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Radio Finance: "We are just getting through the first era of fintech"

By The Asian Banker Live

Lawrence Wintermeyer, chief executive officer of Innovate Finance, an independent not-for-profit membership association representing UK's global fintech community, speaks about the future of the financial technology ecosystem.

Emmanuel Daniel (ED): I'm speaking to Lawrence Wintermeyer, chief executive officer of Innovate Finance. Something I've come to discover since the last time we spoke is the number of hubs that are proliferating in the UK, in the U.S., and other parts of the world.

How has Innovate Finance been able to keep its core position, and are you still attracting big tech players? What is your value proposition; has that changed, or has it had to change in order to remain ahead of the gig?

Building Innovate Finance

Lawrence Wintermeyer (LW): In the UK, we were really born out of the government as a not-for-profit and independent of government funding, with a particular mandate to build a fintech ecosystem. And that is what I would call the modern private-public partnership. Although the funding that we get is predominantly through benevolent funding, from our institutional members, professional services firms, and global professional technology companies like Mphasis, IBM, and Intel.

The importance of being a not-for-profit organisation is that we offer services to fintech start-ups, generally at 1,000 pounds a year, where we give them a “communication services” kind of pitch. We deal with the media on how to give a pitch to venture capital. We connect them to venture capitals. We lobby for fintech on behalf of the community, the government, the Financial Conduct Authority (FCA), and the regulator. We run a large number of programs to get fintech together with institutions. We think that the not-for-profit ecosystem model has been hugely successful.

Our own community has grown in above 120% in membership over the past year. While most of our fintech members are UK-based, more than 200 of them are global. Fifty percent of our financial institutions (FIs) are on the east coast of the U.S. or are based in the United States. The other 50% run from the UK to Asia. And you see one of the biggest trends in fintech is that the institutional venture capital and fintech spaces are hot. But financial institutions and corporate venture capital has really moved into fintech in 2016.

I think that it is expressed in the growth and popularity of it [fintech]. So in partnership with Swift Innotribe, we launched the global federation of fintech hubs to connect all global hubs because a lot of the hubs look at us, mainly because we are independent and not-for-profit. There are some things to learn out of that. There is no right or wrong; there is no one model. We run an open and collaborative space in fintech’s secular environment, but certainly we are happy to share our learning and we do that from everywhere – from the White House to Beijing.

ED: Being a not-for-profit, are you funded by the UK government in any way?

LW: No, we do not have any UK government funding. Generally, we have benevolent corporate funding from the end of organisations.

ED: But that is not benevolent; that’s membership.

LW: No, that is separate to the memberships. Our biggest benevolent funder is the city of London, which is a corporation and on behalf of London. The second is Canary Wharf Group and so that has nothing to do actually with membership. Membership in the case of FIs, where we look at global institutions from Citi or Goldman Sachs to Standard Chartered, UBS paid membership fees, as do the professional firms. So, those membership fees generally fund the work that we do for start-ups.

ED: Is there a quid pro quo for Canary Wharf itself in the same way that Plug and Play would be for the U.S.? Because these are real estate developers who are also getting into this act, saying “give us equity instead of paying rent and we will take a view of portfolio potential, fintech successes.”

LW: Well, in Canary Wharf’s case there is no quid pro quo. I think it is where the fintech ecosystem are arguably started in the UK. So, it seemed natural to my own predecessors to debase us there. In fact, the previous mayor of London opened the Level 39 co-working space. George Osborne launched Innovate Finance at Canary Wharf. So, from our perspective, it's important because this is a co-working space. We’ve got a very large number of our members there so it's really a “convenience factor”. We're actually location-agnostic, so we pop up virtually in the city of London; we pop up virtually in Washington, in New York.

ED: When you say pop up virtually, what do you mean?

LW: Pop up virtually means we borrow the offices or the facilities of our partners in different cities of the world to configure what we are doing. In New York, for example, we launched a transatlantic policy working group program last month. We did it with Maria Gotsch from the Partnership Fund for New York, and Anna Wallace from the FCA. We had all of our east coast membership there, and invited the local fintechs and the local community.

We ran the whole series of two- or three-day sessions that we were doing with the head of our member offices – Hogan Lovell, our strategic law partner, and the CME group. Typically, we only have a team of 15 people, generally supplemented with some comments from our members. We try to use the best of all our members’ real estate to do these sort of things.

Working with regulators

ED: The UK government and the regulators have been building their own propositions to the regtech and the regulatory sandbox concept. Have you been benefiting from that? Do you sell into that? Do you work with the regulators?

