By: Matthew Hemmings, Columnist, International Director
The financial landscape is rapidly changing. Sophisticated algorithms are enabling buyers to meet with sellers more efficiently and enabling supply to meet demand at large in better ways. Those algorithms are enabling insurance companies to calculate their insurance premiums more accurately, and fintech startups to execute transactions at unprecedented speed and low cost, just to name a few benefits. Even traditional banks, the business models of which can be threatened by rising fintech companies, are holding hands and cooperating with fintechs, given the advantages of such collaboration. Such cooperation has been driven by the understanding that legacy models of traditional banks won’t weather the storm of artificial intelligence and machine learning in the industry; therefore the better option is to build a mutually beneficial cooperation. Fintechs are indeed changing the financial as well as economic ecosystems and are enabling the financial system to achieve its objectives more effectively.
Investors can see the potential in fintech startups. In 2017, global fintech funding hit a new record high. Total venture-capital funding amounted to $16.6 billion in 2017, for a total of 1,128 deals. Only five years ago, in 2013, total funding was only $3.8 billion, for 594 deals. The biggest increase in funding for fintechs last year was seen in Europe, whereas in the United States, investors were more active in late-stage funding, with a concentrationon fintechs with high long-term potential. In Asia, funding declined for the first time in four years.
The funding for fintechs has led to the emergence of 25 unicorns today. Those companies provide a wide range of solutions, including loan services, payment-processing services and funding services to rising startups. Given their impact, those companies and others are leading to the emergence of the following trends in the industry:
The expansion begins.
Initially, fintechs focused on finding niche, underserved markets, and they deliveredservices to those segments with optimized user experience and marketing efforts. As those startups became more entrenched in the financial sector, they began leveraging their capabilities to develop more than one product, and even offer new asset classes by using their investment platforms before banks did. Fintech lenders are now offering additional lines of credit, micro-investing companies are expanding into personal banking, and desktop planning apps are planning to offer wealth-management services, to name a few examples. This expansion is associated with mergers and acquisitions along the way.
European fintech companies are likely to have a stronger footprint.
As fintechs get traction in 2018, they are bound to have a bigger global footprint. Moreover, those companies are likely to compete with rivals from the US for market clout. Banking startups from the United Kingdomand Germany are likely to challenge their American peers for market share and talent. For example, Revolut, a digital banking-services provider—which offers services that include a pre-paid debit card, currency exchange, cryptocurrency exchange and peer-to-peer payments—is launching in the US. Many others have similar plans.
Traditional banks adopt a different strategy.
More and more banks are now realizing that the disruptive effects of small fintech companies are growing at an unprecedentedscale. To address this, banks are embracing digital transformations and leveraging their digital capabilities to weather the storm, instead of partnering with fintechs. Moreover, these banks are increasing their investments in building their financial-technology capabilities as another measure to maintain their dominance in the financial sphere. Banks such as JPMorgan Chase, Citigroup and Goldman Sachs are pouring millions of investment funds into blockchain, data analytics, insurance, personal finance, wealth management, lending and financial-services software, among other areas, as a counter strategy. Those large banks had initially backed fintech startups, but now they are becoming more self-reliant.
High growth potential lies in Latin America and Southeast Asia.
The underdeveloped infrastructure in Latin America and Southeast Asia gives little to noaccess to much needed financial services, such as personal loans and funding for small businesses. Those services are an important prerequisite to growth. Given that the two regions are underserved in these areas and others, it is a great opportunity for fintech companies to deliver.
Both fintech startups and investors are aware of this. From 2015 to 2017, Southeast Asia outpaced other regions when it came to the number of fintech deals. In 2017, the deals in South America focused on the demographic with little or no access to banking services, in addition to other market verticals such aslending, payments, wealth management and enterprise finance.
It is not a technological game; it is a game of talent.
The above trends are only a fewof the many technological and geographical expansion trends in the financial industry. Other trends include the diminishing lines between financial-technology companies and commerce, and the return of the allure of cryptocurrencies. The financial sector is heading into a new and more efficient mode of operations and is becoming more able to meet the special needs of different individuals, regardless of how varied those are. The game that traditional banks and other financial institutions should play is less of a technological game than it is about competing for young talent. Young talent is a key driver for innovation and leads to competitive advantage. Companies that have such talent are bound to be the disruptive ones in the industry and set future trends.