Fintech Industry Trends
By Christine Park, Maxwell Jones
Even if you’ve never heard of Fintech, you’ve used it. Fintech is like the thing at the end of your shoelace; you use it every day but never knew it had a name (it’s called an “aglet”, by the way). The analogy falls apart, however, as “aglet” likely will not become a household term, but “Fintech” sure will. Fintech or financial technology is a hybrid sector emerging from the universal access to personal technology and the revamping of dated financial systems. Everything from traditional banking apps to cryptocurrency exchanges fits within this broad sector. Providers of Fintech include all forms of institutions from well-established banks to startups, with numerous acquisitions between the two. A comprehensive list of applications is beyond the scope of this article, but let’s just say, “Everyone’s doing it”.
Fintech is commonly associated with consumer-facing services such as financial services e.g. mobile banking, transactions, and investment management. The first 4 months of 2021 have plotted an overwhelmingly positive trend for the sector led primarily by the 580+ investments made by both early and late-stage VCs.
Over 28 new Fintech Unicorns have come to market since the new year, beating the previous record of 27 set over the entire span of 2019.
These trends highlight the investor buzz and subsequent sky-high valuation for these innovative movers. Analysis of five primary industries embracing Fintech shows that Information Technology leads in deal size followed by Financial Services and B2C services.
As the Fintech industry seeks to disrupt a host of subsectors, this article will highlight some of the most impactful trends in 2021 and their potential in the next decade.
1. Embedded Finance
Creating integrated banking solutions for workforces and consumers to participate in e-commerce
Embedded Finance stands out for its widespread application — it can make any company a Fintech company. By integrating payments, lending, insurance, and a host of other services directly into traditionally non-bank companies, it can increase the lifetime value of customers while also creating a more user-friendly experience. Startups such as Germany-based Banxware are filling the void between non-bank businesses and the financial services they desire to offer. For small businesses, incorporating Fintech technologies in the backend can alleviate cash flow problems as cash is often tied up in AP or AR.
The Digital Payments industry is projected to grow at an AGR of 18.8% by 2024 to a global transaction value of $8,170 billion. In 2020, the United States ranked 39th in Mobile POS usage with only a utilization rate of 16%, compared to 82% in Mainland China. Mobile POS usage showed highest in emerging countries such as Mainland China, India, Vietnam, and Kenya.
The pandemic disrupted many daily patterns, one of which was how consumers and businesses participate in monetary transactions. Due to public health concerns, consumers and businesses alike have demanded and adapted contactless payment methods. Additionally, the traditional brick and mortar retail model seems to be declining in recent years. Companies such as Stripe and Toast have created successful contactless point-of-sale systems in the consumer product and food industries respectively. Consumers are increasingly valuing online accessibility to products and services with an emphasis on cybersecurity and ease of use.
2. Automation in Finance
Improving financial systems to enable beneficiaries to reduce and eliminate their debt and as well as democratizing access to financial services
Digitization of the financial services industry has led to a wide adaptation of robo services and business models that further encourage innovation. Traditional investment platforms have been pressured to lower transaction costs and increase interest rates to compete with increased pressure from robo services and startups. In 2019, more traditional investment platforms like Charles Schwab and TD Ameritrade slashed their brokerage fees to zero to compete with recent startups Robinhood, Public, and Webull.
Studies suggest that there is a gap between consumer expectations and delivered performance that can be closed through automation and technology. As consumers increasingly value speed, easy access, and personalized services, Fintech, in the backend of traditional models, can increase engagement and trust, allowing businesses to shift to a more “customer centric” approach. One interesting phenomenon is the consolidation of incumbents and new entrants in the market. Traditional incumbents have partnered with or acquired Fintech startups to provide specialized services and greater value in service on top of ease of use and mobile interface.
3. Blockchain
Providers and users face the need for high-security systems that are capital intensive
One of the most prominent drivers of Fintech is the incorporation of blockchain technology. In short, blockchain is a database that allows for instantaneous transfer of information without a middle man to develop a sense of trust. Blockchain utilizes a decentralized model and allows for secure transfers of data with greater efficiency, lower transaction cost, and faster speed.
With applications in finance, blockchain has been revolutionary in the development of cryptocurrencies such as Bitcoin and other monetary transactions — including but not limited to money transfers and the buying and selling of stocks. With recent attention on Cryptocurrency (Bitcoin, DOGE, and Ethereum) and crypto-exchanges (Coinbase, Gemini) in social media, the acceptance of a blockchain-based currency is slowly growing within the general public. Blockchain will be integral to the widespread adoption of a purely digital marketplace such as NFTs for its ability to track transaction validity and item authenticity.
4. “Invest-Tech”
Streamlining the process of investing in assets and enabling fractionalized ownership
Made popular around 2010 by sites such as Indiegogo, Kickstarter, and Fundable, online crowdfunding democratizes who can put capital to work. These platforms help democratize investment by creating a system of fractionalized ownership, making it financially feasible for many who were previously left out. While these sites were originally used in seed funding, invest tech has now expanded to become a primary method of raising capital versus traditional sources such as grants, incubators, VCs, and private equity firms. Startups such as SMBX, Wefunder, and Republic are forceful movers for small business investments and allow investors to support what they believe in.
In the face of such growth in alternative financing, large institutions with established customer bases and interfaces can provide consolidated platforms to investors and businesses, with curated access to new investment opportunities. Indeed, the rise in popularity and proliferation of crowd investing platforms have come with onsets of regulation. The first regulation in the US was passed in 2016 as Title III, limiting private companies’ fundraising to $1.07 million annually on equity fundraising platforms. More recently in 2020, taking effect in 2021, this limit has been raised to $5 million. This increase allows greater accessibility for small businesses and startups to seek funding and attracts investors and a more diverse set of projects.
Investors or institutions seek to expand or diversify portfolios based on their investment thesis. The rise in popularity of Fintech companies has provided a plethora of opportunities; however, in turn, a lot of time and resources are diverted towards finding and exploring investment opportunities that may or may not come to fruition. Information frictions — given that many of these potential opportunities are private companies with limited public data — can complicate this process. What if technology could consolidate large samples of data and patterns — from both the investor and investment opportunities — to intelligently curate insights and opportunities?
In conclusion…
As 2021 fades back into “normal” life, the advances in Fintech motivated by the past year will increasingly become commonplace. Although many aspects of Fintech are already well integrated into our daily lives, the next decade will bring about great advancements in democratized access to banking information, efficiency in how we process payments, and the currency with which we trade. For consumers, the transition will be a blur of fading from the old to the new. While it won’t be an abrupt shift to an alternate economy, the access to information and plethora of choices will be noticeable. For investors and entrepreneurs, this season is full of opportunities within the missions of democratizing access to funds, boosting economic growth, and one day, realizing zero inequality.
