Deloitte has just published a new report about FinTech hubs [PDF]. There are many other FinTech city ranking reports besides this one, but many of these reports seem to be based on very traditional finance business premises. FinTech exists to disrupt traditional finance, and old premises are not necessary relevant. FinTech also includes so many different areas, so it is not easy to make assumptions on general competence, market and regulation.
The top-ranking cities in the Deloitte report are the usual suspects: London, Singapore, New York and Hong Kong. Their index includes variables such as government support, innovation culture, proximity to expertise, proximity to customers, foreign startups and regulation. Basically, we can say it is a combination of startup hub and finance services indices.
Competitiveness and startup hub indices are always hard to calculate. There are countries that – based on official numbers – are rated the best places to innovate, create new businesses, and acquire top talent, but in reality we don’t see so many success stories from those places. The pole position doesn’t mean you actually won the race. Theory and reality in business, especially for startup businesses, are often different.
When you throw FinTech into the mix, one issue is that there are many kinds of FinTech services. Some, like robo-advisors, crowdfunding and p2p lending, are services for consumers and enterprises. Then there are technical services that enable finance services and instruments, such as finance back office functions (e.g. KYC, payments, compliance and online accounts). There are also services and technologies that are not directly linked to finance services – such as data analytics and AI – that can be the basis for many kinds of services. I’ve written previously on how FinTech can actually have a bigger influence in money distribution and value chains than the end-user interfaces.
There are also significant differences in finance hubs. For example, Singapore and Hong Kong have small domestic markets, but they offer services internationally. London has been the finance hub of Europe with global contacts, but Brexit is changing its position in Europe. Then we have emerging financial centers, especially in developing countries that have an important role in domestic finance business, and also more global contacts.
A couple of months ago I talked with a person who used to lead Asian commercial banking functions for a leading global bank. He had left his banking job because he felt banks are not able to adapt FinTech and the new reality of finance services. He particularly felt this is the case for established finance centers, where incumbent finance institutions and regulators are significant stakeholders in old finance models. For example, he evaluated countries like China, Indonesia, Vietnam and Malaysia that could be in a good position to go directly to the next phase of digital finance services, while the old business and services are liabilities for Singapore and Hong Kong that make their progress slower.
Finance vs technology
There are many ways to measure the size of the FinTech market. China typically ranks at the top because it has the biggest market size, the biggest FinTech unicorns and biggest customer numbers. The US also has a big market and many unicorns. Some countries like the UK seem to have more local FinTech services, while other countries have more international services. For example, German neo-banks N26 and Fidor offer services in many countries in Europe.
As the buzzword implies, FinTech includes finance and technology components. Some FinTech companies are more “Fin” and some more “Tech”. It is not easy to categorize companies, but there is evidence that the tech-focused companies are more disruptive – for example, they offer things like digital currencies, distributed ledgers, software to replace finance instruments, and AI to replace finance professionals. The “Fin” companies are often founded by former finance professionals who then try to utilize technology to make traditional finance services and instruments more cost-effective and scalable – they believe more in evolution than revolution.
FinTech already has an important role in finance services in developing countries. For example, mobile money transfers, payment services and micro-lending are important in many places in Africa and Asia, where financial inclusion is also very important – not only as a business opportunity, but also politically and economically. In these places, FinTech services can become the backbone of the finance market.
When we talk about innovations and new services, we must also mention that this requires the right environment to attract talented people and creative thinking. For example, some finance hubs might offer relaxed regulations, but they are otherwise quite totalitarian regimes. Immigration and culture are also important to attract young talent. An apartment renting service, Nestpick, ranked the cities where Millennials want to live – at the top of the list (in order) were Amsterdam, Berlin, Munich, Lisbon, and Antwerp.
The points above are not an attempt to create a new FinTech hub ranking methodology. They are more random observations about how it is not so easy to categorize, compare and rank FinTech hubs. It’s important to remember that FinTech exists to disrupt the finance industry – it’s too simplistic to conclude that the old hubs are a good starting point.
Deloitte’s report is a good attempt to measure some potential success factors for FinTech. But it doesn’t really consider the many different aspects of FinTech, it doesn’t really take into account emerging markets like China, India or even Africa, and it looks like it measures straight evaluation and good intentions than disruption and markets for new services.
To be clear, there is no right and wrong ways to evaluate the FinTech markets. It is always nice to publish rankings – people like to talk about them, they are marketing tools for consulting firms and they can have political and business purposes too. But when companies, entrepreneurs and customers look at the real market and opportunities, the picture is always more complex in practice.
I have seen in many industries – e.g. mobile, media, advertising, retail – how easy it is to predict the incumbents have the best position to make new services. But often the disruptive challengers are finally the winners, and the market looks very different than the consultants expected. It will likely be no different with FinTech.