1. © Julian Levy - May 2016
an overview of the fintech landscape
30 MAY 2016
fintech bubble or fintech trouble
An overview of the FinTech Landscape and its
implications for retail banking
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2. © Julian Levy - May 2016
setting the context
the nature of the competition
why now
what happens next?
table of
contents
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3. © Julian Levy - May 2016
Setting the context
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4. © Julian Levy - May 2016
FOR BANKING
the easy bit is over
The 2008 credit crisis presented unparalleled
challenges for modern finance, however many
firms have pulled through
restructure
deleverage
shed non core assets
write down assets
increase provisions
2009 todo list
decrease operating costs
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5. © Julian Levy - May 2016
now comes
the hard bit
increased regulation
cost of capital>roe
functional disaggregation
new competitors
Non Performing Loans
2016 challenges
low interest rates
low growth
However the road ahead presents more
challenges and opportunities
"I'm convinced that too few European
banks were dismantled and disappeared
from the market"
Andrea Enria, European Banking Authority (EBA) chief (2013)
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6. © Julian Levy - May 2016
how much is being
invested in
capturing your
business?
~$20obn
Estimated Global IT Spend by Banks
~$16obn
Run the BankChange the Bank
US$0
US$7,500
US$15,000
US$22,500
US$30,000
2010 2011 2012 2013 2014 2015
Venture Capital allocation to FinTech continues to grow
https://newsroom.accenture.com/news/global-fintech-investment-growth-continues-in-2016-driven-by-europe-and-asia-accenture-study-finds.htm
$22bn
~$4ob
“Silicon Valley is coming. There are hundreds of
start-ups with a lot of brains and money working
on various alternatives to traditional banking”
Jamie Dimon, CEO JP Morgan Chase
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7. © Julian Levy - May 2016
how much
is at risk?
Citibank research suggests that the digitalisation
of an industry resulted in an average shift of 44%1
of market share to new players over a decade ,
whilst mckinsey estimate 60% of Global banking
profits from origination and sales under attack2
1. How FinTech is Forcing Banking to a Tipping Point - Citibank Research
2. McKinsey - Cutting Through the FinTech Noise: Markers of Success, Imperatives for Banks
source: Citibank1
"The incumbents risk becoming merely capital-
providing utilities that operate in a highly regulated,
less profitable environment, a situation unlikely to
be tolerated by shareholders.”
Antony Jenkins, former CEO - Barclays
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8. © Julian Levy - May 2016
and how much
is hype?
£6.6bn
UK Annual Revenues
from High Growth
FinTech
61K
Number of People
Employed in High Growth
FinTech
£108k
Implied average
revenue per employee
£20bn
UK Annual Revenues
from FinTech1
The industry is still young, and whilst it has a lot
of capital being allocated to it, has not been
through an economic cycle.
Performance
Time
low quality use
medium quality use
high quality use
most demanding use
Technology Disruption
Source: Clay Christensen Disruptive Innovation Framework
“There is near hysteria about Fintech. Yes it’s here, yes it’s real, but it’s
not going to change your life tomorrow. It will take years for the
potential of these technologies to unfold”
James Gorman, CEO Morgan Stanley
1. https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/341336/Landscaping_UK_Fintech.pdf
2. https://www.cityoflondon.gov.uk/business/economic-research-and-information/research-publications/Documents/Research-2015/Total-Tax-2015-OnlineFinal.pdf
3. https://www.linkedin.com/pulse/fintech-lending-balance-sheet-vs-intermediary-michael-baptista
2005 £1.2B
.73%
(0.5% - 3.4%)5£11.5M
2014 revenues3 year founded
amount lent through
platform
Avg default rates
2010 - 20144
4. http://www.zopa.com/lending/risk-data
5. http://www.lendacademy.com/an-inside-look-at-zopa-the-worlds-first-p2p-lender/
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9. © Julian Levy - May 2016
the nature of the
competition
source:cbinsights
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10. © Julian Levy - May 2016
seven areas
of FINTECH
Challengers
foreign exchange
investment/advisory platforms
LENDing platforms
payments
financial aggregators
each customer experience lost to a
new player can weaken their
relationship with a bank, and
accelerate their acceptance of new
technology providers
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Insurance
currency
outofscope
this deck is only focusing on the five
that directly impact retail banking

11. © Julian Levy - May 2016
Foreign
exchange
141.31 139.22 (1.5%)
UK banks charge an average of 3.6% on a
£10,000 transaction, compared to an
average of just 0.9% charged by non-
bank providers1. New players are now
offering interbank spot rates.
