Fintech companies have been around since the beginning of the century, even if the term “fintech” is relatively new. As applications seeking to improve and automate uses of financial services grow rapidly, more traditional technology companies are incorporating embedded solutions into their products. Newer startups, focused on improving customer experience in an industry not known for strong customer engagement, are gaining a foothold with a discerning public. Many will join PayPal and Square as the household names of tomorrow.
Today, fintech’s market capitalization comprises 10% of the financial sector. Fintech is chipping away at the heft and power of the world’s top banks. Is banking’s Blockbuster Video moment approaching?
Research shows that Generation Z — often referred to as digital natives — comprises fintech’s early adopters and most loyal consumers. This is partly due to the cohort’s lingering distrust of banks, coupled with a strong preference for digital technology and innovation. Traditional financial services are notably lacking advanced technology enablement. The reasons are many, including shorter investor timeframes that run counter to what a digitization project needs, high levels of technical debt, regulatory requirements, and a traditional risk-averse culture that hinders innovation.
Gaining a Foothold
The term “fintech” was originally coined in 1993 by CitiCorp but came into common vernacular in the 2010s. In that decade, fintech startups sought to “unbundle” traditional financial services. Upstarts such as Square and Stripe were launched, inspiring new fintech startups to tackle a single product or problem that resonated with users and quickly gaining investor interest. By 2019, KPMG estimates fintech startups attracted close to $400 billion worth of equity funding from venture capitalists. That year also saw the emergence of 66 fintech “unicorns” — those with private valuations of $1 billion or more — according to CB Insights.
Fintechs generally focus on a few paths to market and incorporate advances in technology by:
- Partnering with incumbent banks which hold the regulatory licenses needed to operate and offering digital tools to process payments, originate loans and optimize backend processes.
- Embedding regulatory technology and providing a more seamless digital interface for Know Your Customer (“KYC”) and anti-money laundering (“AML”) compliance, an emerging subsegment of fintech known as regulatory tech or “RegTech,” and leveraging improvements in data analytics and AI to offer more tailored products and services while also lowering operating expenses with the future end state of “self-driving money.”
- Breaking down walled gardens that have traditionally defined financial services by enabling users to “connect” disparate financial institutions via API to allow the easy transfer of data and users to see a more holistic view of their finances. This is broadly termed “open banking.”
Unburdened by the banking industry’s investment in legacy software, agile fintechs are free to innovate faster and design digital solutions with cost-effective, next-generation features. By leveraging these regulatory and technological advances, fintechs achieve efficiencies of scale and find profits from niche use cases that target specific markets, “unbundling” a single product and then moving to offer additional tailored products and services. This approach makes the fintech appear like the incumbents they seek to disrupt over the long term, albeit with a more digital-friendly interface.
The reality is that the market’s massive shift to digital poses a serious threat to incumbent banks. The pandemic has placed rapid, innovative digitization projects squarely at the top of banking’s to-do list.
Continued Sector Growth
With these factors in play, analysts predict fintech’s digital muscle will expand beyond the banking, insurance and investment sectors into new opportunities in real estate, education, philanthropy, and capital markets. As banks cope with the erosion of customer trust, increasing regulations and digital modernization, fintechs are poised to be a major factor shaping the future of financial services. Whether fintechs play the role of helpful partner or independent disrupter, the way financial services are delivered will change.
As hockey star Wayne Gretzky said, “Skate to where the puck is going.” As fintechs reimagine the future of financial services, that puck appears to be heading for their corner.