In a very short period, venture capitalists, private equity firms, corporates and a number of other players have poured an unprecedented amount of money into global financial technology (Fintech) start-ups. The focus on finding the next unicorn has meant that more than $50 billion has been in-vested in almost 2,500 companies since 2010 as these innovators redefine the way in which we store, save, borrow, invest, move, spend and protect money (see Exhibit 1).
Technology firms that focus on financial products and services have moved quickly, forcing incumbents to rethink their core business models and embrace digital innovations. But now, the Fintech industry is itself maturing and entering a period of rapid change. Companies wondering how they will fit into this new era must first understand the forces that are pushing the changes.
This new Fintech era is being re-shaped by changes in market conditions, new regulations, and shifts in consumer demands and behaviors. The demise of some iconic industry players has made investors questioning the value of the sector more broadly. As a result, the industry, generally, is becoming more cautious, even as it becomes more diverse across technologies and products. A cooling down period at the end of last year in some of the more mature Fintech hotspots, such as Silicon Valley, New York and London, whereas hubs in other parts of the world, such as Austin, Stockholm and Mumbai gathered pace. The Fintech industry will undoubtedly continue to expand, post this blip, as its customer base grows and investor appetite remains focused, changes are imminent. Indeed, the very concept of what comprises Fintech will shift.
Exhibit 1: Global Fintech Financing Activity (2010-2015)
As the industry evolves, it will play a role well beyond financial products and services, individual companies will compete to become undisputed leaders by size and breadth, and ecosystems will develop that have a tight grip on customer loyalty. An increasing sign of a changing maturity is the increasing number of big-ticket deals in the sector. During the past five years, Fintech investment has been largely focused around retail payments. However, maturity has brought much greater diversification, with innovators seeking to disrupt and enhance elements along the financial services value chain. The ever evolving start up scene is changing, technology giants such as Google, Apple, Facebook, Amazon and Alibaba are redefining the customer experience and increasingly playing around the periphery of financial services. With a changing Fintech era upon us and the investor mind set changing, it is imperative we assess where things are changing and how we intend to participate in this change.
The scope of products and services offered by Fintechs are expanding rapidly. Where once companies focused on payment applications, lending, and money transfers, the industry’s reach has extended into more than 30 areas (see Exhibit 2) This shift brings Fintechs away from a focus on front line activities to a broad engagement throughout the value chain. The new offerings cut across a wide swath of financial services: retail, wealth management, small- and medium enterprises (SMEs), corporate and investment banking, and insurance. Many Fintechs are using a variety of technologies to be active in each of these areas. Some, for example use robo-advisory systems that provide automated recommendations with little human input, use tested technologies to meet customer needs, while others pursue more experimental technologies, such as block-chain systems that track and store an expanding series of transactions to help reduce infrastructure costs and improve efficiency.
Exhibit 2: We see more than 30 areas emerging as new norms in
In addition, Fintechs are moving beyond addressing a customer’s financial needs to offering a wider range of services, blurring the industry’s boundaries.
The Fintech industry is also becoming more diversified, with a wide variety of business models seen across geographies, segments, and technologies. One common model would be a start-up backed by venture-capital funding emerging to address a specific customer need.
Collaborative partnerships will become increasingly important as Fintechs seek scale and traditional financial institutions seek digital expertise. Fintechs have developed applications that create improved customer experiences although many lack skills in customer acquisition and other fields needed to grow quickly. Incumbent banks, on the other hand, already have hard-won capabilities in these areas, but they will have to work harder to create a true digital enterprise. The market and media commentary has emphasised the threat to established banking models however the opportunities for incumbent organisations to develop new partnerships aimed at better cost control, capital allocation, and customer acquisition are growing.
As the industry continues to mature, Fintechs will likely enter a period of consolidation, with larger players turning to mergers and acquisitions to satisfy their expansion goals.
It is not surprising for a new industry; the regulatory regimes affecting Fintechs are also evolving swiftly and will significantly influence how the industry develops. In many markets, regulators are playing a more proactive role in overseeing the industry, often encouraging its development, for instance by following a sandbox—or test and learn—approach that allows Fintechs to experiment without impacting the entire financial system. As regulators increasingly shape the evolution and growth of the Fintech industry, it remains unclear how the costs of regulations will impact players, particularly early-stage start-ups. How-ever, while regulators work toward balancing the risks to the financial-services sector, they are also eager to encourage innovation, and many have taken steps toward this goal.
