The State of FinTechs
Since the financial crisis started in the United States, resulting in the emergence of the FinTech start-ups, the United States has a large share of the global FinTechs. A large number of all FinTech globally are from the United States. It is ironic that most of the financial firms in North America are centered in and around the East coast, while a large number of FinTechs have emerged from Silicon Valley, which is on the West coast. It is a wonder that the industry which once was considered to be “too big to fall” has been shaken by smaller start-ups thousands of miles apart. The primary reasons why Silicon Valley has been able to incubate the FinTechs is the availability of the venture capitalist (VC) ecosystem and availability of a technical pool. As elaborated in the previous chapters, technology disruptors like digital, arti- ficial intelligence (AI), blockchain and the Internet of things (IOT) have been the key drivers for the FinTech revolution. These technologies have also led FinTechs to provide alternative business models to customers and businesses alike. Since most of the thought leadership for these technology disruptors originated from Silicon Valley, therefore, the ability to harness the potential of this new-found technology was ably placed with the technocrats there. Since they were not rooted in age- old processes of the financial industry, they could think afresh and bring about the desired disruption. Silicon Valley also has been the hub for most of the other technology start-ups like Microsoft, Apple, etc., and in almost all of the cases, the start-ups were funded by VCs at some stage. Therefore, there was already an ecosys- tem existing for start-ups in Silicon Valley who immediately saw the opportunity to start a financial revolution that was equipped with the most advanced technology. A large number of FinTechs are from Silicon Valley followed by the financial centers in New York, Atlanta and Chicago. Though most of these FinTechs have originated in Silicon Valley, they were fast enough to explore/exploit the financial services ecosystem in New York and some of the start-ups have already shifted their base to New York. The United States has also been a very progressive country in terms of adopting new regulations and also has one of the best Internet protocol (IP) and patent pro- tection mechanisms in the world. Consequently, FinTechs, or financial technology start-ups, are legally protected from any IP/regulation violations, therefore the team can focus on building the techno-functional disruptor and IP/regulatory-related activities could be taken up by the management teams of the VC firms. The IP/ regulatory-related activities would include patent filing, legal issues, promotions, tie-ups and other such activities. An existent framework for IP protection in addition to liberal workforce laws has enabled a small group of talented people to get in an arrangement quickly to form a financial services start-up. Additionally, the United States is one of the very few countries that fosters one of the best incubation platforms for start-ups, starting with incubation being done in:
1. Undergraduate and postgraduate institutions through research funding. 2. Accelerator programs being launched by corporates from financial and non- financial institutions (FIs). 3. Government-funded initiatives. 4. Incubation programs by VCs. The UK and Ireland has long been the financial centers for most of the world. Most of the big institutions originated from the UK and then they spread themselves globally. As was discussed in most of the earlier section, most of the insurance com- panies also started from the UK. Since the UK was one of the leading countries in terms of trade and commerce, it was also impacted by the 2008 crisis, and some of the leading banks in the UK also went under. Consequently, there were layoffs from these banks resulting in some of the best technical and functional experts in the country looking for jobs. As in the case of the United States, some of these experts got together to build the next FinTech, disrupting the financial industry. Additionally, since the UK is mostly an English-speaking country with a fast rate of technology adoption,, it was possible for most of the entrepreneurs to utilize the technology disruptions to bring in innovative concepts and ways of doing business for the UK financial services industry as well. Incidentally, some of the best technology and business schools are from the UK and Ireland. Consequently, similar to the United States, the start-ups from the UKand Ireland have also used the set-ups available in prominent educational institutions for incubating themselves. The UK’s financial sector typically accounts for more than a tenth of GDP. The financial firms with headquarters in the UK have been the most active in large parts of Europe and Asia as well and employs a large number of finan- cial and technical talent. The UK’s financial system has a greater presence in Africa, Southeast Asia and the Middle East as compared to the United States. Southeast Asia has also been at the forefront of mobile technology disruption and a large part of the finance for FinTechs in these regions have also been funded by the wealthy Middle East financial industry. A large number of the talented workforce and/or funds for most of the banks in Africa, Southeast Asia and the Middle East, excluding China and India, are from the UK. They all have largely influenced the UK, and in par- ticular London, becoming the hub of the FinTech revolution in the UK, Africa and regions of Asia. The UK being a large trading hub, has one of the largest number of cross-border transactions. Consequently, there are enough opportunities for multiple start-ups to transform the age-old cross-border transactions. Blockchain technology has helped ease out distributed transactions with cross-border transactions being one of them, therefore, a large number of blockchain start-ups specializing in cross-border transactions have emerged in the UK. Europe, which is a hub to a large number of non-English speaking countries, is also seeing a major growth across the board for FinTech companies, and the rea- sons are much similar to that of the UK. Some of the reasons enabling the FinTech revolution in Europe include:
1. The presence of large global FIs providing enough market share for FinTechs to disrupt. 2. Access to a large talent pool from good educational institutions that are also acting as incubators for these start-ups. 3. Existence of complex cross-border financial services within European coun- tries that are part of the eurozone. 4. A pool of talented technology and financial experts, some of them coming from erstwhile established banks and technology companies. 5. Easing up of regulations by governments and government support to FinTechs.
