expenditure and it allows more flexibility for growth, as the cloud services can be readily scaled up as the company grows without requiring a disruptive technology refresh project”, says Jennings. Of course, this flexible functionality lends itself perfectly to businesses venturing into “the internet of things” – the data-filled network of physical devices, vehicles, buildings and more – and will almost certainly help “support communications for things like driverless cars”, he says.
Of course, with new technologies in finance comes new ways to pay for goods and services. In particular, the online currency Bitcoin is seeing a surge in online payments within closed communities says Trystan Tether, Partner and Joint Head of Financial Services at Bird & Bird. “A number of companies are working on forms of electronic currency, particularly ones which involve encryption and distributed ledger technology such as Bitcoin”, he explains, although its wider use – beyond closed online communities, at least – is still to come. “The widespread use of this type of technology to make normal daily payments is probably a fair way away, but its use within closed communities – based on what’s called a “permissioned blockchain” – is likely to be much quicker.”
Emerging sectors in fintech mean startups are enjoying new ways to manage finance instead of looking to the banks, too. “In the field of international money remittances, startups are taking on the banks in this niche market, where the banks are perceived to be expensive and slow”, Tether explains on how startups are flocking to newer providers. “We’re seeing new providers in the merchant-acquiring space – such as Square and Stripe – who claim to provide a better service to merchants, particularly small or entirely online merchants, than traditional providers”.
It’s working with these fintech startups that can help existing providers, delivering an “innovative thinking and a can-do mentality, which can rise above the in-built caution, legacy systems and legacy attitudes of those existing providers”, says Tether. More specifically, these thought-leading fintech companies help expose areas where banks (or traditional providers) may be under-delivering. “They [fintech companies] expose the areas where banks’ provision of services has become complacent and insufficiently innovative, acting as a powerful incentive to change and put the consumer first.”
Few others have such knowledge on this emerging shift in technology and Bird & Bird can navigate the legal constraints when it comes to all of these areas (and more) as businesses look to ward off competition, and challenge perceptions of their industry when tackling financial change. Similarly, Bird & Bird assists customers and suppliers in all levels of transactions and in gaining capital, while also helping new and established businesses navigate the often complicated and emerging areas of fintech, where there can be innumerable avenues to explore.
Put simply, if there’s a question about fintech, startups, crowdfunding, big data, payment innovation, the cloud, or anything inbetween, Bird & Bird – and its thought-leading team – will surely have the answer.