I recently opened an investment fund for blockchain start-ups in partnership with Life.SREDA, who produce a report on the state of FinTech twice a year. The latest report, almost 300 pages of analysis, provide more insights of the first half of the year in FinTech [Money of the Future 1H’2016 and Chinese, Korean and Japanese versions available on www.FinTech-research.com].
Vladislav Solodkiy, Managing Partner at Life.SREDA, provides a view of the reports’ content and where things are right now.
Three big areas are emerging in FinTech, from an investors viewpoint: FinTech for the unbanked, the rise of blockchain technologies and InsTech. In this short piece, we look at these three areas, and why they are of such interest.
First, an increasing number of players are now betting on FinTech for the Unbanked. This area is really interesting, both in terms of market potential and its effect on global wellbeing. In particular, the Bill and Melinda Gates Foundation, World Bank and IFC are playing a key role in the promotion of this development, and the success of two e-wallets – M-Pesa and BCash - showed that there is remarkable potential both financially and socially in the poorest markets.
A lot of activity is happening in this area in Vietnam (with IFC), India (where the government is making outstanding efforts to leap from the cash-based society into FinTech), Kenya (increasingly launches new projects, such as Tala Kenya), Peru (the government intends to build the national payment system), Malaysia (activities in Islamic banking), Nigeria (transfer blockchain services Oradian and Stellar and Interswitch IPO), and Myanmar (growing Red Dot Network and ConnectNPay, and new banking licenses).
Zoona, a project launched in Zambia and Malawi, achieved $1 billion in transactions and daily services one million clients through 1,500 POS agents. US's Branch.co (by Kiva.org, the founder of another well-known unbanked-FinTech project) raised $9.2 million in the first investment round, to support lending in Africa. Singapore's Nearex intends to develop public transport payment systems in India, Africa, Thailand, and Latin America. PayPal launched a program to support startups for unbanked countries.
It is not just FinTech for unbanked markets however, as blockchain will play a crucial role for development in unbanked countries. This is the second major investment area and is more challenging, as the implementation of blockchain and distributed ledger technology (DLT) as a real business service is limited by the very blockchain benefit itself: the technology is developed for mass use and has no use without it.
Most projects (a range of wallets and money transfers has appeared over the last half-year) are in their experimental and product adjustment stage and have a long way to go to influence the market. There are some projects (such as Everledger), which could show faster scaling, but they are too few and far between.
The main activity today is more based upon theoretical assumptions of how blockchain can change one industry after another, along with news related to bitcoin and the scaling of R3 and Digital Asset. However, the large players have failed to build anything of substance, based upon the venture industry view, without a top-down agreement. The Ripple (RippleLab) commotion has calmed down now too, and they have made more success so far than Digital Asset, for example.
Other practical developments include a dynamic growth of Ethereum, which improved the first wave Bitcoin blockchain technology by using smart contracts to handle complex tasks in various industries, including for payments and money transfers. Most developers have immediately appreciated its capabilities and are using it to build their new services.
The big challenge then is the stability of these systems. We all know how the Ethereum developers built their own investment fund, The DAO, which attracted $150 million in investments from crowdinvesting. That was unique. Then they followed it up with another unique, as The DAO was attacked by an intruder who managed to steal $50 million from the fund without breaking its rules or codes. In other words, it was a theft from a moral standpoint, but there was no theft from a legal code protection position. This case deserves a book or a film, as it poses more moral than economic questions to us: how far will we go in our trust to the code logic, and what shall we do if the code rules and human morals interpret the events in different ways?
One thing for sure is that if it is too early to invest today (as the sector is at the angel stage), it will become too late to invest soon. Our advice is to start investing in the industry now, but not for income or profit motives but rather for learning first insights. There will be no time for that later on, and you may miss your train.
The third area is InsTech or, if you prefer, Insurance Technologies. Insurance is one of the oldest industries and is stuck in that structure of old-fashioned, non-transparent services full of a huge number of agents. It makes you wonder why it has taken so long for young startups to decide to disrupt it. While Instech is a relatively new development, it has brought together more than 150 startups already.