Europe traditionally has been a host to a large number of manufacturing companies building niche products and IP/innovations has been the mainstay for these com- panies. This has also led to a large number of European companies becoming mar- ket leaders in their field of expertise. Most of these innovations until the late 1990s were concentrated in the areas of industrial engineering innovations. Beginning in the 2000s, a large number of innovators started disrupting the financial ser- vices industry as well using information technology. The difference in FinTechs emerging out of Europe is that they have brought in the disruption in financial industries using a combination of multiple technologies linked to the industrial engineering industry like IOT, Robotics, Process Automation, etc. Additionally, the complex cross-border financial transactions across the European Union has ushered in FinTechs specializing in disruptions for cross-border transactions. The regulatory and labor laws are also different across Europe, therefore a large number of legal and regulatory-related start-ups, often referred to as regtechs, have also emerged in Europe. Europe is also bringing up regulations regarding data sharing and API-fication resulting in the emergence of FinTechs around blockchain and API-fication to address these changes. Another continent besides the Americas and Europe that is undergoing a FinTech revolution is Africa, in particular the sub-Saharan region. There are multiple reasons why Africa has also become the testing ground for most of the FinTechs. African countries have diverse interests across different regions and their demographic segments. The wide diversification of interests is even visible within a single country in Africa.
Additionally, African cities are geographical distant apart from each other and they are separated by difficult natural conditions. One of the key important events that is fueling this revolution is the adoption of mobile services throughout the continent, which is in the range of 70%–90%. Mobile services are helping connect disparate parts of the countries through digital, and since a majority of Africa is unbanked, it has further improved financial inclusion in the continent. Additionally, a large part of the population is above the age of 20, leading to a greater adoption of the new age technology and increased usage of payment and lending alternatives available through FinTechs. A large pool of young Africans have immigrated abroad and are working in most of the European and U.S. economies for a while now. Some of these young professionals are trying to bring about a significant change in their home country/town/city, leveraging FinTechs or even starting a start-up themselves. Additionally, these people have also been sending money back home through the remittance route, resulting in a large number of cross-border transactions in the form of remittances, donations targeted to help people in their home country and for multiple other reasons. Consequently, a large number of FinTechs in Africa are focused around payments, lending and cross-border transactions. Asia, from a FinTech perspective, has been active in this decade. There are different reasons and areas of success for FinTechs specific to every country in Asia. In China, it is the rapid adoption of digital technology and an innovative.
