FinTech is quite simply a combination of the words Financial Technology. According to Investopedia, FinTech encompasses any technological innovations that aim to introduce and/or improve the delivery and use of financial services.
What is Fintech?
These services in the formats of software, algorithms and applications can be accessed via computers or increasingly through mobile phones. This can look like simple money transferring applications like Paytm and bank applications or, in a more complicated outlook, back-end algorithms supporting capital markets.
The Evolution of FinTech
Even though FinTech has only started to gain traction for itself in the 21st century, its origin can be dated back to the 1860s, when banks developed a technology named the Pentelegraph, which allowed them to verify signatures.
Even in the 1900s, however, upcoming FinTech was primarily understood to disrupt existing financial institutions and service providers. However, the contemporary financial world has now converted the once potential source of its dissent into its biggest strength, by incorporating fintech to widen the gamut of the services it can provide.
Moving a bit forward in the timeline, FinTech evolved with the U.S. developing a Fedwire in 1918, allowing electronic transfers of money over long distances through the use of morse code and the telegraph.
Further revolutions such as the establishment of NASDAQ, the world’s first digital stock exchange, and SWIFT, Society for Worldwide Interbank Financial Telecommunications, allowed FinTech to bring about revolutionary shifts in the realm of capital markets and inter-banking communication, crossing boundaries of both countries as well as possibilities.
FinTech next moved into the world of digital payments in the 1990s with the launch of PayPal and eventually introduced the world to cryptocurrency with the launch of Bitcoin in 2008. Today, the same cryptocurrency attracts investment of $8.1 billion from just M&A, Venture Capital, and Private Equity, with yet other millions of people investing in it every single day.
Why FinTech Works in The Contemporary World
Forbes recently stated in an article on FinTech, “today, adaptability and quick iteration (not to mention, instant gratification) are precisely what consumers and business owners expect—and, increasingly, need.”
By making thousands of financial services and functions speedy, accessible, and affordable to people in all corners of the world, FinTech is thus, playing a huge role in the global economy and consequently, the daily lives of billions of people today.
Understanding FinTech affect daily lives with examples
By allowing people to access bank services 24×7, ATMs eliminated the time constraints of banking services for people. However, people still had to be physically present at the ATM or locate one to access these services. So, a geographical constraint continued to exist leaving scope for more innovation to bring about more convenience.
Here, yet another FinTech, in the form of banking applications, allowed banks to remain competitive, by enabling users to access banking services 24×7 via their mobile phones.
Not only did this innovation bring more freedom of use to the users of financial services, but also allowed the financial services industry to cut down on operational costs such as the payroll of the bank staff who previously performed the functions instead of the bank application. This can also be seen in our aforementioned example where the ATM machines and bank applications are eliminating bank tellers.
Moreover, the capital expenditure of building ATMs in multiple locations to ensure access also went down after these applications came into the scenario. In fact, according to Statista, the number of ATMs in India per 100,000 population has remained fairly similar over the years, indicating no significant growth in the number of ATMs since FinTech came into the picture.
Now let’s look at the single greatest reason behind the promising prospects of the FinTech industry.
According to Forbes, by substituting decision-making humans for purely logical algorithms, the industry removes the error of human judgment and adds to the process the speed and accuracy that characterizes all technology today. While the error of human judgment seems quite natural and intuitive, it can impose a huge cost on industries. In 2008 itself, human error cost companies in the US and UK an amount equivalent to $37 billion. More recently, the CITI group accidentally transferred $1 billion to a client’s lenders, who never returned the sum. All this led to a lawsuit, which is further draining CITI’s financials.
Industry Structure
Moving on to the industry structure, FinTech is composed of quite a few segments, including, but not limited to Digital Payments, Financing and Lending, Wealth Technology, Insurance Technology and Neobanking. Of these, Digital Payments exceed the others by a huge margin with a total value of $8,563 billion in 2022. The users of this segment are also projected to rise to 5.197.75 million in 2026.
Talking about the structure of investments in the FinTech industry, the same is primarily dominated by M&A, with almost half of the FinTech industry’s funding coming from them, followed by Venture Capital standing at a quarter, Private Equity, IPOs, and other sources, in that order.
The industry is fairly dispersed when it comes to questions of market concentration. The main rivalry factors in the industry include lack of diversity, easy to expand, low fixed costs, number of players, and undifferentiated product, according to MarketLine.
Industry Insights and Future Prospects
Now that we understand the FinTech industry better, let’s look at the current state and future prospects of this industry.
Banks are now, more than ever, recognizing the need to adopt FinTech and are thus, increasingly incorporating or investing in FinTech services.
A Statista report that focused on the most important opportunities for banks to generate non-traditional revenue streams in 2018 had FinTech in its major factors and opportunities, as shown below:
Statista.com
Tapping into these opportunities, 80% of the financial services institutions across the world reported improving digital experiences for consumers as their strategic priority, followed by enhancing data analytics capabilities (49%) and reducing operating costs (38%), all of which we noted earlier.
