The fintech industry has evolved a great deal over the past few years, reaching new heights in funding and hitting $32.6 billion in value in 2018.
Key market players are moving into top gear by bridging the gap between incumbents, technology, and growing customer expectations. They are constantly launching new products, diversifying their technology stacks, and earning jackpot investments. So what can we expect next?
To answer this question, we've analyzed leading industry reports from McKinsey & Co, Capgemini, PwC, Accenture, CB Insights, and Deloitte and outlined key trends that are expected to have a far-reaching effect on the fintech industry. Let’s take a closer look at what's in store for fintechs in 2019.
Investors are expected to become more selective
Although VC funding continues to grow year by year, venture capital investors are becoming more selective and spending more money on fewer deals, according to a KPMG report. This decline in deals is especially visible in first-time venture investments which reached $39.57 billion across 1,707 deals in 2018, compared to $13 billion via 3,813 deals in 2017 and $17 billion invested across 5,223 deals in 2016.
Now, investors focus more on fintech companies with a proven track-record which have already attained meaningful scale. The majority of companies that managed to receive capital investments operate in payments, personal finance, tax, insurance, lending, banking, and credit sectors. However, investors are also attracted to innovation-driven startups utilizing AI, robotic process automation (RPA), and other emerging technologies.
This, in turn, raises the quality bar for funding, making it harder for new players to draw the attention of technology investors. Indeed, a number of well-established fintech companies have yet to develop a more sustainable business model or find a way to gain larger revenues to continue attracting considerable investments. This is especially relevant for digital banks which have already raised significant funding but still deal with complications around licenses and regulations or struggle to monetize their products in the best way possible.
Global VC investments in fintech
Fintechs will look for new ways to differentiate themselves among competitors
Today, using the best-in-class design principles and providing great user experiences is no longer sufficient. Modern customers need more reasons to switch to new market offers.
“Digital” and “mobile first” are not just buzzwords anymore. They act as a clear directive for financial companies, representing how modern consumers want to interact with service providers.
Hence, fintech providers are on the hunt for new and robust solutions which will help them stand out and offer more viable business models. Some of them address blockchain technology, AI, or leverage cryptocurrency to build next-generation decentralized lending and borrowing platforms. While others actively utilize mobile banking and robo advisors to meet the demands of the always "on-the-go" millennials or accept payments via web applications to eliminate the need for traditional merchant accounts.
“A large number of our clients are taking aggressive action to determine how they can use these technologies within their ecosystems. They’re acting as venture capitalists and investing in their internal projects to see what specific problems these technologies can solve… There’s been a tremendous response within the industry.” Dilip Krishna, CTO at Deloitte Risk and Financial Advisory
Even market leaders have started to feel the pressure to innovate which has lead to a number of acquisitions. For instance, PayPal - global leader in online payments - has acquired AI-powered prediction platform Jetlore, mobile payments company iZettle, fraud prevention platform Simility, and other fintech companies to enhance and differentiate its product line with services that competitors don't offer.
"Digital-first 'challenger' banks are prime acquisition targets for incumbents. We’d also expect to see the largest fintech unicorns become more active on the M&A front, as we saw firms like Stripe and Credit Karma make more acquisitions in 2018." Lindsay Davis, analyst at CB Insights
How financial services companies will differentiate themselves from competitors
Asia will rise as a major innovation hub
Even though America (and Silicon Valley, in particular) has a well-deserved reputation for globalizing innovation, Asia is not falling behind. This region is on its way to becoming a technology juggernaut representing fertile ground for disruptive innovation and a favourable regulatory environment.
Asia has a young population of digital natives which have grown up in the age of technology. The region boasts the largest interconnectivity among other emerging economies and outperforms its Western peers in terms of average GDP growth. Moreover, over the next 30 years, around 1.8 billion people will move into many African and Asian cities, creating new 2% of opportunities for local financial institutions.
Currently, China has the world’s largest peer-to-peer (P2P) lending market and the biggest number of mobile users in the world. In fact, a growing number of companies across Asia are actively embracing mobile innovation (often, ahead of other markets) to meet the rapidly growing customer expectations for financial services. Local banks partner with third-parties to develop, implement, and integrate mobile payment technologies. They create seamless, omnichannel experiences and utilize mobile analytics to efficiently serve customers in the context of their transactions.
