In the world of technology today, perhaps no label is more overused than fintech. Fintech—the portmanteau of finance and technology—is being slapped onto any technology system and process that interacts with finance—from clearing and settlement to counterparty risk management—as if the magic aura of the word alone will suddenly place financial executives on panels with kids in hoodies.
It is with little wonder technology companies wish to append this label to their operations: fintech is hot. In the first quarter of 2016, total investment in fintech companies reached $5.7 billion across 468 deals, according to the Pulse of Fintech report by KPMG Enterprise and KPMG Fintech along with CB Insights. This includes all funding activity by angels, PE firms, mutual funds and hedge funds.
An examination of these funding figures tells the story of how the marketplace defines fintech. According to the Pulse of Fintech, companies receiving funding for fintech generally fall into key verticals such as lending technology, payments, wealth management, money transfer and blockchain. Of the largest fintech deals in the first quarter of 2016, only one was categorized as institutional; AlphaSense, “a unique search engine in 2010 that offers a new standard for information discovery,” which raised $33 million in Series A funding.
EY creates further definition in the Fintech Adoption Index. The global consultancy surveyed 10,000 “digitally active people” and found “FinTech is revolutionizing the way we pay for goods and services, transfer money between accounts and send it overseas. These three activities are the most-used FinTech services according to our survey, and are followed closely by savings and investment products such as online stockbroking/spreadbetting, online budgeting/planning, online investments, equity and rewards crowdfunding and peer-to-peer or marketplace lending.”
The fund flows speak to how the industry sees fintech but so do the investors. While investors are looking at companies changing the payments and lending space, the money isn’t looking in the general direction of back office systems and processes. Matt Harris, managing director at Bain Capital Ventures, told the crowd at the Depository Trust & Clearing Corporation’s (DTCC) private blockchain event in April, "If you came to me and said, 'Are you interested in tech that can solve back-office problems and requires a consortium approach?' I’m not interested in that as an investor.’"
Hearing terms such as “consortium approach” and “back-office problems” are another reason the label fintech is becoming popular right now. Company executives see in the label the promise of “innovation” and “forward-thinking.” These are among the descriptors mostly commonly applied to fintech companies, descriptors executives pursue in their own ventures.
This is not to say traditional technology companies cannot be disruptive; rather, to point out where the disruption is occurring. Instead of changing the way the individual interacts with finance, technology companies are powering the change in how the financial system operates.
The American Banker FinTech Forward rankings further illuminate the impact technological innovation can cause in the financial system. The top companies on this list describe themselves not with the label of fintech, but with a description of how their technology impacts finance. Consider Fiserv “global provider of financial services technology,” FIS “providing software, services and outsourcing of the technology that drives financial institutions” and Sungard “provides software and processing solutions for financial services.” These companies and the others on the list recognize their role as technology vendors to the financial services industry and work within this system to effect the change powering the financial system.
Further proof is found in how technology companies are deploying innovations in finance and technology to change the processes by which finance operates, most notably in distributed ledger technologies—aka the blockchain. In March interdealer broker ICAP announced the completion of a proof of concept of distributed ledger-based smart contract on Traiana's Harmony network, stating the technology has the potential to "significantly transform post trade operations.” Simultaneously, executives at established financial institutions are taking a measured approach the solutions fintech may provide. In a letter in Fund Technology, Pete Cherewich, President of Global Fund Services at Northern Trust said, “We are cautiously optimistic about blockchain’s potential to change the mutual fund industry for the better over the next five to 10 years. At the same time, it’s important to recognize that while blockchain is a promising technology – Deloitte has called it ‘game-changing’ – we know that the industry must coalesce around one standard and that means both the technology and the underlying data to support it.“
Changes and enhancements to the technology powering finance’s systems make this an exciting time for change in the financial industry. Change that is happening when the brightest minds in finance think about how they change the processes by which finance is transacted, not change that happens when a new label is applied to the company description. Rather than chase ephemeral labels, technology companies should seek the change what will have the greatest impact on the industry.
It’s time for the technology companies in finance to rightfully claim their spot in the ecosystem as the power behind the infrastructure, leaving the fintech labels to define the companies changing the way the individual interacts with finance. Failure to do so risks confusion in the marketplace and detracts from the innovations that are happening that will improve finance for all.