Deloitte has just released “Fintech by the numbers”, the first of a series of three reports examining the history and prospects of Fintech. The subsequent parts will explore the perspectives of incumbent financial institutions, of Fintech incubators, and of Fintech companies.
As for this first report, it concludes that Fintech development has reached what I might call Stage 3.
Let’s take the stages one by one.
Though ‘Fintechs’ in marketplace lending and payments have been around for 15-20 years, the report says that it is only since early 2015 that the term ‘Fintech’ has taken off. So Stage 1 might be considered the period up to 2015. In that stage, financial industry executives either ignored Fintechs entirely or were worried by the threat posed by Fintech companies since they are more nimble and less constrained by regulation. The feeling was that Fintech companies were “disruptive competitors that could overturn the industry’s existing business models and grab significant market share, perhaps even driving some well-known players into irrelevance”.
However, we are now fully in the middle of Stage 2, in which “many traditional financial services companies (have) dramatically ramped up their own investments and transformation initiatives”. In other words, Stage 2 has large financial institutions, Fintechs and investors teaming up in pursuit of new markets, products, customers, profits.
So what is Stage 3? Well, Deloitte’s examination of the figures leads it to suggest that Fintech “has entered a stage of shakeout and consolidation”. I discuss the implications of such consolidation right at the end of this piece.
Let me start by observing that though the report mentions regulatory changes, the implication is that these will all benefit the industry – which may or may not turn out to be the case. For example, the report does not mention the Fintech-related bans in some countries, not the court cases in others.
Neither does the report take seriously the hacking of Fintech and Fintech-related companies. If Mark Hughes, the President of Security at BT is to be believed, the whole world of AI is now a war, or an arms race, between the ‘good guys’ and the ‘bad guys’ – and there is a horrifying chance that the ‘bad guys’ might win (see https://www.weforum.org/agenda/2017/11/cybersecurity-artificial-intelligence-arms-race).
So, as often with consultancy companies, this “report” is something of a puff, focusing as it does entirely on the positive in order to attract potential customers.
However, even puff pieces have their uses.
Its findings can be summed up as, the following, only the first of which will be anything of a surprise to anyone at all aware of the industry:
– New company formations are in decline over the past two years.
– Funding in many categories is still on the rise, especially in certain banking and commercial real estate categories.
– New and much larger sources of funding are emerging.
– Fintech acquisitions and initial public offerings (IPOs) are ramping up.
– There continues to be “meaningful regional variability” in Fintech creation and investor interest.
On the last point, the report observes that the USA and the UK are among the most Fintech-friendly countries, and that the US far outstrips any other country in terms of the total number of Fintechs in operation as well as total investments, particularly in deposits and lending, payments, financial management, and investment management.
However, the US seems to be on a divergent path from another great investor in Fintech – China. The US world of Fintech is made up of thousands of companies, large and small (e.g. 264 fintech companies have raised $7.71 billion in funding); but, in China, the focus is on a few large companies such as Tencent and Ping An (e.g. 7 fintech companies have raised $6.92 billion).
In the payments sector, India has been a favourable market for startups, with a few companies but large investments.
On the other hand, in the commercial insurance sector, while the US does have the largest number of Fintech companies, it is Bermuda where the most investment dollars have been allocated, driven by the large and influential reinsurance business in Bermuda.
Overall, the current position is that Fintechs have driven technology innovation, resulting in operational efficiencies, new product development, and changing customer expectations; however, Fintechs “have not meaningfully disintermediated existing providers”, nor does it look likely that they will overturn “longstanding financial services infrastructures, such as exchanges or payment networks”.
And what are the implications for the future?
For Fintechs: investors have heightened expectations as companies move from “startup to scale-up.” That means engaging with these investors in new ways that may be beyond the current comfort zone of most Fintech companies. Fintechs also need to consider: how will their company valuations change in a climate of consolidation as distinct from expansion? How will they need to be governed and how comply with regulations and rapid regulatory changes? Most important: how will Fintechs be regarded in terms of leadership, reputation, culture, and values?
For large incumbents, whether seeking to partner with Fintechs or acquire them, the key issue is that of ramping up their abilities to manage working relationships with new companies while being agile enough to adjust to rapid shifts in the business landscape from additional potential disruptions and new tech developments and solutions. Current evidence indicates to Deloitte that “many incumbents are challenged to execute pilot programs and proofs of concept. These difficulties could stem from, among other things, a lack of technical skills and resources, as well as access to relevant fintechs that may have applicable capabilities”.
For other companies, government bodies, and NGOs: in addition to the considerations mentioned above, in such a rapidly changing and highly volatile landscape, how do you identify the right Fintech partners with which to engage?