Technology has always played a crucial role in the financial industry. Fintech is not new, it dates back to 1950, when ATM and credit cards were first introduced, but with the continued innovation and evolution, new technologies are redefining the industry. The global fintech market has been on an upward trajectory lately. And this is evident by the increasing number of fintech start-ups challenging the dominance of incumbents and growing investments in the global fintech market.

How does Fintech work?

Fintech, is a portmanteau of finance and technology, which is used for referring to technologies used in the operation and execution of activities in financial institutions. Money transfer, raising money for business, depositing money or managing your investments, all of them have been made possible with fintech backed by the internet and the smartphone revolution.

Fintech has not only proved out to be beneficial for financial institutions, but it is helping customers as well. Unlike traditional banks, it is facilitating short-term loans to customers almost immediately. Additionally, companies like Affirm and Tala are helping customers with no or low credits to secure loans so that they can also build their credit histories.

It is not only a win-win situation for customers, financial institutions can now directly reach customers across the globe. Online presence of financial institutions removes the need for intermediators, consequently, assisting in reducing the overall cost of operations and helping customers in securing loans at reduced rates.

Companies in global fintech market are using different approaches and adopting various models to increase their clientele and market share. One of the major strategies adopted by the companies is to offer services for niche or unexplored market segments. Popular business models for fintechs are mentioned below:

•       New entrants are investing in breakthrough technologies to implement models similar to banks with primary focus on a niche or particular product. However, for such fintech start-ups, main challenge is the cost of customer acquisition.
•     Incumbents as fintechs are investing in transforming their traditional framework with innovative technologies in order to improve the functioning and performance of their business.
•      Fintechs as consortia composed of large technology companies which offer their services to improve existing platform and to monetize current user data or relationships.
•      Fintech companies as infrastructure providers are selling services to financial institutions so that they can improve customer experience and engagement by digitization.         

Fintech Market Outlook

Fintech is a multi-billion-dollar market and is expanding to various other verticals. Earlier, fintech offered services under a single umbrella; however, unbundling of these services led to streamlined and efficient process with reduced cost of the transactions. Each of these services now represent a new market. Implementation of technologies like blockchain, artificial intelligence, machine learning has removed the guesswork from the financial institutions. Decisions or actions taken in the financial service institutions are now backed by predictive behavioral analytics and data-driven marketing.

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According to TechSci Research report, “Global Fintech Market By Technology (API; AI; Blockchain; Distributed Computing), By Service (Payment; Fund Transfer; Personal Finance; Loans; Insurance; Wealth Management), By Application (Banking; Insurance; Securities; & Others), By Deployment Mode (Cloud & On-premises), By Region, Competition, Forecast & Opportunities, 2024”, the global fintech market is anticipated to grow at CAGR of over 20% during the forecast period. The key reason for the growth of the fintech market includes high investments in technology-based solutions by banks and other financial institutions. Moreover, the infrastructure-based technology and open application programming interfaces (APIs), are reshaping the future of the financial services industry, thus aiding the growth of the global fintech market.

The investments in the global fintech market witnessed tremendous growth from $14.4 Billion in 2014 to $54.5 Billion by the third quarter of 2018, which is almost four times the investment in 2014. Additionally, by the end of 2018, the industry witnessed emergence of 39 fintech unicorns, which are backed by venture capitalists.

 Fintech finds applications in verticals including:

• Banking

Banking is one of the major verticals of fintech market. Nowadays, consumer want easy access to their bank accounts, convenient transfer of money, among others. Attributing to the boom in the mobile devices market, almost every financial institution is offering apps and online banking services. Increasing proliferation of technology has also led to rise of neobank i.e. digital bank with no physical branch. Neobanks are gaining traction as these institutions offer financial services at lower cost in comparison to traditional banks and are more transparent. Examples of neobanks include Chime, Simple and Varo.

Fintech companies are not just changing how people save or spend their money, but they are also working toward boosting customer engagement and are implementing AI enhanced chatbots for banking assistance 24x7 and anti-money laundering software that helps them to detect suspicious transactions.

