BRIT FIN-TECH

My thoughts on Fintech living and working in London  - ideas, passions, experiences that matter most to me...

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Finding my Fintech Fortun-ate….

I am not a believer in luck. My life experience has shown me that fortune, material or otherwise is not linked to some surprising intervention of destiny, but always to a heightened connection, an innate drive, a desire to achieve and learn no matter what background, culture or creed you originate from.

I grew up in South Africa. A world of contrasts where on the face of it, the gulf between those that are fortunate (however you define that) and those that are not can be put down to social, political and economic influences. But this is an over simplification, and I have learnt to truly appreciate that despite huge barriers to overcome, lives can be changed dramatically by those who see things differently, who acknowledge challenge but creatively and very often collaboratively come together to break ‘barriers’. After all, I transitioned with the Madiba generation – a youth in my 20’s when  my country flipped from one world to another with the freedom of the world icon, Nelson Mandela.

London has been my home for the last 15 years and yet it has only been in the last few that I can truly say I recognize how the piecing together of my heritage, career, location, and network have made for an obvious magnetism to the World where finance meets technology.

I found my way into this industry just a short 3 years ago, managing the launch of an integrated payments engine for a global FTSE 100 software company. The momentum of the market combined with the relative shortage of cross industry skills – technology vs finance – provided me with an early window to recognize the value of those who could work across the industries but also blend and broker the sources of innovation – in the form of new entrants with large institutional incumbents.  

The potential force that Fintech can and should be, has afforded me a rare opportunity – to toss aside the confines of old working models, leverage my intertwined desire to be an entrepreneur, advisor, broker and industry change agent – with the potential to make an impact I never imagined. Timing, market momentum, location and my own personal drivers have conspired to draw me into this World, and it fits me perfectly.

This is a vastly complex multi industry stream of technologies which are driving change across the financial supply chain from the incarnation of the money flow and liquidity at wholesale bank level through to the retail convenience of the person in the street. The value created by innovation in Fintech can and will affect almost every aspect of society. More than half of the global non cash payments growth comes from developing countries and in 2015 the number of mobile payments are projected to grow at 60.8% (RBS and Capgemini World Payments Report, 2014).

Institutions and regulators alike are embracing the need to get in on the act through links to accelerators such as Barclays, Lloyds and Rabobank. Others are launching venture funds (Santander £100million) or directly making investments in companies such as Goldman Sachs’s £15mill funding round in Kensho alongside some other big name investors.

The consequence is profound – the models for the way in which money is made, moves and protected is transforming – so that country, institution and individual can and will be impacted.

Dare I say it, Fintech could be considered a movement for Global change. The launch of Innovate Finance last August 2014 by George Osborne drove home the collective strength of government work with industry for greater inclusion in financial services is indicative of the power we are building here.

It is rare to be surrounded by an amazingly open and collaborative global peer group of industry influencers, market and policy driven momentum. Added to this, the insatiable appetite to drive and consume innovation. Company founders, investors, financial services companies, foundations, trade bodies and thought leaders are converging to explore collaboration in multiple forms. The consequence just for the UK and Ireland has been a tripling of the volume of deals since 2011 (Accenture – The Boom in Global Fintech Investment, 2014).

I feel this is my little window into history in the making. My character piece, fuelled by my own personal opportunity to write a page. A passion for my country of birth and my city I now call home and all the chapters in between are a force which has helped me find my Fintech fortune…and ironically that’s not just about money….

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Summer at Hampton Court

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Why the enforcer must become the enabler – the irony of regulation in financial market liquidity

