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Fintech’s next decade will look radically different

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The birth and growth of financial technology developed mostly over the last ten years.

So as we look ahead, what does the next decade have in store? I believe we’re starting to see early signs: in the next ten years, fintech will become portable and ubiquitous as it moves to the background and centralizes into one place where our money is managed for us.

When I started working in fintech in 2012, I had trouble tracking competitive search terms because no one knew what our sector was called. The best-known companies in the space were Paypal and Mint.

Google search volume for “fintech,” 2000 – present.

Fintech has since become a household name, a shift that came with with prodigious growth in investment: from $2 billion in 2010 to over $50 billion in venture capital in 2018 (and on-pace for $30 billion+ this year).

Predictions were made along the way with mixed results — banks will go out of business, banks will catch back up. Big tech will get into consumer finance. Narrow service providers will unbundle all of consumer finance. Banks and big fintechs will gobble up startups and consolidate the sector. Startups will each become their own banks. The fintech ‘bubble’ will burst.

Who will the winners be in the future of fintech?

Here’s what did happen: fintechs were (and still are) heavily verticalized, recreating the offline branches of financial services by bringing them online and introducing efficiencies. The next decade will look very different. Early signs are beginning to emerge from overlooked areas which suggest that financial services in the next decade will:

  1. Be portable and interoperable: Like mobile phones, customers will be able to easily transition between ‘carriers’.
  2. Become more ubiquitous and accessible: Basic financial products will become a commodity and bring unbanked participants ‘online’.
  3. Move to the background: The users of financial tools won’t have to develop 1:1 relationships with the providers of those tools.
  4. Centralize into a few places and steer on ‘autopilot’.

Prediction 1: The open data layer

Thesis: Data will be openly portable and will no longer be a competitive moat for fintechs.

Personal data has never had a moment in the spotlight quite like 2019. The Cambridge Analytica scandal and the data breach that compromised 145 million Equifax accounts sparked today’s public consciousness around the importance of data security. Last month, the House of Representatives’ Fintech Task Force met to evaluate financial data standards and the Senate introduced the Consumer Online Privacy Rights Act.

A tired cliché in tech today is that “data is the new oil.” Other things being equal, one would expect banks to exploit their data-rich advantage to build the best fintech. But while it’s necessary, data alone is not a sufficient competitive moat: great tech companies must interpret, understand and build customer-centric products that leverage their data.

Why will this change in the next decade? Because the walls around siloed customer data in financial services are coming down. This is opening the playing field for upstart fintech innovators to compete with billion-dollar banks, and it’s happening today.

Much of this is thanks to a relatively obscure piece of legislation in Europe, PSD2. Think of it as GDPR for payment data. The UK became the first to implement PSD2 policy under its Open Banking regime in 2018. The policy requires all large banks to make consumer data available to any fintech which the consumer permissions. So if I keep my savings with Bank A but want to leverage them to underwrite a mortgage with Fintech B, as a consumer I can now leverage my own data to access more products.

Consortia like FDATA are radically changing attitudes towards open banking and gaining global support. In the U.S., five federal financial regulators recently came together with a rare joint statement on the benefits of alternative data, for the most part only accessible through open banking technology.

The data layer, when it becomes open and ubiquitous, will erode the competitive advantage of data-rich financial institutions. This will democratize the bottom of the fintech stack and open the competition to whoever can build the best products on top of that openly accessible data… but building the best products is still no trivial feat, which is why Prediction 2 is so important:

Prediction 2: The open protocol layer

Thesis: Basic financial services will become simple open-source protocols, lowering the barrier for any company to offer financial products to its customers.

Picture any investment, wealth management, trading, merchant banking, or lending system. Just to get to market, these systems have to rigorously test their core functionality to avoid legal and regulatory risk. Then, they have to eliminate edge cases, build a compliance infrastructure, contract with third-party vendors to provide much of the underlying functionality (think: Fintech Toolkit) and make these systems all work together.

The end result is that every financial services provider builds similar systems, replicated over and over and siloed by company. Or even worse, they build on legacy core banking providers, with monolith systems in outdated languages (hello, COBOL). These services don’t interoperate, and each bank and fintech is forced to become its own expert at building financial protocols ancillary to its core service.

But three trends point to how that is changing today:

First, the infrastructure and service layer to build is being disaggregates, thanks to platforms like Stripe, Marqeta, Apex, and Plaid. These ‘finance as a service’ providers make it easy to build out basic financial functionality. Infrastructure is currently a hot investment category and will be as long as more companies get into financial services — and as long as infra market leaders can maintain price control and avoid commoditization.

