Since 2010, venture capitalists, private equity firms and others have poured more than $50 billion into nearly 2,500 financial technology or “fintech” companies. Recently, there have been signs that the market is maturing and fintech is moving mainstream. Today, I want to take a look at a few of these emerging trends—and how the relationship between existing market players and fintech change-makers is evolving in response.
How fintech is changing
Recent changes in the fintech industry can be summed up in three statements:
- Money is moving: Fintech growth is cooling down in some geographies and ramping up in others, particularly Asia Pacific. Fintech investment more than quadrupled in that region in 2015, hitting $4.3 billion. Nearly half of those funds (45 percent) went to China.
- Focus is shifting: After focusing largely on retail payments in the last five years, the fintech industry is exploring innovations that will disrupt and enhance processes along the entire financial services value chain. As an example, investment in insurance technology or “insurtech” more than tripled between 2014 and 2015.
- The chasm between weak and strong is growing: 2015 saw the demise of iconic industry players like mobile payments provider Powa. That same year, however, there were 94 fintech deals worth more than $50 million, and successful IPOs from companies like PayPal, Square, Worldpay and First Data. That’s over and above growing interest from technology giants like Google, Apple, Facebook, Amazon and Alibaba—or “GAFAA” as they are collectively called.
The slow march to collaboration
Both financial institutions and fintech start-ups are becoming increasingly aware of the potential benefits of collaboration. In 2015, investment in fintech companies interested in collaborating with industry increased 138 percent, compared to a 23 percent increase in those seeking to compete. Overall, there is still more investment in competitive fintech companies, but the momentum is shifting—in some markets, at least.
Significant geographical differences are emerging, with investment tending to favor competitive fintechs in Europe and collaborative fintechs in North America and, to a lesser extent, Asia Pacific. The shift toward collaboration has been particularly pronounced in New York, where the share of investment in collaborative fintech companies rose from 37 percent in 2010 to 83 percent in 2015. Initiatives like the FinTech Innovation Lab, sponsored by Accenture and the Partnership Fund for New York City, have an important role to play in this regard.
Time for financial institutions to step up
Despite growing interest in collaboration, most financial institutions are not stepping up with investments of their own. In 2015, banks participated in less than 10 percent of all reported fintech deals. In fact, their total fintech investment fell short of $5 billion—one-tenth of what they invested in technology.
With the entry of GAFAA into targeted areas of the financial services sector and movement away from end-to-end processing in house, financial institutions have to start thinking about fintech strategically. If they want to seize the opportunities presented by the digital revolution, they must be prepared to act open, collaborate and invest. At the end of the day, fintech start-ups are not the competitive threat most financial institutions once thought. Instead, they just might be the saving grace.
Find out what collaboration looks like in “Fintech and the Evolving Landscape: Landing Points for the Industry”
If you’re wondering how your organization can capitalize on fintech, get in touch with me directly via email.