John Rosenberg, General Partner, TCV
How well are financial companies adapting to the rapid pace of fintech development? What fields are furthest ahead of the game, and what sectors are being left behind?
Until recently, banks and large financial institutions had historically been relatively slow to adapt to the rapid pace of fintech development, but over the last several years they have begun to embrace the market structure changes. Where fintech start-ups had previously been viewed as potential threats, we are starting to see increased collaboration between traditional financial institutions and those start-ups. This is coming not only in the form of proactive partnerships, but many banks have been participating in the funding rounds of many startups. In addition, many banks now have started ‘accelerator’ programs as a way to nurture early relationships with emerging technology companies and their founders.
Fintech innovation began during the dotcom craze in the late ‘90s and early 2000s, as the early maturation and development of the internet and the electronification of certain financial markets created opportunities to deploy technology against previously manual processes. This served to dramatically increase volumes and lower transaction costs, driving huge efficiency and profit gains for those who embraced technology. Big beneficiaries were the capital markets, consumer banking and payment processing sectors. The pace of innovation accelerated in the wake of the 2008 financial crisis, as banks were forced to become more capital efficient, hold fewer illiquid assets, and exit businesses that were viewed as risky or unprofitable, opening doors in areas like mortgages, wealth and asset management, insurance and cross-border payments.
What challenges do you see for fintech development and disruption, both from a user's perspective and from a regulatory standpoint?
As companies large and small look to deploy technology to disrupt large swaths of the financial system, regulatory requirements, which vary dramatically across jurisdictions, can create enormous amounts of friction and added costs. This often presents challenges for smaller fintech companies looking to compete on an international level against incumbents that enjoy an embedded cost advantage accrued through decades of effort and millions of dollars invested in their risk and compliance infrastructure. From a user’s perspective, security and safety concerns still inhibit mass adoption of certain financial products, as many consumers are hesitant to put their entire financial lives online. And while the technically savvy millennial generation may be less sensitive to privacy issues, their contributions to the potential revenue and profit pools are still in its infancy.
What impact do you think Brexit will have on the broader financial technology industry in the UK?
It’s far too early to determine how Brexit will impact the broader financial technology industry in the UK, but the free movement of labor and capital has always been the fuel that drives innovation.
The UK, and London in particular, has served as the epicenter for fintech innovation in Europe, so any regulation that places an unnatural limitation or restriction on investment in time or ideas can create friction or stunt growth. In addition, were the UK to lose or alter its passport rights into Europe, it could cause a dispersion of talent and fragmentation of ideas that could take years to recreate. Nevertheless, the UK is still one of the largest and most powerful global economies, and we are confident that those pillars will remain quite resilient.
What will you be discussing at The Economist's Finance Disrupted Conference on January 25th 2017 in London?
We are at an interesting cross-roads when it comes to fintech investing. By mid-August of 2016, another $15 billion had been deployed globally, a very healthy figure by any historical measure. But the year wasn’t all smooth sailing. The sector was met with significant challenges from Brexit and political uncertainty across the globe over the last six months, and many investors have shifted their mindsets from investing in the future story to funding the present.
I’ll be discussing opportunities and challenges that face the fintech sector in the coming years. We’ll discuss the areas where fintech start-ups can add the most value to the financial value chain; where traditional financial institutions may have embedded advantages; and why we are seeing increased collaboration between the two.
What are the next promising opportunities for investors in Fintech?
The growth in e-commerce and cross-border trade; the globalization of the world’s workforce; and a dramatically changing regulatory environment at the local, national and international level are all creating enormous opportunities for investors in financial technology. At TCV, our aim is to find and invest in those companies that are best positioned to deploy technology to capitalize on those themes – companies with great management teams and durable business models which can drive significant growth and long-term profitability.
To learn more about the Finance Disrupted event, please click here.