Staying ahead in the fintech revolution
By Ian Lavis and Sarah Willington on behalf of Praxity Global Alliance
Read time | 7 minutes
The finance sector is undergoing a massive digital transformation as the snapchat generation demand more transparent, easy and secure financial services. Accounting firms are playing a key role in the revolution.
Independent accounting firms across Praxity Global Alliance are helping businesses and institutions to both lead and adapt to the fintech phenomenon.
Fintechs are transforming the way finance is delivered in areas ranging from digital banking to money transfers, lending apps and biometrics.
Accounting professionals are providing extensive support to help finance businesses stay one step ahead and avoid being overtaken by more agile competition.
Expertise is being provided by Praxity participant firms across the sector:
- Tech specialists are helping long-established organisations partner or compete with challengers and disruptors
- Tax and compliance experts are helping fintechs do business across international borders and deal with complex regulation
Dramatic transformation
The scale of the fintech revolution was highlighted recently at Praxity Global Conference in Athens. Author, commentator and fintech advocate Chris Skinner told conference delegates the dramatic transformation of the finance sector is being fuelled by the digitally wired younger generation.
Does this mean the death of traditional finance companies and institutions? Far from it. Some might need to ramp up their game and behave more like technology companies. While many recognise their shortcomings, with decades of regulatory experience under their belt, there are also a lot of things they do right.
As well as large customer bases, capital, resources, strong brands, well-established financial companies have deep expertise managing risks and navigating regulations. Fintechs might be agile, but as with every innovation, there’s risk.
In Athens, Chris highlighted the integrated approach and the need for radical change. “It is not finance versus technology but finance with technology. Banks and insurance providers were designed for the industrial revolution. They were built around paper, cheques, cash and ledgers. Those things are of the last century. But we live in a digitalised network of software and servers, which requires banks and financial service providers to completely flip their business model.”
Opportunities and risks
The fintech revolution has only just begun. We’ve barely scratched the surface when it comes to transforming how financial services can be structured and utilised.
Vast amounts of money is being invested. In 2018 alone, US$111.8bn was put into fintechs, twice the amount than the year before. The future of financial services will be based on the ability of institutions to use contextualised insights to enrich consumers’ daily lives.
In many cases, fintechs are moving into lending areas that have been ignored by banks and financial services. In other cases, they are in direct competition, although the trend is towards collaboration.
According to a recent thought leadership article by Praxity participant firm Plante Moran, banks and credit unions are collaborating with fintech companies to offer customers quick and convenient access to an array of banking services. This includes automated online payments, fund transfers, personal loans, investments, and more. Yet, these partnerships could be subject to increased scrutiny. And as they scale up, fintechs could find complying with financial regulations their biggest challenge.
Troy Snyder, partner at the US firm, comments: “The biggest risks are often unforeseen. Fintech companies have limited experience dealing with both regulations and regulators. And banks and credit unions aren’t accustomed to the fast-paced, changing environment in which fintech companies operate. It’s not hard to imagine how these opposing weaknesses could overlap and contribute to a significant risk management blind spot.”
It's a generation thing
Traditional finance organisations and fintech startups are poles apart in many ways. Take the average profile of a fintech. These are founded by very young people with a hunger to change the system. Their mindset isn’t limited. They can, so they do.
Christine Ballard, partner and CPA at Praxity participant firm Moss Adams, might sit in an office in Silicon Valley but her work with fintech start-ups based in Latin America has been a real eye opener. Christine describes these founders as “young, energetic, brilliant and solving local problems regarding getting access to banking and capital”. She adds: “Regulators are, for the most part, trying to learn and evolve at the speed of a 20-something with a million ideas.”
Christine has observed an interesting trend – millennial accountants resonate with millennial entrepreneurs. Crucially, the new generation of accountants not only understand tech, they understand the needs of end users.
Pivotal role of accountants
Young talent isn’t the only reason why accountants are important to the fintech revolution. Fintechs need a lot of advisory services that accountants offer, including education of stakeholders, early structuring advice, due diligence support through multiple rounds of financing, IPO readiness, valuation and other services through the fintech’s life cycle.
Adrian Ramaioli, partner at Praxity participant firm Mazars Argentina, which collaborates with Moss Adams to provide support for companies in Latin America, says the main focus of fintechs in the region is payment and billing.
He stresses fintechs often need help with governance, adding: “Administrative procedures, data flows and conceptual structures are important for these types of companies.”
Commenting on the collaborative approach of accounting firms within Praxity, he says “multidisciplinary teams are becoming more common” but he points out it is important to deliver comprehensive solutions via single point of contact.
These solutions often concern venture capital. Andy Mattson, tax partner at Moss Adams explains: “Many, if not most fintechs take venture capital money. For those that are organised with offshore holding companies, we find that proper tax and legal advice is critical.” This advice extends to helping entities avoid double taxation when operating across international borders to maximise the return for founders and investors.
Moss Adams represents at least 100 fintechs backed by venture capital. Several of these are ‘unicorns’ valued at over $1 billion, including QuintoAndar, Transferwise, N26 and Nubank. The most innovative fintechs are not simply changing the way finance companies operate, they are changing lives.
“The fintech I find most interesting from an impact perspective offers life insurance to AIDS and diabetes patients in Africa,” Chrisine says. “As part of the package, the insured has to take their medicines and get regular medical care. Personally, I really love this platform and think of it as a win-win situation.”
Compliance
Compliance is also important. Successful fintechs attract significant institutional money fairly early on. As a condition for taking venture money, the fintech is generally obligated to provide robust investor tax packages.
Christine explains: “We do frequently ask our fintech clients if they have considered the local regulatory issues, and in many cases, the regulatory environment on the ground is rapidly evolving.”
She adds: “From what we’ve seen, regulators understand the need that fintechs are serving and are generally trying to come up with workable rules that protect the interests of consumers, provide for the requisite transparency, abide by laws and don’t overly burden these startups. The most successful fintechs are actively working with the regulators and educating them about their products and services.”
Challengers and disruptors
Fintechs tend to be disruptive of traditional, old-line banking businesses that have historically not reached a large segment of the population in countries that are not fully developed. In these countries, fintechs provide services such as loan processing, small commercial lending, bill payment services for those without bank accounts, payment processing, insurance products and cash transfers.
However, these firms need to tread carefully when it comes to tax. Stressing the need for expert advice, Christine warns: “The penalties for investors who are not provided proper tax reporting by their fintech investee companies are significant.” She adds: “Moss Adams has a good reputation in the venture capital community for providing high quality investor tax packages which has made us the go-to service provider for startups in several Latin American markets.”
Collaboration and acquisitions
While many see fintech startups as in direct competition with well-established finance companies, there is a growing trend towards collaboration and acquisitions. This is another area where accounting firms can provide expertise.
Andy explains: “One way that both institutional banks and startups could benefit is via a startup getting acquired by an institutional bank. Some of our clients expect that they will have an exit in this manner.”
And it’s not just accounting firms. The fintech revolution is providing opportunities for professional services firms specializing in law and regulation, tech platforms, algorithms, software, telcos.
“It is this marriage of cutting edge disruptive mobile technology with heavily regulated financial systems that is causing businesses and regulators to adapt and evolve. Accounting, legal and advisory firms need to understand the heart of these companies is the tech,” Christine says.