The future of money is changing. The financial services industry is rapidly transforming its value chains and established technologies. 'FinTech' (a term used to describe technology applied to financial services) is the embodiment of this shift. To illustrate how important FinTech is becoming, Accenture reports that global investment in FinTech tripled to $12bn in 2014, with UK and Ireland-based companies taking the lion's share of Europe's FinTech deals.
In this series of articles on FinTech, our Technology team will examine what FinTech is, what is driving the rapid growth of the FinTech sector and how Ireland is making FinTech a priority. We'll also take a look at the legal and business risks that FinTech companies need to be aware of and strategies to mitigate and manage these risks.
What is FinTech?
FinTech is shorthand for 'financial technology' and represents innovation in financial services. It generally encompasses two different types of technology in financial services:
- new and innovative consumer facing financial products; and
- an improvement of existing technology used by financial institutions.
Today, the term 'FinTech' is used inter-changeably to refer to both new products from start-ups and the adoption of new technology by industry incumbents to tackle existing problems.
The NDRC in Dublin believes the term 'FinTech' is now evolving to refer to broader applications of technology "to front-end consumer products, to new entrants competing with existing players, and even to new paradigms such as Bitcoin".
What is driving the rapid growth of FinTech?
The swift digital disruption is, in part, driven by technological innovation and the improved connectivity from mobile devices like tablets and smart phones. In banking, for example, the digital FinTech revolution is radically re-shaping nearly every aspect of the customer experience, from user expectations to a demand for banking options 'on the go'. Customers are becoming accustomed to online and mobile-friendly services, and the rapid advances in technology across Europe and the US have created a widespread requirement for these capabilities to stay competitive. The march towards mobility FinTech is facilitating seems to be unstoppable.
The economic downturn in 2008 was also influential to the rise of FinTech. It forced financial institutions to turn to technology in order to improve the effectiveness and efficiency of their existing processes while at the same time reducing costs. The incumbents who failed to innovate and invest left a gap that more agile online start-ups, such as Ireland's Stripe, now valued at $5bn, and GoCardless, the UK's leading direct debit provider, were only too eager to fill.
While more established players in the market may not have been able to adapt as quickly to a range of new European and local financial regulation introduced in recent years, it has arguably helped more nimble FinTech companies find innovative ways of managing compliance and reducing risk that has propelled their growth.
Broad reach of FinTech
FinTech products are often based on technologies that provide new solutions for existing financial services. These new technologies can be applied to just about anything in the financial services space, including:
- retail banking
- mobile banking
- payments and transactions
- personal financial management (PFM)
- trading and consulting platforms for investments
- digital wallets
- commodities markets
- foreign exchange (FOREX)
- peer-to-peer lending and crowd-funding
- digital and alternative currencies
- financial advisory services
While the technology that operates a FinTech service like CurrencyFair may be different to what runs another such as Bitcoin, the underlying feature linking all FinTech products is the democratisation of finance. In other words, FinTech allows start-ups with lower overheads and adaptable user interfaces to facilitate small businesses and individuals efficiently accessing cheaper finance and payment methods.
Ireland's 2020 FinTech Strategy
In March of this year, the Irish government published its International Financial Services sector's strategy for 2015-2020 (IFS2020). In IFS2020 the Irish government sets out its renewed commitment and support for the sector and seeks to ensure that Ireland's international financial services sector continues to grow.
One of the main objectives of IFS2020 is driving research, innovation and entrepreneurship in the international financial services sector. This priority focuses on both existing financial services firms and FinTech companies. In fact, the Irish government has resolved to increase its emphasis on sourcing domestic and international funding for FinTech companies, with one of its main priorities being to facilitate introductions from investor-ready companies.
FinTech has certainly established a variety of innovative products and services on the market with benefits that are tangible and easy to promote to potential customers. Many FinTech start-ups are hoping their solutions can offer something extra or provide users with the same functionality in a more efficient manner allowing them to corner a segment of the market. Despite this, all FinTech companies will need to understand the common legal and business risks they may encounter, as well as strategies to mitigate these risks. Coming up in our next instalment we will examine:
- how 'big data' analytics can be applied to FinTech in a lawful way
- important data protection and privacy considerations
- how to address security and the threat of cyber-attacks
- what financial services regulation means for FinTech governance
- the implications of consumer law on FinTech
- protection through intellectual property, commercial contracts and licensing arrangements
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