Second, industry groups like FINOS are spearheading the push for open-source financial solutions. Consider a Github repository for all the basic functionality that underlies fintech tools. Developers could continuously improve the underlying code. Software could become standardized across the industry. Solutions offered by different service providers could become more inter-operable if they shared their underlying infrastructure.

And third, banks and investment managers, realizing the value in their own technology, are today starting to license that technology out. Examples are BlackRock’s Aladdin risk-management system or Goldman’s Alloy data modeling program. By giving away or selling these programs to clients, banks open up another revenue stream, make it easy for the financial services industry to work together (think of it as standardizing the language they all use), and open up a customer base that will provide helpful feedback, catch bugs, and request new useful product features.

As Andreessen Horowitz partner Angela Strange notes, “what that means is, there are several different infrastructure companies that will partner with banks and package up the licensing process and some regulatory work, and all the different payment-type networks that you need. So if you want to start a financial company, instead of spending two years and millions of dollars in forming tons of partnerships, you can get all of that as a service and get going.”

Fintech is developing in much the same way computers did: at first software and hardware came bundled, then hardware became below differentiated operating systems with ecosystem lock-in, then the internet broke open software with software-as-a-service. In that way, fintech in the next ten years will resemble the internet of the last twenty.

placeholder vc infographic

Infographic courtesy Placeholder VC

Prediction 3: Embedded fintech

Thesis: Fintech will become part of the basic functionality of non-finance products.

The concept of embedded fintech is that financial services, rather than being offered as a standalone product, will become part of the native user interface of other products, becoming embedded.

This prediction has gained supporters over the last few months, and it’s easy to see why. Bank partnerships and infrastructure software providers have inspired companies whose core competencies are not consumer finance to say “why not?” and dip their toes in fintech’s waters.

Apple debuted the Apple Card. Amazon offers its Amazon Pay and Amazon Cash products. Facebook unveiled its Libra project and, shortly afterward, launched Facebook Pay. As companies from Shopify to Target look to own their payment and purchase finance stacks, fintech will begin eating the world.

If these signals are indicative, financial services in the next decade will be a feature of the platforms with which consumers already have a direct relationship, rather than a product for which consumers need to develop a relationship with a new provider to gain access.

Matt Harris of Bain Capital Ventures summarizes in a recent set of essays (one, two) what it means for fintech to become embedded. His argument is that financial services will be the next layer of the ‘stack’ to build on top of internet, cloud, and mobile. We now have powerful tools that are constantly connected and immediately available to us through this stack, and embedded services like payments, transactions, and credit will allow us to unlock more value in them without managing our finances separately.

Fintech futurist Brett King puts it even more succinctly: technology companies and large consumer brands will become gatekeepers for financial products, which themselves will move to the background of the user experiences. Many of these companies have valuable data from providing sticky, high-affinity consumer products in other domains. That data can give them a proprietary advantage in cost-cutting or underwriting (eg: payment plans for new iPhones). The combination of first-order services (eg: making iPhones) with second-order embedded finance (eg: microloans) means that they can run either one as a loss-leader to subsidize the other, such as lowering the price of iPhones while increasing Apple’s take on transactions in the app store.

This is exciting for the consumers of fintech, who will no longer have to search for new ways to pay, invest, save, and spend. It will be a shift for any direct-to-consumer brands, who will be forced to compete on non-brand dimensions and could lose their customer relationships to aggregators.

Even so, legacy fintechs stand to gain from leveraging the audience of big tech companies to expand their reach and building off the contextual data of big tech platforms. Think of Uber rides hailed from within Google Maps: Uber made a calculated choice to list its supply on an aggregator in order to reach more customers right when they’re looking for directions.

Prediction 4: Bringing it all together

Thesis: Consumers will access financial services from one central hub.

In-line with the migration from front-end consumer brand to back-end financial plumbing, most financial services will centralize into hubs to be viewed all in one place.

For a consumer, the hub could be a smartphone. For a small business, within Quickbooks or Gmail or the cash register.

As companies like Facebook, Apple, and Amazon split their operating systems across platforms (think: Alexa + Amazon Prime + Amazon Credit Card), benefits will accrue to users who are fully committed to one ecosystem so that they can manage their finances through any platform — but these providers will make their platforms interoperable as well so that Alexa (e.g.) can still win over Android users.

As a fintech nerd, I love playing around with different financial products. But most people are not fintech nerds and prefer to interact with as few services as possible. Having to interface with multiple fintechs separately is ultimately value subtractive, not additive. And good products are designed around customer-centric intuition. In her piece, Google Maps for Money, Strange calls this ‘autonomous finance:’ your financial service products should know your own financial position better than you do so that they can make the best choices with your money and execute them in the background so you don’t have to.

