The FinTech Explosion
FinTech is one of the most well-funded and fastest growing areas of emerging technology. In 2020, cumulative global investment activity across VC, PE and M&A for FinTech companies was just under $123.8 billion, lower than the $200.9 billion in 2019, but still an immense amount of funding into a single sector.
Although 2020 saw pullback in total deal activity and a shakeout among some of the less capitalised startups, the first half of 2021 has been a different story. The first quarter saw the most funding rounds for private FinTech startups valued above $100m, and in June, funding for European FinTech startups broke the record for annual FinTech investment, just halfway through the year. With innovation in the sector at an all time high, we expect sustained venture capital focus on the sector in the long term.
The past few years have seen unprecedented advancements in FinTech, driven by innovation in mobile payments, digital currencies, blockchain and distributed ledger technology, peer-to-peer lending, and digital banking. FinTech innovation has arisen in the traditional financial and banking system, largely driven by venture capital backed FinTech startups and emerging companies, as well as non-traditional providers.
FinTech is progressively breaking barriers to entry that have long surrounded the traditional financial system, and is causing a radical shift by challenging conventional customer approaches, business models, and market positioning. Significantly, FinTech innovation is changing customer experience and expectations by promoting a more client-centric and interactive approach to financial and banking services with hyper-personalised products.
FinTech innovation encourages traditional players to embrace new technologies and develop similar capabilities. Banks and legacy institutions around the world are taking significant steps in this direction, including large investments in client services and customer reporting using digital channels, creation of internal dedicated digital teams, and increases in budget for digital change and innovation.
How is FinTech Changing Banking?
FinTech is transforming traditional banking in a number of ways. Breaking banking down to its core principles, banks provide a financial intermediary with three key purposes: to provide a place to store value, have this store of value be transactable (payments in and out), and finally, to provide liquidity to balance the transactions where required.
These three core functions provide the basis of banking as it has always existed. Since the FinTech revolution began, different FinTechs have targeted core elements of this service. From payment as a service providers such as Stripe and Square dominating the point of sale area, to lending solutions providing unsecured loans or ‘Buy Now, Pay Later’ finance for purchases, building valuable businesses by specialising in a segment has created exceptional digital user experiences, more efficient workflows and greater scalability. This is commonly known as the unbundling of banking.
As we move forward, we believe there will be a shift as established FinTechs and incumbents look to move up and down stream, expanding their services into the named ‘superapps’, creating integrated end to end, complete solutions. However, what we also predict is the success of the further sub-sectored areas. Businesses doing this provide valuable plug and play solutions, as larger FinTechs and incumbents look to offer the full flow of banking services.
Looking to the Future
FinTech has already vastly disrupted financial services, and is expected to continue disrupting as we enter the next wave of innovation. We will see entirely new financial concepts as the next wave looks to not only digitally disrupt traditional industries, but to redefine and create new economies and ecosystems.
Key areas to watch include:
Sustainable investment and banking will be on the rise as the socially conscious Gen Z consumer grows and acts with their wallets.
Moving away from traditional financial institutions, finance and insurance will become embedded in other areas of life, creating an even more seamless experience.
One of the few remaining areas for innovation aside from the ‘Buy Now, Pay Later’ product, as the next generation of consumers has been raised as ‘anti traditional’ debt for both daily credit cards, as well as larger loan finance.
Innovation in the pension space which has been almost untouched despite all the current changes.
Both lending innovation, invoicing/accounts payable, B2B payment rails, blockchain smart contracts and more.
To summarise, the pandemic has compressed adoption of FinTech applications in all consumer segments, and has significantly advanced the funding landscape. The real winners in the rising tide will be decided in the coming decade, as consolidation and innovation continues.