FinTech companies are businesses that leverage new technology to create new and better financial services for both consumers and businesses.
It includes companies of all kinds that may operate in personal financial management, insurance, payment, asset management, etc.” According to Huffington Posts.
For example, when you use PayPal, Apple Pay, Google Wallet or simply your credit card to make an online purchase, you the consumer, the ecommerce retailer and the banks behind the money exchange are using FinTech.
What would be the Next Big Thing in FinTech?
If someone asked me this question six months ago, I probably would have said blockchain and distributed ledger systems (think of all that paperwork it could replace!)
“Next big thing” depends upon where – North America or Western Europe, China, or “developing economies” such as in Africa or South America?
However, if I think about financial services broadly, trends begin to reveal themselves.
The most prominent theme I’m seeing in the financial services industry is the rise of digital banking.
As a consequence, the digitization and automation of financial services in small business banking is potentially a significant opportunity. Another significant area is digital and mobile banking to provide basic access to financial services (2 billion adults do not have a bank account).
A number of broader trends are impacting the financial services industry
- Low or negative interest rates
- Debt-fueled economic growth
- Pressure to reduce costs meaning automation is increasingly more attractive
- How to retain/maintain customer relationships and attention to service
- In general, an industry with a future-oriented lens that is focused on managing risks ahead of innovation
- Customers are expecting digital and mobile offerings of financial services
- Branch network are shrinking
Lending, credit cards, and mortgages will continue to be large market opportunities.
Financial institutions will be looking for ways to reduce costs and increase their margins on these products, creating fertile ground for fintech solutions.
Taking a look at the type of fintech opportunities I’ve been seeing over the past year to 18 months as an investor, I’ve seen a few business-to-business solutions including automating workflow, introducing algorithmic predictive cashflow analysis for small businesses, and digitizing underwriting and pricing financial products for small business lending.
These opportunities mainly centre around the same recurring theme – financial activities are costly for small businesses due to lack of scale, coupled with small and medium-sized enterprises being drivers of economic growth, which means financial institutions need more cost-efficient and effective ways of serving this market.
Financial technology is the direction this is heading.
Not everyone has a bank account…yet.
Two billion adults worldwide do not have bank accounts. This represents a completely new market opportunity for many financial institutions.
Mobile money accounts can drive financial inclusion and accessibility, as seen in Sub-Saharan Africa.
Especially if you consider people in rural areas or with limited time or connections to the already shrinking branch network, digital and mobile banking are potential solutions.
When I think about significant developments in financial services of the past, not necessarily fuelled by technological innovation, I think of:
- Securitization (1970s, private label issuances exceeded government sponsored issuances for the first time in 2005)
- Microfinance (1980s)
- Online payments (late 1990s)
All of these innovations reached large markets and made financial products or services more accessible to more people.
I think the next big thing(s) in fintech will similarly reach large markets and will be the digitization and automation of financial services for small businesses and digital and mobile banking for the unbanked.
In developing this answer, I made the following notes. Maybe there are other significant opportunities in fintech around these activities.
What happens in the financial industry?
- Storing money – deposit-taking, trust services, retail banking, and business banking
- Money management – activities related to currency, investments, and financial management
- Financing activity – lending, financing, and capital funding
- Payments – including interbank transfers, accounts payable and receivable, credit cards
What are the activities needed to make the above services/benefits possible?
- Trust and compliance
- Record keeping
- Automating administrative tasks such as application forms
- Movement of money
- Transfers between institutions and accounts
- Transfers of money from institutions to individuals, companies, and organizations
- Data gathering
- Prediction and learning loops
- Algorithmic decision-making
- Building capital, generating income
- Relationship building and management
Machine learning becomes one of the strongest cybersecurity tools
Machine learning continues to be an essential tool in fighting increasingly complex hacking schemes.
When it comes to fintech and the potential draining of billions from bank accounts, AI will be even more important to combat increasingly complex attacks.