“Alibaba continues to make progress there with its large stake in fintech affiliate Ant Financial. And Google has been deepening their work in Asia with Google Pay, which is experimenting with QR codes for peer-to-peer payments. These players are digging in, and we expect that trend to continue.” Vanessa Colella, head of Citi Ventures at Citigroup Inc.
Moreover, cloud computing is rising as a top technology priority across Asia, with more than 50% of local institutions naming public cloud as a critical or high priority. Along with Asian fintech startups, that are starting to focus on blockchain, cloud, and cyber-security – much like their counterparts in Silicon Valley. The region saw 64 early-stage fintech deals worth $270M at the end of 2018, 5 more than the US.
Asia VC-backed fintech funding 2014-2018
What's more, by 2020, the majority of the 'middle class' population is expected to shift from North America and Europe to the Asia-Pacific region. And many US-based financial institutions are expected to have fully functional Asian hubs.
All of these factors will act as a catalyst for technology innovations on the Asian fintech market and foster its rapid growth in the upcoming years.
Blockchain will continue making waves in fintech
Emergent areas such as blockchain and distributed ledger technology (DLT) are gaining traction. Over the first half of 2018, traditional venture capital investments in US-based blockchain companies have exceeded the total for 2017 according to the Pulse of Fintech report. Moreover, the global blockchain market is expected to grow to over $60 billion by 2024.
"I believe that in 2019 we will begin to witness more acceptance of blockchain based financial offerings. I estimate that more and more strong projects will position themselves as a ‘foot-in-the-door’ option for traditional investors, making investing easier than ever before, but in an above board and legally compliant manner.” Frank Wagner, Co-founder and CEO at INVAO
The main reasons behind blockchain's growth and attractiveness for C-level executives, private equity companies, and startup founders are:
Reduction of infrastructure costs
Blockchain can help investment banks cut costs by more than 30% across the middle and back office, translating into savings of $8 to $12 billion annually.
Blockchain-based systems remove the overhead costs related to confirming authenticity. In a distributed ledger system, confirmation is effectively performed simultaneously by everyone on the network. This reduces the need for intermediaries - stock exchange, money transfer services, payment networks, etc. - due to which 45% suffer economic crime annually.
Myriad of applications
Blockchain use cases in fintech are almost limitless, ranging from financial transactions and cryptocurrencies to automated contractual agreements and more.
According to an Accenture report, blockchain can bring substantial benefits and savings for banks’ core middle- and back-office processes in the following areas:
- Finance reporting: costs can drop by 70% as a result of optimized transparency, data quality and internal controls provided with a shared, single source of verified data;
- Compliance: due to enhanced transparency and the auditability of transactions on the blockchain, the costs can shrink by 30 to 50% on the product level;
- Centralized operations: blockchain can bring 50% savings by optimizing digital identity management and enabling secure data sharing across multiple banks;
- Business operations: areas such as trade support, middle office, clearance, settlement and investigations can cut costs by 50% by reducing/eliminating the need for reconciliation, confirmation and trade-break analysis.
How blockchain technology will change banking
Artificial Intelligence will address new complex issues
PwC considers artificial intelligence (AI) the biggest commercial opportunity in today’s rapidly changing economy which can result in a 26% GDP growth by 2030. This is equivalent to a colossal $15.7 trillion in value - more than the current GDP output of China and India combined.
The fuss around AI applications in fintech is rather intense as both fintechs and traditional financial institutions have begun to leverage this technology. According to a Digital Intelligence Report, around 20% of financial companies are already utilizing AI in their operations while 41% are planning to implement it in the near future.
In financial services and banking, we expect a variety of narrow AI applications designed to handle a specific task. These smart autonomous systems will help companies automate repetitive tasks performed by humans and focus on more value-generating activities.
"Use of AI is going to increase in 2019. Among other benefits, artificial intelligence, and especially machine learning algorithms, can capture, analyze, and categorize data faster than human workers; this gives companies using AI the ability to identify patterns and use this information to optimize existing systems, or create new systems that solve problems unseen until machine learning software revealed the inefficiencies.” Dustin Plett, Chief Strategy Officer at Consensus AI
AI-powered machines are expected to perform from 10 to 25% of banking activities in the next few years. And leading players are already testing their potential. For example, JPMorgan Chase is utilizing a Contract Intelligence (COIN) machine learning program to automate legal documentation reviews which cuts down the typical amount of time lawyers spend on this task by 360,000 hours per year.
