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 banking customers’ lives easier.
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 allow 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.
- Examples: 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.
- Examples: 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.
- Examples: Venmo, Samsung Pay, PayPal, and Apple Pay
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.
- Examples: Giant BlackRock Inc., Nutmeg, and Scalable Capital Ltd.
- 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, and achieve higher savings and efficiency within the current insurance industry model.
Initially, fintech started offering services in first wave sectors with approximately 70% of start-ups falling under this category globally.
Quite recently, there has been a rise in the second wave sector expanding the scope of financial technology even further. Blockchain-based services such as cryptocurrencies are building momentum, 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, such as PayPal, Alipay, Klarna, Square, BitPesa, Lending Club, OnDeck, SavvyMoney, Lendio, Credit Karma, LendingRobot, BTC and more.
Impact of Fintech on Traditional Bank Branches
Digital transformation and automation are making their mark in several industries, not least of which is the financial services industry. Business Insider claims that “disruptive technologies such as artificial intelligence, blockchain, and alternative lending are transforming financial services.” Many traditional banking organizations and branches continue to play a key role for a variety of services, but a vast majority are integrating digital services, to compete with the fully digital startups that have been making a name for themselves. Technology has become a powerful force in how customers can use their financial service platforms. And this way, banks and financial institutions can outsource some basic customer support and approval processes to artificial intelligence programs.
There is some confidence that comes to financial services customers from in-person interactions, still. In a recent study of banking customers, 50% of those surveyed said they would prefer to open a new deposit account or apply for a new loan in person. Furthermore, 25% said they would not open an account with a financial institution that did not have local branches. The comfort of having local and human faces to banking is important to customers.
Despite digitization, physical channels – branches and ATMs – 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
- Regarding security concerns, branches provide a sense of permanence and security that is difficult for digital banks to match
Traditional Banking Superpowers: 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 FinTech through investments, partnerships, and acquisitions.
According to MEDICI Global Research, most recent fintech acquisitions were led by American & European banks. And while American & EU fintech has been the major target of acquisitions, startups from Asia and other regions are also emerging as the preferred destination for acquiring fintech. 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 the 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 behavior 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
The Force of a Generation in Banking
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,” “personalized 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 produce 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 advanced technology which could provide a competitive edge over others, rapid expansion into new markets, and even a new customer base.
Check out our recent blogs:
The Current State of Medication Management The science behind modern medications is always evolving and always progressing. We see that in the news with new treatments, cures, and prevention methods for all sorts of illnesses and conditions. The downside of this...
When it comes to marketing and tailoring messaging and product development to the customer, gender is a common way for marketers to personalize their messaging to a specific customer or audience. But marketing based on the gender binary has as much chance to backfire...
Data Management Platform and Customer Data Platform have become nearly interchangeable in the world of digital business. Both are used to collect and understand the vast amounts of customer data available online, from what sites they visit, to what choices they make,...