by Oliwia Berdak, VP & Research Director, Forrester Research
Using technology to innovate financial services isn’t new. From credit cards to ATMs, banks have always leveraged technology to deliver new and better ways to serve their customers. But since the mid-2000s, incumbents have been overtaken in their innovation efforts by a new breed of firms: fintech. And this innovation shows no signs of abating.
Fintechs are start-ups and scale-ups that use technology to deliver new or improved financial services to customers and/or to target inefficiencies in the financial services value chain. The term itself only started gaining traction from about 2015. But nearly a decade earlier, upstarts such as Zopa started experimenting with bank-free lending, and Betterment launched dirt-free portfolio management. Since then, fintech players have proliferated globally, with well over 2,000 start-ups vying to take a slice of the financial services pie.
What’s driven this explosion? Fintech has benefited from customer mistrust in incumbents following the financial crisis, favourable regulatory environment, digital development tools and cloud-based services widely available at a marginal cost, and an influx of venture capital funding. And fintech is no longer niche. It is big business. According to Venture Scanner data, fintech funding has grown steadily since 2013, reaching $131 billion between 2008 and 2018. There are now 46 fintech unicorns – privately held start-ups valued at over $1 billion. Can this party continue? After all, many fintech start-ups haven’t lived up to their expectations, with, for example, the British peer-to-peer lending platform Funding Circle losing almost 75 per cent of its value since going public in September 2018.
Despite these disappointments, Forrester believes that fintech-enabled disruption will march on. Why? Because its drivers – digitally empowered customers, emboldened entrepreneurs, rapid technological change, and deep private funding pools – haven’t changed. Yes, there will be painful consolidation in areas such as digital banking, robo-advice or peer-to-peer lending, but there are plenty more opportunities where high margins and accumulated inefficiencies continue to tempt entrepreneurs. For example, international payments, share trading, small business services and mortgages are all brimming with fintech activity. And, of course, it’s not all about direct-to-consumer fintech. Plenty of fintech firms are jockeying for the lucrative business of identity verification, eKYC and fraud detection, or driving innovation unleashed by open banking.
Most fintech firms will remain niche players or fail altogether. But some will gain a foothold as they engage customers in new ways. Firms such as Alipay and PayPal have demonstrated they can quickly win market share and grow from start-ups to major players within a few years. And banks themselves have also recognised this, with many setting up dedicated fintech accelerators and venture capital funds, and forming uneasy alliances with fintech firms to target niche customers, build new client experiences, or experiment with new business models. The key is not to fall for the hype but to continuously question the source of the start-up’s success. Does it address an unmet client need, does it deliver customer value, does it have a sustainable business model, and is the technology innovative and built on solid technical foundations? If the answer is yes, you’re potentially looking at the next fintech unicorn.