What Are The Ten Trends Shaping Fintech?
As the fintech landscape continues to evolve, a look at the newest developments from across the globe.
Fintech, the portmanteau of finance and technology, represents the collision of two worlds—and the evolution of the use of technology in financial services. Financial services and technology are locked in a firm embrace, and with this union comes both disruption and synergies.
For established technology players entering the fintech ecosystem, regulatory challenges may prove a hurdle. The “move fast and break things” approach that disrupted the advertising industry is unlikely to be tolerated in financial services. And concerns about monopolistic behavior could well prevent Western tech giants from developing the sort of integrated financial services offerings we see from Ant Financial or Tencent in China.
To cut through the headlines and buzzwords that saturate the discussion of fintechs, we now take a closer look at current trends, and the implications for both incumbents and attackers.
1. High level of regional variation in fintech disruption
Winners in fintech are primarily emerging at a regional rather than global level, similar to traditional retail banking. Regulatory complexity within countries and across regions is contributing to regional “winner take most” outcomes for disrupters. Firms need to invest more in regional compliance rather than launching a global effort on day one.
As fintech markets mature, attackers that have established a regional presence are now eyeing international expansion. To successfully enter new markets, they must adapt to new sets of market dynamics and government regulations and select new markets based on a clear understanding of regional variations.
The buzz surrounding artificial intelligence (AI) applications in fintech is intense, but to date few standalone use cases have been scaled and monetized. Rather, we see more advanced modeling techniques, such as machine learning, supplementing traditional analytics in fintech. While AI shows great promise, it is likely to be more of an evolution than a great leap forward into new data sources and methods.
At least in the short term, winners may not be characterized by completely new modeling approaches or the most complex algorithms, but by the ability to combine advanced analytics and distinctive data sources with their existing business fundamentals.
The most successful fintechs have evolved into execution machines that rapidly deliver innovative products, with dynamic digital marketing campaigns to match. Notably, winning start-ups often succeed without using completely new technology. Data-driven iteration, coupled with early and continuous user testing, has led to robust product-to-market fit for these firms.
While cutting-edge technology is exciting, it can also be complex; demand is also untested, which can result in long lead times with little opportunity to validate the business model. As an example, consider cross-border money transfer, a market that has traditionally been dominated by large incumbents such as Western Union. Despite much hype about fintech—particularly blockchain-based solutions—entering the space, no start-up has gained anywhere near the scale of TransferWise, a digital business built on top of traditional payments rails, rather than a reinvention using the latest tech. TransferWise used great user experience and distinctive marketing campaigns to grow rapidly, enabling it to successfully disrupt the space, and to report £117 million in revenues in March 2018.
Years into the fintech boom, after many highs and lows, investors are becoming more selective. While overall funding remains at historically high levels, technology investors globally are increasingly investing in proven, later-stage companies that have shown promise in attaining meaningful scale and profits. Data compiled by PitchBook show that despite a clear increase in total VC funding, investments in early-stage fintechs decreased by more than half from a peak of more than 13,000 deals in 2014, to around 6,000 in 2017. The bar for funding is quickly rising, and companies with no clear path to monetization are going to have a harder time meeting it.
Back when banks had cumbersome websites that didn’t render on mobile, it was easy for fintechs to win over customers by building a half-decent app with a great user experience (UX). Today, most financial institutions have transformed their retail user experience, offering full mobile functionality with best-in-class design principles. Great UX is now the norm. Customers, as a result, require more reasons to switch to new fintech offerings.
In general, incumbents were initially slow to respond directly to fintech attackers, perhaps for fear of cannibalizing strong legacy franchises. Many started by trialing digital offerings in non-core businesses or geographical areas, where they could take more risks. Retail banks have led the charge in upgrading digital experiences to match fintech in their core banking products. For example, Wells Fargo recently added a predictive banking feature that analyzes account information and customer actions to provide tailored financial guidance and insights, with over 50 types of prompts.
An increasing number of incumbents and fintechs are realizing the benefits of combining strengths in partnership models. As they reach saturation point in their native digital marketing channels, many fintechs are now actively looking for partnerships to grow their business. They bring to the table their higher speed and risk tolerance, and flexibility in reacting to market changes. Larger ecosystem firms also bring broad and sticky customer bases from their core internet businesses.
Like a giant tower of Jenga pieces, an enterprise’s legacy IT stack has many building blocks, some purchased off-the-shelf and some developed in-house. As in Jenga, removing or replacing “pieces” of the IT stack can be risky and complicated. Digital innovation is often hindered by legacy IT, particularly the core banking system (CBS), and the costs of changes are high.
CBS fintechs are likely to continue, therefore, to target smaller banks or focus on non-core areas. This should allow the fintechs to prove their concepts and build their reputations, while fine-tuning their product offerings for larger customers.
As fintechs mature, at some point they must decide whether to go public. While both investors and employees require a path to liquidity, many fintech founder-CEOs have preferred to stay in the private market to avoid the burdens of public listings—as well as the batterings received by other fintechs that tested the IPO market.
China’s fintech ecosystems are structurally different from their counterparts in the US and Europe. Outside China, the most successful fintechs are typically attackers that have focused on one vertical, such as payments, lending, or wealth management, deepening their core offering and then expanding geographically. In the US, for example, PayPal and Stripe focus mainly on online payments; Betterment and Wealthfront offer digital wealth management; and LendingClub and Affirm are alternative lenders—all proven strategies.
Fintech has evolved considerably in the last few years and continues to change rapidly. Indeed, the trends outlined in this paper will likely give way quickly to new movements, as new winners emerge and existing leaders mature and diversify.
Data source: Mckinsey