The financial crisis and ensuing recession altered large parts of the global economy and sparked innovation in many industry sectors. But one area where innovation is conspicuous by its absence is in the very sector responsible for causing the crisis – the banking sector itself.
Many commentators expected the opposite. They thought the crisis would spark not only much-needed reform within banks and other financial institutions, but also innovation. The reality, however, has been quite different.
No new ideas of note have been created within banks in recent years and surprisingly few people have left their jobs within the financial sector to launch start-ups. While innovation has never been a strong suit of financial institutions, the recent nadir has nevertheless been surprising. It has been left to the Fintech sector to fill the void in innovation.
The lack of innovation within banks can largely be explained by the archaic regulations that plague the sector. A myriad of rules make the barrier to entry for new products and start-ups frustratingly high, and scare off would be innovators. This is in contrast to other major industry segments such as marketing and commerce that are arguably over-serviced by start-ups.
While this may sound like a very negative assessment of the sector, it actually means that there are plenty of opportunities for Fintech start-ups to exploit.
There are aspects of the banking sector that are beginning to be disrupted and many more which are ripe for disruption. If a start-up manages to navigate their way around the regulations successfully, those regulations then turn into a barrier which protects them from competition. This barrier then provides a Fintech start-up with vital breathing space to refine its offering and secure financial rewards without competitors snapping at its heels.
The breadth of expertise within banking also provides plenty of talent for start-ups to poach. Many of the UK’s most talented mathematical and scientific minds populate the financial sector. These sought after skills, coupled with real world experience of the sector, mean that many of the employees within financial institutions are the perfect fit for Fintech start-ups.
For an innovative Fintech product, the rewards are much higher than in other sectors. Banks have plenty of cash to purchase anything interesting or with the capacity to grow and eat into their business.
The above factors are increasingly being recognised by entrepreneurs and investors. The Fintech sector has grown steadily over the past five years from a handful of start-ups into a sector of note. There is also a growing flow of expertise out of the banking industry into Fintech. Hand in hand with this expansion is the changing attitude of consumers. People are now much more interested in new financial products and legacy institutions must evolve accordingly.
As a result, financial institutions are increasingly seeking to improve their operations and offering to consumers and purchasing technology wholesale from Fintech start-ups is the easiest way to do this. Investors have recognised this trend and are now much more willing to invest in the sector.
However, despite this growth, the sector is still relatively immature. Although some M&A has taken place and a few companies have been successfully sold, the numbers are still relatively small, especially when compared to other tech sectors.
The economic revival starting to take root promises to invigorate the Fintech sector with both increased interest and investment. Investors will naturally look to sectors where big exits are possible and given the global nature of Fintech, this makes it a very attractive proposition.
The next few years are likely to be critical for the sector, which will be in its strongest possible position in terms of investment, opportunities and access to talent. If the sector does not flourish, serious questions will need to be asked about whether regulations are so constraining that they need wholesale reform, or if there needs to be a cultural shift in financial institutions which makes them more amenable to accommodating innovative products.
While the financial crisis may not have sparked the explosion of innovation many analysts expected, the rewards on offer for a quality Fintech start-up, coupled with the increased investment the economic recovery will unleash, gives the sector a very healthy prognosis.
Paul Jozefak is managing director and co-founder of innovation laboratory Liquid Labs