Fintech: What The Future Holds

In 2018 global investment in fintech companies reached a staggering $111.8 billion, more than doubling the result of 2017. There were also many M&A deals and collaborations — an indicator of further fintech integration into the financial industry. A perfect illustration of this is the following news: online trading major Interactive Brokers made electronic money transfers to third parties available to the US clients.

Photo by Coline Beulin on Unsplash

Whenever the word “fintech” is mentioned, most people think about now, or just several years back — when mobile apps started to cover our everyday life needs. Some people think in terms of “financial sector and banks,” others — “startups with crazy, unrealizable ideas.” Some industry professionals, though, claim that fintech started in the 1950s. And they may have their reasoning right. Do you remember when credit cards entered our lives? In the 1950s (we’re talking about the Western world, obviously). ATMs were introduced in the 1960s. The 70s and 80s brought advanced data keeping system, among other things, while the 90s saw the entrance of the Internet. That’s a turning point, because everything went online, eventually.

Fintech Now

So what is fintech (or, financial technology)? Investopedia provides the following definition:

“Fintech is used to describe new tech that seeks to improve and automate the delivery and use of financial services. ​​​At its core, fintech is utilized to help companies, business owners and consumers better manage their financial operations, processes and lives by utilizing specialized software and algorithms that are used on computers and, increasingly, smartphones.”

At the very beginning, fintech was mostly associated with big financial institutions, providing them with solutions for their back-end systems. The focus is shifting, though, and now it’s more and more about the consumer’s needs (either real or non-existent ones). It’s happening because technology itself is getting consumer-oriented, which makes it accessible and understandable for the “general public.” Fintech now is any tech innovation within any financial field or even operation. And of course, it includes cryptocurrencies.

Fintech innovations are diverse and numerous, but there is at least one common feature in them: they will eventually disrupt and change the way companies and individuals perform financial activities. Some of these innovations are so revolutionary that they will change financial and business models. Here are some numbers showing how strong the belief in fintech potential is (taken from KPMG report):

• In 2018 global investment in fintech companies raised to $111.8 billion from $50.8 billion in 2017;
• There were three 10 billion+ deals in 2018;
• In 2018 global cross-border fintech M&A activity grown to $53.5 billion from $18.9 billion in 2017;
• Investment in blockchain and crypto in 2018 was steady at $4.5 billion.

KPMG together with H2 Ventures has identified the following firms as top 10 in 2018 leading fintech companies:

1. Ant Financial (China): an affiliate company of the Alibaba Group, which aims at bringing inclusive financial services to consumers and small business globally;
2. JD Finance (China): an e-commerce company, one of the biggest B2C online retailers and a major competitor to Alibaba’s Tmall;
3. Grab (Singapore): a transportation network company which operates in the Southeast Asia; aside from transport services it offers food delivery and payment solutions;
4. Baidu (China): one of the largest AI and Internet companies in the world, which offers Internet search and online marketing solutions;
5. SoFi (US): an online personal finance company, which focuses on student loans refinancing, mortgages and personal loans;
6. Oscar Health (US): a health insurance company, which is known for tech-based approach towards the industry (telemedicine, transparent pricing systems etc.);
7. Nubank (Brazil): a digital bank and credit card operator with no-fees products like NuConta (a mix of current, savings and payments accounts in one) and an international credit card;
8. Robinhood (US): a financial services company, which provides users investing commission-free opportunities (stocks, options, ETFs, cryptos);
9. Atom Bank (UK): 100% digital banking with no physical outposts, a smartphone-based bank with a complete set of banking services;
10. Lufax (China): an online marketplace for the origination and trading of financial assets.

According to this rank, it can be concluded that online financial services and bank’s substitutions are the most popular fields in the fintech sector.

There were five criteria by which the selection was made. They are: total capital raised, rate of capital raising, geographic diversity, sector diversity, and X-factor (a degree of product/service/business model innovation).

Among countries which have developed fintech hubs are the US, the UK, Australia, China and Switzerland. There are also emerging players in this field, like Canada, Brazil and Israel. These new markets are supported by favorable regulatory frameworks, which stimulate growth and opportunism.