LW: We work very closely with the FCA and the Treasury for all sorts of reasons and programs, but they are generally fintech oriented. I have a great degree of respect for the FCA and Chris Willard, Anna Wallace, Bob Furguson and team, and in the Treasury on the focus they have on Fintech. Because I don’t think a lot of people understand that they’ve taken a competition mandate following 2008 and really understand how innovation can work. Government civil servants have really developed all of these programs. The FCA has appointed us to chair the independent industry sandbox consultation, which is a global consultation we are running now.

ED: The U.S. seems to have picked up on that.

LW: I saw Senator McHenry announced that they are trying to get a bill in Congress to get a regulatory sandbox up, and we are supportive of that. We were in the White House on a fintech mission last May 2016, and we are doing everything to collaborate and get better interoperable regulatory dialogues going. And as you know, the FCA, with fintech bridges – which is a fintech passporting scheme for authorised firms – has already set up relationships with Australia, Singapore, South Korea, India, and other locations.

There is an important thing happening here in fintech beyond just where the venture capital or the institutional capital are moving – regulators are connecting up. We, in support of the Treasury and the Competition and Markets Authority (CMA), will sit on the advisory panel for the open banking application program interface (APIs). And we are involved, on behalf of the membership, lobbying in the UK and Europe or doing advocacy work to promote fintech.

ED: Tell us a little bit more about the global fintech federation. It sounds more like a trade association rather than something more substantive. What is the plus of the association and the federation, and what are the initial goals that you’ve set for yourself?

LW: The thing about digital it is global. And the West Coast entrepreneurs have probably proven that, most certainly, over the past 40 or 50 years with mobile technology, internet connection, and the app. We all see how digital has become really scalable and global. In fintech, increasingly, the talent is global. In our own community, 30% of our start-up CEOs or founders are non-British or foreigners.

The capital is increasingly global. Institutional venture capital, FI capital, and CBC capital is global. But increasingly, even at an angel capital level, platforms are increasingly global. And we are seeing the rise of really digital and venture capital as an alternative asset class.

It made sense to us with our partner Innotribe to launch a federation of hubs to connect up all of the ecosystems like Innovate Finance around the world –as a platform for those hubs to come here at Sibos, to come to our own conference in London at the Guildhall, and use those two platforms to build out. We’d hoped to be able to get better global representation of fintech at Davos as well, which is the other important global platform for us.

But increasingly we want to be able to promote all of the fintech platforms that are going on in Asia, Latin America, Europe and the rest of the world. We want to share the knowledge and understand where capital and investment trends in fintechs are going, and really use it as a platform to get a better understanding of how to collaborate. Simply, from my perspective, we are connecting the entrepreneurs and capital, trying to make that more efficient – since the talent, place, and technology are quite global.

Fintechs transforming the financial services industry

ED: How much of the entire fintech phenomenon is actually transformational to the financial services industry? And how much of that is just a different model by which we're dealing with, say, excess capacity in the talent pool, the financial services industry, and access to capital? And it will it evolve? I have a concern that if global interest rates start to go up even 1% – which right now is in no danger of doing that – but if the Fed raises interest rates in one or two steps, a lot of the fintech funding will actually evaporate.

And then the story will start looking quite different, and then you need to focus on what is substantive about the fintech phenomenon. How do you see that evolving? I'm asking this question also because I want to see the overall trend – what is this part of? At the end of the day, a business has to run on its own merits – it has to be profitable, it has to have customers. But if you take ten fintechs, maybe six of them are ideas and four of them are businesses.

LW: Well, I think that is an excellent question. From my perspective, the global fintech ecosystem is in the early stage of development. I think we're just getting through the first era of fintech, which has been predominantly retail –payments, remittance, peer-to-peer– quite often unregulated or on the fringe of the regulators. And quite often innovative –that the solution being delivered to retail customers is innovative, but there isn't anything really disruptive. It’s still using the rails, it's using the fixed cost of the infrastructure. And again, one of the biggest trends we've seen in fintech in 2016 is the move of fintech into capital markets.

So it is in the early stages. But just to take your point systematically, I think we are in an interesting time. So, with zero interest rates, negative yields on fixed income, and the impact that it had on liquidity, it isn't just fintech, it is tech. And where that liquidity is moving around the system that would be impacted by any sensitivity if and when rates start to creep up, which I think most of us who are vintage really expect to see inflation as a good sign coming back into the global ecosystem for all sorts of reasons, not least of which across global asset classes and the amount of money now pouring into equity markets as a result of asset rotation.

I think in the context of Fintech, one of the reasons that it's become so popular is that, first, the global pool of money from payments on the retail end to the fixed income market on the institutional end are absolutely massive. And so, the appetite for entrepreneurs to access that money and either disintermediate or deliver it to customers on either buy or sell sides of the equation more efficiently is huge. And a lot of the entrepreneurs coming out of fintechs are really experienced in financial services, investment banking, wholesale entrepreneurship, or are very savvy retail people.