FX PLATFORMS WITH LOW CUSTOMER ACQUISITION
COSTS, END TO END DIGITAL EXPERIENCE, AND a
better value proposition are available for
consumers and sMe’s1 https://www.saxopayments.com/non-bank-money-transfer-providers-eating-into-uk-bank-profits-111198
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134.73 (4.8%)

12. © Julian Levy - May 2016
lending to smes
and consumers
27% 16%
% FinTech investment
$ allocated to1
Business
Lending
Consumer
Lending
2. http://www3.weforum.org/docs/IP/2015/FS/GAC15_The_Future_of_FinTech_Paradigm_Shift_Small_Business_Finance_report_2015.pdf
123% 2010 - 2014 CAGR for marketplace lending2
1. http://www.morganstanley.com/ideas/p2p-marketplace-lending/
3.43%
3. http://www.nesta.org.uk/sites/default/files/pushing_boundaries_0.pdf
% of SME lending in uk via alt. financing (2015)
almost 1/3 targeting real-estate sector3
intermediary and principal based models
mainly unsecured higher risk and moral hazard
innovative credit scoring models lean operational models
uk fintech lending growth by sector3 2015 2014 YoY Growth
P2P Business Lending (ex Real Estate) 881
P2P Real Estate Lending 609
total P2P Business Lending 1490 749 99%
P2P Consumer Lending 909 547 66%
Invoice Trading 325 270 20%
Equity Based Crowd Funding (ex Real Estate) 245
Equity Based Crowd Funding (Real Estate) 87
total Equity Based Crowd Funding 332 84 295%
nonbank lenders have structural capital advantage
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13. © Julian Levy - May 2016
payments
Deloitte’s Estimate 25% of european retail banking
revenue linked to payments
1 http://www.mckinsey.com/industries/financial-services/our-insights/the-digital-battle-that-banks-must-win
2 Deloittes 2015: Payments disrupted - The emerging challenge for European retail banks
25%
credit card interest
credit interest margin
float benefit
interchange fees
fx spread
bank transfer charges
debit/credit card fees
CURRENT-ACCOUNT FEES
44%
35%
21%
big difference between developed/ developing world
non banks creating payment and acceptance solutions
ecommerce dominated by new players and growing rapidly
CROSS-BORDER SME PAYMENTS SEEN AS major opportunities
ecommerce currently at 8.5% of US sales, and CAGR of 10.4% 2006-20153
source: http://www.census.gov/retail/mrts/www/data/pdf/ec_current.pdf
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14. © Julian Levy - May 2016
aggregators
services allowing users to combine multiple
financial data sources present a
disintermediation risk to incumbent players.
PSD2 xs2a* will be a major driver of change
XS2A
(API)
Third
party
providers
Banking
apps
Banking
apps
XS2A
(API)
XS2A
(API)
XS2A
(API)
current approach post psd2 xs2a
*EU Regulation - Payment Services Directive 2, Access to Accounts
Currently growth is held back by broad refusal
of banks to support sharing of credentials with
third party services.
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15. © Julian Levy - May 2016
investment/advisory
platforms
robo-advisors, and user-centric
financial management platforms
offer partnership opportunities
and disintermediation threat
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16. © Julian Levy - May 2016
why now?
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17. © Julian Levy - May 2016
multiple factors
are accelerating
the rate of change
Digital Natives
new technology
low growth
new regulation
new entrants
a combination of structural and technical
changes are converging to accelerate the
growth of the fintech industry
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18. © Julian Levy - May 2016
rapid Release cycles
structurally lower cost base
regulatory support
highly focused
low barriers to entry
online is default environment
supply and demand
are digital natives
With a generation of companies and consumers
growing up with the Internet as standard,
leveraging new online services and platforms is
seen as normative, and New players are entering
without accrued technical debt providing
structural cost advantages.
