A few decades ago, business owners, home buyers, and investors had to go through a lot of hurdles personally with their bankers to apply for an SMB loan, mortgage, or opening a trading account. Besides, the customers had to bear hidden charges for services they opt-in. One such example is the currency conversion, for which the exchange bureau still charges hefty exchange rates to customers.
As a matter of fact, even today, a few traditional banks follow the same old brick and motor model with all the old elements intact.
But, not anymore. Thanks to Financial Technology.
What is Financial Technology (Fintech)?
Fintech – (the short form of Financial Technology) is the innovative use of technology in the design and delivery of financial services. The term Fintech includes a huge range of products, technologies, and business models that are changing the financial services industry. This includes everything from cashless payments, crowd–funding platforms, robo-advisors to virtual currencies – to name a few.
So, every time you or your customer transfers money to someone’s kickstarter campaign or to your friend’s account using Google Pay or Apple Pay or Venmo – that’s Fintech. And that’s just one example of Fintech.
Similarly, hundreds of companies disrupt the banking and finance industry by changing the way customers pay and borrow money through software or innovative technology.
Evolution of Fintech
Historically, as technology evolved, the banking and financial services industry was reasonably good at integrating those new technologies in order to serve customers better.
But all this changed during the financial crisis of 2008. Back then, banks started dealing with the numerous rules, regulatory requirements, and fines imposed on them. And, innovation became a far distant priority.
But at the same time, some of the most game-changing technological innovations have transformed the way we live and become a part of our lives. For example, think about WhatsApp, Facebook, or Uber.
This innovation change led to a gap between what the banks offered to their customer with respect to convenience & overall experience.
And this gap is where the Fintech innovations are filling in and disrupting the overall banking & financial services landscape.
Before proceeding any further on why these new fintech models are better, let us understand more about the fintech landscape, segmentation by customers, and finally, the tech trends for 2021 & beyond.
With that being said, let’s get started.
Fintech Landscape: Categorization & Funding Statistics
The main players in the Fintech Landscape are (listed by the scale of importance):
- Government entities, like regulators, central banks, sovereign wealth funds, and all the authorities that grant licenses can actively influence the financial sector.
- Traditional financial services firms: Involved both as investors, potential strategic acquirers, and as promoters of innovation.
- Tech companies: For instance, Google & Apple providing financial services alongside their core products.
- Tech companies aiding financial transactions: American Express, Visa, Bloomberg, etc.
- Professional investors: For example, venture capitals, private equity – to name a few.
Even though the industry is shifting towards convenience and superior customer experience using technology, it’s still a long way to go. The Fintech firms are still only getting a slice of the entire banking customers.
According to The Business Research Company report, “The global Fintech market reached a value of nearly $111,240.5 million in 2019, having grown at a compound annual growth rate (CAGR) of 7.9% since 2015, and is expected to grow at a CAGR of 9.2% to nearly $158,014.3 million by 2023.”
Despite the economic uncertainty surrounding the Covid-19 pandemic, US banks are futureproofing by actively investing in Fintech. In 2020 YTD, US banks have made 40 equity investments into fintech companies.
And, funding increased by 17% quarter-over-quarter (QoQ) to $9.3B in Q2’20.
The most active US bank investors in Fintech (by number of deals backed) are Goldman Sachs, Citigroup, and JP Morgan Chase & Co. While all 3 have ramped up their fintech investment activity in recent years, they’ve taken different strategic approaches.
Take a closer look at where leading US banks are focusing their fintech investments.
Goldman Sachs and Citigroup are the most active investors largely because of their investment arms — Goldman Sachs Strategic Investments and Citi Ventures — which have participated in 59 and 38 fintech deals from Q1’18 through Q2’20, respectively. As a result, the 2 banks continue to invest in a wide range of fintech sectors.
Goldman Sachs has focused its M&A strategy in recent years on wealth management. In May 2019, the bank spent $750M on wealth management firm United Capital. More recently, it snapped up boutique wealth management custodian and technology provider Folio Investing in May 2020.
Adding, the Fintech mega-rounds ($100M+) hit a new quarterly high of 28 as the largest companies in the space raised additional funding.
These are signs that the fintech ecosystem is continuing to mature, especially as financial technology becomes more deeply embedded across other sectors of the banking and financial services industry.
Categorization of Fintech Landscape
As FinTech represents an umbrella term for business models and products, to display the complexity of a classification, we tried to bucket the Fintech customers and the user segmentation into separate sub-categories in the below table.
FinTech companies provide the same services to the end customer, but use a different process than the banks, similar to the difference between the Wikipedia and Britannica analogy.
Fintech has far-reaching effects that range from anti-money laundering software that protects banks from fraud to the emergence of challenger banks that aim to disrupt traditional banking models.
With the help of fintech, the way that we interact with money and conduct financial business is changing every day and is not going to slow down anytime soon. Fintech will always strive to reimagine the traditional banking services and products with customer being the center of focus.