Macquarie : Demand for digital wallets driving investment

New York, 04 Jan 2016

The shift towards digital platforms and ongoing innovation in financial technology is driving significant investment and change in the global financial services sector.

According to Accenture, in the period between 2013 and 2014 alone, global investment in financial technology companies trebled to $US12 billion.

Macquarie Capital's Peter Davis says the evolution of digital infrastructure - mobile devices and the software behind them - is what's driving the most change in the consumer sector and also forcing an evolution of the business finance sector.

Many current business ideas, business models and even company valuations are similar to the late 1990s, says Davis, who has more than 20 years experience in the sector.

'What's different now are the physical devices we use every day and their advanced capabilities.'

'Fifteen years ago, mobile phones were almost the size of a shoe and were good for making phone calls and the odd text message,' Davis says.

'Now, we've got infinitely more capability at our fingertips, including the ability to transact online, using intuitively designed apps and devices.'

These innovations have created significant opportunities for financial technology entrepreneurs in many areas of consumer finance.

The evolution of digital infrastructure - mobile devices and the software behind them - is what's driving the most change in the consumer sector and also forcing an evolution of the business finance sector.

One such area is digital financial advice, or robo advice, which Davis says is offering asset managers an opportunity to enhance their retail strategies. It is also offering institutional asset managers a new channel to develop a retail-centric offering.

A second important area of financial technology innovation is in lending, through the advent of 'peer-to-peer' lenders or marketplace lenders.

These lenders are using a variety of strategies and data to improve service to parts of the market, including small businesses, super-prime borrowers and sub-prime borrowers.

Leading platforms in the consumer lending sector include Lending Club and Prosper, while rapidly growing platforms in the small business lending sector include Dealstruck and On Deck.

Many of these platforms are also providing individuals and institutions unique opportunities to invest in loans.

Consumers are becoming increasingly comfortable with having personal and banking data and transaction details provided through via mobile phones, tablets and other electronic devices.

The most important motivators currently driving industry decision making are improving the customer experience, appealing to changing customer behavior, reducing the cost of services and expanding the breadth of services delivered to customers.

According to Davis, financial technology has improved the financial services industry's ability to understand the consumer, and innovate to improve their experiences.

Data gleaned from enhanced consumer feedback and digital activity, including real-time transactions and social media, has been the result of growing investment in purchasing and payment methods.

Sites such as PayPal and China's Alipay have revolutionized purchasing. Apple is the latest industry player to introduce its own mobile payments processing brand, Apple Pay, enabling mobile phones to act as digital wallets to facilitate contactless point-of-sale credit card purchases.

Despite new payment system innovations, some challenges remain. Many consumers are confused around how different payment methodologies work, and in some cases the cost of new payment systems are higher than traditional methods.

'Despite the use of cheques becoming increasingly antiquated, it may be one of the most cost efficient way for many consumers and small businesses to receive money as they are not paying the interchange,' Davis explains.

This cost differential has created opportunity for financial technology start ups and traditional financial services providers to develop cost effective payment methodologies.

'Efficiencies in networks and infrastructure and processing, as well as people's willingness to try out new things that make their lives easier, will ultimately create new ways to do things,' Davis says.