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Fintech: Disrupting & Augmenting the Financial Landscape

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Overview

FinTech has today established itself as an industry in its own right, with diverse players ranging from start-ups and technology majors, to traditional players who are adopting emerging technologies to enhance their services. Growing attention from regulators and shifts in policies to make way for financial innovation further validate FinTech's role in shaping the financial services space.

With global market volumes approaching ~USD 300 Billion, it is interesting to study the regional strengths and opportunities within the FinTech market. China, at 99 percent volumes of APAC, may be a dominant market, but high local focus and geographic isolation make it an uncertain one too.

As individual FinTech segments grow, player consolidation is an expected outcome. However, as capabilities deepen and use cases evolve, are we likely to see convergence as well? Challenger banks, for example, are fast emerging as a super FinTech segment with the potential to address the service and scale limitations faced by e-wallets and Peer-to-Peer (P2P) lending platforms. The report traces key players and the latest use cases to track future trends across FinTech segments.

Fintech: Confluence of Finance and Technology

FinTech is a term coined for companies that combine financial services with inventive technologies. However, there is no industry-wide consensus on an exact definition of FinTech. Even global regulatory bodies and leading think tank organizations provide variations of the definition, ranging from the World Economic Forum (WEF), which describes it as 'the use of technology and innovative business models in financial services', to the Financial Stability Board (FSB), which is more precise by describing it as 'technologically-enabled financial innovation that could result in new business models, application, processes or products with an associated material effect on financial markets and institutions and the provision of financial services'i.

While there are many ways of defining FinTech, two key characteristics that stand out in all definitions are:

  • Use of neoteric technologies: Disruptive technologies include the use and deployment of cloud computing, robotics, artificial intelligence (AI) and machine learning, mobile applications, big data analytics, blockchain or distributed ledger technology, cryptography and quantum computingii. While many of these technologies have been in existence for decades, the extent of their application as path-breaking technologies in financial services is a key determinant of them being categorized as FinTech disruptions.
  • FinTech has the potential to augment, disrupt and revolutionize the financial services landscape, which is also its most prominent characteristic, both from a risk perspective and functional point of view. This ability to metamorphose the financial services industry is what differentiates FinTech innovations from the previous wave of technological inventioniii

FinTech holds the promise of reducing the cost of financial intermediation by screening clients and assessing credit worthinessiv, thereby improving access to finance and productivity. FinTech also has the potential to transform 'user experience'. The enablement of FinTech is dependent on the availability of computing power, intelligent algorithms, huge amounts of data and mobile hardware that provides constant accessibility. A mix of factors such as consumer preferences and adaptability, the regulatory framework, the reactions and attitudes of incumbents, and political choices will determine the extent to which the FinTech ecosystem influences the broader financial structurev.

Structure and Scope

The FinTech industry is composed of a diverse range of players, with majority of them being startups which are narrowly focused on applying technology to boost or amplify a specific process or financial service. Well-known players in this segment include robo-advisors such as Wealthfront and Betterment, peer-to-peer (P2P) lending companies such as Lending Club, and providers of digital wallets and online payment services like Venmovi. However, another segment of the FinTech industry consists of established technology players such as Amazon, Google, Facebook, Apple and Microsoft, which are using their deep market knowledge and decades of experience to expand their presence in the financial services industry and leverage their market position. At the same time, existing providers of payment services and transaction technology are increasingly making use of new and emerging technologies while traditional banks and financial institutions are adopting FinTech applications to improve their business processes and strengthen their market positionvii.

The FSB has proposed a broad classification of FinTech into the proposed areas:viii

  • Payments, Clearing and Settlement
  • Deposits, Lending and Capital Raising
  • Insurance
  • Investment Management
  • Market Support

There has been a rapid growth of innovations across all these categories of financial services, both at the retail level (households and small and medium enterprises) and wholesale level (non-financial corporations and banks)ix.

In the payments space, for example, the emergence of mobile and web-based platforms such as Alipay, Android Pay, Apple Pay, M-Pesa, PayPal and Samsung Pay offer end-users the ability to transact through online devices and reduce transaction costs involved in more traditional methods of paymentx. Crowdfunding connects investors with borrowers and for equity with issuers, through an internet-based platform; this is seen as a way of pooling funds and streamlining information- sharing beyond traditional financial intermediariesxi.