Global markets are intertwined. The tsunami of 2008 on financial markets proved one thing. A financial crisis leaves no market unscathed. And the ill effects can be felt for years to come. The rise and prominence of broader and deeper regulation has been undoubtedly necessary but pressure for governments to ensure they serve their national interest for political longevity continues to have an ironic twist. Tighter control means greater restriction at source. Rightly so I hear you say. Complex banking structures have become the perfect breeding ground for the manipulation of markets. Tapping into these structures to avoid further crises has resulted in the rise of SUPER regulation - regulatory frameworks applied to multiple jurisdictions in order to intercept points of failure that structures, markets and countries invariably offer up. But markets play forward. Decisions and actions made or taken at source have a multiplier effect and in the connected world we live, the consequences have and continue to ricochet along the financial supply chain – central bank to Mr & Mrs Smith. Liquidity simply refers to level banks can lend. Markets thrive on the flow of money. But ‘money’ takes on different definitions depending on market sentiment. The tolerance for credit expands in bull markets and the cost of money drops – as credit becomes more accessible the line between credit and ‘cash’ takes on a far more porous quality. When things turn bear, then the liquidity quotient rises and the value of cash vs credit rises. Everything gets more costly. For the banks – safeguarding against further penalties through higher levels of collateral lodged with a central bank is just one pressure weighing down on them. This means less freedom of movement. And that ultimately stifles the rest of the market. The Basel III framework is calling for unprecedented levels of both liquidity and capital ratios. As a result liquidity costs have increased as a percentage of a bank’s total capital from 1% in 2008 to 30% in 2012 such that every $1 billion increase in the size of a bank’s liquidity buffers increases its costs by $10 million per year. And it doesn’t stop there. All banks have inherent legacy costs. Structures, data and disconnected processes simply do not allow for compliance requirements that force unity. A 2011 study revealed that internal fragmentation of global collateral management costs banks over $4 billion a year. What this means is that many banks could be laying too much of their asset book at the central bank’s doors each day – just to ensure they are not exposed on intra-day liquidity requirements. The result – even more throttle placed on flow of funding into the market - painful for a bank trying to remain competitive and for all market players big and small. For the most part regulators have highlighted – what must not happen again as the enforcer. How to enable the journey is far tougher. The Basel Committee recognizes this and by design & necessity – have evolved their thinking for Basel III implementation such that there is a willingness to engage with market recipients to explore the pragmatic so that that financial institutions can work alongside regulators to explore ways in which the ‘rules’ can be adhered in ways that are benefit the onward health of the market. What is emerging is that regulators are needing to be an enabling force 1st and enforcer 2nd so that ways can be sought to bridge the gap between entrenched models and agile operations. There is way more to be gained by figuring out the implementation in unison. The cynical may say ‘better the devil you know’. I would argue such labeling solves very little. We all need our banks to be healthy. Amen!

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The future cannot be predicted but it can be invented

  The future cannot be predicted but it can be invented

For banks their management of intraday liquidity risk is a key component of their overall strategy and risk policies. The Basel Committee on Banking Supervision lead the debate on this and their guidelines state banks should actively manage intraday liquidity positions and risks to meet payment and settlement obligations on a timely basis, under both normal and stressed conditions. Easier to commit to than achieve!

So the stance adopted by regulators is all geared towards avoidance of any repeat of the 2008 crisis. This means financial institutions must maintain sufficient amounts of high-quality liquid assets to withstand the effects of adverse market environments. And not just those based on past events for which there is too great an assumption that history will repeat itself, but in future looking scenarios that banks struggle to imitate. It is not about reporting the past!

All this requires greater understanding of their current management of intraday risk, whether they are direct or indirect participants in clearing and settlement schemes.

Take a glance at the Basel Committee paper-Monitoring tools for intraday liquidity management and its key reforms to strengthen global liquidity regulations. Condensing it all means banks must report regularly on their intraday management commencing 2015 and will require tools to calculate availability of liquidity, daily maximum usage, average number of payments, time specific obligations, manage the timing of outflows and more.

The need to capture all this in a range of reports and show how to deal with unexpected disruptions to intraday liquidity flows adds to the complexity straddling operational silo’s within banks. With no single source of data capture to provide the source of reporting and a continually evolving set of regulatory requirements it is no wonder that banks are at varying stages of adherence.

To comply is quite simply a major, costly project! One that demands greater understanding of intraday liquidity performance resulting in changes to internal processes, reporting tools, accessibility of data, profile of clients and the need to have total control of their own payment flows as well as those who supply or consume it.

This is all shifts attention from traditional management of end of day and fixed-time reporting based on past trends and assumptions.

So what if you could see the future? How would this be beneficial today? The use of simulation techniques in other industries, coupled with banking regulatory demands drove the creation of Simulocity (www.simulocity.com).  Its single focus is to simulate highly complex real business situations and enable banks to look at how they manage future events and scenarios.

The use of a sophisticated modelling platform to simulate ‘what-if’ planning enables banks to challenge the effectiveness of their current business practices and performance to meet future demands, all with no compromise to existing systems.

While the technology enables this traditional bank thinking stifles innovation no matter that executives encourage and support it. So to manage the market risks someone inside a bank has to take a risk!

