In an interesting deviation from conventional thinking, there appear to be more fintech start-ups targeting incumbent financial institutions as buyers of their inventions than there are those who want to become genuine disruptors in the marketplace, according to a senior research analyst with Martin Currie Australia.
Matt Davison, the financial analyst at Martin Currie in Melbourne (formerly Legg Mason), produced a research note last week based on his attendance at the ‘Finovate Spring 2015’ conference, in San Jose, California, in May, which included many demonstrations of the latest financial innovations.
Fintech firms attracted US$12 billion of investment in 2014, up three times on 2013 and ‘Angelist’ industry research suggests start-ups now outnumber banks. Davison says the A$600 billion value of ASX-listed financial companies reflects the excellent returns they earn from the parts and the whole, so a lot is at stake.
He says, in his research note: “The inexorable forces are clear. Successful Fintech innovators are cutting costs and improving service. They can raise the level of transparency and depth of information in financial services and they often come from the ‘start-up’ culture.
“This wave of capital will surely see consumers paying less for financial services, as the nascent P2P sector attests. With capital requirements higher, generating value is going to be tougher for all but the most resilient and agile incumbents and some start-ups will prove excellent investments.
“However, the debate often misses the volume of FinTech capital supporting vendors to incumbents, the desire for a return and the aversion to chasing customers at scale. Hoping to find the next LendingClub at the conference – and there were candidates – I was more struck by the number of start-ups existing to help incumbents remain relevant. For every game-changing potential bank solution, I estimated five B2B aspirants were looking to sell their application into the IT department of banks.
“It follows the ongoing disruption of financial services using technology is profound, but not terminal, to agile players that choose the right ways to keep tapping their customers and embrace the number of helpful innovators. Some comfort for Australian companies is that much of the FinTech innovation is designed to capture US customers, leaving a longer transition and opportunity to potentially use the technology without facing direct competition.”
Davison says that Martin Currie is cautious to invest in areas with the widest margin to attack, such as personal lending. He says that avoiding management teams that refuse to adapt is also important. “If a major Australian bank broke ranks and removed a third of its branch network, we think it could be interesting to the investment case.”
Most fintech start-ups target banks… as buyers