Engineers must be careful to track how their systems behaviors respond to security threats, however, or risk missing out on uncovering exactly which vulnerabilities exist.
Innovation will continue to outpace regulation
Financial regulation has been a hot topic since the 2008 recession, and will continue to be as fintech continues to change faster than laws and government agency oversight can adapt.
Unsurprisingly this leads to increased risk for investors and therefore reduced valuations for fintech startups, but is unlikely to stifle progress.
There is simply too much opportunity for improvement of the legacy systems in place. While lawmakers do tend to move much slowly on policy changes, they should not rush to regulate for its own sake.
Engagement and ongoing dialog between entrepreneurs and government leaders is imperative to minimize collateral damage to the industry while maximizing consumer protection.
Automation impacts will be felt by finance employees
Financial analysts and advisors may have a target on their back from software with access to enormous real-time databases.
These robo-bankers will be able to make split-second recommendations to customers with the best monetary outcomes all but guaranteed.
Blockchain and digital currencies keep up progress
First invented by bitcoin in 2009 to secure batches of valid transactions, blockchain distributed databases will become even more important in the coming years.
The continuously growing list of records secured against revisions and tampering through peer-to-peer sharing is building fans in government too.
The US House of Representatives has passed a nonbinding resolution calling for a “national technology innovation policy that includes supportive language for digital currencies and blockchain technology.“
Expect to see blockchain and digital currencies show in ever more places for payment and exchange.
Collaboration Between Legacy Firms and Insurtech
As we saw in the fintech revolution, most fintech startups got some of their earliest support and interest from traditional banks.
This trend continues with insurtech, with the top insurance companies being the biggest investors in early stage insurtech initiatives.
Some other ideas on what might become the next big thing – Anything having to do with simplifying bureaucratic red tape, licensing, taxes and rules and regulations could be quite well-received.
Especially if these services are designed to be extremely user-friendly and affordable for “lay” entrepreneurs and small business owners who don’t have degrees in business administration.
A lot of would-be entrepreneurs could be daunted by all the paperwork and fine print involved in getting their businesses up-and-running, getting all the appropriate licensing and permits to conduct businesses across states and globally, filing taxes, legal issues, etc.
Breaking down these barriers could spur greater innovation and job creation; and these could be especially helpful to the baby boom generation, some of whom aren’t as tech-savvy as millennials and whose jobs may have been rendered obsolete by recent innovations so they’re trying to find ways to reinvent their own careers.
On that note, however, there still are many in this demographic and others who have yet to adopt the latest “big things” in fintech, like Bitcoin, Robinhood, Apple Wallet, Square, Wealthfront, etc.
They might never adopt some of them since their mainstay blue-chip counterparts seem to be chugging along fine.
There also seems to be an “anti-elitist” trend in society (evident in the current political climate). So there may be more financial services geared toward the blue collar or low-income demographic.
Wealthfront recently accommodated this demographic by lowering their minimum investment amount from $5,000 to $500, taking into account that many folks might not even have $5,000 on hand to invest.
The “anti-establishment” trend might give rise to more barter platforms and other alternative systems since the finance sector seems to have lost a lot of trust back in 2008 and doesn’t appear to have fully regained it.
Particularly with all the refugees fleeing wars and natural disasters, some communities might find it appealing to try to become self-sustaining and get by without money altogether.
Green tech and hydroponic community farming might bring this closer to a reality.
Only issue would be housing. Services that can make housing more affordable — particularly where the cost of living is extremely high — would solve a critical problem for a lot of recent college grads.
Be they of the “establishment” elite or not, the fintech companies that can successfully gain and maintain their clients’ trust via transparency, client-centeredness, CEO integrity, etc. will probably do better than their competitors.
Cyber-security and ID verification would also be very important (both as stand-alone and B2B fintech services).
Something that offers greater security than fingerprints since a lot of fingerprint data has been hacked.
Whether using new and old technology, people need to be assured that their identities will be protected and also that their savings and portfolios won’t be wiped out by malicious hacks or human errors.