The most important thing that triggered the FinTech revolution in the United States is the availability of a pool of talent that was equipped with domain knowl- edge and easy availability of finance through VCs. A large number of FinTechs have a particular combination of a domain of subject matter experts (SME) team- ing with a group of technology experts, thus delivering innovative solutions in the financial domain through disruptive technologies. After the 2008 financial crisis, a large number of wealth advisors, bankers and technology experts in the financial domain lost their jobs. Some of these people were enterprising enough to start up their own businesses aided by VC funding resulting in creating a potentially disruptive business environment. Additionally, the infrastructure requirement was easily met as most of the transformative technologies for infrastructure like the cloud, Big Data, customer relationship management (CRM), etc. were built in the United States itself, and were now offering their services in a pay-per-use model at affordable prices. A start-up in the United States would start with an entrepreneur or group of entrepreneurs getting together, possibly in a rented low-cost accommodation, to develop a product around an idea. The only expense they would have is paying for the food for everybody. This would continue for some time, ranging from 6months to 2years until the team launches a product that manifests the underlying idea. The entire setup could be self-funded if the promoters have adequate capital, or they could seek initial seed funding after their idea or product has reached a logical step. After this stage, the promoters can decide to keep funding themselves for the subsequent stages of growth. In most of the other cases, funding would be done by VCs until either the company goes public or it is acquired by another company. The funding in the later stages increase due to expenses including promotion, selling, partnerships, etc. A start-up would go through similar stages elsewhere in the world, but the advantage in the United States is that they have been doing the same thing for decades. Therefore, a start-up would not spend much time getting access to capital, but instead would build upon the idea and see how technology could be best used to deliver the idea in question. Thus, summarily it can be said the United States is more equipped to handle the entire lifecycle management for innovation. FinTechs were able to leverage the same setup to ideate, develop and launch themselves, thus caus- ing a disruption in the financial services domain. The disruptions caused by these FinTechs in the United States and worldwide have taken away up to a one-fourth share of the total revenue made by the traditional financial services industry. The average American was the one most affected by the 2008 financial crisis as they invested a large part of their savings either in insurance, wealth instru- ments or in real estate, and these were the exact three investment avenues that lost their market value in the financial crisis. Therefore, unlike in other parts of the world, erosion of trust in the FIs was the worst in the United States. This led to an increased adoption of FinTechs since they came up with new business models that were transparent and offered products that would ensure there was little or no lossof the base capital. Consequently, start-ups on both ends of spectrum emerged, one that was safeguarding individual’s interest while making profits or offering benefit for the individual, and on the other end of the spectrum, offering high-risk assets like participating in individual unsecured debt was made available to the customer through P2P lending. Since most of these opportunities were offered in a transpar- ent manner, a large number of customers adopted the same. It was the United States which was also spearheading the technology revolution with multiple innovations like the Apple iPhone, cloud services through Amazon Web Services (AWS), etc.
Americans who in the past have been witness to multiple technology revolutions like IBM mainframes, desktops, servers, etc. were quick enough to adopt these new technology disruptions as well. Therefore, for FinTechs in the United States, the tech savvy and financial literate customers were the early adopters of the alternative, yet transparent, business model offered by them.
All the above-mentioned factors, an innovation ecosystem and a customer who was ready to embrace a new way of doing business, facilitated the emergence of FinTechs in the United States. Therefore, the largest number of successful FinTechs are from the United States with more than a dozen FinTechs having valuations greater than $1 billion. Money transfers, payments, savings and investments are the most used FinTech services. The FinTech outlook in the United States looks promising with the focus shifting from customer experience to back-office and automation start-ups.
Cloud and software as a service (SaaS) adoption would increase in the United States, with more people understanding the capabilities and limitations of the same. A large number of FinTech businesses in the United States are centered around: 1. Lending—The P2P and online lending market is expected to cross a tril- lion dollar mark in the next decade, therefore this space is revolutionized by FinTechs providing alternative lending solutions like P2P lending, lending to a first-time borrower, lending to creditworthy customers with less or no formal credit scores, etc. Prosper, Lending Club and OnDeck are some of the FinTech companies that are doing good business and are having steep valuations. 2. Payments—Mobile payments in the United States are poised to hit half a billion dollars by 2020 and there are clear signs that the payments indus- try is transforming with FinTech offerings like P2P payment, digital wal- lets, loyalty, Bitcoin payments, payment banks and eliminating the payment interface itself. Coinbase, PayPal, ApplePay, Square and Stripe are some of payment FinTechs that are disrupting the payments and cards industry. 3. Personal financial management and robo-advising—A large number of FinTechs are focusing on giving financial advice, personal financial manage- ment and robo-advising affordable to the common man. This results into tap- ping hundreds of prospects, who have small corpus to be invested, but are not aware of the avenues for the same.
The UK also has the highest Internet and mobile phone penetration. London has one of the world’s most active accelerator programs, that not only provides office space and infrastructure to FinTechs, but also helps them collaborate with the industry to test out ideas and corresponding imple- mentations. There are meet up groups based in London, which have a network of thousands of professionals involved in financial innovation. A large number of regulatory authorities are also based in London. Other cities in the UK like Edinburgh, Belfast, Manchester, Birmingham and Leeds are the center to most of the large insurance and banking organizations. The UK’s government has not accepted Bitcoin as a formal currency, but has also not banned or levied taxes on it like many other countries. A large chunk of the investments for FinTechs in 2017 was primarily centered around the cities of London, Berlin, Stockholm, Paris, Barcelona and Amsterdam. One-third of the investments in FinTechs are companies from London.
