Fintech is in the news on a daily basis with bold statements that claim it's the disruptor for financial institutions all over the world. It is exciting to think that it could be the game changer everyone was hoping for to drive revolutionary change in an industry that has been entrenched in its legacy practices. However, it's important to dig deeper when these types of claims are made. No one can forget the dot-com bust of decades past where the excitement far outweighed the ability of technology to deliver during that time.
Fast forward to now and fintech, short for financial technology, has made quite an impression, impacting various sectors and creating standout companies to watch. However, fintech also has some challenges to overcome to truly become the disruptor everyone wants.
A Statistical View
Starting with the numbers, it is clear that fintech is having an impact. The 2017 EY FinTech Adoption Index found that 33 percent is the average adoption rate around the world, which is compared to 15 percent globally in 2015. Nearly 50 percent is the average fintech in emerging markets like Mexico, South Africa, China, India and Brazil . While most of the available numbers are focused on consumer adoption, the growing adoption of fintech products like money transfer, remittances and payment platforms reflect what will also occur between businesses.
CBInsights found that investment dollars for VC-backed fintech companies in 2017 is set to drop minimally but that overall global fintech deal activity could surpass 2016’s all-time high during the balance of this year. During the first quarter of 2017, the second most highly valued fintech unicorn in the US, SoFi, raised $500 million. European fintech investment also has grown in 2017 with estimates that total funding dollars will surpass $2.6 billion and will top 2016 deal activity.
An infographic from Fintech Ranking painted another positive picture of fintech during 2016. Statistics collected by the research firm found that funding of fintech startups totaled $49.7 billion between 2010 and 2015 with investment tripling between 2013 and 2014. In 2016, there was $25.8 billion in total funding around the world. There are nearly 1,400 fintech companies in 54 countries as of 2016. Countries with the most attractive ecosystems for fintech development include the UK, US, and Israel while government involvement in encouraging fintech development include the UK, US, Hong Kong, Singapore and Luxembourg. Accenture also released a report on fintech that offered other insights, citing statistics from 2014 that support the Fintech Ranking statistics and illustrate how rapid fintech has developed in just the last two years.
Specifically in the B2B fintech investment arena, there is also exceptional growth in funding startups to address the significant growth potential of the B2B global payments market. Numerous B2B fintech startups have raised millions of dollars to fund the development of their solutions and build out their companies.
Impact on Financial Services Sectors
From payments and lending to insurance, asset management, and equity finance, fintech is touching every aspect of the financial services sector in various ways around the world, driving significant changes to the processes found in financial services. In deposits and payments, mobile-only banks, digital wallets, and peer-to-peer payments are providing more ways to conduct business transactions free of fees, excessive time for bank reconciliation of funds, and more cost-effective payment processing. Peer-to-peer models have also changed the lending environment as has crowdfunding and short-term loans that all help small businesses tap into additional capital where they were previously rejected by the big banks. Then there are areas like blockchain and virtual currencies along with local currencies that are changing how businesses can transact with those in other countries, minimizing the time and cost that traditionally has plagued international transactions.
Keeping an Eye on Fintech Disruptors
Some studying the changes in the financial services environment actually see what fintech is doing is less of a disruption and more about creating healthy competition in the industry in order to push it forward and past the legacy systems of traditional institutions. Some of the earliest fintech disruptors include PayPal, Amazon, and Stripe . These companies laid the foundation that inspired many other startups to develop fintech solutions.
For example, PayPal was the first to offer a way for freelancers and small businesses to accept online payments without having to sign up for a separate payment processor in order to accept credit and debit cards. Amazon enabled an easy way to take online retail payments for those that opened storefronts with them while Stripe introduced the idea of accepting payments via a smartphone reader so that more small business owners could accept credit card payments. Since then, so many more incredible examples have emerged in fintech, including ApplePay and Samsung Pay, which provides a secure way to take a payment with just a photo of a customer's payment card.
The fintech disruptors are not just in the U.S. Global startups are popping up to illustrate how great ideas are appearing everywhere on how to change financial services. In the UK, ClearBank is the first UK clearing bank that does not offer its services directly to the consumer. It is built with cloud infrastructure rather than legacy systems, so it provides open access to payment services and other types of transaction clearing services.
Challenges with Fintech to Still Address
Those fintech disruptors, despite their ability to start shaking things up, still have some barriers. Banks continue to hold the most power in financial markets, maintaining control over the core financial processes used in numerous countries. Since government regulations are so complex and are creating their own issues, it has slowed down what some fintech companies are able to deliver. This is one reason why regtech has emerged as a force to help both fintech companies and traditional institutions work past this cumbersome regulatory environment.
The response by fintech companies is to continue sharing and educating businesses on what it can offer and how the changes it is proposing for financial services is beneficial to everyone involved, including banks and other institutions that may feel threatened by it. More discussions at trade shows, networking events, and industry conferences can stimulate further dialogue and collaboration to unleash the true disruptive nature of fintech.