Overcoming this is not easy. The layers of operational complexity in managing intraday liquidity, the lack of total understanding of the many dependent functions, the cross-organisational impact, the disparate legacy IT infrastructure all conspire to make it almost impossible for banks to report on all the metrics proposed by the Basel Committee. Who is going to lead this?

If banks could capture the complexities of managing intraday liquidity in the future through simulation of a range of daily and unexpected scenarios the value is enormous.

Simulation showing the eventual real effects of events is a tool some banks are receptive to using, as are regulators, auditors and consultancies but progress is slow.

Simulation and modelling tools enable banks to better understand their own liquidity management issues, the impact of their clients on daily payment flows and adhere to regulatory requirements, but the potential benefits are beyond compliance and make this far more than an exercise in meeting Basel guidelines.  

So it is time to stop predicting the future and start inviting it. 

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The Business of Start Up

 Having just returned from my monthly trip to the Bay Area, which is partly committed client work; exchanging and meeting with those in 'the know'; raising funding and simply soaking up the good advice, I cannot help but be struck by how quickly attitudes change.

  Enjoying the warm sunshine at a trendy coffee bar on Sutter Street, I was lucky enough to meet up with a good friend and well-respected VC, investment banker and lawyer. For the record this is one individual.

  He aptly described the consolidation phase in the 'Valley'. The Mecca of technology innovation has created a halo effect, an after life which is now a full blown sub industry where offshoot models have emerged collectively known as The Business of Start Up.

  Whilst we have some way to go in London, the trends are there. Capital flows in early stage tech businesses continue to surge. The power of a the capital-driven financial centre is fostering the growth of the city as a tech hub. Supporters - investors, incubators and government are fuelling the belief that even an idea, no matter how formative can be worth the flow of credible money that in some cases is eye watering. 

  We have all heard about competitive take out strategy but this is becoming normal business practice. Big tech vendors regularly scout the start up scene and deal flow to ensure that 'ideas' that could be a threat down the line are dealt with by early acquisition. 

The profile of a tech career is also changing. There is a growing divide between those that enjoy a career with a traditional (some would say legacy) vendor and those choosing to play a role in a fast growing investor backed business. The risk appetite even for some accomplished and very senior corporate career types, has taken a turn. The drivers are many, least of which the need to be seen to be agile and adept at playing in the raging torrent of change.

  A few years back, the likelihood of appeal would be sparse and viewed upon with a suspicious eye. But with a buoyant economy and the heady flow of ideas, enterprise apps, mobility and the continued exponential opportunity data exploitation fuels, many are changing their attitudes of being in, working with or birthing a start up.

  Over a 2nd cappuccino, the conversation turned to the statistics of success. Irrespective of whether a market is more or less mature the average success rate remains remarkably consistent. On average 7% of all start ups will succeed. Approximately 60% of start-ups survive to age 3 and roughly 35% survive to age 10, according to separate studies by the U.S. Bureau of Labor Statistics and the Ewing Marion Kauffman Foundation.

  This too, has found a place in the spinoff sub industry. Marketing one's failure is not uncommon.

Attitudes are changing and fear of failure is not as loaded as it once was. What counts is that you test your idea and learn quickly. The notion of failure as a stigma is long gone and being  one step ahead of your competition is more important than perfecting your plan. Playing in the swirl of uncertainty says much more about a person's tenacity. The focus has shifted from what could go wrong to what could go right.

"People are embarrassed to talk about their failures, but the truth is that if you don't have a lot of failures, then you're just not doing it right, because that means that you're not investing in risky ventures," David Cowan of Bessemer Venture Partners says. "I believe failure is an option for entrepreneurs and if you don't believe that, then you can bang your head against the wall trying to make it work."

  There is some comfort in that. But ironically for someone who has founded a startup and is living the high and lows, I am quite thankful for my inherent mild cynicism and self awareness. I am not fully converted. I am somewhat uptight about the cost of failure.

It's a grounding factor, which outwardly serves up a nice blend of credibility and intrigue.

  The volume and the beat will simmers down. We will see a migration back to good old risk/reward and the perennial laws of business success. The business of start-up is still business and personally that translates to: 

  - insatiable curiosity 

- bravery

- being one step ahead of the competition 

- never assuming, always ratifying 

- moving with speed and

- always simplifying 

  Nicole Anderson

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Nearly every sub-sector within the financial services industry has the potential to be revolutionised by an innovative tech product. Unlike other tech segments such as e-commerce or advertising technology, which have seen innovation for many years, there is a dearth of startups in the financial sector and many legacy problems still to be solved by technology. The financial services industry is virgin territory for tech, largely due to the reluctance or inability of legacy financial institutions to drive innovation within their sector.

