By Ihab Khalil*
SINCE its inception, the vast, fast-paced world of FinTech – the intersection of two dynamic industries – has irrevocably redefined, retransformed, and reshaped the sphere of business. In just over a decade, a plethora of trends have punctuated the FinTech landscape, giving rise to a new era of investment, customer service, and digital innovation. More importantly, this FinTech revolution has turned conventional approaches to financial technology on their heads.
In recent years, FinTech companies, which are mostly start-ups, have increased dramatically in number – from about 1,000 in 2005 to over 8,000 in 2016 – and have harnessed new cutting-edge technologies to provide financial services while sidestepping the legacy cost structures and regulatory constraints of traditional banks. Collectively, FinTech firms now offer services covering many of the traditional business lines of retail and other banks, from credit cards and loans to payments, cross-border transfers, and digital currencies.
Today, globally, Fintech funding is increasing at an accelerating rate: the $5.5 billion in total funding of eleven years ago has skyrocketed to a cumulative $78.6 billion, according to the Boston Consulting Group’s FinTech database. Geographically, North America players have received the greatest absolute level of funding – about 71 percent of total funding – while Asia Pacific ones have attracted the highest share. In parallel, within that specific time frame, Fintech offerings have focused in particular on consumer- and corporate-banking activities; in fact, companies targeting consumer and corporate customers have attracted the greatest share of investments.
Remarkably, since 2011, a total of six nonpublic firms – Social Finance (or SoFi), Alipay, Avant Corporation, One97 Communications, Zenefits and Square – have garnered more than $500 million of cumulative investment. In addition, more than 15 unicorns – start-ups with valuations of $1 billion or more – have emerged with an aggregate valuation of over $50 billion.
There is no denying that FinTech’s emergence as a full-fledged worldwide phenomenon has been sparked by steady, strategic investments and tremendous growth – driven primarily by three popular investment categories: payments, lending/crowdfunding, and data & analytics. Overall, the payments cluster – comprising consumer payment services, merchant payment services, new payment types and infrastructure and ancillary services – has received the largest investment as a category (30 percent) and is currently dominating the FinTech landscape, exhibiting rapid growth across an increasingly diverse product mix.
On a global scale, the retail digital payments industry is, today, in the throes of profound change, triggered by a number of key factors. First, when making payments, consumers in this day and age want omni-channel solutions, security and value-added services that offer more than just seamless convenience. Secondly, merchants, on their part, want lower cost payments and easy integration with value-added applications. Moreover, digital giants and new entrants are vying for digital transactions and firms are shifting towards revenue-sharing models, such as Apple Pay. From a technology standpoint, biometrics and tokenization are driving a step change in security and convenience.
The reality is, new breakthrough technologies and digitization initiatives are reinventing the ‘art of the possible’ in payments and ushering in a new world of multiple wallets, ‘devices,’ and supporting infrastructure. More specifically, they are simplifying the payment process and rendering it invisible.
Together, these forces are radically altering the payments space and helping to reevaluate the needs of both consumers and merchants – leaving ample room for FinTechs to irreversibly change the game.
The vast appeal of FinTechs lies in their ability to offer a differentiated business model, deliver an enhanced, personalized customer experience and tap into the power of digital to ensure end-to-end business value. And that is precisely why payment FinTechs – which include digital wallets, integrated Point of Sale (POS) systems, person-to-person (P2P) payments and cross-border transfers – are disrupting the industry to varying degrees.
With this in mind, an immediate question arises as to how exactly FinTechs are impacting banks.
The answer? It varies depending on the type of disruption.
To determine whether the FinTech ecosystem poses a threat or presents an opportunity, banks need to adopt a multi-phased assessment framework that begins with three questions:
Does it scale?
Does it provide real value to consumers?
Does it provide real value to merchants?
If the answer to all three questions is “yes”, then the next obvious question is: ‘What is the impact on your economics?’
If it is likely negative, then it is most probably a threat. By contrast, if it is potentially positive, then it may bring forth an opportunity.
Typically, the emergence of digital wallets is more opportunity than threat: after all, it cements card usage at POS systems and offers the chance to build digital wallet leadership. On the other hand, new POS technology can hinder small business relationships – it can take merchant acquiring business and offer value-added services.
Simplified P2P systems are a potential threat only if the scope is extended. They could win consumers thanks to their ease of use, prompt a move towards POS systems, offer other financial services, and promise value-added services. Lastly, cross-border transfers are generally classified as a threat as they can capture high margin business and eventually reach small businesses.
Based on this, it is clear that the size of the prize that FinTechs could grab remains to be seen; it all depends on banks’ respective reactions, the sweeping changes in the ecosystem, and the creation of attractive alternative revenue streams. FinTechs also spawn opportunities for inorganic innovation in the banking sector; they can be acquired to offer pioneering services – in a manner that is faster and cheaper than would otherwise be possible (so if they built them in-house).
In spite of the rise of the Fintech tsunami, banks remain well protected by regulations particularly with regards to deposit holding.
As a result, while Fintechs can pose a threat for part of the core business of banks, they also open up avenues for innovation for other divisions of the organization.
In short, adequately assessing the risk is what it all boils down to.
*The writer is Partner & Managing Director of The Boston Consulting Group Middle East