And so now we see the rebundling of services. But are these the natural endpoints for fintech? As consumers become more accustomed to financial services as a natural feature of other products, they will probably interact more and more with services in the hubs from which they manage their lives. Tech companies have the natural advantage in designing the product UIs we love — do you enjoy spending more time on your bank’s website or your Instagram feed? Today, these hubs are smartphones and laptops. In the future, could they be others, like emails, cars, phones or search engines?

As the development of fintech mirrors the evolution of computers and the internet, becoming interoperable and embedded in everyday services, it will radically reshape where we manage our finances and how little we think about them anymore. One thing is certain: by the time I’m writing this article in 2029, fintech will look very little like it did today.

So which financial technology companies will be the ones to watch over the next decade? Building off these trends, we’ve picked five that will thrive in this changing environment.

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AT&T announces deal to spin off DirecTV into new company owned by… AT&T

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Enlarge / AT&T’s logo at its corporate headquarters on March 13, 2020 in Dallas, Texas.

Nearly six years after buying DirecTV for $48.5 billion, AT&T today announced a deal to sell a minority stake in the business unit and spin it out into a new subsidiary.

AT&T said its deal with private equity firm TPG Capital values the TV business at $16.25 billion. A press release said that AT&T and TPG “will establish a new company named DirecTV that will own and operate AT&T’s US video business unit consisting of the DirecTV, AT&T TV, and U-verse video services.”

AT&T will own 70 percent of the spun-off DirecTV company’s common equity while TPG will own 30 percent. DirecTV in its new form “will be jointly governed by a board with two representatives from each of AT&T and TPG, as well as a fifth seat for the CEO, which at closing will be Bill Morrow, CEO of AT&T’s US video unit,” the announcement said.

AT&T acknowledged that its DirecTV purchase didn’t work out as planned.

“With our acquisition of DirecTV, we invested approximately $60 billion in the US video business,” AT&T said in materials distributed to reporters. “It’s fair to say that some aspects of the transaction have not played out as we had planned, such as pay TV households in the US declining at a faster pace across the industry than anticipated when we announced the deal back in 2014. In fact, we took a $15.5 billion impairment on the business in 4Q20.”

Focus on 5G, fiber, and HBO Max

Separating DirecTV into a new unit will help AT&T focus on its key “strategic” areas of 5G mobile service, fiber Internet, and HBO Max, AT&T said.

“As the pay-TV industry continues to evolve, forming a new entity with TPG to operate the US video business separately provides the flexibility and dedicated management focus needed to continue meeting the needs of a high-quality customer base and managing the business for profitability,” AT&T CEO John Stankey said. “TPG is the right partner for this transaction and creating a new entity is the right way to structure and manage the video business for optimum value creation.”

The companies said they expect to close their transaction in the second half of 2021 and that it “is subject to customary closing conditions and to regulatory reviews.” AT&T said it expects to receive $7.6 billion in cash from the partial sale and that it will use the money to reduce its debt.

8 million TV customers fled AT&T

AT&T has lost over 8 million customers since early 2017 from its Premium TV services, which include DirecTV satellite, U-verse wireline video, and the newer AT&T TV online service. Total customers in that category decreased from over 25 million in early 2017 to 16.5 million at the end of 2020.

“Since AT&T closed the DirecTV acquisition in 2015, the business has generated cash flows of more than $4 billion per year, and the company expects this to continue in 2021,” today’s announcement said.

DirecTV’s deal with NFL Sunday Ticket apparently will not be disrupted, as AT&T said it will continue to “fund NFL Sunday Ticket for 2021 and 2022 (up to a $2.5B cumulative cap).”

Current video customers should not expect major changes, AT&T said.

“Existing AT&T video customers will become DirecTV customers at close and will be able to keep their video service and any bundled wireless or broadband services as well as associated discounts,” AT&T said. “AT&T and TPG are committed to a smooth transition and seamless customer experience and will work to further improve customer service and bring new features to DirecTV’s video services.”

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Armed with exploits, hackers on the prowl for a critical VMware vulnerability

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Hackers are mass scanning the Internet in search of VMware servers with a newly disclosed code-execution vulnerability that has a severity rating of 9.8 out of a possible 10.

CVE-2021-21974, as the security flaw is tracked, is a remote code-execution vulnerability in VMware vCenter server, an application for Windows or Linux that administrators use to enable and manage virtualization of large networks. Within a day of VMware issuing a patch, proof-of-concept exploits appeared from at least six different sources. The severity of the vulnerability, combined with the availability of working exploits for both Windows and Linux machines, sent hackers scrambling to actively find vulnerable servers.

“We’ve detected mass scanning activity targeting vulnerable VMware vCenter servers (https://vmware.com/security/advisories/VMSA-2021-0002.html),” researcher Troy Mursch of Bad Packets wrote.