But, second, even with a pop in interest rates and inflation, many large global banks have a number of infrastructural problems. If you take away zero interest rates in that, they do have cost income ratios that are unsustainable. And their own use of capital, whether it is due to the constraints of adequacy and making sure that they are capitally efficient from a regulatory perspective, or that they're actually investing correctly in their own infrastructure and their ability to deliver products and services, I think, will be under scrutiny for the next 10 or 15 years.

And a lot of that traditionally, when the turn on capital is high and margins are very high on products, FIs, in particular, haven’t been very good at getting the end-to-end process automated. We do have a lot of spreadsheets, processes, and manual workarounds that are actually exacerbated and made more complex by regulatory reporting. I think we need to see a decade where that shakes out.

But to your point, it is difficult to talk about fintech and banks. Because within fintech and banks, we are talking about so many different verticals – from retail to wholesale – and so many different business models that, I think, what we will see is a greater focus on specific areas of the financial services landscape.

I don’t think we should include insurance companies or other financial institutions here. This just isn’t about banks; it’s increasingly about asset managers.

ED: Do you see a maturing on the kind of fintechs that get assessed across the bar? Because investors should become more discerning. And the kind of fintech ideas that get funded and then cultivated should feed into a phenomenon of sorts. You just mentioned the cost in combination of banks, so that is a great concern. But at the same time, financial services need to mature to meet with the revolution that’s taking place in the internet – the Internet of Things and the supply chain revolution. Do you see a maturing or a greater discernment of the way in which fintechs are being funded today?

LW: I do. And so let’s get back to the trends. What would the evidence markers be for us to make an assessment of how we would look at that maturity? The rise of corporate venture capital, and in this case institutional investment in fintechs, has been one of the biggest phenomena. In terms of institutional venture capital money, whether we always focus on the West Coast of the U.S. or whether it comes from the UK, has been broadly in the retail space. You still need to have deep pockets to get through a full cycle and get through VC funding rounds.

But the investments that many financial institutions are making in fintech are anecdotally in the billion dollar, over two- or three-year programs for accelerators or labs. The degree of participation we have seen and the discretion that institutions are using in how they partner with fintechs are probably two of the best markers that they are taking it very seriously. You could look at R3, which is an extraordinary model of a consortia where the banks have really come together to develop new rails or infrastructure.

In the UK, we’ve got nine banks focused on the open banking API in advance of PSV2 in Europe, regardless of what goes on in Brexit.

And broadly, the level of collaboration and again, I'll come back to the EUI reports that were launched here. EUI really reached out to our community through our capital markets working group to produce a landscape of where they see the nine big technology trend in IB, cap markets, and particularly where the players are and where the level of collaboration is. And relative to a couple of year ago, the collaboration is significant. There’s a lot of co-investment and investment in proof of concepts, trying to move technologies along.

I think, to get back to your early point, great signal, and good early stage but too early to tell. The point you raised is important in a macro economic environment that looks like there’s a lot of implied volatility, and we see the volatility with moves particularly in interest rates or oil, quite often. But with increasing political risk in the world, which is something probably even newer in our lifetime in the recent years – we had UK referendum, U.S. election, and French and German elections coming up – it is actually quite an uncertain time.

And so I think as many of those forces, when we’re talking about zero interest rates, will probably have an impact on the macro financial system. But it is difficult to see at this stage that fintech is going to slow down and stop. In fact, it is actually almost doubled in many ways since the last time we were talking. And I think that was driven out of the need to get infrastructural changes and to do something about some of these issues that we are speaking about, whether they’re lost income-based or they have to do with how we efficiently move products between capital and customers or consumers.

ED: Who are the winners that you see are coming up, in terms of the stable that you have?

LW: In the retail, payments and remittance spaces, peer-to-peer and crowdfunding are the big winners that attract the bulk of investment. That’s not to say the analytical or big data plays aren’t as interesting. It is just that they are on a slower path of adoption for banks. And in fact, I think that with the rise of capital markets, analytics and bigger data, either in reference data or research, are starting to make better sense.

The emerging fintech mega trends that we see in 2016 going into 2017 are all around sandboxes, as a mean for fintechs and institutions to participate in open API markets and shared data sets to accelerate some of the solutions they are working on. What are the big solutions? Regtech is a megatrend; it is at the top of the agenda. And regtech, if you’re an institution, is about having the controls in place, in a more real-time or predictive way, to spot misspelling and misappropriations going on, whether it’s in the front to back office.