Shifting Consumer Expectations

Existence of market demand for innovation is essential to its success. A number of factors are driving the demand for FinTech innovations. Foremost among these is the omnipresence of internet access and real-time transacting capability of users of internet- connected devices, giving rise to higher customer expectations with regard to convenience, cost, speed and user-friendly features of financial services. This has, in turn, become one of the most important factors in consumer purchasing decisions. Financial inclusion is also an important factor across the globe. With an estimated two billion of the global populationxiii without basic banking and accounting services, FinTech is seen as an impetus to the provision of easy-to-understand and convenient services, lowering costs of adoption and enabling a wider customer base for financial services.

Demographic Factors Driving Demand

These include the rapidly expanding mobile- and internet- savvy population and its growing financial and economic influence across the financial ecosystem. Economic development in emerging and frontier economies has the potential to significantly increase the user base of FinTech. Also, many FinTech innovations may display positive network capabilities that influence demand. For example, the larger the number of users of a digital currency or crowdfunding platform, the more easily they can be used for transactions and hence greater the benefit to every userxiv.

Swiftly Advancing Technologies

Rapidly growing emerging technologies and unique business models are the key characteristics of the supply-side forces revolutionizing financial services. New technologies, such as big data, artificial intelligence, machine learning, cloud computing and biometricsxv, combined with mobile devices connected to the internet has added a new dimension to the digital world.

New Forms of Service Provision

Breakthroughs in financial services include new mobile payment services (e.g., PayPal [U.S., Europe] and Alipay [China]), new FinTech lending platforms (e.g., Lending Club [U.S.], Zopa [U.K.], Lufax [China]) and even low-cost investment products. The availability of such services at one's fingertips bodes well for increased choices and access to financial services, particularly in emerging marketsxvi.

Global Market Trends in the Fintech Industry

According to figures published by the Cambridge Centre for Alternative Finance, the Asia- Pacific market (incl. China) is the largest market for FinTech by volume, with the total market volume in 2016 at USD 233 Billion, surpassing the market volumes of USD 33.5 Billion of the Americas (incl. U.S.) and USD 8 Billion of Europe (incl. U.K.) by a wide marginxvii.

The Asia-Pacific market also registered the highest growth rate in terms of market volume, growing exponentially at the rate of 126.8 percent over 2015-16, in comparison with the smaller growth rates of 36.8 percent and 2.7 percent for the Europe and Americas markets, respectivelyxviii.

The growth in the Asia-Pacific FinTech market has been spearheaded by China, with 99 percent of the market composed of Chinese FinTech firms. The Asia Pacific market grew by 79 percentxix, excluding China. The Americas Fintech market grew by 22 percent in the year 2015-16, and is dominated by the U.S., with U.S.-based FinTech firms owning 22 percent of the marketxx. While Europe is the smallest market for FinTech by volume, I ts per-annum growth has beensteadier in comparison to the Americas and Asia-Pacific market, growing at 85 percent annually on average between 2013-16xxi. While FinTech, as an industry, is experiencing rapid growth spurt across continents, it is also worth assessing as to which models of FinTech dominate the broader industry in these regions. The table below lists the business models classified in the FinTech industry, along with their market volume in major continents across the globe.

Global Fintech Financing Trends

Financing deals in the FinTech industry have grown by leaps and bounds in the last five years, with 2017 registering record growth in Venture Capital (VC)-backed financing deals.

The year 2016 was the only year when VC-backed FinTech didn't witness growth. Primary reason for this was the lack of any notable mergers and acquisitions (M&A) and initial public offering (IPO) exits in the FinTech industry. Most FinTech startups were acquired to get an access to their advanced technology, and not because of their business success, implying that multiples were quite low. IPO exits were even worse only a few traditional payment and financial services companies went public, with no major startup in the list.

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Europe witnessed an exponential growth in VC-backed FinTech funding between 2016 and 2017, with funding growing by over 120 percent. On the other hand, Asia witnessed an 11 percent fall in VC-backed FinTech funding from 2016 to 2017, falling for the first time in four years.