Photo by Christopher Burns on Unsplash

Fintech Challenges

Although fintech aims at solving current problems, the industry is not immune to have its own. There are three big blocks of challenges; ironically, most of them are effects of fintech innovations themselves:

• Regulations;
• Cybersecurity;
• Retaining of human touch.

Regulations: governments are getting more and more involved in the financial sector and fintech. This involvement means, in most cases, more control and limitations imposed. New laws mean that time and resources should be allocated to ensure compliance with them. For large financial institutions and companies, it’s not that of a big problem: they usually have a dedicated team dealing with regulations and compliance questions. It’s a different story for fintech startups, which have limited human resources. Moreover, sometimes new law can jeopardize the whole activity of a startup. Another negative aspect of regulations is that they are behind the times, or simply put, outdated. They drag the industry backward, holding up innovation development and adoption.

Cybersecurity: 2018 will be remembered as the year of major cyber attacks and breaches of personal data. It seems that no one is safe these days. Cybercriminals are using more and more sophisticated attacking methods, making security solutions outdated. Fintech innovations often concern sensitive/private data of clients, so the question of cyber security is a vital one.

Retaining of human touch: fintech is all about digitization and automation, aiming at simplifying bogus financial operations for general usage. This inevitably raises a question: when enough is enough? When is automation going too far? “Human touch” often means offering services which are personalized and personified. In other words, people want to deal with people, especially when it comes to older clients or too complex problems.

Fintech Trends

Will the challenges above prevent fintech from further growth? Of course not. Will they affect the direction and speed of developments? They may. On the other hand, there are up-and-coming trends, which started to emerge already and which potentially address challenges:

• Crypto and blockchain;
• PaaS (Platform as a Service);
• (Even more) collaboration between traditional financial services and fintech;
• Data science.

Crypto and blockchain: in terms of the financial sector and fintech money transfer innovations are the hottest topics, which will continue to build momentum. This is happening because it concerns a large number of people — general users — meaning that mass adoption is almost inevitable. Crypto transfers, especially via mobile phones, have the potential to change the way we perceive and perform transfer operations forever. Stablecoins — another aspect of crypto and blockchain — are of particular interest to banks and financial institutions (or even governments), many of which consider issuing of their fiat-backed crypto. Here is our view on stablecoins’ perspectives.

PaaS: Platform-as-a-Service is usually connected with cloud solutions. However, the trend goes beyond that. PaaS vendors have already started to transform fintech by offering tools for team collaboration, deployment streamlining, resource management and others. It is expected that even more business process within the financial sector — billings, budget planning, payments handling, etc. — will be handed over to PaaS providers. PaaS benefits fintech because it provides the following:

• Opportunities for quick product launch;
• Agile approach;
• Fast adaptability;
• Standardized database management.

Collaboration between traditional financial services and fintech: it’s happening now, but it will continue to grow and evolve. The reason behind it is somewhat trivial: getting more clients. In the past, the traditional financial sector and groundbreaking fintech were competing for clients. They will establish partnerships — or, smart collaborations — instead, in the nearest future. Such collaboration will also create new business models, improve customer experience and boost innovations, above all. There are examples already, like Mastercard’s Start Path — a program helping fintech unicorns to jumpstart their projects.

Data science (and AI): it’s like a marriage made in heaven. Fintech and data science. The latter, and especially machine learning, offers more sophisticated solutions to gather, process and analyze big data. These solutions could be applied to solve or improve a variety of problems and challenging tasks, like fraud detection, risk modeling and evaluation, trend predictions, etc. Processed data could also be used to take the customer’s experience to the new level. For example, analyzed data can help fintech startups to create behavioral patterns and develop relevant products, addressing real needs.

These trends intertwine and complement each other. It’s impossible to view them as independent developments. The nature of fintech is to mix the “unmixable” and to implement the result in practice — that’s how disruption happens. Moreover, the pace of innovation is so quick that tomorrow these trends will become today’s reality.