My last post on the future of banks was triggered by a billboard that I saw in New York on the way to JFK Airport. It said, “The future of banks is no banks”. This was probably triggered by Financial Technology (FinTech) startups which have attracted approximately $50 billion from investors over the past 5 years, according to Investopedia. This also speaks to the digital transformation that is underway in the financial industry.
In my post I noted that some of the biggest investors in FinTechs are the banks themselves. Many of the bigger banks have overlapping investments in these companies as a way to open up new revenue opportunities and connect with new consumer preferences. Bizjournal reports that Bank of America holds a yearly innovation summit which draws 200 to 300 FinTech companies every year where they evaluate the ones that they want to have a relationship with. Wells Fargo created an innovation lab to help FinTech startups and entrepreneurs work more closely with the bank.
In addition to the Fintechs, the banks as well as leading technology companies are developing FinTech technology in house. It is not surprising since FinTech is the intersection of technology and finance, that financial companies as well as technology companies would be some of the key patent holders: Here is a list of the top FinTech patent holders as of October 2015 as reported by Relecura.com.
Although no one company dominates the FinTech patents, Hitachi is the only technology company that ranks among the top 3 patent holders. FinTech patents are distributed among a wide range of patent holders. The top 200 patent holders constitute only 39% of the total.
The FinTech Unicorns (Startups with $1billion or more valuation) who are creating such an investment frenzy usually have patents numbering in the single or double digit range.
This table indicates where Hitachi has been granted the most patents in terms of financial and technology categories according to Relecura.com. This table does not seem to include the large number of Hitachi patents in mobility and cloud computing across other sectors.
While FinTechs rely on technology they rarely have the resources to develop deep technology. FinTechs rely on the technology developed by the established financial and technology companies to build innovative, new business models by knitting these technologies together with software. FinTechs did not invent the cloud, but clouds are key to their success. The advantages that FinTechs have over the established banks are the freedom from legacy applications and infrastructure and freedom from regulation. They essentially have a blank sheet of paper to start with.
Last month the U.S. office of the Comptroller of the Currency (OCC) published a white paper announcing its focus on the FinTech industry calling for “responsible innovation” in developing “new or improved financial products, services, and processes to meet the evolving needs of consumers, businesses, and communities”. The OCC defined a framework for understanding and evaluating innovative products, services, and processes at OCC-regulated banks (national banks and federal savings associations). This white paper was viewed as good news by the banking and FinTech industries as it shows that the premier regulatory agency in the U.S. appreciates the importance of the emerging role that FinTechs play and appears committed to facilitating discussions between innovators and regulators as well as legal and IT professionals early-on in the development process. before too many resources are devoted to a project that may carry “fatal regulatory flaws”.
Hitachi is also committed to facilitating discussion between technology and financial innovators. Recently Hitachi announced the establishment of a Financial Innovation Laboratory at their Global Center for Social Innovation in Santa Clara. Operations began commencing this April to pursue FinTech projects with strategic financial partners in the Americas as they do in Japan. Using a systemized customer collaborative creation process with unique methodologies, tools, and lab space, called NEXPERIENCE, Hitachi will accelerate research and collaborative development of FinTech technologies including blockchain technology to support business innovation in financial industries. As I reported in a previous post on blockchain, this seems to be a key technology for the financial industry as well as other industries where a distributed ledger could be of value.
Hitachi is a founding member of the Linux, open source Hyperledger Project which was formed in February to advance the blockchain digital technology for recording and verifying transactions. The diversity of the member companies involved in this project underscores the potential of this technology. Hitachi was joined by ABN AMRO, Accenture, ANZ Bank, Blockchain, BNY Mellon, Calastone, Cisco, CLS, CME Group, ConsenSys, Credits, The Depository Trust & Clearing Corporation (DTCC), Deutsche Börse Group, Digital Asset Holdings, Fujitsu Limited, Guardtime, IBM, Intel, IntellectEU, J.P. Morgan, NEC, NTT DATA, R3, Red Hat, State Street, SWIFT, Symbiont, VMware and Wells Fargo. Toshiya Cho of the Hitachi Financial Innovation Lab is a member of the board and Satoshi Oshima from research sits on the Technical Steering Committee for the HyperLedger project.
Development of new technologies like Blockchain will play a major role in the digital transformation of the financial sector. Digital transformation will involve many moving parts working together: core financial companies, startups, regulators, consumers, technology companies, and open source consortiums. The future of banking will certainly not be like the banks we have today.