There are still many websites that are far from FinTech focused on advertising and price-comparison or blocker models, but in the near future the main areas for growth will include risk insurance in agriculture along with companies relying on databases generated by the non-stop communication of IoT and cybersecurity devices.
US-based Lemonade is the best known of those who rushed to build new marketplaces in the fashion of “Uber/Airbnb/Kaya for”, but other platforms also successfully win investments (and customers): US's Zebra ($17 million in round A) and PolicyGenious ($15 million), India's Coverfox and Swiss FinanceFox ($5.5 million). The main breakthrough is expected not in the lead-generation model, but in the analysis of data generated by devices sharing information about lifestyles and health integrated with online consultations.
The German firm Friendsurance, which raised $15.3 million in a new round, launched an interesting p2p model. Zendrive ($13.5 million in round А), Moov and Prevent analyses your driving style and offer the best option for auto insurance.
It is hard to define the borderline between InsTech and HealthTech, as both sectors are intertwined in their growth. For example DocPlanner from Poland now operates in 23 countries, and enables its eight million customers to book their visits to doctors. The company raised $20 million in round C, for a total funding of $34 million, and merged with Spanish Doctoralia (9 million clients in 20 countries). Is this an InsTech or HealthTech service? Similarly, many ask the question why Zenefits, a platform to manage HR and payroll plans, is included in many lists as an example of InsTech. The answer is because monetization happens from insurance integration and sales, and Zenefits offers that capability.
Ping An Health Cloud, a similar service merged with online consulting (Ping An's POS) to serve 77 million customers in China, booking 250,000 medical consultations daily, and raised $500 million on a $3 billion valuation,
Online service development boosts the development of both cyber security and employees involved (Slice labs provides insurance to Uber and Airbnb employees).
So the sexy words for investors today are Unbanked, Blockchain and InsTech. What about tomorrow?
The “Sexy words” in FinTech for tomorrow will belong to IoT, O2O, big data and chat-bots. While giants are actively experimenting with artificial intelligence, such as Apple’s Siri, Amazon used its online assistant Alex to demonstrate how this could be applied in the financial sector by integrating it with Capital One online bank. Today, it allows users to do only simple transactions on their accounts, but tomorrow? How far could this go?
Evolution in retail in general, related to online trade development and requiring to transform offline POS in showrooms to be integrated with online sales, are having strong impacts on communication across devices (through BLE, beacons, WiFi). Combine this with aggregation and fast processing of various customer data, data sharing on previous behaviors in different conditions, and customer device data and prospective customer data in a particular POS, and you can see the world of Minority Report coming true.
In this context, Facebook released an interesting solution in the form of The Offline Conversions API. This allows outside developers to integrate data on prospective customers and their offline behavior, with their location at a particular merchant.
Increasing ranges of wearable devices, their sales growth and amount of data generated on human health and lifestyle behaviors, show that such device integration combined with their data and analytics, will affect both new offline trade solutions (sorry, O2O), smart homes, robot and drone controls. In turn, this will also have an even stronger effect on such industries as health care and InsTech, as it will change the very nature of health insurance, auto insurance, etc.
Chat bots, which appeared late last year, only gave rise to unnecessary further interest in this development, as a potential integration of this technology and FinTech services is titanic. Money transfers, financial advice, online trading and much more, has the potential to be transformed by the mixture of IoT, AI, Chat bots. This is because there are a large number of repetitive functions today that may be automated by these technologies and, if combined with artificial intelligence analysis, will allow users to process increasingly complex tasks in real-time, in-memory and developed by firms together with their users.
Notwithstanding a huge potential of all these developments, no breakthrough is likely in the short term. These services will be developing for years and, what is most important, we will have to learn them. Users will have to become comfortable with sharing their growing amounts of data and ask questions, make mistakes, correct them and teach firms how to understand us and be able to predict our needs. This teaching process will hinge on our willingness to engage and the amount of time and effort we have to spend on them. It takes not only developers.
Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...