Fintech: the financial technology frontier is ripe for startups | Media Network | Guardian Professional (via hackingfinance)

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What great weather we have been having!

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Thousands of successful, intelligent businesses are already using alternative finance to grow and explore new opportunities. These businesses are the pioneers of what will soon become a standard practice, like the early customers of eBay or Amazon, and the first viewers of YouTube.

http://www.theguardian.com/money/blog/2014/jul/22/banking-reform-digital-finance (via hackingfinance)

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Meetings at the Royal Exchange.

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Fintech and fairy dust – the reality of start up success…

You are a tech start-up, or trying to be. You are young (in body and mind), fervor flowing through the ideas of what you can bring to the world and how it can change the lives of many.

You, like many others, believe the world needs fresh ideas that truly impact the way people live, and to that end nothing is more emotive than the subject of money – how it’s made, managed, moved and protected. Disillusionment with the status quo, a deep recession and the rise of a discerning public have inspired your offering.

And what better place to build your idea and secure your future customer base than London.

London has demonstrated massive growth in Fintech (financial technology) deal volume – 74% annualized since 2008 and has reveled in a huge inflow of investment capital, nearly 8 x within the same period. Unsurprisingly London is the emerging Fintech capital of Europe, but also boasts a growth rate 2 x that of Silicon Valley (51% vs 23%).

Since the beginning of 2013, London now boasts a growing number of Fintech accelerators, many linked to pure play or corporate venture capital. Examples include the multi-bank and Accenture sponsored Fintech consortium – Fintech Innovation Lab, the Canary Wharf backed Level 39, Microsoft Ventures London and the latest entrant Startupbootcamp Fintech backed by SBT Capital.

There is no shortage of buzz. Finnovate – the foremost showcase for technology innovation in financial services is clear demonstration of that. Four annual locations with on average 80-100 companies represented and/pitching for investment. The data is in overwhelming in support of non banks technology sources being the drivers for innovation.

The ‘But’ – and there has to be one, is, how does the market, either consumer or business institution, metabolise this tsunami?

There is still a fundamental gap between current or legacy, and what represents the new World order. Whether your offering is supportive or conflicting with historic models, the biggest challenge remains the ability to create an impact and rise above the noise. For a b2c entrant the key to success is scale. Many of the new players that look at alternatives to established consumer services, such as peer to peer movement of money, crowd funding, alternative personal finance options, have some big barriers to entry – brand recognition, channel to market and customer acquisition, and in many cases navigating regulatory or compliance requirements. Those that invest in the market gap the fastest accelerate their own speed to market.

For those innovations that extend, enhance core consumer or retail banking services, the challenge remains navigating fragmented structures, investment dilution, and leap frogging the long queue of entrants trying to captivate attention.

On the b2b side – the noise levels are lower, but the complexity of processes and systems present a natural barrier to entry. Here the cultural resistance to change may be greater and the investment pockets may be more aligned to satisfying compliance rather that the new. The need for change is not perceived as that urgent given the middle and back office reliance on core systems, processes, and skills.

Entrenched and mission critical systems and data sources lend to a blend of incremental innovation which serves to extend, enhance core systems, deepen data insight or address data integration gaps. Perennial drivers, to reduce costs and improve efficiency, still carry impact. Growing acceptability of cloud solutions for infrastructure, data, and applications allow for continued interest in cloud infrastructure and security solutions.

The obvious levels of official and public scrutiny and regulation solutions that support compliancy readiness are pushing on ‘open doors’ across the full mix of institutional players, banks and non bank financial institutions.

At the end of the day, hitting the whitespace with the smartest technology is fundamental, but no new business can afford to downplay the power of a network. Referenciability is paramount in early formation, and even more acute for those who operate in a market that is going through so much change.  As one senior global banking executive in an open exchange with me shared, -“whilst we are experiencing a burst of innovation in our sector, one has to remember that very few in powerful positions will be captivated by the abundance of Fintech fairy dust”.

Aligning to key influencers, securing seasoned advisors, or better still investing in strategic and connected leadership will ensure that your get the platform your proposition duly deserves. It is not just who you are, but who you associate with that determines your destiny. Choose wisely.

  Nicole Anderson