“customers are 4.5 times more likely to choose a bank
with a good digital banking platform than
one with branches nearby”
The fight for the customer:McKinsey Global Banking Review 2015
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19. © Julian Levy - May 2016
new
technologies
New technological capabilities and delivery mediums
have resulted in the ability to reengineer the customer
experience and replace legacy systems at low cost
big data - here
mobile ubiquity - here
cloud services - here
machine learning - getting here
open source Software - here
Blockchain - not quite here yet
standardised API’S - GETTING here
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20. © Julian Levy - May 2016
Low
Growth
Long-term low interest rate environments
has resulted in increases in both venture
allocation, and appetite for opportunities
offered by new lending schemes and
alternative finance platforms.
displaced financial services workers
provide experienced resources for new
players
6%-9%
1. Source: MORGAN STANLEY RESEARCH, May 19, 2015 Global Marketplace Lending
Yield on marketplace financing (W/Out
Leverage)1
11%
venture capital fund raising caGR 2009 -
20142
2. Source: http://www.bain.com/Images/BAIN_REPORT_Global_Private_Equity_Report_2015.pdf
43%
Monthly compound growth in institutional
capital on p2p lending platforms jan 2014 - apr
2015
132K
Number of jobs lost in city of london 2008 -
20133
3. Source: http://realbusiness.co.uk/article/29193-a-glance-at-london-employment-over-10-years-the-financial-crisis-and-its-aftermath
extensive government support via tax breaks and investment
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21. © Julian Levy - May 2016
New
regulation
Regulators have significantly increased their
oversight on traditional financial institutions
whilst providing new entry paths and a light
touch for newcomers
PSD2 xs2a* will be a major shift
Regulatory Arbitrage for MarketPlace Lenders
international payments remain tightly regulated
“Regulators should never be at the front of
technological development. Regulators should follow
it as closely as possible, understand it and deal with
financial stability and consumer protection. You don’t
want to over regulate before you understand it.”1
Jeroen Dijsselbloem, Dutch Finance Minister
1 http://www.bloomberg.com/news/articles/2016-01-25/biggest-global-banks-at-davos-we-re-all-fintech-innovators-now
security and accountability being addressed
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22. © Julian Levy - May 2016
new
entrants
Non-traditional players have begun to eat
into financial services, and with psd2,
they have more scope to extend their
capabilities
e-commerce platforms - real-time insight into financial performance
mobile eating into branch network moat
highly targeted propositions 63%
% Retail Bank Customers leveraging Fintech applications or
services1
students real estate supply chain financing money transfer
new data sources allowing experimentation in risk models
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23. © Julian Levy - May 2016
what happens next?
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24. © Julian Levy - May 2016
Fear NOT
All is not lost
banks are
well positioned to compete with
significant reputational, digital and
material assets
trusted brands
lots of data
banks have the customers
Massive scale
and the appetite to change
Big balance sheets
A Physical Network
“doing the same thing a little
better is now the riskiest thing you
can do.”
Antony Jenkins, former CEO - Barclays
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25. © Julian Levy - May 2016
how are banks
responding?
invest acquire
engage
Direct Strategic Investments
Setting up their own VC’s
investing in other vc’s
startup accelerators
commercial partnerships
innovation programs
Startup incubators
fast
followers
catalysts
leaders
banks have been acquiring a
wide range of fintech companies
ranging from online
banks to technical capabilities
and specific solutions
“FS-on-FS acquisitions achieve ‘above market’ returns
of 4%-6% after 12 months, FS-on-Tech acquisitions
returned 10%-15% over the same period.”
Arjun Sethi, Partner, A.T. Kearney
Where banks have structural disadvantages due to cost of capital,
fintech platforms offer a route to higher returns
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26. © Julian Levy - May 2016
and the
new players
have a lot to learn
In the us - leading platforms struggling to get their models right
sells on loans to
institutional
seen demand fall 35%
YoY
has needed to raise rates
3 times in 6 months
increased risk on
balance sheet
cutting staff by
28%
seen first QOq
fall in 3 years
has had major
compliance issues
Quality of high risk U.S. loans decreasing
BORROWERS debt/income ratio grew 18% in
2015
average income of borrowers dropped 3% in
2015.
recent loan delinquency
rates rising1
1. http://ftalphaville.ft.com/2016/02/22/2153904/the-worrying-signal-from-us-online-lending/
“We don't Take Credit
Risk” - maybe you do!2
2. http://ftalphaville.ft.com/tag/online-lending/
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27. © Julian Levy - May 2016
where
to next
regulatory and cost
pressures likely to
remain
new players grow into
ancillary services EATING
AWAY AT BANKING MARGINS
Time
confidence
interest rates go up
higher profile failures
in lending business
banking consolidation
back-end utilities and
front-end banks diverge?
low high
near
far
digitisation works ~50% of personal
lending was executed through digital
channels at Barclays in
March 2015, up from one-third in 2014.
regulations gradually
increase on fintech
ongoing banking
digitalisation
minor fintech scandals
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28. © Julian Levy - May 2016
questions
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