What’s the difference between a FinTech and a TechFin? Is there even a clear distinction, or is it one of those “you know it when you see it” situations? Fintechs have been with us for some time – the upstart challengers taking technology and applying it in novel ways to existing financial services use cases, to create cloud-based, scalable and customer-centric digital banks, for example. Or applying technology to the thorny challenges of post-trade derivatives processing, eliminating the need for many post-trade processes such as reconciliations, and enabling more efficient and streamlined regulatory reporting, using distributed ledger technology (DLT) -based solutions. In order to execute their strategies, many Fintechs require regulatory authorisation and oversight. Yes, their aim is transformation – but of a fairly modest nature, taking the financial system that we have now and making it better, faster, cheaper and more efficient.
TechFins, on the other hand, are a different beast altogether. Tech giants such as Google, Apple, Facebook and Amazon (collectively known as GAFA) have little direct interest in becoming financial institutions themselves. Indeed, regulatory authorisation and oversight are something of an unwanted overhead, to them, ideally delegated to those best suited to dealing with regulators and their inconvenient demands around prudential capital requirements and investor protection. Their driver, instead, is the seamless incorporation of financial services into their commercial offerings. Take Amazon, for example. If you want users to stay in your app for as long as possible, then it makes sense to take control of their full end to end user experience, including payments. For Google, where consumer data IS the product, the goal is to collect as much of the stuff as possible – and introducing financial products furthers that goal by adding a rich seam of consumer financial data to the massive quantities of user account, search, location and other data already available.
Facebook’s announcement of the Libra coin and payments system, in June 2019, epitomised this attitude towards the role of financial services. A reasonable idea on paper, with a strong commercial case – introducing a fully digital, frictionless payments system to Facebook users that could transform the way they used the platform – it also seemingly and surprisingly failed to consider the regulatory impacts of its proposal. The concept went further though; Libra coins could also be used for payments, outside the Facebook platform, creating a privately operated payments network completely outside the existing global payments technology and regulatory architecture, with an initial base of 2.7 billion potential users. Facebook probably didn’t mean to trigger to current massive international regulatory focus on stablecoins, or the eye of every central bank worth its salt turning towards exploration of central bank digital currency (CBDC), but that’s exactly what it did.
Internalise the financial product in the wider commercial product, and you create a seamless experience for platform users in which they need never leave your platform or its ecosystem. Want to buy a new sofa on Amazon? Use their lending facility to gain access to credit without ever visiting a bank or credit card website. The possibilities are endless, for the imaginative and ambitious TechFin (and no-one can accuse them of lacking in either of those departments): mortgages, savings, pensions and investments… When integrated into a TechFin’s product suite, all of these can also be offered up on a customised basis to individuals based on their search profiles (sustainable investment products for those reading up on climate change), or their spending habits (a busy month on ApplePay might lead to the offer of short term credit)… Again, the list goes on.
We’ve referenced GAFA extensively, yet the best examples of highly successful TechFins come from further afield. China has proven to be a fertile ground for firms such as Alibaba and Tencent. The latter two did not intend for their in-built payments infrastructure to compete with banks; their primary goal was to increase the “stickiness” factor of their platforms, much like Amazon’s motivations. As Alibaba’s Alipay platform grew and was eventually rebranded as Ant, it also began to explore the introduction of additional financial products in the Alibaba platform and ecosystem. Ant Financial’s model was all about distribution of existing financial products through a single platform, rather than developing its own suite of regulated products.
What does this mean for existing players in the market – incumbents such as banks, fund managers, payment service providers and of course, the FinTechs? It’s too early to tell whether there will be any immediate or lasting impacts on wholesale and retail market structures. What is becoming evident, however, is the dependency that many TechFins have on incumbents when it comes to regulatory cover, product structure and of course balance sheets. Sure, the TechFins have piles of cash available, but these are fairly useless when it comes to providing financial services unless they’re residing on the balance sheet of a heavily regulated entity. And for the TechFins, this inconvenient function is best served by the incumbents. This is why many rely on banks to provide the core payments and credit infrastructure and products which they then white-label for their own purposes.
Nevertheless, the TechFins are creating huge transformational potential, for the way in which consumers understand and access financial services. By not only embedding them in processes but also making them more directly relevant to consumers and their interests, they’re creating new channels and use cases for consumption of financial products. They are also driving demand for greater innovation in financial products (the mechanics of which may be provided by the Fintechs and incumbents), to address new consumer use cases. And finally, some of the interactions between technology and finance may drive systemic change in ways we can’t yet anticipate, much like Facebook and Libra.