As 2019 draws to a close, the forecast for this year’s investments into FinTech and InsurTech, suggest that landscape has changed significantly compared to previous years. The number of entrepreneurial start-ups within the financial sector has dropped and there have been fewer funding deals, where entrepreneurs raised external capital. And this irrespective of whether the development is viewed by region (Europe, Asia, Latin America etc.) or subject area (InsurTech, WealthTech, RegTech, Payment & Remittances etc.[i]).
However, although fewer deals, the funding raised is on track to outperform 2018 as the average deal size has increased. This is seen by many market analysts as a sign of the market maturing with focus on business opportunities that have moved from the initial innovation and proof of concept phases into scale up across one or more markets.
During 2019 many financial companies have also examined their future appetite for inhouse innovation labs and the potential for creating new business functionality of relevance to products, distribution or customer services and engagement. Many insurers have quietly closed down their in-house ‘digital garages’ or embedded them into the direct retail operations, where the contribution of the innovation activities is measured directly against the financial bottom line. However, some of the incumbent companies continue to partner with and remain investors in innovative tech start-ups – again suggesting that the potential outcomes are viewed in terms of risks and returns.
Is FinTech just another dot.com boom?
Innovation enthusiasts have often claimed that FinTech/InsurTech would disrupt the market and challenge the existing players. The argument against this perspective is based on the reality that shows very few new ‘full stack’-companies emerging as disruptors: in the insurance sector most InsurTechs have been positioned as intermediaries and service providers – not insurers – and in the banking sector, many FinTechs have focused on payments services, where the regulatory requirements (incl. capital) are lower compared to operating a full suite of banking products.
Could the last decade’s investment into FinTech/InsurTech etc. be seen as equivalent to the Dot Com-boom at the start of the millennium as it could easily be argued that in both periods, there was a quest for technology to find a business problem it could solve? On the other hand, it is obvious that the Dot Com-age resulted in an accelerated digitalisation although it took another 10 years before the investments started to pay off. There is also no doubt that there innovative and potentially industry changing developments already ongoing:
- Blockchain: TradeLens is using the Blockchain distributed ledger technology to connect independent supply chain operators in the shipping and freight forwarding sector (e.g. manufacturers, shipping companies, marine insurers, port and customs authorities) and already has over 100 operators signed up. Processes and platforms for marine cargo insurance will change although the insurance fundamentals will remain.
- Big Data: Massive data collection is now taking place across many industries and allows dynamic and on-line monitoring of e.g. airplane engines or vehicle performance. Technologies such as AI and Machine Learning are already let loose on the data to interrogate patterns and develop new insights. The data is collected and owned by the manufacturers will provide insights into performance vs. design options by for example modelling implications of new usage patterns and shared ownership suggesting embedded Pay-As-You-Go insurance and finance provided by manufacturers.
- On-the-Top business overlays: Telecom operators in Africa and Asia have for years demonstrated how they can overlay the basic mobile telephony operations with additional business layers allowing money transfers, simple banking and micro insurance to be delivered at very low costs. Some insurers have ‘embedded’ small apps on smartphones, which are activated at purchase, resulting in a dynamic portfolio of policies covering loss and thefts, which allows pre-emptive measures when the phone ‘disappears’.
There are many more examples of successful developments – and of less meaningful ideas (e.g. one Asian life insurer was considering using Blockchain spending USD 1m without any benefits that could be realised via already existing in-house technology).
What to expect in 2020?
The maturity of the FinTech/InsurTech players will continue to develop in 2020, and the incumbents will focus less on promises from new start-ups and rather search for deployable business opportunities.
Investments will no doubt continue as there continues to be plenty of capital available especially via private equity funds. However, as only 5% of InsurTech start-ups become commercially viable, there will be probably be an increased focus on the sustainability of the proposed solutions and increased scrutiny of the business model assumptions embedded.
Big Data and Artificial Intelligence will continue to develop as for example the impact of new vehicle technologies combine data with ‘connected insurance’ and claims management; climate change (wildfires, raising sea levels and flooding on an unknown scale) requires new real time insights into environmental risks and impacts as historical risk data become less valid for underwriting purposes.
DeepTech: An initiative under the European Union focuses on Deep Tech, i.e. on development of novel technologies that can have a profound and positive impact to the collective challenges faced today. This contrasts with the hype of disruption with its focus on squeaking business models to claim a ‘disruptive’ market impact by applying existing functionality as is the case for e.g. many of the taxi-hailing applications that are more about social dumping in terms of income and worker/customer protection than applying new technology to a sector.
Where do you go from here?
It is always sensible to question the hype that flows from sector developments: What will change – and what will be the positive outcomes for customers and companies? How and where will the value be generated? Most innovation does not happen by accident (although 3M’s Post It-note is often used as an example) but involves research and design, modelling, construction and testing. Just because banking and insurance products are less ‘physical’ and more of a virtual concept (based on constructs such as money, time and risk) does not mean less efforts should be applied compared to development of a physical product or service.
‘Disruption’ from so called new business models are often exaggerated and the competitive advantage gained might not be sustainable if the technology, products and processes can be easily replicated. And business models primarily based on social dumping and tax avoidance often come to an abrupt halt when regulators start to take an interest.
So, enter into 2020 with both feet on the ground. Look for real change – maybe based on Deep Tech relevant to the sector – there are many challenges for financial services and many options for deploying meaningful and holistic solutions to address key issues. But focus, industry and technology outlook, including relevance and value from possible solutions remain more important than ever for the innovation efforts.