• Fraud Detection & Security

Undoubtedly, mobile banking is flexible and time-saving, but technological advancements have also paved the way for hackers and identity thieves. Last five years witnessed phishing and cybersecurity attacks, which was way more than the number of attacks that the industry witnessed over the last two decades. Therefore, there is need for anti-fraud efforts, to secure personal information. In light of abovementioned events, governments across several countries mandated EMV chips on credit and debit cards so that card cloning can be prevented. Multi-level authentication is another step to make mobile and online banking safer.

• Blockchain and Cryptocurrency

Blockchain, which was developed at the height of global financial crisis in 2008, is a kind of distributed ledger technology used for recording origin and transfer of anything that holds value. The technology gained prominence when it was used for payments (cryptocurrency), as it eliminated the need for central authorities (banks in case of money transaction) and is more secure and efficient. Though, cryptocurrency and blockchain are different technologies, but their combination with fintech can be used to deliver vast amount of services.

• Lending

Learning from the mistakes of 2008 financial crisis, lending sector is becoming increasingly vigilant and is now employing AI, bigdata and blockchain to solve existing bottlenecks in the system. Lending companies are now streamlining risk assessment and speeding up the processes of approval so that customers don’t have to wait for long time. Customers can now apply for a loan through their mobile device and can generate their credit reports multiple times in a year. Companies implementing this business model include Avant, Tala, Ondeck, among others.

• Insurance

Insurance industry, which falls under fintech, due to complexities in regulations is somewhat slow adopter of technology but returns of implementation of these technologies are noticeable in this industry as well. From life insurance to non-life insurance, incumbents are using technology for every insurance grouping for increasing coverage and automating processes. Even, companies are introducing insurance telematics and ultra-tailored policies to encourage customers. Some insurtech companies include Root Insurance, Oscar Health and Acko General Insurance.

Trends to look for in Global Fintech Market:

• Artificial Intelligence is just the Steppingstone

Propelled by the usefulness of artificial intelligence, financial institutions are implementing the technology and capitalizing on the idea. However, AI is just the steppingstone, future of fintech market is bright for other technological disruptions such as bigdata, machine learning & natural language processing (NLP) and their combinations.

According to another TechSci Research report, “Global AI in Fintech Market By Component (Solution (Software Tools and Platform) and Services (Managed and Professional)), By Deployment Mode (Cloud and On-premise), By Application, By Region, Competition, Forecast & Opportunities, 2024”, the global AI in Fintech market is anticipated to grow at a double-digit CAGR during the forecast period, on account of technological advancements and surging penetration of internet. Artificial intelligence (AI) is transforming the finance and banking industry. Since, AI helps to improve the efficiency and reduce the chances of error, the application of AI in Fintech is increasing at a rapid pace.

Increasing Fintech Disruptions in Regional Markets:

Leaders in the fintech ecosystem are focusing on regional market rather than global markets. Regulatory approval is a crucial step and often acts as a barrier for the entry of fintech companies in any geography. Obtaining approval in one country can be exemplified for regulatory approval in other countries also. For instance, approval in one European country can be passported to other countries of EU. As a result, companies are first targeting on entering to one geography rather than global market directly. Fintech market has witnessed this trend in the past as well in case of companies like TransferWise. The company started its offering with United Kingdom and then expanded to other European Union countries before moving to North America.

Additionally, states in the US require independent approval for operations within the states, and therefore companies like Remitly and Xoom expanded first to US and later to Europe.

•  Understanding Regulatory Framework of the Geography

Not all countries have stringent regulations and the exception to that is China. Fintech leaders such as Ant Financial is not only offering financial services in digital payments but is also operating in other fintech markets as well i.e. asset & wealth management and loan. However, that is not the case with leading companies operating in other geographies, say US or Europe. These geographies have strict regulatory requirements and so players are limited to only few sub-verticals of fintech market. Therefore, clear understanding of regional variations and government regulations is vital for successful entry into any country.

• Fintech - An Inspiring Threat

When start-ups started competing for their share in the fintech market, incumbents considered them as threat for their position and share in the market. But, fintechs are pushing well-established companies to take necessary steps required for the adoption of innovative technologies. It is one of the strategies adopted by the companies to stay ahead in the market.

Another trend which is being witnessed in the market is increasing partnerships of start-ups and incumbents. Fintechs are known for their speed and flexibility in terms of operations and incumbents have massive customer bases, and consequently, collaborations between incumbents and fintech players is a win-win scenario of all the stakeholders.