How investors can help merge FinTech into the traditional market

Convergence between FinTechs and financial institutions is slow, but more value-add investors can help, according to Viola FinTech partner Tomer Michaeli in a research interview with FinTech Global.

Most of the current ‘disruption in the FinTech world’ will one day end up in the existing financial system, Michaeli said. The issue lies in a gap between the various FinTechs and traditional financial institutions, and as a result, the convergence is slow to happen. The way to solve this is more value-adding investors, he stated.

Convergence between FinTechs, startups and financial institutions is going to be the main evolution of the FinTech sector in Israel over the coming years. Some people still believe that these different areas won’t come together, but instead something new will replace the current financial ecosystem Michaeli added. However, this will eventually change, and people will realise that while the existing ecosystem has its inefficiencies, which technology can modernise and improve, it was built on ‘strong and sound principles’ which shouldn’t be replaced.

Viola is currently in the process of raising its maiden global FinTech fund, having held the $100m first close late last year. The firm decided to raise the fund due to the ‘need to accelerate the convergent processes’ between financial institutions and FinTechs.

There is a target of between $120m to $150m, with a final close expected within the next few months. Around 40 to 50 per cent of the fund will be invested into Israeli companies, whether they are based in Israel or founded in another country by someone from Israel.

Contributions to the round are all from LPs that could potentially partner with the FinTechs within the portfolio. This vehicle will help to support the merging of the industries and can benefit first hand from the companies’ solutions. Some of the LPs that have already made a commitment to the fund include Scotiabank, The Travelers Companies, and Bank Hapoalim. Two top tier EU banks, two of the largest banks in Israel, an Israeli insurer and an asset manager have also provided commitments.

 “Financial institutions that are most likely to be disrupted are banks, asset managers, insurance companies, and that is why we consider them as the natural partners for a fund like ours,” Michaeli added.

Viola FinTech hopes to support growth between both its portfolio companies and its LP investors. The firm aims to support the formation of partnerships and earlier customers of the FinTechs and investors. Alongside this, Viola hopes get the LPs working together, by sharing data, market trends, and fostering a co-operative environment where ideas can be shared.

“We foster a cooperative environment where they can share ideas and best practices because they understand they’re all facing the same challenges and they can learn from one another in a non-competitive way,” he added.

This vehicle was launched by a new division of Viola, its current other investment groups are Ventures, Growth, Credit and Partners.

A slow convergence process is not the only issue facing FinTech companies, with regulators creating a consistently evolving regulatory landscape, in which new entrants have to comply with.

 “I think the regulators understands that FinTech poses a threat and opportunity, they are still struggling with striking the right balance between allowing FinTech startups to disrupt the existing system without jeopardising the sound principles the financial institution was built upon. That continuous discussion and dialogue with the regulator will always be a challenge for any FinTech player.”

The evolution of the market will also see solutions like machine learning and AI become the ‘bread and butter’ of financial services, as well as other new advancements in technology. Blockchain also has a big part in the future, but in specific areas that it can truly be disruptive. Michaeli believes that there is too much hope in these solutions at the moment, with it being used for services where it is ‘not the best fit’.

Big in Israel

Israel has had a strong B2B sector and also solutions around data and algorithms. This is why areas like RegTech, analytics, fraud and certain areas of lending are stronger in the country, according to Michaeli. However, B2C solutions and capital markets are not as popular and so there are less companies focusing on the space. “When you do see an Israeli company, usually it’s an Israeli that moved in New York and been working at places like Goldman for a while.”

Last year, Israel picked up the largest chunk of FinTech funding in the Middle East, with it receiving 90 per cent of the capital invested in the region. Israel saw $199m deployed to FinTechs last year, of which, infrastructure and enterprise software companies received the biggest share picking up $55m. The remaining capital was split between RegTech, data and analytics, payments and remittances and institutional investing and trading businesses.

Michaeli sees Israel as an ‘extremely vibrant’ market and one of the few places where there is a well-developed financing ecosystem from seed stage all the way through to late stage investors. Israel also offers a range of global financial institutions like Barclays and Citi, which offer support to the companies. Not only does the country offer these, but there is a ‘legacy of FinTech’ where people have sold or IPO’s their initial company and building their second or even third business up.

Michaeli said, “All of these ingredients create a very unique FinTech ecosystem and explains the fact the Israeli FinTech market and ecosystem is extremely vibrant.”

Areas the company is particularly interested in is where there are a lot of ‘middle-men, manual processes, insufficiencies or regulatory constraints’. He said, “Where technology can come in and disrupt processes and areas of the financial services that are characterised by these insufficiencies, there are a lot of opportunities.” One of the areas Michaeli sees these issues is in lending, with consumers still having to go through long processes, going through banks and filling out forms, but now this can be done by a mobile.

“There are still a lot of areas that change hasn’t actually happened yet. Areas such as anything around SMBs. We believe that today SMBs are still pretty much undeserved sector of the economy in terms of financial services and we believe there are a lot of opportunities around providing financial services to SMBs,” he added.

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