Fintech market moves beyond lending

Goldman Sachs, arguably the world’s leading investment bank, has not been the greatest success story of recent times. After all the challenges of the 2008 financial crisis and the post-crisis regulatory glut, its profitability has declined sharply.

Today its stock market valuation, though far stronger than most banks, puts it on a so-called price-to-book valuation of 1.1 times. That is to say, its shares are worth 10 per cent more than the value of its net assets.

Compare that with the market’s view of Lending Club , the upstart peer-to-peer lender. Despite a scandal last year founded in slipshod controls, and a fall in the group’s share price from a 2015 high of more than $25 to barely a fifth of that today, it is relatively far more valuable than the Wall Street titan, with a price-to-book multiple of 2.6 times.

No wonder Goldman wants to reimagine itself as a tech group and online lender rather than an investment bank. For years Lloyd Blankfein, chief executive, has been describing Goldman as a technology company with a bank attached — justified to some degree by its superior investment in IT, its army of technologists (nearly a third of staff are engineers) and the fact that so much of its trading depends on models, algorithms and computerised structuring.

In September, it reminded the world that it sees at least part of its future in a core wing of financial technology — online financing. Having launched an internet-based consumer lender and deposit-taker in the US in 2016, it is expanding that business to the UK.

All that has yet to follow is a re-rating of Goldman stock — from bank to fintech. Though with barely $1bn of Goldman’s near $1tn balance sheet so far devoted to online lending, it may have a while to wait.

Online lending is hardly the cutting edge of fintech, however, and may even be passé, judging by the Financial Times’ second annual Future of Fintech awards. Of the applications longlisted for both the Impact and Innovation awards — the winners of which will be unveiled in November — only a smattering were peer-to-peer lending engines or other online consumer finance businesses, a clear shift from 2016.

In a sign that the fintech business is maturing into more sophisticated areas, “regtech” is among the fastest-growing areas, accounting for a chunk of applications to the Future of Fintech awards.

Within regtech, there are further subdivisions, several of which appear particularly in vogue.

Many banks believe that the high cost and duplication entailed in each bank conducting KYC work would justify the setting-up of an industry-wide utility to carry out checks on their behalf

RSRCHXchange, one of the companies shortlisted for the Future of Fintech Innovation award, is among more than a dozen research marketplaces set up in anticipation of the EU’s Mifid II rules. The updated Markets in Financial Instruments Directive governs a range of activities by the financial sector, including the way in which equity analysts can market their research to asset management clients.

At present, research is often given away in exchange for a bundle of investment banking fees but from next January, pricing must be clear and “unbundled”. Investment banks and their research departments are jostling for position with clients and a range of business models are emerging.

RSRCHXchange and rivals such as Alpha and Research Tree are promising to cut through the chaos and provide clear access to multiple sources of research.

Another booming area of regtech is compliance. The financial crisis, and the market-rigging and mis-selling scandals that emerged in its wake, exposed a shocking lack of controls inside many banks. That realisation has led to a rapid expansion in compliance departments. The range of tools available to such staff has likewise expanded.

Know-your-customer, or KYC, checks were found wanting at banks such as BNP Paribas and HSBC, which received multibillion-dollar fines from US regulators over sanctions breaches and business links to criminals.

Many banks believe that the high cost and duplication entailed in each bank conducting KYC work would justify the setting-up of an industry-wide utility to carry out checks on their behalf. So far regulatory and competitive concerns have scuppered such a plan. In the meantime, though, regtech operators such as Tradle — another longlisted Future of Fintech applicant — see the KYC market as a rich seam.

Ever-tougher regulatory requirements relating to the recording of text and voice communications are another hotspot for compliance-related regtech. And here the likes of Novastone, FinChat and Recordsure look well placed.

All of which is not to say that fintech focused on good old consumer credit is dead. Consider QCash, founded by the Washington State Employees Credit Union, as a kind of low-cost payday lender. Or EFL, which uses behavioural science rather than traditional credit scoring to facilitate access to credit. Both were shortlisted for the FT fintech awards.

So e-lending has evolved — in some cases, seemingly with an ethical slant. Perhaps that will be Goldman Sachs’s next transformation.