Payments Critical to FinTech Growth
The IFS2020 document, “A Strategy for Ireland’s International Financial Services Sector 2015-2020, published last month, is a useful point to assess the story of Ireland’s experience in financial services since the beginning of the IFSC in 1987 when the Centre employed just 60 people. The industry now employs some 35,000 people and, having apparently shaken off the catastrophe of 2007/8, seems to show no signs of flagging.
The Irish it seems have a particular appetite and acumen for financial intermediation. However, very many of that 35,000 are employed in relatively low-level processing operations: Ireland needs to have far more front office positions to become a truly world-class financial centre but the country has the talent at its disposal to catapult itself to the next level.
What is encouraging is the level of activity around the area of financial services innovation where technologically minded entrepreneurs have spotted the vulnerability of old models and practices to disruptive new offerings.
There have been notable successes such as payments company Stripe, while the location of global innovation labs from MasterCard and Citi is a major vote of confidence. Consequently, the report makes much of the FinTech sector as a source of growth.
In 2014, Enterprise Ireland supported twice as many early stage FinTech start-ups than in the previous year. This thriving tech start-up scene, according to the report, combined with established research centres, “creates what is an internationally recognised ecosystem for FinTech research, development and innovation.” As a result, the report continues, “Ireland is uniquely positioned to become a leading global centre for FinTech investment – Where global multinationals can develop and implement their innovation strategies, while Irish-owned start-ups continue to scale up and succeed in global markets.”
If Ireland is to succeed in FinTech, then the area of payments will be critical. Payments is by far the largest sub-sector in FinTech – in the UK, Ireland’s main rival for FinTech investment, come STG20 billion has been invested in the FinTech sector and about €10 billion of this relates to payments.
The key reason for this is data, according to Vocalink CEO, David Yates. “Every payment has a business even or personal event connected to it,” says Yates. “A large part of payments innovation is about getting to that underlying data.”
With established start-ups such as Stripe and MasterCard’s strategic presence, Ireland has a platform for potential payments excellence, much in the way that GPA’s experience before its implosion provided the foundation for a host of aircraft leasing start-ups. The sale of Realex Payments earlier this month highlights another local success story.
Innovation around payments, however, is not just interesting from the point of view of growth and employment, new entrants also have the potential – rapidly being realised – to transform the retail financial services space utterly.
Legislation such as the Payments Services Directive and Second e-Money Directive has opened the door to new innovators to ride on the rails of the existing banning and payments infrastructure while offering a dramatically improved user experience. This implies that much of the value from those transactions will accrue to those new entrants with banks becoming relegated to the position of mere utilities. But in fact, as has been commonly observed, the value behind payments lies less in the revenue attached to the transaction. Put simply, payments data is the DNA of an individual’s personal financial profile. Understanding spending patterns is critical to those who would position themselves to meet consumer needs – it is a highly saleable commodity.
Perhaps the most dramatic illustration of bank disintermediation at the hands of FinTech innovators is that of peer-to-peer lending with companies such as Lending Club, which raised USD1 billion in funds through an IPO last December.
The legendary Citibank head, Walter Wriston, once remarked that banking was at heart a simple business: “You borrow at three percent, lend at six and you’re on the golf course by three.”
That may once have been true, but no longer