Despite the fact that investments in world fintech amounted to almost $25 billion last year, even in the US, the ratio of digital business models in the financial sector to the classical does not exceed 1 to 100. It becomes a surprise, however, for those who find this out first, because the buzz around the industry is indecently large.
Fintech is a capacious term for designating companies that introduce advanced technologies in the finance industry. The world’s number of startups presently is several thousand. However, only a small share of them excel. Nevertheless, CB Insights informs that, in 2016, venture investments in fintech startups in the world were $12.7 billion. What areas does fintech deal with, who heads this movement, and in what areas do institutional investors invest their funds?
For users, this is the most graspable market segment. It concentrates over half of the profits of today’s banks, and assimilates half of venture fintech investments. Its progressive development started after the 2008 crisis when, due to regulation changes, it was less profitable for banks to lend to certain groups of borrowers. The first big stories in this segment were those of companies who did not compete directly with banks, but rather embraced customers whom the banks had failed to engage (worldwide, roughly two billion people have no access to banking services). A striking example is Ferratum Group from Finland with a focus on short- and mid-term consumer lending. As early as in 2015, this company demonstrated a revenue of over $111m. Today the company’s capitalization is estimated at $423m — and this is in a fintech market dominated so far by startups who rarely operate at least without loss.
Balance sheet lending is growing fast in developing markets. We are seeing a huge market potential in Eastern Europe, Transcaucasia, South-East Asia, but especially, in Latin America. Therefore, ID Finance was the first among the competition to launch a consumer-lending platform in Brazil. Our office in São Paulo is a gate to a market with a population of 470 million speaking only two languages and sharing about the same cultural field. We managed to create a foothold in a region, from which inroads into the continent will start. For this purpose, ID Finance managed to attract $50 mln of debt funding.
Lending, as a division of fintech, is dominated by American players. Their aggregate capitalisation is about one-third of the value of all other fintech in the world. Another third belongs to Chinese companies, with Ant Financial as their leader. Lending to small enterprises has also been growing extensively because banks see many risks here. Generally, I believe that everyone understands that money is concentrated here, i.e. in the lending industry.
A story of its own is peer-to-peer (P2P) lending when the service provides a platform for bringing together borrowers and lenders who can be represented by retail investors. This model is being used advantageously for lending to enterprises. The major player in this area, the British platform Funding Circle, promises investors who invest in it a 5-8% annual net income, whereas the deposit interest rate in Europe rarely exceeds 1.5%.
The P2P segment witnessed the biggest uproar in the fintech history with the downfall of the Ezubao pyramid operating in China. The company forged 95% of loan applications, with about a million of Chinese investors losing $7.6 bln on their investments in these loans. The P2P loan boom in China is a unique phenomenon in the world: About 4,000 P2P platforms are operating in the country. The second uproar related to LendingClub, whose top management deliberately sold bad loans as those with an acceptable or low-level risk.
Do not forget about POS-lending, where Klarna, Affirm, and Divido are considered prominent players in Western Europe. In Eastern Europe, AmmoPay is more commonly known, and it’s geographic expansion is only to be started.
Payments and money transfers
This segment joins wallets, money transfer services, online payment gateways, and so forth. It accounts for up to one-third of all fintech investments, with major national fintech companies having been set up in the payment segment. The margin in this segment rarely exceeds 2%–3%, and one can earn only by involving big volumes. This is why major payment companies PayPal and Ant Financial (an Alipay brand), who conduct transactions to about $100 billion monthly, have been growing due to close links with eBay and Alibaba – major worldwide e-commerce platforms.
Money transfers are another rapidly growing subcategory of this segment. Investors are attracted by a market turnover of $500 billion and the presence therein of niches and of huge areas for development. The cost of international transfers in some cases is 10% and even more. To reduce this cost by winning over customers is the objective of the technological automation of processes.
The insurance industry with a value of about $5 trillion was one of the most technologically unfeasible ones to date. In the first place, this was owing to stringent requirements imposed by regulatory agencies and the passivity of existing players (for instance, the average age of a major American insurance company is about 100 years). Until present, the major innovations in insurance were in the distribution segment. This is of little wonder because the majority of insurance companies so far have been distributing their products by relying on their huge agency networks that collect up to 20% as commission fees.
A recent trend is creating a digital insurer from the ground up. However, such projects are costly. For instance, the American startup Bright Health, whose official launching date has been slated for 2017, has raised over $80 million to create a new-generation insurance company.
Asset and Investment Management
The existing asset management mechanisms and the available methods of investing funds are often customised to a narrow circle of customers: Either professional investors or high net worth individuals serviced by professional financial advisors. However, with developing technologies, this has enabled automating many processes and making them cheaper. This is often the business of companies in this segment. A part of Asset and Investment Management is robo-advising – an online investment advising service.