Regtech, if you’re a regulator, is as much about allowing you to be plugged into financial institutions to do the same thing. But in a counter party, you don’t handshake. Regtech is huge. The rise of artificial intelligence (AI) – and this is something that’s important to me having worked with tech companies that have things we call smart algorithms, Bayesian learning networks – systems that are able to work out of determination preferences and understand by looking at the standard distribution of the way people express preferences, what works for most people, what doesn’t, where there are standard deviations in the behavioural system of consumption.

I think those are highly important to financial services and we’re going through an era where organisations are learning how to do that. The best, I think, are expressed in players that we have in either the analytical regtech space in front office trading than in machine. Looking at analytically how you spot trader biases to improve trader performance, that goes right back to the end of systematic trading and having algorithmic trading networks…

And I'll just mention in the infrastructure case, when we were here last year, blockchain surprised us all. That distributed ledger blockchain was the big trending topic for banking executives. Well, a year on us, it’s going full force. So, in the settlement process now, whether those are custodians looking at distributed ledger technologies to get the cost down and to get the timeframes to settlement down, you would have noticed recent announcements of people really focusing on digitising assets even in the settlement process to look at releasing liquidity through the period.

These are pretty extraordinary things. I’m not even sure we would have thought that it would emerge last year when we were sitting here talking. So, there’s quite a bit of interesting stuff going on.

Brexit and the future of fintech

ED: Has Brexit touched you in any way?

LW: The vote on the 23rd of June shocked many people. It certainly shocked not just fintechs but businesses in the city. As an independent members’ association, we didn’t have a view on Brexit, one way or another, since we were a small organisation. But we polled our members in March and 80% of our membership wanted to remain. That correlated with most city polls. Tech London Advocates had a poll of 2,000 digital convents, all at the 80% mark. So when it happened, it was a great shock.

We spent two or three weeks with each of our governance bodies, convening the membership in a town hall after polling them. The most important message that we delivered to the government from polling our membership was whatever we do, make sure that we maintain the attractiveness in investment that we’ve had, particularly for start-ups. But the message was clear: maintain access to the single market, maintain access to financial services, passporting, and maintain access to free movement to Fintech labour and talent.

And so those results were pretty consistent with trade associations and what everyone in the city was saying anyway. But it was really an emotive time. Three months later, 12 weeks on, everything's back to business and we are waiting for Q3 numbers to come in but it looks as if we’ve had a record amount of capital raised for our own fintech community. And in the typical Anglo-Saxon fashion, I think people have just dusted themselves off.

Again, if you put Euro clearing aside, which certainly is an issue, if you’re a fintech or a start-up or an institution, the message to government has been independent of what the government needs to do around Brexit, the agenda is the same: maintain access to the single market, passporting, and talent. But independent of that, fintechs and institutions will have to make their own decisions in their own timeframe to make sure they’re meeting their own shareholder, customer, and staff needs.

Or we’re going through a process where Brexit, and practically what needs to happen is in a different time zone that isn’t aligned either to momentum start-up talent or capital, or institutional capital. It’s really quite extraordinary.

ED: Thanks very much for this update. We’ll look forward to meeting you regularly because this phenomenon is an evolving one and we see other governments starting to take their own position, including the U.S. but also far away in Hon Kong and Japan. You seem to have set the tone and the mechanism by which many of the other initiatives are modelling themselves. So, tracking how you’re thinking about it and how it’s evolving from your perspective is always important to us.

LW: That’s really kind of you to say that, and I always enjoy our discussions because we actually get to the structural nitty-gritty of what’s going on with the ecosystem. What I would say is if you look at the hub report, next to London, Singapore is the No. 1 hub on the planet with what the regulator is doing there and what they’re trying to achieve. Hong Kong is certainly coming online as a fintech hub. A start-up boot camp and rainmaker just recently launched a Mumbai hub project.

And of course, China venture capital in fintech has exceeded U.S. venture capital for the first time in history. So it would be great in our next meeting to pick up what’s going on in Asia and some of the trends that we see there.

ED: I would draw a line between government funded and government capitalised. The moment there is government funding, it becomes too easy and you actually dampen the entrepreneurial aspect or energy that needs to drive this. So I would actually draw a line where in your case you’re saying that it’s not funded, that you do have to work with various agencies…. They’re closer to the entrepreneurial side of the evolution. I would draw a line that way.

LW: I couldn't agree with you more. I think one of our biggest strengths is that we’re independently funded. I think the elegance, though, of having been created from government as an independent entity, to then come back and lobby to the government is brilliant. And you know me, I’m poacher turned game keeper. I’m an asset manager and an advisor now that’s in a not for profit role. But I found that era of private-public partnerships really quite refreshing. But I couldn't agree with you more; follow the money and it’s all about where the enterprises, the talent, and the capital are going.


Institution: Innovate Finance
Country: United Kingdom
Region: Europe
People : Lawrence Wintermeyer, Emmanuel Daniel
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