The fintech industry allows for startups to be successful, innovative, achieve accelerated growth and become global players all using the power of the internet. The consumer market welcomed the innovative approach to financial security that fintechs offer, from low interest and exchange rates, to ease of transfer and payments with international partners. Fintech pushed the traditional banking sector to catch up with the needs of customers in the business and private sectors.
But has innovation started to stall? Customer questions have been answered, systems have been improved and it seems there is little room for new ideas, ways to improve security or process or even provide more efficient services. This is not true, but it seems to have become an accepted industry myth.
Is the fintech market overcrowded?
The pandemic has not dampened investor confidence in financial technology. Global fintech investment reached US$98 billion at mid-year of 2021, almost double 2020’s total, according to Forbes. The US was the main catalyst of growth, gaining ground during the last quarter to make up 38% of global fintech deals, followed by Asia with a 26% share.
The main shift in the industry seems to be that bigger players are achieving scale and smaller players are catering to niche markets. There have been a number of unicorns emerge – 200 in total in 2021 – and they are from all over the globe.
The fintech market is experiencing an evolution with startups falling away, while others are being snapped up or incubated by big banks. Anytime there is a digital disruption to a sector or industry, the larger, stronger players tend to consolidate with the successful players, and push out those who are determined to be competitive.
All in its place
The market is maturing. While many fintechs that have scalability and strong backing have been successfully incubated or consolidated by larger more powerful players, such as the institutions and banks that have been global players for many years. There have been real attempts to quash the fintech industry, to buy or take the innovation of fintech and regain control of the marketplace.
However, it has not been wholly successful. The way people live has shifted. People who work remotely, want online access to shopping, fast payments and international currency conversions. Fintechs have been the instigators for change and have provided people with solutions at a faster pace than financial institutions. This has led to a shift in loyalty for many people who now use fintechs as their primary banking services.
Investors’ choice
VC investors seek out high growth, robust returns and safe exit strategies. While this has so far sustained many smaller, niche market players, there is a shift that is due to come, as happens when any new market begins to mature. The next phase is likely to require patient capital and patient investors.
The notion that all companies should aim to be unicorns is not sustainable. It requires intense attention and growth with high profitability. Maintaining that level of growth while adhering to the rules in such a heavily regulated market costs money. Achieving fast-paced growth is only possible for those that have access to deep funding.
In reality, the businesses that grow at a slower pace with considered steps in the market tend to be more scalable over the long term, but less attractive to VC investors, as they don’t fit the desired model for high investment, fast returns.
Banks and tech companies
The fintech market has posed a massive threat to the behemoths of financial services. The big banks are being disrupted. Their potential to skew markets, dampen or channel investment and control wealth access and distribution are being challenged by tech innovation.
Big banks have partnered with big tech, like Google, Amazon and Microsoft to offer cloud services. Alibaba and Tencent have made major advancements and offer users services that banks have not been able to provide, but the large-scale investment that these big players can float means that private or smaller, less connected companies might be lost in the challenge that major player pose, again taking control of the market, reducing consumer options.
What it’s all about
Big tech companies want to reap the benefits of banking data. They are not interested in taking on the risk of being a financial service provider. This data gives tech companies the power to control technology and create highly personalised products and services that the banks then buy. The real money for fintech is found in innovation, not banking.
This doesn’t mean that fintechs won’t provide banking-type services and products. Billions of people worldwide are not offered services by big banks, and they rely on digital services. Blockchain and fintech are threatening to disrupt the world economy by giving more people access to financial security.
However, while private digital banking is fast evolving, there are still big gaps in the development of professional digital banking services and products for business.
The industry is far from peaking. While it is plateauing right now, the next push in digital banking is likely to see VC investment in those players that are seeking to serve the professional sectors, and those wanting to focus on innovation developments.
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