IFLR Fintech Europe 2018 forum: key takeaways

Author: Amélie Labbé | Published: 23 Mar 2018
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Keynote address – Technology as an opportunity not as a threat  (Paul Cuatrecasas, chief executive office, Aquaa Partners)

  • It takes a lawyer on average 92 minutes to review a contract but a machine can do it 10s, with 10 times more accuracy (Stanford University study);
  • Almost all big companies by market capitalisation are in the technology sector (10y years ago, only Microsoft was in that category): banks’ market capitalisation has grown 60% in past few years but technology companies have seen growth of over 1,000%;
  • 80% of companies feel threatened by digital startups, with half of the CEOs concerned (KPMG);
  • -There are over 15,000 fintechs out there with are disrupting the market: in the financial sector, challenging banks have no physical outpost, doesn’t carry out normal banking services and everything has to be done via an app. Established banks are looking in (RBS for instance);
  • 2017 was the year that more technology companies were bought by non-tech counterparts than by companies in the same sector. Old M&A is dead: 75% of EU executives say fintech disruption has caused an overhaul of their M&A strategy (Harvard Business Review).
  • Tips for successful M&A in fintech: find the right target, rank the target, build relationships, and value IP and talent as well.

Fintech 1Making sense of new regulatory requirements in Europe

  • GDPR is the right thing for all the wrong reasons, this 'monstrous piece of legislation’ could not come soon enough. It hands more power to the consumer, which is good because a majority of businesses are barely reaching the DPA standard, so there is a clear need for new legislation;
  • This legislation is demanding especially for smaller companies which are trying to grow: documentation is where everyone will fail (providing evidence of compliance especially). The sheer scale of GDPR means it touches almost all contractual relationships that a bank has.
  • It’s a fundamental balancing act: a bank has to be very minimalistic as to what it chooses to focus on to be compliant quickly. Some chose to focus on binding corporate rules previously – this pays dividends for GDPR;  
  • On the technical side, PSD2 and GDPR are not in conflict: you need to start giving everyone a bit more of a level playing field but don’t lower threshold of security;
  • When it comes to Brexit, passporting is not going to survive, so it’s likely there will be a shift of business towards Germany: recruiting tech people has got harder for example.

Preparing for the challenge of AI: legal, ethical and policy issues

  • Artificial intelligence (AI) isn’t built for specific applications, but there is a risk of falling into pattern of thinking it will transform everything. AI calls for us to relax some of our assumptions about corporate responsibility and other legal concepts;
  • Data is the new oil: you need better and better data – has the Cambridge Analytica scandal exposed that the best data is Facebook’s? Algorithms are creating wealth, building contracts – but for who? Algorithms don’t have a legal personality;
  • f you look at the long run impact of technology: there is an increase of the contribution of capital to growth, and a shift from labour to capital, which could work in AI’s favour.

Framework for expanded use of block chain technology

  • The market is not as mature as it could be though there are some established good companies – one thing that works in DLT’s favour is the financial industry taking this decentralised technology and applying it to industries that didn’t have any innovation;
  • What you’re looking at is a revolution is ownership, which focuses on the distribution and allocation of capital. One thing that bitcoin has done: removed password and provided a better way of securing data. The focus should be on good design patterns in DLT (common data structures, lean processes) and also asset-backed tokens.
  • Some areas are naturally suited to DLT: the supply chain, for instance, for there are many others. Alignment is the keyword here. Blockchain can contribute to creating a single source of trust and truth between organisations;
  • Smart contracts are usually seen as a legal term but people use them outside them outside of the legal world. There is a need to make these as costless as possible so they can grow to other sectors: for now, there is a disconnect between the legal world and the software engineering world
  • One issue remains: it’s difficult to open a bank account using cryptocurrencies in the UK. Esma isn’t ready to deal with crypto yet.

Finance and fintech collaboration – the dos and don’ts

  • If you’re a fintech and you want to advance collaboration with a big financial institution, how should you position yourself? Approaching them on a partnership basis is a start;
  • Challenge with fintechs is that they don’t necessarily have audited accounts or collateral – as an investor, you have had to come up with internal solutions to address these challenges. In addition, a fintech’s business model isn’t necessarily to make money/profit so both the large financial institution/investor and the fintech need to be clear on what common goals are;
  • Large financial institutions have an army of people all over GDPR, but most smaller fintechs aren’t even mentioning it – which is paradoxical when a lot of fintechs specialise in legal and compliance;
  • Some tips: it’s useful to plan collaboration using a phased approach; don’t be wed to where you think the partnership should go; don’t try and drive innovation via a structure, it’s really about trying and failing.

Regulating cryptocurrencies: where are we now?

  • Several approaches to this: ban (Bangladesh or Bolivia); isolation (China) and integration (Gibraltar). Five years ago, cryptocurrenices were more of a commodity than anything else but now there are issues of stability, consumer protection which are informing the debate;
  • But here is an asset working like a commodity than a currency;
  • Regulators really need a case-by-case review of cryptocurrencies to decide which is what:
  • They need to look at the economic function of the token and the underlying network/protocol. Some are very straightforward but the vast majority of some form of commodity-like asset (a lot are app coins, which only work in a given network);
  • Will tokenised model of fundraising win over private equity? Comparing voting rights to liquidity – for bitcoin, early stage investors have the ability to vote early, which is invaluable. This could be better than liquidity;
  • Case in point: in Gibraltar, the issue started off as a narrow topic area, but has now expanded in defined crypto asset classes.

Scaling up – financing options for start-ups

  • The kind of businesses that operate in the sector are not mass market, but niche which is why investors tend to look for grit and tenacity in entrepreneurs;
  • There is lots of K out there to do grow but companies that raise millions and still haven’t broken even or have a strong business case are a worrying trend;
  • What should companies think about doing to prepare for a crash? Tips include thinking ahead – put the business in survival mode; raising more money than needed, and; picking decent VCs to work with;
  • IP is becoming more critical in any industries, there no reason it shouldn’t be the same in banking. Banks could be in a tricky situation if they don’t develop their IP like smaller fintechs do;
  • Problem with some aspects of fintech: investors are at the mercy of regulators – investors are regulated entities, and they don’t want exposure to non-regulated assets or assets under scrutiny.

Capturing the regtech opportunity

  • Regulatory drag phenomenon – there is no regulation around new technology but regulation behind innovation. Companies have gone down three routes: building, buying or borrowing technology;
  • Three areas of focus: internet of things, DLT and AI. Regulators are pretty neutral on technology, it’s about the outcome;
  • Regtech's biggest development have been in KYC and AML: regtech tends to look at how we organisations process/look at data. It's helped facilitate reporting, and implement new regulatory requirements.