Fintech refers to the technological innovations that have sought to improve and automate the delivery and use of financial services. Many view Fintech as essential to the future of the Financial Services sector, as technology has the potential to revolutionize all facets of finance, and bring superior products and cost savings to consumers. This pandemic, while very unfortunate, has provided a great opportunity for Fintech. The effects of Coronavirus have changed consumer habits and have drastically sped up adoption rates of many Fintech products that normally might have taken years to reach their full potential. We shall examine some overarching trends that BITA has observed in the Fintech sector, and how some of them are being changed or sped up by the coronavirus crisis.
The Fintech Revolution, led by Digital Banking
Fintech has emerged as the answer to inefficiencies in an aging Financial infrastructure that has been long overdue for change; it has provided more efficient and superior products for consumers and businesses by leveraging technology, while allowing for significantly cheaper offerings. Fintech has proven to be crucial for the Financial services sector, and almost everyone has been embracing the transformation: from consumers adopting Digital Banking and Mobile Payment options like PayPal, Adyen and N26, to retailers embracing Digital Payment solutions like Square and Stripe, all the way up to the major financial institutions who have recognized that they need to keep up with the trends by implementing Fintech solutions, or fall victim to them.
One of the most important trends in the Fintech sector recently has been on the consumer side, where cash and physical cards are slowly being phased out in favor of Mobile Payments and Digital Banking offerings. As Michael Corbat, current CEO of Citigroup put it:
“We know, at some point, cards are going to go away, and it’s just going to be digital wallets, digital payments… [Fintech is] central to who we are. The piece of plastic is going away, and so how do we make sure that we embed ourselves in whatever the wallet of the future is?”
Mobile Payment adoption has varied across different regions; Emerging Markets have embraced Fintech the most, with significant economic powers like China and India leading at 87% consumer adoption. Other countries haven’t been as quick to adopt Mobile Payments: while the UK and the Netherlands are at 71% and 73%, respectively, the USA is at 46%, and Japan is at 34%.
Emerging Markets have a head start with adoption rates because they have been able to switch from cash to Fintech options seamlessly, whereas developed economies need to phase out intermediary existing infrastructure and ingrained consumer habits.
For many countries, these adoption rates represent an enormous opportunity for Fintech expansion, and the effects of Coronavirus can speed up existing adoption efforts, as consumer habits can now change much faster.
How has Coronavirus impacted Fintech?
The pandemic has accelerated the adoption of Fintech solutions. In particular, the usage of Mobile Payment and Digital Banking offerings have increased. Bacterial/viral concerns have driven consumers towards “hands-free”, remote solutions, in contrast to using cash or physical methods. As Coronavirus affects how we consume services, more and more people are turning to digital solutions, allowing Fintech companies to gain market share. Coronavirus has created new opportunities for those companies clever enough to adapt.
When it comes to taking out Insurance, for example, consumers might choose digital, asset-light providers like Lemonade or Oscar, rather than going to companies with traditional physical locations.
In Wealth Management, people might replace their in-person advisor with online Wealth Managers like Charles Schwab or Betterment. Chime, a challenger bank, is even helping people get their US Government Coronavirus stimulus checks faster.
With Remittances, which will probably get more popular with the decrease in international travel, consumers are turning into digital-based solutions, offering cost-efficient services by leveraging innovative cross-border financial engineering.
Fintech VC and M&A activity
A general trend in the Fintech sector has been fragmentation on behalf of Fintech startups; while traditional institutions have tried to cover all sectors in the Financial Services sector in-house, Fintechs have targeted each specific niche to modernize with technology, create a better product, and decrease costs for consumers. By cutting overhead such as physical locations and upkeep of outdated systems, moving everything to online and mobile apps has allowed Fintech challengers to provide superior products at lower prices, putting pressure on the older institutions.
This fragmentation has sparked a few trends in response; traditional Financial institutions have ramped up in-house Fintech efforts, but have also been investing in and acquiring Fintechs through their Corporate VC arms and through M&A deals, respectively.
Investment in Fintech has been exceptionally strong for the past few years, and 2020 was expected to have a lot of frothy deals before Coronavirus was on the radar. Venture Capital investment in Fintech has been strong in 2020 because of strategic deals, per KPMG’s Pulse of Fintech Report, even after a general reduction in M&A activity. Visa’s acquisition of Plaid in a $5.3 billion deal serves to showcase the fact that the pandemic has not overshadowed the embedded value present in these Fintech deals.
The future of Fintech
The pandemic has created uncertainty for all industries to some extent; however, it has brought many opportunities and potential for the Fintech sector in particular. Fintech companies have been highly adaptable to the pandemic by adjusting their products and services to meet the needs of customers. The future holds a lot of hope and potential, not only for companies operating in the sector but also for investors.
The growth experienced by Fintechs has made it possible for retail investors to take part in and allocate capital. While Venture Capital was the only vehicle to invest in Fintech only 10 years ago, as most of the firms in this sector were too small to become public, today it is possible to access these investment opportunities through ETFs, Mutual Funds and other investment vehicles accessible by retail investors.
As with other relevant Thematic “sectors”, BITA has been covering Fintech as part of its proprietary Thematic Investment Database, making it possible for Asset Managers to develop innovative thematic products, following objective, rules-based, thematic indexes developed by BITA.
If you want to obtain access to our database or use our data collection services, please visit our website www.bitadata.com or contact us via info@bitadata.com.
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References:
https://www.ey.com/en_gl/banking-capital-markets/what-is-next-for-asia-in-fintech-adoption