Since the United States, the UK, Australia and New Zealand are English-speaking countries, it is more likely that an application developed in the United States and the UK is easily replicated across in the UK, the United States, Australia and New Zealand, respectively. The FinTech industry employs about a million people directly or indirectly in the UK and is generating multibillion dollar revenue. One of the key differences between the UK and other emerging markets is the support they are getting from the central bank and the regulator.
The Bank of England leads the effort in pro- moting FinTechs in the UK. Additionally, FinTechs are able to participate in the regulatory sandbox, which means FinTech can test their business models for 3–6months in the market, free from many of the regulatory demands they might be subject to otherwise. FinTechGermany: Playing the Catch-Up Game After the UK, Germany is the second largest FinTech destination in Europe. A large group of FinTechs are payments, lending and crowdfunding platforms, and most of them work closely with established banks to create a collaborative financial services environment. The highest growth sector in the FinTech market in Germany has been the robo-advising market, which has grown tenfold between 2017 and 2015. The social trading and crowd investment platforms have growth rates in triple dig- its during the same time. Germany appeals to start-ups because the cost of living is still low. The other drivers for FinTech growth this year and in the future could be the Brexit vote, when Britain decided to leave the EU. Since Brexit, a lot of UK FinTechs would not have direct access to EU assets and markets, which would therefore help Germany participate more aggressively in the entire EU market. The changing rules in regard to PSD2 and the flexibility to adopt digital measures for identification and legitimation of customers is further fueling the emergence of new FinTechs in Europe and specifically in Germany.
The Place Where Skype and Spotify Were Born Sweden is the EU’s third largest country and the FinTech industry there is all set to become one of the most influential in Europe. Sweden is also one of the leading countries to pursue becoming an entirely cashless economy. Stockholm is second in the world in terms of the number of unicorns per capita. The engineering culture is evident in Sweden with many inventions like pacemakers, refrigerators and ultra- sound originating from Sweden and large engineering companies being based in Sweden. Sweden also has a large financial industry that is one-third of the overall Swedish economy. It is also the highest-funded city in Europe after the UK and has been mentioned as “Europe’s No 2 FinTech City.” Some of the reasons that can be enumerated for success of Sweden in the FinTech space are: 1. An abundance of wealth and capital-rich economy leading to heavy invest- ment in R&D and technological infrastructure. 2. The state and nonstate is more supportive for entrepreneurship from a fund- ing and knowledge perspective. 3. The corporate tax rate is also less than the EU average tax rate. 4. Swiss FSA is playing a proactive role in delivering changes and information about regulations. 5. Encouragement to e-identity tools and becoming cashless. 6. Setting up a new public fund for a fund investment company by the govern- ment to invest in private VC funds. Sweden’s FinTechs are primarily centered around payments, trading, lending and solutions using cryptocurrencies. France: Gearing Up for the Next Revolution, the FinTech Revolution France has over 150 FinTechs, over 200 public and private incubation centers and multi billion euros worth of investments. It is the sixth largest economy in the world and is one of the leading global financial centers.
In 2015, the France FinTech Association was formed due to the collaboration of 36 companies. Some of the other criteria that is helping FinTech growth in France are: 1. A favorable tax regime for capital gains from investments. 2. High networth individuals (HNIs) get a 50% discount on investments in small and medium enterprises (SMEs). 3. A start-up immigration program that includes a free co-working space and unconditional government grants to promote entrepreneurship by immi- grants in France.