Moreover, recent research by Accenture suggests that companies which embrace intelligent automation can boost their revenues up to 32% by 2022. AI is expected to greatly influence the customer fintech experience and potentially lead to cost reduction for certain operations. However, it won’t dominate on a product level, rather as a critical part of financial business processes. The fintech market will see more usage of machine learning (ML), supplementing traditional analytics with advanced modeling techniques.
“Throughout 2019, we will continue to see an increased use of AI and machine learning to improve customer experiences, whether it is the use of enhanced chatbots to facilitate quicker client assistance, or the use of imaging recognition software to provide hyper-targeted marketing based on age, sex, and even temperament.” Brent Jaciow, Head of Blockchain Affairs at Utopia Music
The AI impact on financial services
Cloud-based solutions will settle the fintech market
Cloud computing helps banks and other financial institutions become more visible and accessible to end customers while reducing overhead costs. It eliminates the need for banks to invest heavily in dedicated hardware and software with a limited shelf life and in the resources required to maintain it.
According to Accenture's Cloud and Clear report, cloud capabilities can lay the groundwork for how banks will conduct their businesses and grow in the future. Hence companies are adding new cloud-based applications and transferring existing ones to cloud platforms to offer greater flexibility and efficiency and enable innovation and growth.
Leading financial institutions already use cloud-based SaaS (software-as-a-service) applications for non-core business processes such as CRM, HR, and accounting. However, cloud is also making its way into areas such as KYC verification and ‘point solutions’ for security analytics.
A growing number of financial institutions today depend on cloud-based infrastructure and use online utilities for storing and processing data. Moreover, top-performing financial companies indicate that they are almost three times as likely to invest in an integrated, cloud-based technology stack as their mainstream peers, according to the Digital Trends 2018 report.
Financial services industry cloud readiness score
Data-driven marketing and personalization can surpass innovative tech
Today successful fintechs can be compared to smart machines that constantly bring innovative solutions to the market backed by dynamic digital marketing campaigns. However, despite the growing hype around cutting-edge technologies, they can still be difficult to implement and might not meet the consumer demand which can result in long lead times and few chances to validate the business model.
Notably, some winning startups often succeed without using hi-tech technologies. With the help of data-driven processes and continuous user testing, they managed to find their perfect niche and win the trust of numerous customers.
For instance, no startup has reached the scale of TransferWise which is built on top of traditional payment rails without utilizing innovative tech. The secret lies in its great business model, user experience and distinctive marketing campaigns, enabling it to successfully disrupt the space, and gain £117 million in revenue in March 2018.
With this in mind, many fintech providers focus on refining their marketing campaigns and harnessing data and analytics to:
- Fine-tune their products and service offerings;
- Enhance service targeting and personalization;
- Optimize customer journeys in key areas such as price, convenience, access, choice, and community;
- Ensure message consistency across different channels;
- Analyze and understand user behavior and preferences;
- Utilize data to optimize both online and offline experiences;
- Train employees in new techniques and disciplines;
Partnerships between global banks and fintechs are expected to grow
The lines between fintech and financial service companies are blurring while the number of partnerships is growing rapidly.
Around 88% of global financial service providers believe that they could lose a substantial market share to fintech innovators. In response to this competitive pressure, 56% of respondents have incorporated disruption into their core strategy. They are looking for ways to invest in or collaborate with fintech companies, with over 82% expecting to increase their partnerships even more over the next few years.
As a result, many incumbent financial institutions are undergoing digital transformations to reimagine everything - from core services and products to front-end and back-end processes. For example, JP Morgan - leading global financial services company - as a part of its digital strategy has partnered with fintechs such as OnDeck (a digital small and medium business lender), Roostify (a mortgage fintech), and Symphony (a secure messaging app).
“It’s quite possible to see fintechs looking to continue to combine, to both create scale and a deeper and richer set of capabilities.” Zachary Aron, Banking & Capital Markets Payments leader at Deloitte
The trending shift towards increased automation, mobility and digitization in financial services continues. Blockchain, machine learning, AI, and robotics, are making huge waves in fintech, bringing both synergy and disruption to the industry.
The competition is getting tougher while investors are becoming overly selective. Even the world's most established financial institutions feel this pressure which leads to an increasing number of partnerships and market acquisitions.
As fintech companies are becoming more mature and technology-oriented, they face the need to invest more into elaborate software backed by advanced analytics and personalized marketing campaigns. This leads fintech to a more customer-centric state where providers are driven by constantly changing demands and needs of their customers.