Ireland’s fintech sector enjoyed a prolonged burst of growth prior to the pandemic, stimulated in large measure by direct government involvement and a more collaborative culture than is common in other hubs of innovation.
The government’s interest was signaled with the launch of its Ireland for Finance strategy in 2019, with a set of aims for 2025 that included substantially increasing employment in the sector.
As in many parts of the world, however, the fintech industry in Ireland is at a turning point. On the one hand, the pandemic is far from over, while on the other, the increasing importance of financial compliance and regulation present substantial challenges. In Ireland there is also the Brexit factor. Although the UK has struck a deal with the EU, the medium-term consequences of Brexit have yet to play out.
The first of these factors – the pandemic – came in with crushing force and compelled fintechs to prioritize survival. Despite the huge boost given to contactless payments, the continued reduction in consumer spending triggered by the coronavirus significantly affects a fintech sector in Ireland dominated by digital payments technologies.
There is also evidence that private equity or venture capital investors are still holding back on Series A funding, gravitating more towards fintechs with a track record of attracting investment. In its most recent report, the Irish Venture Capital Association found that deals in the €1-5m range fell by 20% compared to the same quarter last year. In addition, seed funding did not increase in line with the market in general. Seed funding rose by 9% in this quarter to €18.9m from €17.3m, compared to a 41% increase overall. Investors are more interested in the personnel at fintechs as well, since success depends so heavily on talented and capable individuals.
And just like their global counterparts, Irish fintechs face emerging threats from the Techfins such as Alibaba, Amazon and Facebook, with their enormous reach and economies of scale. Relatively free from the most stringent banking regulations, these giants are poised to offer fast, easy access to financial services because of their interest in personal data. Having said that, it was great to see the President of the European Commission reach out to US President Joe Biden inviting constructive talks between the two superpower trading blocs on working together to regulate tech giants.
Despite these challenges, Ireland has many advantages. Whatever the fallout from Brexit, for example, the country has an English-speaking, educated workforce and offers a common-law foothold in the European Union. It is already the European headquarters of Facebook, Google and Amazon.
The country also benefits from IDA Ireland, an energetic business-focused statutory body which, encourages inward investment that has a multiplier effect in terms of employment and nurturing of expertise. This is complemented by another well respected government agency, Enterprise Ireland, which supports and invests in Irish tech and other firms to scale globally.
While there are many external factors over which the fintech sector has limited control, data and regulation are key elements where it can take action to improve its future. This has been the basis of many fintech successes in Ireland but will become more critical as artificial intelligence (AI) and machine learning (ML) spread into more areas of financial services and commerce around the globe.
Data is essentially what fintechs are about, rather than gold bars or banknotes. AI already enables the larger institutions to monitor traders in capital and equity markets, but as we move forward, it will be an utterly necessary technology to optimize all the data that fintechs process. It will provide the insights that humans cannot ever hope to obtain manually. To give a simple example, an AI application can monitor payments and remittances to spot early on who is becoming a more regular customer deserving better rates of exchange. In another scenario, the technology can be used to monitor the credit risk profile of a customer to identify financial safeguards appropriate to both the borrower and creditor.
AI and ML are also powering the global regulation technology sector (RegTech). Ireland has had a strong presence in RegTech. The challenge for the country’s fintechs is not only whether they can leverage Regtech in a timely and scalable manner for deployment in a highly regulated environment but whether, importantly, the fintechs can set themselves apart from larger competitors which are now progressing along the digital transformation maturity curve.
What all this points to is the critical importance of Irish fintechs ensuring they have the right kind of data that is clean and fit-for-purpose, but also secure and compliant with regulations such as GDPR. The data flows for regulation, for example, are only going to be heavier. Where fintechs and financial services companies outsource their data storage, processing and analysis, they (and their regulators) will need to know they are entrusting it to organizations that are highly advanced in their techniques but also demonstrably on the right side of all data regulation. This is non-negotiable when data is the lifeblood of all financial organizations, but especially fintechs.
As we look further ahead in the fintech sector, whether it is the use of virtual reality (VR) for consultations or the entry of the Techfins, data quality will be essential. With further rough economic weather forecast, Irish innovators need to ensure they have access to every competitive advantage available, and at the very heart of this is harnessing innovative technology to do more with their data.
Listen back to the recent Fintech Ireland & InterSystems webinar to hear more from Peter Oakes and other leading industry experts on the opportunities presented by big data and advanced analytics for financial services firms.