4. France’s fund of funds contributed multimillion euros to a private VC fund for innovation through the French Public Investment Bank (bpiFrance). 5. Regulators like ACPR created initiatives to help FinTechs with the regulatory requirements and overcome barriers. 6. Introduced an agility program offering a 2WeekTicket for UK start-ups to get them started with all the regulatory approvals and an English-speaking assistance program. China: The FinTech Dragon Awakens Silicon Valley has been a leader in hosting the FinTechs until recently. In the last year, China has overtaken Silicon Valley in terms of the number of FinTechs and the overall investment in the FinTechs. The Chinese Internet giants are currently the ones who are dominating the FinTech revolution globally. China, which is the most populous country and is also the second larg- est economy in the world with a multitrillion dollar GDP, is quickly catching up with London, New York and Silicon Valley to become a leading center for FinTech innovation. Shanghai and Hong Kong have been recognized as one of the leading FinTech hubs globally. The growth of China in FinTech space is evi- dent as it is home to now almost a third of the unicorns valued at $100+ billion. The world’s four biggest unicorns are all from China. The FinTech growth in China has been primarily centered around payments, wealth management and P2P lending. The drivers for the FinTech growth in China can be enumerated as follows: 1. Chinese economic growth has been exceptional in the last decade and espe- cially the growth of the middle class population in China and their growing income levels. While the income levels have grown over time, unfortunately the lack of the diversification of products and the customization of financial products to an individual’s need has made the high income middle class to look for alternatives. This in turn has fueled FinTechs to fill in the gaps unad- dressed by established banks. Retail customers are usually offered/pushed products that are low on financial returns like real estate, etc. as compared to any other market-linked products. It has resulted in a large number of FinTechs coming up with innovative products to manage their customer’s wealth. 2. High Internet and mobile penetration in the hands of the educated and ris- ing middle class has given rise to high Internet-based shopping. The Internet economy in China is expected to be a significant proportion of China’s GDP in next 5years. This resulted in the highest e-commerce and digital transac- tions being reported from China. The majority of e-commerce transactions would mean that payments would be done online and therefore a large chunk of FinTechs are from payment space. It is estimated that half of Chinese con- sumers are using the new payment methods. 3. Financial inclusion has been low in China, even though Chinese banks have become one of the largest banks in the world. One in five of China’s adult population is unbanked. The SMEs are also underserved and make up for a quarter of all the disbursed loans while accounting for over half of GDP. Consequently, a large number of P2P lending solutions emerged. 4. Inadequate regulatory structure has led to multiple FinTechs emerging as there was little or no requirements for any government regulatory approval for opening a start-up in areas of lending and wealth management. 5. The government has launched an “Internet plus” initiative that has various development targets, help for local Internet companies, financial funding and tax relief for key projects. It has also created a multibillion dollar emerg- ing industries innovation investment fund to promote digital industries in China. It also operates multiple funds to raise money for start-ups and has been able to raise about a quarter of trillion dollars to fund them. They are also taxed at lower corporate tax rates than established industries. In 2016, the first angel fund from a private company was launched to fund FinTechs with the intent to invest a large part of their corpus in FinTechs. 6. The technical and functional talent is also available in abundance in China, with companies like IBM, Microsoft, JD.com existing in Beijing and local tech giants like Huawei and ZTE in Shenzen. China is also host to some of the leading universities that rank among the top universities in the world, namely Peking University and Tsingua University. 7. China has a large population of tech savvy millennials and GenY who are giving preference to customer experience and the flexibility offered by the FinTechs as compared to the rigid and state-oriented outlook of established banks. Additionally, the Chinese are less anxious to share their personal data, therefore, a large number of FinTechs have been able to create customer- centric personalized offerings. Some of the FinTech areas that are leading China’s growth into the FinTech space are: 1. Some of the leading payment-provider FinTechs are from China. These FinTechs are offering a facial recognition-based payment service. They also provide an escrow service for e-commerce shopping as a protection from low- quality products being made available to consumers. Some of these payment services have integrated a social media chat application as part of their pay- ment application, thus helping customers to pay using the chat applications. Besides facilitating payments for individuals using chat platforms, a large number of FinTechs are also facilitating businesses to make B2B and B2C payments using chat platforms.
A large number of these FinTechs have also been instrumental in transacting for gifts that include billions of red enve- lopes being sent over a holiday period using these FinTechs during the year- end holidays. 2. P2P lending platforms have been a rage in China as a large population is unbanked and underserved, but in absence of regulatory controls, a huge number of these platforms went out of business. Since then, regulations have been tightened around the same. Some of the players who established their reputation in the market have collaborated with established FIs in China. There are couple of large P2P lending platforms who have a major share of the overall P2P lending. 3. Wealth management and personal finance management—Wealth manage- ment is a thriving industry in China, and by 2015 had expanded to about one-third of the country’s GDP. There are major digital wealth manage- ment platforms that by mid-2016, had more than a quarter billion customers offering funds from as little as RMB1. A large number of wealth manage- ment firms are also launching mobile apps to lure young professionals who are interested in managing their wealth themselves. FinTech companies in wealth management have their mobile apps for investing in stocks. Some of the digital wealth management firms are also offering robo-advising plat- forms. There are now multiple platforms offering robo-advising services to B2B and B2C customers.