In essence, the robo-adviser performs the functions of a portfolio manager who buys and sells securities according to “host” preferences. The robo-adviser helps shape a market strategy and implements it consistently. Mobile applications or a computer program are used to communicate with a robo-adviser. Automated counsellors for stock exchange speculation are gaining popularity due to their effectiveness. According to experts’ estimates, in June 2016 the global volume of assets controlled by robots was $50 billion. According to projections, this volume in the long term can grow to $13.5 trillion. Services cut annual service costs from the industry-established average 2% to sometimes less than 0.4%. The underpinning of fintech startups is namely cost saving, product ease of use and democratisation of access.
The multitude of crowdsourcing platforms can also be related to this segment. And if many people have already got accustomed to investing in pre-order of projects in platforms such as Indiegogo or Kickstarter (crowdfunding), investment in shares of private companies in the same manner (crowdinvesting) is only starting to gain momentum.
Personal Financial Management
Startups for personal financial management are another important fintech category. For instance, American Credit Karma enables users to gain free-of-charge access to their credit rating and credit history (earlier users had to pay up to $100 for this option), and maintains a record of all financial products the customer uses.
In the fintech world, a customer’s current account is something like a Holy Grail because this account is often the image of the organisation with which one interacts. Actually, the current account on its own is monetised not so well, and pays only if it is linked to other products, including payments, loans and investments. This is how most of today’s banks operate, and this is the area where more so-called neobanks – new-generation digital banks – are emerging. But if the first attempts to create a digital bank were focused on the provision of a convenient service built around an existing bank infrastructure, new startups are developing an infrastructure from the ground up. The flexibility of regulatory agencies as to digital banking models also helps startups to create full-fledged banks. Thus, in Great Britain, after the banking legislation had been changed in 2014, several new banks were granted licenses, and during this period London became the world fintech capital.
Simply stated, Neobanks are banks that provide the majority of services via mobile applications and web sites. As a rule, such credit organisations have no distributed system of offices, and the bulk of communication with a customer is carried out online.
Obviously, neobanks function by tapping into the potentialities of online banking, distance personality identification, online payments, and other fintech instruments. The most well-known European neobanks are the British Atombank, German Number26 and Russian Tinkoff, one of the largest digital banks in Europe.
There is also a big segment of B2В services for fintech or traditional financial companies. These are both point solutions related to ensuring security, managing big data arrays, borrowers’ scoring mechanisms, and full-fledged platforms.
In particular, Payment Initiation Services is one of them. They are set up for fast online payments without a bankcard and the need to register an e-wallet. The providers of these services offer a fast and convenient way of payment by standard access to online banking via a login and password, but with an extra functional.
The service providers offer their customers a payment method that is faster than conventional online banking without the need for registration and creating new passwords.
Payment initiation services are focused primarily on those users who often make purchases in e-shops, and to those who simply have no bankcard (in Europe, about 60% of the population have no bank cards). In Europe, the major providers of the payment initiation service are Sofort in Germany, Ideal in the Netherlands, and Trustly in Sweden.
Voice Recognition is worth mentioning as a niche in B2B fintech. Voice recognition is used for identifying bank customers by their voice when they contact the call centre. This method of identification saves about 40-60 seconds on the time of each customer’s turning to a bank (required for validating passport data and the code word).
Online voice recognition systems are built around machine learning technologies. This method of identification is deemed more secure than validating personal data by hand.
Yet another method of identification of a bank customer is Face Recognition. As distinct to voice and speech recognition, it has been so far not during a customer’s regular turning to the bank (the bank’s call centre), but mostly when a photo has to be validated.
As a rule, this technology is used when taking out a loan. When validating documents submitted online (or received by the bank’s central office from field operators), a computer algorithm determines whether a photo is genuine and confirms absence of photo editing. In a broader sense, the facial recognition technology can be used for distance identification of customers by banks and nonbank credit institutions.
Biometric authentication – hi tech or a high risk? This is not my question but the title of an article in Phys.org. Indeed, the security of our data is a core problem, especially when we consider access to our money. Security and ease of access are on the opposite sides of the discussion. Debates on Biometric authentication are not subsiding, but the hottest ones concern scanning the eye retina and fingerprint scanning.
Obviously, fintech includes a great variety of business models and approaches. Part of them, such as payments, are already on an advanced level, whilst others are just emerging. Financial organisations, in spite of their sluggishness, have started considering fintech with growing interest. They are starting to understand that new technologies, jointly with their established customer base, capabilities of attracting cheap loans and a well-developed regulatory base can be the foundation of a new-generation digital financial institution. Telecom operators are looking along the same lines because they have been for long merely “pipes” for data transmission, and are keen to learn how to earn money with customers’ services. Needless to say, this is a gravitation point for companies with huge databases, such as Google or Amazon.
Today fintechs are finding their niches with relative ease. But the bigger they grow the more they start to overlap with traditional financial companies. Here a new dilemma appears – either fintechs will start integrating with banks and share the cake, or traditional financial institutions will vanish as a class to clear the ground for companies of new types. This can occur along the same lines as in the case when Uber eliminated the majority of taxi companies. And do not be hasty in giving an answer; in fact, it is not as obvious as it may seem offhand.