The economist reports that Goldman Sachs estimates the financial services industry is worth $4.7 trillion in revenues.
Fintech hubs have been established in places as far apart as the Silicon Valley, Singapore, Abu Dhabi, Dubai, Frankfurt and London.Â
PwC has published an excellent report on the future of Fintech titled Financial Services Technology 2020 and Beyond: Embracing disruption. Closer home, Wamda and Payfort’s State of Fintech report estimates that there will be 250 Fintech startups in the Mena region by 2020.
What is Fintech? It’s an abbreviation for Financial Services Technology and it covers a range of concepts including big data and analytics, the blockchain, payments, P2P lending and crowdfunding, roboadvisors, and mobility.
Why is Fintech attracting investments and attention?
Here’s one possible explanation and this relates back to the 2007-2008 financial crisis. In general, it can be said that the crisis showed up the mismatch between the tenure of the loans that the banks were making versus the tenure of the deposits that customers were willing to make.Â
Typically, banks were lending money for housing mortgages that had tenures of up to 30 years and customers usually do not deposit money for long tenures. A five-year fixed deposit is usually considered to be very long term.
Fintech on the other hand does not follow the classical banking pattern i.e. to borrow from depositors for shorter tenures and lend out to borrowers for longer terms. Usually, Fintech firms in crowdfunding or peer-to-peer lending will match lenders to borrowers, acting purely as technology and user-experience intermediaries.
Similarly, Fintech firms in payments act to reduce or eliminate settlement risk. Such a risk can occur if the source of funds in the payments transaction loses its ability to fulfill its promises. The longer the delay between the occurrence of a transaction and the time that it takes for good funds to come in to balance the books, the higher the risk.Â
Here again Fintech firms do not actually perform the settlement but instead provide the technological platform that enables this risk to be mitigated through faster processing.
In a way, it was financial technology that enabled some banks to become massive globe-straddling institutions.Â
Technology was capital intensive and the domain of a few. In the post 2007-08 world, technology is more likely to take away that dominance through pervasiveness and availability at low-costs.
Increasingly, the competition is not about who has the better technology but instead it is about who serves the customers’ interests and experience better. Money is moving out of the industrial age “build-it-and-they-will-come” mindset to a digital age where everybody wants to pay as easily as sending an SMS or social media message.
With that as a background, here are some terms that would probably start becoming clearer to the casual reader and to people who are curious about Fintech and investing in it.
Crowdfunding is epitomised by Kickstarter. It’s about making pitches to “virtual” crowds, promoters’ videos, blogs and lots of high-touch interaction with funders. Pretty much like a beauty contest. It’s closer to equity funding. It is a great way to create visibility for a good idea but sometimes the form can be more attractive than the function.
Peer-to-Peer, or P2P lending on the other hand is more purpose-based. Investors lend money based on fixed terms and tenures and expect to see the return as if they were depositing money in a bank account, although at a better rate of return and it is accompanied by a perceived higher risk. Lending Club and Beehive are names that come to mind.
Payments are usually further disaggregated into P2P, Person-to-Merchant (P2M), Business-to-Business (B2B), Cross-Border personal and business remittances and a host of other combinations. Each one of these sub-categories follows a set of historical processes and rules, some of which are codified by industry standards. However, at the base of these are processes relating to authentication, capturing, blocking and making good on the promise to pay.
Another factor is the pervasiveness of payments in our lives. We may make a banking transaction probably in terms of weeks or months. Borrowing or depositing more likely in terms of months or years. But payments are made in terms of hours or minutes.Â
Hence user-experience plays a defining role. In general, payments capture a large share of the creativity of Fintech entities because this area represents a large playing field for driving efficiencies.
Blockchains, cryptocurrencies (have you been following Ethereum?) and the related fields would require dedicated articles of their own.
In general, Fintech is not flavour-of-the-month or even of-the-year. Goldman Sachs values the opportunity at 4.7 trillion according a report in The Economist. Keep a lookout for more on this area in the coming months.
The writer is a Partner at BridgeDFS, a bespoke financial advisory firm (www.bridgeto.us). He’s a digital banking and digital banking financial services evangelist, practitioner, advisor and consultant. Views expressed are his own and do not reflect the newspaper’s policy. He can be contacted at email@example.com.
Via Khaleej Times