FinTech is the label assigned to financial service firms whose product or service is built on technology, often resulting in major innovations that have the capacity to change working practices. Tech entrepreneurs have disrupted almost every other major industry, usually to the benefit of the consumer. That it has taken so long for them to make any headway in the financial sector may seem strange to some. Surveys often suggest widespread discontent among customers, who feel like they’re getting a raw deal from their banks. However, the financial industry is one of the world’s oldest industries. The ways of working are deeply entrenched, and the money and vested interests that riddle the sector mean those inside are highly motivated to resist change.
Traditional finance establishments are now taking notice though. Last year, global investment in FinTech ventures tripled to $12.21 billion across more than 730 deals - growth of 201% on 2013. This is compared to 63% growth in all venture capital investments. The gap in the market for disruptors to exploit is widening as a result of the distraction created by an influx of new regulations since the financial crisis, which banks are in a constant struggle to comply with if they are to avoid massive fines.
FinTech investment has manifested itself in a number of ways, with innovators developing technology to enter the market from every angle. Payments companies in particular are seeing massive investment, accounting for 29% of deal volumes in 2014. FinTech is set to change the nature of financial transactions irrevocably. It’s likely that the next few years will see money evolve from the paper and plastic we have today, into pure computer code. This will see some of traditional banks and brokers’ primary streams of incomes removed, such as transfer fees and account management fees.
One example of a successful FinTech company is UK firm Monitize, which connects banks and mobile operators to enable consumers to make payments directly from their phones. Monitise has grown so significantly since it was founded in 2003, that it now provides mobile banking technology to 350 financial institutions worldwide. It has operations in the UK, US, India, Hong Kong and Indonesia, and had 24 million customers in 2013, with annual revenues exceeding £100 million.
Businesses must watch carefully for the way the wind is blowing, or risk falling behind the curve and losing their competitive edge. They must watch out for new products, not only innovations in payments which could help reduce costs, but lending too. Crowdfunding is predicted to provide more money to projects than venture capital as of 2016, while P2P lending is also growing, which means organizations must re-examine how they seek investment.
While FinTech is growing rapidly, however, to count banks out would be foolish. Much of FinTech will help them to comply with regulations far more easily than before, allowing them to focus on other areas. The sheer amount of money that they have also means they will be able to adapt quickly to new technologies, while their lobbying power should ensure that incomers to the market face regulations in line with their own, in a way that, for example, the private car industry has not been able to with Uber.