Outsiders and Insiders Are Behind the Fintech Revolution

by Freeborn & Peters LLP

“When’s the last time you were in a bank? Do you want to go to a bank?”

This question was posed by George Vukotich, co-founder of FinTank, a fintech-focused organization that serves Chicago’s technology and start-up communities. His remarks were part of a broader panel conversation on Chicago’s booming fintech scene that took place at the 2017 Incubate Illinois Conference.

“People don’t want to [go to a bank] anymore. Lifestyle has changed, and technology has allowed us to do things differently,” Vukotich continued. His comments reflect a broader trend that affects not just the relationship between financial institutions and consumers but interactions within the B2B community as well. As technology continues to enable companies to conduct business in new and more efficient ways, fintech (which is the abbreviated term used to describe innovations under the umbrella of financial technology) is a fast-growing area for forward-thinking entrepreneurs as well as established companies that prioritize investment in in-house research and development.

“[I] think the technology’s become an enabler for individuals, changing lifestyles and demands of people,” Vukotich said. “Things like peer-to-peer lending, alternative currencies. You hear about Bitcoin…[B]ut I think the key is that the technology has become an enabler to change things.”

The Growth of Fintech  

From peer-to-peer lending to online banking, the fintech industry is a rapidly growing area for technology investment. In the first quarter of 2017 alone, U.S. venture capital-backed fintech start-ups raised $1.1 billion across 90 deals, according to CBInsights Global Fintech Report. The only region to outdo the U.S. during this same period was Asia, which reported for the same group investment of $2.7 billion across 226 deals.

While incumbent financial institutions are certainly part of the fintech mix, the industry appears to believe that the major disruptions will likely come from enterprising outsiders. According  to PricewaterhouseCoopers 2017 Global Fintech Report, respondents felt the industry is most likely to be disrupted by start-ups, with 75 percent predicting start-ups will be the most disruptive players over the next five years. This realization is one that is picking up steam, with 82 percent of North American respondents to the aforementioned report citing that “standalone fintech companies” pose a risk to part of their business within the next five years. That is an increase of 13 percentage points from when the same question was asked in 2016.

Fintech Technologies  

There exists a wide range of technologies that fall under the definition of fintech, and each is seeing significant growth. One such technology is artificial intelligence, which, according to the PricewaterhouseCoopers 2017 Global Fintech Report, 30 percent of large financial institutions are investing in. For example, another factoid from a separate PricewaterhouseCoopers report, projects that, by 2020, AI will automate a considerable amount of underwriting. Note that because the sector is still new, exact parameters for what falls within the confines of fintech remain blurred with other technology areas, specifically regulation technology (regtech) and insurance technology (insuretech).

Mobile payments are another rapidly growing area of fintech, with TechCrunch reporting that there will be an estimated $60 billion worth of payments made on mobile platforms in 2017. The site also predicts that, by 2020, 90 percent of smartphone users will have made a mobile payment, which serves to underscore just how commonplace this fintech will be within a very short time.

Blockchain is another technology that often comes into play in the fintech space. Blockchain is a continuously growing list of records that are linked and secured using cryptography. It is an established technology employed in the use of cryptocurrency, though it is not exclusive to that area. According to the PricewaterhouseCoopers 2017 Global Fintech Report, 77 percent of financial services incumbents surveyed expect to adopt blockchain technology as part of an in-production system or process by 2020.

Fintech in Chicago

With access to incumbent financial institutions, large volumes of critical data, excellent universities and start-up resources, Chicago is poised to become a significant player in the fintech space. According to a report published by Deloitte in April 2017, Chicago is the epicenter for fintech activity in the Midwest, representing more than 20,000 financial institutions. Over six percent of the Chicago workforce is focused on the financial ecosystem.

“[W]hat’s interesting about the fintech space…in Chicago is there are so many great incumbent players from the financial services industry here who know they have a mandate to grow and innovate,” said Colleen Wilson, founder and CEO of Collaborate Chicago and co-chair of FinTEx Women in Fintech Group. “What worked to get those companies to the point that they were at in the last five to 10 years is not what’s going to take them for the next to 50 to 100 years. The marketplace has changed, the consumer has also changed, and the regulations have changed dramatically.”

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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