Driven by the desire to revamp or obviate the need for the banking legacy systems, the fintech industry has risen to prominence. The term, used loosely, generally describes a company that utilises technology to innovate in the financial sector. This includes cryptocurrency, peer-to-peer lending, payment processing and insurance services. Over the past five years, the number of fintech companies has skyrocketed from a couple hundred to just under a thousand. Along with that trend, the venture capital deployed to fund fintech has consistently increased to reach $ 7.6bn in 2015.
Taking center stage in fintech is the software underpinning Bitcoin: the Blockchain. The Blockchain is a decentralised, cryptography-based, public ledger that records and verifies transactions in a way that essentially cuts out the middleman. While initially born out of the need to create and track Bitcoin, this digital platform has the potential to redefine the back office of multiple industries by making transactions quicker, less expensive and safer. Multiple startups have been trying to harness that technology to bypass the traditional transactional systems.
Consulting firm Oliver Wyman estimated banks and insurers could lose as much as $150 billion in revenue to fintech startups by 2025. But although platforms like Venmo and Coinbase are multiplying, banks are also keeping up and investing heavily in technology. A consortium of 30 banks has joined the New York-based financial innovation startup, R3 CEV, led by Wall Street veteran, David Rutter. R3 CEV is working on a framework for using blockchain technology in financial markets and has offices in New York, London, and San Francisco to manage the design and delivery of advanced distributed ledger technologies for global financial markets. Furthermore, banks have the leverage of a huge customer base, deep pockets and a head start in the regulatory and compliance field. An interesting development though would be to see startups move from creating a new layer on top of the existing banking infrastructure to improved independent platforms, and gradually cross-sell financial products to offset the high cost of customer acquisition and to maximise ROI.
Another blooming ecosystem is that of insurance. As we are moving away from long-term ownerships to micro-moments of renting, insurance policies need to take advantage of the short-term limited exposure to risks and therefore, a decreased need for reserves. In this sharing economy, fintech startups are adapting to the concept of just-in-time insurance policies delivered on mobile devices in a matter of seconds. Protection can also be tailored on an ongoing basis, taking into account the huge amount of data collected from the interconnected platforms that we are constantly plugged into. Artificial intelligence will become, in the next couple of years, if it is not already, the insurance sector’s most valuable player. Through data provided by APIs and the Internet of Things, machine learning will enable companies to improve compliance, cost structure, and competitiveness, and fintech startups are front-runners in the adoption and harnessing of that sort of technology, placing them one step ahead of traditional insurers.
If fintech startups, in the developed markets, have to compete with incumbents and build their business on exploiting gaps between the traditional providers and the consumers, they usually enjoy more prominence in the developing world, by tapping into the $9.3 trillion market of the currently 2.5 billion of unbanked people. By collecting cyber ID data, fintech is allowing peer to peer marketplaces to exist in an ecosystem judged to insecure for traditional banks. This is, by far, an important lever in the economic performance of the region. Hopefully, fintech startups will multiply their presence in this field and find a way to crack through the bureaucratic strangulation and the lack of governmental corporation and encouragement particular to the developing world.