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What's Next For Fintech?

This article is more than 7 years old.

These are the boom years for Fintech. Between the years 2010 to 2016, investments in the Fintech sector jumped. From $1.8 Billion in Fintech investments in 2010 to an investment of $5.2 Billion in the first quarter of 2016 alone. Investments ranged from seed money for Fintech startups to takeovers by traditional banks, to banks’ internal research and development. So far, the industry’s primary focus has been P2P lending and P2P wire transfers, which have enabled dramatically lower wire fees to crowd funding platforms. But as technology in those key areas mature, and as regulation across the world differentiates, a new era has begun to emerge. With that emergence, the landscape for Fintech could begin to change. Check out Forbes' 2016 Fintech 50 here. 

Thus far, growth in the Fintech sector has been exponential, but that has largely been the result of many years of under-development and a general absence of regulatory hurdles. That has left many other segments within the Fintech sector underdeveloped.  Those areas include insurance, wealth management and corporate finance, which require a “friendly” regulatory environment. As a result, those sectors have seen much less innovation, but that, of course, leaves plenty of growth potential.

And this spells change for the industry in two significant ways. The first is the increased focus on new technologies. The second is that sector growth will concentrate in geographical areas of the globe where the regulatory environment is Fintech friendly.

The Frontier Technologies

So, what are the new frontier technologies that will push for the next hype in Fintech? Here are some of the more interesting ones:

Robo Advisors: Robo Advisors are online investment services that assess a user’s risk profile and match it with a diversified and low-cost investment portfolio. Algorithms keep managing the investments to optimize returns and taxes. The first wave of robo-advisors is selling model portfolios only, but the future looks much more personalized. Swanest calls itself an investment assistant and recently completed a round of $800,000 in seed funding. The startup uses robo-technology to redesign the brokerage experience. Interestingly, Swanest co-develops the solution together with its community of self-directed investors.

Smart Contracts: Smart Contracts involves the use of Blockchain technology to validate, negotiate and enforce digital contracts from a distance. Those contracts could be for essentially anything, ranging from insurance policies and pensions to asset management and real estate contracts. In fact one of the most notable cooperation in the field of smart contracts started earlier this year between BNP Paribas, France’s largest bank and smart contract startup CommonAccord to standardize a protocol for smart contracts.

Colored Coins: Colored coins is a new technology that puts another layer of information on digital currencies and will allow to easily mint new types of digital currencies for different uses as well as transfer ownership of assets through an extra layer in the blockchain. In fact colored coins start-up Colu has already been able to digitally “mint” currencies such as the Camden Pound. And this may very well be only the beginning. According to Amos Meiri , CEO of Colu, “It’s a picture of an entirely new way of thinking about money.”

The Next Fintech Capital

There is a very good reason why innovation in asset management, insurance, corporate debt and many other segments of traditional finance have lagged. That is because these sectors are more tightly regulated. However, since those sectors are now in the forefront, more and more Fintech startups will begin to move into geographical areas with friendlier regulation.

Cities such as Austin, Texas and Palo Alto, California, all tech hubs, have been able to attract investments and lure startups into the Fintech arena. But those cities, and many other traditional tech hubs, have suffered from extremely difficult regulatory frameworks which are largely unfriendly to segments such as asset management.

According to the research group Accenture, cities like Berlin and Palo Alto, and even Hong Kong, have suffered from an unclear regulatory environment. That makes it difficult for Fintech startups to develop. In fact, in Berlin, under the German financial regulator BaFin, regulations on Fintech are becoming more stringent.

Meanwhile, London (deemed the world’s second largest Fintech hub after New York City) has a Fintech- friendly regulatory framework, under the Financial Conduct Authority (“FCA”). The Sandbox, which falls under the FCA’s innovation initiative, allows Fintech startups to develop and try out their innovative solutions without the typical burden of regulation. As often as needed, the Fintech startups can consult with the FCA on how best to adjust their projects to ensure compliance with regulation. At the same time, it allows the FCA regulators to adjust or tweak existing regulations in step with the developments in Fintech. Thus, an ideal environment for future growth in Fintech has been created, even in areas that have typically had greater regulatory oversight.

London is not alone in its Fintech friendly environment. Recently the Swiss government announced its own friendly regulatory framework for Fintech startups which could allow both Zurich and Geneva to follow London as a significant Fintech hub.

The Next Fintech Capital

So, where does it all lead? It leads to a very dramatic shift. As noted, London is second only to New York City in terms of Fintech friendliness. However, if US financial regulations continues to weigh, New York City could lose the title as the world’s premier financial capital. Fintech hubs, such as Berlin and Palo Alto, could quickly lose their standing to Zurich, London and Singapore, where Fintech regulation is more friendly.

And as for the industry’s focus? Prepare for a very big shift as the Fintech sector moves in close towards the trillions of funds under management in traditional banking.