While the spotlight may be shining on the FinTech market, it is not a new phenomenon. Over the past five years, investment in FinTech start-ups has been steadily growing. According to CB Insights, in 2013, there was more than $3 billion of global financing activity. This represents a nearly 3-fold increase since 2008 in dollars invested and companies financed. Investments in North American continue to lead by a significant margin but the rest of the world has experienced faster growth, especially in 2012/2013.
The Dawn of FinTech 2.0?
For all the current excitement about FinTech investment, it is important to remember this is not a new trend. Financial institutions have been investing billions of dollars in technology for years. We are, however, entering a new and dynamic phase for FinTech, driven by mobile and cloud computing, consumer expectations, regulatory changes and even cultural developments. This is creating unprecedented investment opportunities for companies that can identify and develop innovative technologies to help financial institutions improve the customer experience and technology operations. Here are 3 trends shaping this newfound interest in financial technology.
1) Financial institutions refocusing on innovation
From 2008 to 2011, there was an underinvestment in FinTech. In the wake of the 2008/2009 global economic crises, financial institutions focused on cost cutting to maintain profit margins. There was less attention on investing in, or embracing of new and innovative technologies. As economic conditions have improved, however, there has been a renewed interest in building market share and launching new products. A key part of this strategy is innovation, specifically how to leverage technology to modernize financial services, which new products to launch and how to optimize customer experience. What’s more, financial institutions are embracing innovation in order to strengthen their brand values in the eyes of the general public.
2) Lower technology costs
There are a growing number of disruptive start-ups aggressively pursuing new opportunities, particularly in the B2C segment. As consumers become more digitally engaged and mobile devices ubiquitous, there is demand for better and easier access to financial services.
Start-ups such as Square and Stripe are attacking “low hanging fruit” through technologies that leverage low cost, cloud computing, powerful mobile devices, and easily available interfaces to bypass channels owned or controlled by incumbent financial institutions. As these start-ups attract more users and media coverage, investors are increasingly excited about this next generation of new and disruptive challengers.
“We have a chance to rebuild the system. Financial transactions are just numbers; it’s just information. You shouldn’t need 100,000 people and prime Manhattan real estate and giant data centres full of mainframe computers from the 1970s to give you the ability to do an online payment.”
– Marc Andreessen
3) Digitally and financially aware consumers
Tech-savvy millennials do not trust banks. According to the Millennial Disruption Index, 71% of millennials would “rather go to the dentist than listen to what banks are saying”, while 53% do not think their banks offer anything different than other banks. Translation: if banks want to gain or retain customers, they have no choice but to embrace innovative technology. We believe that banks are at risk of becoming irrelevant. “Banking is at the highest rate of disruption”, the Millennial Disruption
Index concludes. “The change will be seismic”.
One of the biggest drivers for FinTech is the size of the market. Gartner estimates global enterprise IT spending for the banking and securities market was $485 billion in 2014. Although barriers to entry may be high, the financial services market is too big to keep disruptive players from entering the fray. The risk for financial institutions is that if they do not have the right technology, it will become more difficult to compete. Adopting innovative technology will not only let financial institutions battle disruptive players, but also provide new opportunities to drive revenue and profit, and expand product portfolios.