Financial technology or ‘Fintech’, with the help of technology-enabled products and services, is rapidly reshaping traditional financial services, making them faster, easier, cheaper and more accessible. Fintech empowers consumers to take charge of their financial decisions, leading to much greater financial literacy than ever before. In short, Fintech combines traditional financial services with the latest digital technology and Big Data products, making customers’ lives easier.
Different Financial Sectors that Fuel the Growth of Fintech
Whether we are purchasing at a local tea shop, going online and checking financial transactions or utilizing apps that track spending which allows financial institutions to make quick lending decisions, Fintech is all around us.
Fintech offers its services in First Wave Sectors (which scale quickly) and Second Wave Sectors (which scale slower and have more regulations and risks involved, with difficult customer acquisition).
- First wave sectors include peer-to-peer (P2P) lending, capital raising (crowdfunding) and online/mobile payments
Peer-to-peer lenders – These match borrowers to investors, shortening the approval time to hours. Some P2P lenders include Upstart, Funding Circle, LendingClub, Prosper Marketplace and more nonbank lenders.
Crowdfunding – These help charities and entrepreneurs by raising small amounts of money from large groups of people. Some crowdfunding platforms include: Indiegogo, GoFundMe, Crowdcube, Kickstarter
Mobile payments – These help people transfer money from their mobile phones, without a need for bank accounts. Some services also convert currencies for much less than what banks charge. Venmo, Samsung Pay, PayPal, Apple Pay are some examples
- Second wave sectors include international money transfer, asset and wealth management, insurance, investments (robo-advisors), digital security, Big Data analytics and Blockchain.
Robo-advising – Use algorithms to match portfolios to customer’s risk preferences. Giant BlackRock Inc., Nutmeg, Scalable Capital Ltd. are some examples
Blockchain and Bitcoin – Exchanges and banks are developing applications using blockchain, the free database that processes Bitcoin (electronic cash) transactions
Insurance – Traditional companies are investing in Insurtech start-ups, which cut the time taken to buy life insurance products, from weeks to minutes
Initially, fintech started offering services in first wave sectors with approximately 70% of start-ups falling under this category globally.
Quite recently, there is a rise of the second wave sector expanding the scope of financial technology even further. Blockchain-based services such as cryptocurrencies (a form of electronic cash) are still in its infancy with potential to transform technology that goes well beyond finance.
The Fintech Ecosystem:
In most cases, fintech products and services are developed by start-ups, which are young companies attempting to scale by creating opportunities in new markets or in established markets through a better value proposition. Therefore, fintech start-ups are small companies that aim to improve the way individuals and companies bank by collaborating or competing with established financial service providers.
However not all players on the fintech market are start-ups. Over the years, some companies have established themselves well in the sector like: PayPal, Alipay, Klarna, Square, BitPesa, Lending Club, OnDeck, SavvyMoney, Lendio, Credit Karma, LendingRobot, BTC and more.
Impact on Traditional Bank Branches:
A leading 2017 industrial report revealed that the branches continue to play an important role for a variety of services. Approximately 50% of those surveyed said they’d prefer to open a new deposit account or apply for a new loan in person. Furthermore, 25% said they wouldn’t open an account with a financial institution that didn’t have local branches.
Despite digitization, Physical channels – branches and ATMs – seem to continue playing major roles in banking, as:
- Comparatively simpler transactions have migrated to digital channels, but branches remain relevant for more complex transactions
- Stringent know-your-customer (KYC) and anti-money-laundering rules across various countries mandate personal contact for specific transactions, especially for first-time customers
- Many customers prefer personal advice about products even after conducting research digitally
- Similarly, many Millennials prefer to visit a branch to open a new account, learn about budgeting, understand retirement options, and to understand and apply for a mortgage
- Security concerns: Branches provide a sense of permanence and security that is difficult for digital banks to match
Traditional bank’s strategies to combat FinTech – investments, partnerships and acquisitions
It was only in the second half of 2010 that banks started realizing the emerging threat of FinTech companies. As FinTech start-ups started gaining momentum, a fear set among banking institutions, which led to the rise of bank innovation teams to combat FinTechs through investments, partnerships and acquisitions.
- According to MEDICI Research, nearly all FinTech Acquisitions in 2018 were led by American & EU Banks. And while American & EU FinTechs have been the major target of acquisitions, startups from Asia and other regions are also emerging as the preferred destination for acquiring FinTechs. Breaking down the total acquisitions by segment indicates that:
- 38% of all acquisitions have been made in wealth management followed by
- 19% in B2B FinTech
- 14% in Lending
- 10% in payments
- Another industry study revealed that the number of FinTech deals rose sharply, from just over 1,800 in 2016 to nearly 2,700 in 2017, showing continued investment in banking, insurance and capital market start-ups
- Global investment in FinTech companies between 2010 – 2017 reached more than US$97.7 billion, with the US start-ups accounting for 54% of all investments, followed by UK and India. Within this timeframe the FinTech deals globally, grew at a compound annual rate of 35%, with total funding growing at a CAGR of 47%
The 2017 growth in the sector was majorly driven by:
- Huge new investment flows from China, Russia, the Middle East and other emerging economies
- Huge investments in FinTech start-ups operating in payments and lending sector
- B2B FinTech models, where they help banks & other financial institutions upgrade their technology
- Rapid leap of ‘insurtech’ ventures offering advanced insurance-related services
FinTech to become the Driving Force of Future Banking:
Rise of Digital-Only Banking Consumer: A 2017 Digital Banking Consumer Survey provided significant insights into the rapidly changing behaviour of the banking customer:
- Around 46% of consumers use only digital channels (omni-digital customers) in 2017, a rapid increase from 27% share seen just four years ago in 2014
- More than 80% of consumers own a smartphone, amongst which 60% reported using mobile banking in 2017, up from 36% in 2012
- The segment of customers who used a variety of channels including both digital and physical (omni-channel customers) has been significantly shrinking over the past four years (57% in 2012 to 45% in 2017), being replaced by the “omni-digital” customer
- Human-interaction channels continue to shrink, falling from 15 to 10% during same period
Rise of Millenial generation:
- The most prominent factor that helped FinTech to become a disruptive force in the financial world, is the millennial population. Millennials are highly demanding and less loyal expecting personalized products and services at their convenience. They tend to check for information/ financial products/ advice online instead of following traditional ways of finding information
- As per a report for Millennial Disruption Index (MDI), 1 in 3 millennials change their bank in every three months in hope of getting desired experience, which in turn is increasing the need for FinTech solutions (which provide customized products and services as customer’s convenience)
In this FinTech era, the financial institutions need to adapt to the digital trends as early as possible, understanding the unmet needs of a digital customer in a better way. The growing expectation from Financial institutions is to shift from product-based models to customer-based models, equipping themselves to offer “real-time”, “easy to use”, “personalised products and services” to the digital customers through “customer’s preferred channel”. By finding the right blend of acquisitions, partnerships and investments, traditional banks have a leverage to come up with innovative solutions to address the evolving needs of their customers in this tech-first era of financial services.
This will also open doors for the banks to get exclusive rights to the advanced technology which could provide a competitive edge over others, rapid expansion into new markets, and even a new customer base.