- Exploring fintech landscape and business models
- The growth of fintech
Despite a vogue in and around media and technology circle, the buzzword ‘fintech’ is still misapprehended by many, including tech-savvy professionals. Fintech is basically a blend of two words ‘financial’ and ‘technology’ that applies to an innovative and emerging technology in financial services or financial aspects of a business that helps companies to deliver in fast and new ways. This can be in the form of the latest software or a process, application or a novel business model.
What is fintech?
- A consumer shop online; e-commerce website and bank use fintech.
- A wealth advisory service company’s use of robo-advisors for client’s asset management is fintech.
- A consumer transfers money online via mobile from one bank to other and the bank uses fintech for such transactions.
- An applicant for a housing loan, apply online for best interest rates and receives an approval within minutes also falls under the category of fintech.
Fintech is broadly defined as a technological innovation applied and used in financial services sector. This is transforming the financial industry by creating an advanced financial ecosystem, which enhances the quality of services offered, saves time and help in cost optimization.
The financial crises (2008-09) led to the birth of fintech companies with inventions comprising analytics, e-finance and social networking. Fintech startups gained attention by offering innovative and data-driven personalised services.
The terminology and jargon are defined below for a better understanding of the sector.
Pillars of fintech ecosystem
Fintech can be defined as a technology-based business that competes, enable and/or collaborate with financial institutions (Source: Fintech in India, 2016-KPMG and NASSCOM).
Fintech companies engage with financial institutions, technology vendors, consultants and government agencies to create an integrated ecosystem that brings technology, expertise and facilities all the entities through a common platform. In the current era of tech-driven financial services, growth and market success of a fintech depends on successfully integrated ecosystem where all are well connected and participants share ideas and convert opportunities into businesses.
Fintech is shaping new financial service experiences with technological developments and depending on the diversification in the financial sector few new business models have arisen. The next generation payments, automated wealth management, robo-advisors, P2P lending, insurance technology, capital markets are prominent examples. These fintech models changed traditional approaches to conduct businesses both at B2B (business to business) and B2C (business to customer) levels. Moreover, several companies embraced these transforming business models, which, in turn, enhanced efficiencies with regard to time, money and benefited their customers.
Fintech companies are broadly segmented below, these were able to add value by providing enhanced accessibility, convenience and tailored products.
Payment fintech is a relatively simple business model among the others and facilitate digital payments at a low cost. Payment fintech may cater to retail and customer payment market and/or corporate and wholesale market by offering ease and simplicity of instant payments at low costs. Payments, one of the most used (and least regulated) retail financial services on a daily basis, include mobile wallets, peer-to-peer (P2P) mobile payments, foreign exchange and remittances, real-time payments and digital currency solutions. These services improve customer experience in form of speed, convenience and multi-channel accessibility. The popular mobile payment applications, such as Google Wallet and Apple Pay are convenient and secure to use.
P2P lending fintech provide an efficient platform to individuals and/or businesses to lend and borrow on a mutually agreed rate of interests. Lending fintech can be a P2P consumer lending and/or P2P business lending. Further, due to efficient structure these fintech’s do not directly get involved but match a right lender with a right borrower by charging a minimal fee, these are able to offer low-interest rates and direct improved lending process as compared to banks.
Crowdfunding fintechs are facilitators between entrepreneurs or initiators that require funding for development of a new product/service or cause and the ‘contributors’, individuals and/or businesses, which are interested in supporting a project. These fintechs allow contributors to access information on different initiatives and funding opportunities for the development of products/services. The rewards-based crowdfunding, donation-based crowdfunding and equity-based crowdfunding are some of the business models for crowdfunding fintechs.
Automated wealth managers or robo-advisors that provide automatic financial advice by use of algorithms and suggests a mix of investment based on customer’s requirement in a fraction of cost are most popular fintechs apart from capital market fintech. Capital market fintech allow investors or traders to connect with each other to buy or sell stocks, commodities in real time at minimised risk and cost.
Insurance fintech enables insurers to have a more direct relation with customers through the use of data analytics to calculate, mitigate risk and offer the best suitable insurance products to meet customer’s need. Furthermore, technology also allows smooth and streamlined processes right from buying a policy online to billing and claim.
Growth in fintech
Fintech companies are having a significant impact on the financial services industry as ~83% of financial institutions believe that various aspects of their business are at risk from fintech startups as per a report published by PwC (2016). Thus, financial firms are building in-house capabilities or investing in fintech startups to remain competitive. Similarly, customers are also embracing fintech companies with 50.2% (58.5% in Asia-Pacific) conceding globally that they do business with at least one non-traditional firm (Source: The World Fintech Report 2017; Capgemini). An increasing expectation from customers, reduced entry barriers, technological evolution and expansion of VC funding are few reasons for an astonishing growth of fintech financing in the last 6-7 years.
*Financing include publicly announced equity capital raised for private fintech companies across the world and lending capital, IPOs, debt and other company spin-offs and secondary transaction are excluded
In 2016, fintech firms raised ~USD 28.4 billion worldwide from over 1,550 funding deals. Fintech companies have raised ~USD 18.2 billion from more than 1,160 deals as of September 2017. Investment in fintech companies is expected to grow at a CAGR of 7.1% and is estimated to reach USD 45 billion by 2020 (Source: KPMG-Fintech in India, 2016; Business Standard 2016).
Investment in fintech segments
Again in 2016, payment fintech companies attracted the highest financing with ~39% of the total funds raised by the entire fintech industry. While banking/lending sector fintech companies dominated the market with ~34.6% share in the total raised funds and saw the highest number of deals until YTD (year to date) September 2017. The banking/lending fintechs raised ~USD 6.3 billion (out of the total USD 18.2 billion financing) in 356 deals (out of the total 1,160 deals) in 2017 YTD followed by financial management solution fintechs and payments/e-commerce fintechs.
Notably, Asia-Pacific emerged as a global leader in fintech startups left North America and Europe behind. Fintech companies in Asia-Pacific raised ~USD 14.9 billion in 2016, this was double from the previous year and almost 50% higher from North America.
The surge in Asia was predominantly due to three big rounds of financing in China (2016). The funding of USD 4.5 billion in Ant Financial, USD 1.2 billion in Lufax.com and USD 1 billion in JD finance mostly contributed for an increase in numbers. Hence, with the above deals, China for the very first time surpassed the USA with a total of USD 7.7 billion of funding deals. The country also witnessed ~84% increase as compared to 2015 when the total funding value was USD 4.2 billion (Source: KPMG-Pulse of Fintech, 2016). The financing activity in the USA is on a decline primarily driven by political factors. On the contrary, a massive unbanked population, the rise of the middle class with disposable incomes, increasing smartphone penetration with the convenience of shopping online has helped Asian fintech to create new models of financial inclusion. The main areas of investment are payments and alternative lending that is still unmet through traditional financial institutions.
Lastly, apart from China, India is also gaining stride with digital banking and digital payments. The government’s initiatives for a digital system and unified payment interface is enabling India to step further towards the growth in the sector.
‘For more on the above read the next blog…‘Emergence, growth and potential of fintech in India’.