Mursch said that the BinaryEdge search engine found almost 15,000 vCenter servers exposed to the Internet, while Shodan searches revealed about 6,700. The mass scanning is aiming to identify servers that have not yet installed the patch, which VMware released on Tuesday.

Unfettered code execution, no authorization required

CVE-2021-21972 allows hacker with no authorization to upload files to vulnerable vCenter servers that are publicly accessible over port 443, researchers from security firm Tenable said. Successful exploits will result in hackers gaining unfettered remote code-execution privileges in the underlying operating system. The vulnerability stems from a lack of authentication in the vRealize Operations plugin, which is installed by default.

The flaw has received a severity score of 9.8 out of 10.0 on the Common Vulnerability Scoring System Version 3.0. Mikhail Klyuchnikov, the Positive Technologies researcher who discovered the vulnerability and privately reported it to VMware, compared the risk posed by CVE-2021-21972 to that of CVE-2019-19781, a critical vulnerability in the Citrix Application Delivery Controller.

The Citrix flaw came under active attack last year in ransomware attacks on hospitals and, according to a criminal indictment filed by the US Justice Department, in intrusions into game and software makers by hackers backed by the Chinese government.

In a blog post earlier this week, Klyuchnikov wrote:

In our opinion, the RCE vulnerability in the vCenter Server can pose no less a threat than the infamous vulnerability in Citrix (CVE-2019-19781). The error allows an unauthorized user to send a specially crafted request, which will later give them the opportunity to execute arbitrary commands on the server. After receiving such an opportunity, the attacker can develop this attack, successfully move through the corporate network, and gain access to the data stored in the attacked system (such as information about virtual machines and system users). If the vulnerable software can be accessed from the Internet, this will allow an external attacker to penetrate the company’s external perimeter and also gain access to sensitive data. Once again, I would like to note that this vulnerability is dangerous, as it can be used by any unauthorized user.

The researcher provided technical details here.

Positive Technologies

CVE-2021-21972 affects vCenter Server versions 6.5, 6.7, and 7.01. People running one of these versions should update to 6.5 U3n, 6.7 U3l, or 7.0 U1c as soon as possible. Those who can’t immediately install a patch should implement these workarounds, which involve changing a compatibility matrix file and setting the vRealize plugin to incompatible.

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Verizon and AT&T dominate spectrum auction, spending combined $69 billion

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Verizon and AT&T dominated the US government’s latest spectrum auction, spending a combined $68.9 billion on licenses in the upper 3GHz band.

Verizon’s winning bids totaled $45.45 billion, while AT&T’s came in at $23.41 billion. T-Mobile was third with $9.34 billion as the three biggest wireless carriers accounted for the vast majority of the $81.17 billion in winning bids, the Federal Communications Commission said in results released yesterday. US Cellular, a regional carrier, was a distant fourth in spending, at $1.28 billion, but came in third, ahead of T-Mobile, in the number of licenses won.

The auction distributed 280MHz worth of spectrum in the “C-Band” between 3.7GHz and 3.98GHz. This spectrum will help carriers boost network capacity with mid-band frequencies that cover large geographic areas and penetrate walls more effectively than the higher millimeter-wave frequencies that provide the fastest 5G speeds to very limited geographic areas.

Mid-band spectrum doesn’t match the geographic coverage and obstacle penetration properties of the low-band spectrum below 1GHz, which was used extensively to deploy 4G networks. But there’s more spectrum available in the mid-band than in the low-band. Carriers are using a mix of low-, mid-, and high-band spectrum for 5G.

“It is essential to America’s economic recovery that we deliver on the promise of next-generation wireless services for everyone, everywhere,” FCC acting Chairwoman Jessica Rosenworcel said in the results announcement. “This auction reflects a shift in our nation’s approach to 5G toward mid-band spectrum that can support fast, reliable, and ubiquitous service that is competitive with our global peers. Now we have to work fast to put this spectrum to use in service of the American people.”

T-Mobile and US Cellular

Licenses are being distributed in 14 blocks of 20MHz each in 406 “partial economic areas” across the US, for a total of 5,684 licenses. Verizon Wireless (referred to as “Cellco Partnership” in the FCC auction) won 3,511 licenses in 406 areas, AT&T won 1,621 licenses in 406 areas, and T-Mobile won 142 licenses in 72 areas.

US Cellular’s $1.28 billion in winning bids accounts for 254 licenses in 99 areas, suggesting that it purchased licenses in parts of the US with lower demand from the big carriers. Overall, 21 bidders won spectrum licenses, which last 15 years.

Winning bidders must make down payments by March 10 and final payments by March 24, with the money going into the US Treasury.

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