As digital offerings become more mature and inter-connected, vast ecosystems will develop that span multiple industries. In many instances, Fintechs will become submerged in these ecosystems, representing, like many others, a component of a much broader digital network.
Ecosystems will likely develop to follow customer needs, rather than conform to traditional industry lines. Leaders in these ecosystems will need strong data-analytic capabilities to develop useful insights from the torrent of customer information available, and they will likely use Fintechs and others to develop the system and extract maximum value. While data and analytic capabilities are crucial to leading an ecosystem, companies will also need demonstrated prowess in cyber security to credibly safeguard the huge amounts of potentially sensitive client data available in the system.
Fintechs have matured rapidly in recent years, and the industry is entering a new phase of development. With no signs of the industry’s growth abating, its reach is likely to broaden quickly to embrace even newer technologies and offerings, blurring the boundaries now delineating financial services. As the momentum continues, some aspects of Fintech are likely to reach into a broad swath of the global economy, much like how digital technologies have become a necessity, rather than an option, for every industry.
In general, banks that are willing to adapt can capture a range of new benefits. Fintech innovations can help them in many aspects of their operations, from improved costs and better capital allocation to great-er revenue generation. The threat to their business models still remains real however the core strategic challenge is to choose the right Fintech partners.
Notes to consider:
The South African banking landscape operates in a stringent regulatory environment where customer processes must align accordingly. The administrative pressure of managing this compliance also requires banks to focus more carefully on removing obstacles that hinder the customer relationship whilst also enabling a service oriented, human centred environment. With Fintechs looking to exploit customer failure points in poor product design or processing, banks are leaving themselves increasingly vulnerable to innovative companies looking to use technology to enable banking in a virtual environment. That said, there is an increasing need for local banks to consider doing business with a Fintech company.
Interestingly, CEOs’ would prefer to avoid the minority stake option because direct investment creates an additional burden of regulatory restrictions that hinder real progress. There is the added alternative of a venture capital fund ring-fenced from the rest of the bank’s activities, an option where the likes of HSBC and Santander have already pursued. This approach can also offer the South African bank a low commitment option where the focus will be on 2-3 core fac-tors, e.g. innovative products\services, customer retention or market share\profitability.
SBG took an interesting approach to Fintech where acquisition was the primary motive, instead of continued collaboration. SBG played its first move in the Fintech payments space in December 2016 when it announced that it had acquired a majority stake in Firepay, the team behind South Africa’s largest mobile payments product, SnapScan, with a national network of more than 32,000 physical and online merchants. It would interesting to see which of two outcomes plays out , i.e. 1) the conservative, hierarchical and bureaucratic culture that of-ten hinders a highly regulated institution will damp-er SnapScan’s positioning in the payments industry or 2) The risk-averse, commercially restrictive lens is removed and SnapScan moves forward aggressively to build on its social payments plat-form model.
The opposite side of the scale also saw a different move from Capitec Bank, i.e. the bank took the route of acquiring a stake in an online lending business with the view of gaining experience in online lending and understanding platform scale. This type of collaboration is good for consumer Fintech, thereby opening up new opportunities for both the producers and the market. It remains to be seen whether any other South African bank would venture into this territory where acquisition rather than collaboration becomes the norm. This approach is very much dependent on the appetite of the bank’s strategy committee. As at today, it is very much a ‘wait and see’ scenario in the market with short term strategic calculations in play.
Capitec makes first major move overseas in R283 million deal with online only lender. (2017). Available at: https://businesstech.co.za/news/banking/166137/capitec-makes-first-major-move-overseas-in-r283-million-deal-with-online-only-lender/
Dietz, M. HV, V. and Lee, G. (2016). Bracing for seven critical changes as Fintech matures. Journal, [online]. Available at: http://www.mckinsey.com/industries/financial-services/our-insights/bracing-for-seven-critical-changes-as-fintech-matures
Dietz, M. Moon, J. and Radnai, M. (2016). Fintechs can help incumbents, not just disrupt them. Journal, [online]. Available at: http://www.mckinsey.com/industries/financial-services/our-insights/fintechs-can-help-incumbents-not-just-disrupt-them
Meager, L. (2017). Fintech deals help banks adapt. International Financial Law Review, 1.
Skan, J. Dickerson, J. Gagliardi, L. (2016). Fintech evolving landscape. Journal, [online]. Available at: https://www.accenture.com/za-en/insight-fintech-evolving-landscape
Standard Bank buys SnapScan maker, Firepay. (2016). Available at: https://businesstech.co.za/news/banking/147063/standard-bank-buys-snapscan-maker-firepay/