With investments starting from $9 billion in 2010 to $210.1 billion in 2021, FinTech thus grew dramatically this decade, as a report on Statista indicates.
The leading FinTech company in terms of market value in 2020 was Ant Group at $150 billion, followed by Stripe at $36 billion, Adyen at $22 billion, and Paytm at $16 billion.
Moreover, the total number of FinTech start-ups across the world rose from 12,131 in 2018 to 26346 in November of 2021. Out of these, 163 startups launched in 2021 currently have the status of a unicorn FinTech Startup, with Stripe ($36 billion), One97 Communications ($16 billion) and Chime ($14.5 billion) being the leading ones. The National Stock Exchange of India also made it to the list of the most valuable fintech unicorns with a market value of $6.5 billion.
Even though this dramatic increase in the industry created ripple effects throughout the world, Statista reports that 80% of these are concentrated in the Americas with almost 10,755 new FinTech start-ups located here as of November 2021.
From the perspective of consumer adoption rates in 2019. The use of it has also been growing exponentially with 75% of the global population. It used for money transfers and payments, 34% of it using savings and investments. The 29% of it using FinTech budgeting and financing planning. It followed by use for insurance at 48% and borrowing at 27%.
China’s FinTech Adoption
China has by far been leading the world in terms of FinTech adoption with 92% of its population. It used FinTech for banking and payments, 91% of them using it for financial management. It followed by 89% of people employing it for financing and 62% people employing it for insurance. Other countries dominating FinTech adoption are the U.S., Mexico, South Africa, and the United Kingdom, in that order.
Talking about future prospects, MarketLine reports a CAGR of 4.5% for the global FinTech industry over the period of 2019-2024. Its capping the industry at $169.3 billion with an annual growth rate of 17% in 2024. The same report on MarketLine also forecasted a deal volume of 2,319.7 deals. The CAGR of deal volume over 2019-2024 being a negative 2.9%.
FinTech Industry in India
Investments in India also followed suit with investment deals in the firms rising to 1153 in 2019. It was right before the pandemic hit. Even then, angel investors increased their investments from 417 deals in 2019 to 518 deals in 2020. While the venture capital investments declined by 116 deals in the same period.
According to the National Investment Promotion and Facilitation Agency, India has the highest adoption rate at 87%. With a market value of $31 billion and transaction value of $66 billion. The Indianindustry boasts a Compounded Annual Growth Rate of 20%.
Currently, the FinTech industry in India is thrusting towards growth. The main key drivers such as open API platforms, higher amounts of fundingetc to name a few. All these projects together expected to provide the highest RoI. The industry set at 29%, as per the National Investment Promotion and Facilitation Agency.
The Boston Consulting Group (BCG) and (FICCI) submitted a collaborative report. It indicates that the Indian industry has prospects exceeding $100 billion. In the report, they also outlined business model portability, product maturity. It accessed to market enablers as the key factors to ensure the success of an Indian FinTech company.
The report states India also has the 5th largest FinTech investments in the world. It is among the world’s top five favoured FinTech investment locations.
Users of FinTech
With rising rates of adoption, it has for quite some time caught the global spotlight. It massively value it brings to its adopters and users. Like every other industry, the B2B market comprised of wide array of FinTech.
B2C FinTech services mostly cover the wide array of client-facing bank services. They comprise of making deposits, applying for loans, etc. They offered these institutions via online website portals and banking applications for mobile devices. B2C services can also include applications like Paytm or Splitwise. It allows consumers to make payments online and manage their finances respectively, providing convenience in financial transactions and management. Most people engaging with the B2C FinTech services are also GenX and upwards till GenZ. It has led all these organizations to target more of this demographic.
On the other hand, B2B services, which deal with inter-business FinTech. It includes financial institutions’ corporate portals and other business-facing services like E-invoicing, etc. B2B It came into light in the early 2000s with payments and online banking dominating most of the innovation. As noted earlier, the launch of PayPal also contributed vastly to the development of the B2B industry. Some B2B services include blockchain platforms, alternative lending platforms, etc, although some of these can come under both umbrellas. According to TMC, the two major users of B2B FinTech are online-only retailers and tech companies.
After understanding the users, it becomes important to identify their needs. It can be anything ranging from applications to algorithms. Once the consumer identified, a FinTech algorithm or application designed accordingly, prompting innovation in the financial world.
Conclusion
Fintech has achieved the milestone globally. It has developed different unique financial transactions. There is a huge advancement in the mobile payment technology that has large impact on the financial incorporation. The technology is expanding vastly. The technology companies are also providing financial services that will benefit the country as a whole.
Moreover, it bounced on the different monetary systems as well as the financial stability is limited. Fintech is also progressing to adapt the legal and the regulatory framework. The traditional financial institutes adapted to the new digital format. As there is increase in the rapidly increase topic of FinTech.
