2018 looks to be a good year for U.S. fintech companies, as advisory firms and banks plan to step up their investments.
The research firm Statista predicts U.S. fintech companies will receive $4.7 billion from all types of investors in 2018.
Even the smallest RIAs are looking to new technologies to enhance the client experience while streamlining operations through time-saving software and applications, according to the latest technology survey by Financial Planning.
Some of the areas of fintech likely to draw investment are the buzzwords of 2017.
“We’re seeing different ways of enabling funding or lending and measuring creditworthiness,” said Jennifer Byrne at Quesnay, a company that connects fintechs with traditional firms. “AI, machine learning and blockchain are top of mind in every conversation we have, whether it’s with investors or corporate executives.”
Financial firms of every size, including wealth management firms, banks and accountants, are looking to distributed ledger technology for ways to increase efficiency. Vanguard took a leading role, recently announcing plans to launch a blockchain network with the goal of reducing costs on index funds.
“There’s a lot of interest right now in the ecosystem around finding the right use cases for blockchain technology,” said Reetika Grewal, head of payments strategy and solutions at Silicon Valley Bank, and one of the leaders of its fintech accelerator.
“People are willing to put money into them, though there might not be a strong return on investment just yet. Are we going to hit the use case next year? I’m not sure. It’s still a young technology, so it will have continued investment and experimentation and learning from early solutions out there.”
Tyrone Canaday, managing director at the consulting firm Protiviti, predicted the use of blockchain technology for identity and access management will gain momentum in the new year. “There will be more use of blockchain in security because I think it’s needed and a good way to leverage that technology and protocol,” Canaday said.
Up till now, many blockchain pilots have been about gaining back-office efficiencies, such as in clearing securities, Canaday noted. She said she expects the use of blockchain to shift to ways to make money.
Institutional custody for crypto assets is the clearest use case for enterprise blockchain technology, argued Lex Sokolin, global director of fintech strategy at Autonomous Research.
“It’s a well-known problem in the market right now,” he said. “Before we see [cryptocurrency] ETFs, we need to have crypto-custody. Building out traditional finance infrastructure for crypto as an asset class is a very clear theme of 2018. It’s already underway.”
The rise of blockchain technology will mean more transactions will need to be monitored, Canaday said, pushing financial institutions and even some regulators to use regtech tools.
Anti-money-laundering and know-your-customer rules, along with identity verification, will continue to be the hottest areas of regtech, he said. Regulatory reporting by fintechs and banks will be another area of focus in the coming year, he said.
Though artificial intelligence seems to lead every discussion within financial services, some venture capitalists have become bearish on AI, considering it overhyped and a crowded field.
“We’ve recently passed on a couple of AI companies,” Michael Steinberg, general partner at Reciprocal Ventures, said at a recent conference. “It’s a gigantic opportunity, obviously, but there are also significant challenges for AI firms today.”
One is intense competition. “There was a study done about last quarter’s conference calls where the count of the number of times companies said ‘artificial intelligence’ in their calls was 800, up 25% quarter over quarter,” Steinberg said. “When you’re competing with 800 companies, it’s probably a difficult experience.”
And for AI systems to work well, they need to be trained on data, which is expensive to acquire, he said.
Putting aside such challenges, applying AI to tasks such as fraud monitoring and monitoring large transaction volumes is compelling, Canaday said.
“As we see more data distributed between entities, you’ll need something that will be able to analyze across these transaction sources to make sure you’re monitoring for fraudulent or suspicious activity,” he said.
Though fintech apps that help people save, manage their money and invest abound, there are likely to be even more coming out in 2018.
Grewal calls this the next generation of personal finance. “Things like, ‘Am I saving money the right way?’ ” she said. “More holistically, trying to make sure you’re being an advocate for the consumer when it comes to saving money and spending money wisely.”
Better experiences from fintech apps like Digit and Acorns are turning financial services firms into “ingredients” rather than “destinations,” according to Schwark Satyavolu, general partner at Trinity Ventures.
“So far we’ve tended to think of financial services as, you go to Chase or you go to Citi to get these different kinds of services,” Satyavolu said. “Now, small pieces of that are integrated in other experiences like Digit.”
Though bitcoin has quickly cooled off in price, Sokolin envisions bitcoin wallets taking off in the U.S. in 2018.
“Being able to spend your bitcoin or Ethereum investments in the traditional economy, that bridge will be built in 2018, whether it’s in banking, investment or an adjacent industry,” he said.
He pointed out that in the U.K., the neobank Revolut has a prepaid card and a million customers, enabling them to access their cryptocurrency from its app. It’s currently applying for a banking license so it can make loans.
The ability to review purchases in virtual reality may be closer to becoming reality.
“We’re going into a world where Amazon, Ikea and every retailer has a mobile app on the iPhone, and every iPhone starting with iPhone X comes with augmented reality capabilities,” Sokolin said. “Amazon wants to have experiences where you check out without swiping the card. They bought Whole Foods for that.”
At some point, Amazon customers will be able to scan their produce through the image recognition on their phone.
“It’s a bit of science fiction land, but I think figuring out the payments mechanism for that paradigm will be an investment opportunity for the future,” Sokolin said.
Along with investment, many observers expect to see more partnerships between incumbent institutions and young fintechs in 2018.
“If you went to conferences a year ago, people were asking, who’s going to win, the fintechs or the banks?” Grewal said. “No one is asking that question anymore. The question is, what’s the right partnership model? We kind of need each other.”
Executives are starting to view partnerships with fintechs as vital to their success, allowing them to keep up with the pace of innovation and to better adapt business models to tech advances, Canaday said.
To be prepared for fintech partnerships in 2018, he said, firms have been upgrading their tech infrastructure, moving from client servers to the cloud and revamping their data architectures.
“In 2018 we’ll see some of the leaders in financial services look for the fintech partnerships that will complement their business models, help them access new data sources and enhance the customer experience," he said. "At the end of the day, that’s where the rubber meets the road.”