Deep Dive into Fintech Sectors: The Key Game Changers

While FinTech, as an industry, has grown exponentially, there are certain segments and sectors within the FinTech space that have dominated the expansion of the industry over the years and will continue to play an imperative role in the future proliferation of the industry. In the following pages, we assess the key FinTech verticals that are pre-eminent to the success of the industry.

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E-Wallets

Ever since their inception, mobile wallets have garnered much attention, with questions around the value they deliver to their end-clients and their business results, in addition to their ability to compete with banks and payment systems. It is worth assessing the future direction e-wallets will take, as well as the key players that are shaping the segment.

P2P Lending

Investors on alternate lending platforms are increasingly gaining prominence as large institutional investors and banks dominate this arena. Such platforms require a different level of reporting, transparency and business processes from the startups (higher expertise in securitization, rather than in financial innovation)xxii. P2P business models are required to be either very well targeted and differentiated, or be the best in risk management (via big data analytics), or have a unique selling proposition (specific conditions, e.g. regarding collateral, payouts, particular clients) or have the largest funds for loan origination. P2P lending has firmly established itself in 3 countries U.S., Great Britain and Chinaxxiii. The Chinese market is the biggest because of the large population and lower availability of traditional sources of credit, but is highly uncertain because of a number of issues. Firstly, there are approximately 2,000 P2P lending platforms in China, majority of which are poorly diversified in terms of products and invest too little in risk management, resulting in soaring bad loans. Secondly, the geographic isolation of these models makes them susceptible to overvaluation and corruption. All these projects are Chinese, work exclusively in China and have only Chinese investors. Opening these models to foreign investors will improve transparency and increase reliabilityxxiv.

Crowdfunding

Crowdfunding has emerged as one of the most talked about and popular FinTech models in recent years. The collaboration between crowdfunding platforms and big corporates is gaining momentum. Technology giants can now try new services and technologies in a more interactive manner, thereby expanding their base of innovation-friendly customers. The crowdfunding market has witnessed increasing consolidation over the years due to the abundance of players n the market. Also, many companies are using their own platforms to raise capital. Many countries also support the growth and acceleration of crowdfunding companies. For example, Singapore, Malaysia, Hong Kong, Korea and Japan offer grants and co-investment programs for their startups. Banco Santander has partnered with Crowdfunder platform in providing startups with 50 percent financing along with 50 percent from the crowdxxv.

Crowdinvesting

Real Estate crowdinvesting and increasing partnerships with stock exchanges are the key trends gaining prominence in this segment. Stock exchanges offer crowdinvestors some pre-IPO settlement and trading in technology stocks, which are very small-cap relative to the main board stocksxxvi.

Challenger Banks

Challenger banks are often seen as rivals to the traditional brick-and- mortar banks. However, this perception is gradually changing. Innovational solutions are built in the mobile-first model, in contrast to a branch-first modelxxvii. These banks also serve the new generation of technology- and mobile-savvy population, and not the existing clients of traditional banks, which fundamentally changes their brand positioning, language and perception. Also, the level of service is entirely different in terms of quality and channels of delivery. With challenger banks, one can ask a question via a messenger or web chat service and get an answer immediately. Challenger banks are also complementary to various other FinTech verticals. E-wallets suffer from poor functionality (ApplePay, SamsungPay, AndroidPay) and difficulties with customer retention and scalability (AliPay, Paytm). Traditional banks (CapitalOne, MetroBank, SBI) use outdated technology and hence need a boost, in addition to being geographically limited. P2P lending platforms experience burgeoning customer- acquisition costs, and need continuously updated and advanced information with regard to a client's credit-worthiness to avoid credit risks. These areas offer potential opportunities for challenger banks to help other FinTech verticalsxxviii.

Most of the mobile-banking activity is concentrated in two segments the young, working class population (age group 18-19) and emerging marketsxxix. Geographically, challenger banks enjoy the largest demand in the U.K., U.S., Canada and Brazil. There is very little volume of challenger bank activity in Asia, which acts as an incentive for investors and banks in the region to look for solutions in Europe and the U.S. and implement them in Asia.

Blockchain

The Blockchain segment is highly fragmented and the wide array of implementation possibilities and technical complexity involved make it a challenging segment to dissect.

