The Dark Side of FinTech

The Dark Side of FinTech

geschrieben von René
The Dark Side of FinTech

Not «dark» as in «evil,» but «dark» as in «unknown, out of sight from the general public.» Just like the «dark side of the moon» is not actually dark, we just don’t see it from earth.

On May 30, the Economic & Trade Department of the Israeli Embassy in Geneva held a FinTech and Cyber showcase, hosted by UBS, presenting 15 startups from Israel who want to influence the financial market in one way or another. About half of the attendees were UBS employees and the rest were made up of investors and representatives of large consulting firms. I was probably the only business outsider, if you will. Fortunately, that made it a proper industry event, i.e. no buzzwords, no bullshit, just real talk.

It soon became clear that the event was not about showcasing the next Square or Number26. They were only marginally interested in retail banking, that is everyday banking needs of private or corporate «individuals» such as paying bills, sending money to friends and suppliers, or paying for goods at a retail store. Even though these kinds of FinTech startups get the spotlight and the most press – the bright side of FinTech.

At Israel Innovation Effect, the focus lay much more on products and solutions which would optimize wealth management for high-net-worth individuals and companies – the dark side of FinTech. «Dark side» because media coverage on businesses and startups offering those kinds of services is scarce. Yet according to Stefan Arn, UBS’s Global Head of Technology for Wealth Management, IT is the highest cost block in wealth management at around 50 per cent. But then, UBS also has 50 per cent of the world’s billionaires on their books, of which right now there are a total of 1694, resulting in assets of around $1 trillion for them.

Think about it. From the bank’s point of view, it is much more appealing to optimize the infrastructure and processes of their Wealth Management division, catering only to a few hundred individuals who hold vast amounts of assets, than it is to come up with the next great payment app for millions of people with only a few thousand dollars each. Whichever bank has the better offer sooner will have more high-net-worth clients in the end. One single additional billionaire as a customer generates more cash for the bank than one hundred thousand new retail clients with a thousand dollars each. So the race has definitely begun.

Nevertheless, retail customers shouldn’t be entirely ignored either. In 2014, $300 billion were spent through mobile wallets worldwide. That number is set to increase to $1.5 trillion by 2020 – according to OffLA’s representative at the event – and if financial service providers like SIX or even VISA and MasterCard keep their transaction fees up, which undoubtedly they will, then they are bound to make a pretty penny on the side. Especially since they all want to turn monthly active users into daily active users, just like any other social network.

One tidbit particularly took me off guard. UBS right now is working on unifying their entire infrastructure. So instead of having individual systems for each division, country, or market, there will be one single global platform for their infrastructure backbone. Then you can move your funds and accounts from Switzerland to Singapore to Delaware to the Cayman Islands basically with the click of a button or a swipe in your app. Bye bye federal banking regulations. This is what UBS’s Stefan Arn called the «offensive offer» to keeping afloat in this changing market; a straight up middle finger to the system as it exists now. A «defensive offer» for example would be the service of online banking – the same product as before but with a bit more convenience.

On the whole, the event showcased companies with focuses on investment fund management (Finnovest, BondIT), backend security (Hermetic, Checkmarx), customer onboarding (AU10TIX), an in-app payment solution via a simple keyboard extension (PayKey), Bluetooth-to-NFC converters for universal near-field mobile payments (WiseSec), data aggregation of seaborne commodity shipments (Windward), and the like. All the products and services were entirely B2B-focused so that financial service providers could improve or enhance their existing products and services, meaning the target audience for these FinTech startups are not end customers. Actually, it is not your run-of-the-mill B2B relationship anymore either («defensive offer») but something entirely new and disruptive («offensive offer»).

These «backend FinTechs» are not trying to put out another convenience product, instead they are turning the entire system on its head by offering solutions to problems that are rooted deep within. In the long run, this is probably the much more lucrative and rewarding approach to FinTech because these new and innovative companies are working towards collaborating with banks and service providers instead of speculating on a high-value acquisition by the likes of Amazon, Google, or Facebook.

And, sure, the whole thing might also be a bit dark in the evil sense. But what isn’t?

Image credits
Above: CC BY-NC-ND 2.0 by Kristina Alexanderson on Flickr
Featured image: CC BY 2.0 by Antonio Silveira on Flickr