The most popular area, cryptocurrencies, is the most complex subject within Blockchain. There are over 150 cryptocurrencies, including 30 major ones, and 10 currencies with the largest number of transaction volumesxxx. They are mainly traded in China the four Chinese pools control 60 percent of the market. Cryptocurrencies are headlined by continuous emergence of tools such as high frequency trading and margin trading and index investment fundsxxxi. The other key areas of interest in Blockchain are healthcare, logistics, land registry, public and corporate document managementxxxii. Estonia, a global leader with regard to implementation of e-government services, is collaborating with Guardtime blockchain startup to create a unified base of medical records for people, which will be accessible to hospitals and insurance companiesxxxiii. Swedish authorities are collaborating with ChromaWay blockchain company to create a single registry of land plots on blockchain to make life easier for land sellers and buyers as well as banks that use land plots as collateral for loansxxxiv. While all areas in the financial sector, from payments to transfers, trade finance, stocks, collateral records, have registered significant activity in the Blockchain realm, the largest number of activities take place either in money transfers or establishment of new standards for the banking sector by regulators and associationsxxxv. A Singaporean startup, DaoPass, offers complete identification of customers through partner banks for Fintech startups, telcos, messengers and e-commerce players. Two American companies R3 consortium and Digital Asset Holdings are competing for the right to become the largest 'SWIFT' banks for the worldxxxvi.

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Summary

While FinTech as a financial sector phenomenon is gathering pace worldwide, Latin America and Southeast Asia will see the strongest FinTech growth in terms of market volume in coming years, thanks to a relatively young population and increasing demand for robust mobile products. The year 2017 witnessed VC-backed FinTech deals in Latin America focused on the unbanked and underbanked demographics. As more venture-backed Latin American FinTech startups crop up, the focus will continue to expand from lending and payments to wealth management and enterprise financexxxvii. Blurring lines between FinTech and commerce will enable innovation in the Southeast Asian and Latin American financial sectors. Blockchain and cryptocurrencies will strengthen their position as the most popular segments within FinTech. As crypto speculation continues, more companies will look beyond their initial use cases to enable and expand investment and trading across platformsxxxviii. The coming years will also witness growth and collaboration between Challenger banks and traditional banks, e-wallets and P2P lending platforms, as these FinTech segments look to consolidate their market position across the globe. In this increased pace of FinTech market activities, it is the end-consumer who is set to benefit from the assortment of user-friendly features available at his disposal.

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References:
i. DTCC, FinTech and Financial Stability: Exploring how technological innovations could impact the safety and security of global markets, Oct 2017. Accessed on Feb 28, 2018.
ii. Ibid.
iii. Ibid.
iv. Bruegel, Capital Markets Union and the FinTech opportunity, Sept 2017. Accessed on Feb 27, 2018.
v. Ibid.
vi. DTCC, FinTech and Financial Stability: Exploring how technological innovations could impact the safety and Accessed on Feb 28, 2018.
vii. Ibid.
viii. Financial Stability Board, Financial Stability Implications from FinTech, June 2017. Accessed on Feb 28, 2018.
ix. Ibid.
x. Ibid.
xi. Ibid.
xii. There are three common and interrelated drivers of FinTech innovations.
xiii. Global Partnership for Financial Inclusion, German 2017 Priorities Paper, 2017. Accessed on March 5, 2018
xiv. Financial Stability Board, Financial Stability Implications from FinTech, June 2017. Accessed on Feb 28, 2018
xv. Ibid.
xvi. Ibid.
xvii. Cambridge Centre for Alternative Finance, The 3rd European Alternative Finance Industry Report, 2017. Accessed on March 1 2018
xviii. Ibid.
xix. Ibid.
xx. Ibid.
xxi. Ibid.
xxii. Life. SREDA, Money of the Future, 2017. Accessed on March 6, 2018
xxiii. Ibid.
xxiv. Ibid.
xxv. Ibid.
xxvi. Ibid.
xxvii. Ibid.
xxviii. Ibid.
xxix. Ibid.
xxx. Ibid.
xxxi. Ibid.
xxxii. Ibid.
xxxiii. Ibid.
xxxiv. Ibid.
xxxv. Ibid.
xxxvi. Ibid.
xxxvii. CB Insights, 2018. Accessed on March 7, 2018
xxxviii. Ibid.

 

 

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