Fintech – Time to change traditional finance industry

Fintech is the new Buzz word in the market which has shifted Finance industry on the verge of disruption. The Fintech start-ups are ahead of traditional banks and finance institutions in digital technology and developing banking products which are of low cost and more user friendly. The emerging trend of mobile banking, data, increasing information, analytics and decentralization of access is creating the room for growth of Fintech. Now the questions arises are whether the traditional finance and banking industry is losing its market on exponential basis and why? And whether the traditional finance industry is on death bed? Does this traditional finance industry have any chance to fight back the new emerging tough competition?

According to a report by Accenture, Global investments in Fintech ventures tripled to US$12.21 billion in 2014 which was only US$4.05 billion in 2013. Investments in Fintech has grown to 201% in 2014 globally compare to 63% growth in overall venture capital investments. Fintech investments in the US soared to US$9.89 billion in 2014, up 191% from US$3.39 billion in 2013In this investment of US$12.21, US enjoyed the biggest share but Europe had the highest growth of 215% YOY. With the five biggest banks controlling nearly US$15 trillion in assets, FinTech’s US$12.21 billion in venture investments this year still look like peanuts. But Fintech is poised to grow in coming years radically.

Silicon Valley, New York, London and Hong Kong are topping the charts in global fintech race. These cities are the dark horses which are among the first innovators in the industry. Recently a manifesto, UK Fintech 2020 has been launched by Fintech Innovate Finance with a vision of making UK to be a centre for financial services. Currently £20 billion of GDP of UK economy is being generated by Fintech and 135,000 people are involves in this industry. According to Innovate Finance, the UK is top in Europe for fintech investment, taking 42% of all European fintech investment in 2014. Investment grew 136% in 2014, from US$264m in 2013 to US$623m 2014.

A large population of Asia, Africa, Latin America and Middle East still uses cash and coins for transactions and they have minimal contact with banks and financial services and hence considered as unbanked. This unbanked constitutes about half of the world’s adult population and Fintech start-ups are maximizing their efforts to provide services to the Unbanked population which can be considered as a virgin market. With the significant growth in Fintech sector, digital currencies for unbanked is becoming the focus for Banks and start-ups. The unbanked now can transfer, remit, save, loan and purchase goods and services by mobile money.   2014 have seen radical increase in number of international remittance using mobile money. Mobile money helped in cost reduction and point to be noted is the cost to sending remittance by mobile money is less than half the average of sending it through transfer agents. Without disruptive technologies, the unbanked would have to struggle with remittance and conversion fees charged by transfer agents like Western Union, which can cost up to 8.5 to 10 per cent of funds transferred. If we talk about ASEAN economy, the unbanked is said to have the potential which can contribute US$17 billion to US$52 billion to the economy by 2030. 

Big Banks have tightened their belt to compete with these Fintech start-ups. CoinDesk recently issued State of Bitcoin for second quarter of 2015, which stated that Santander, Barclays, UBS and BNY Mellon are among the global banks which are exploring the potential of blockchain.  These banks are studying the every possible use of blockchain for cost reduction, increasing efficiency and speed and to provide transparency and more security. But still banks are ill prepared to take up the emerging cut throat competition.

There were 192 fintech mergers and acquisitions worth a total of US$18.9 billion in the first half of 2015, according to research from investment bank Berkery Noyes. Six of the top ten largest deals in 1st Half 2015 were in the Payments segment. These six transactions, with a combined value of US$10.46 billion, accounted for 55 percent of aggregate value year-to-date. Total transaction volume in 1st Half 2015 decreased by seven percent over 2nd Half 2014, from 206 to 192. Total transaction value in 1st Half 2015 rose by 17 percent over 2nd Half 2014, from US$16.21 billion to US$18.90 billion. This is a clear indication that Fintech is constantly rising and constantly trying to disrupt traditional finance market.

“In the next three to five years there will be more change in finance and the way you use your money than in the last 20 years, “John Lunn, PayPal’s global director for developer and start-up relations, said at Rise 2015. According to a recent report by Goldman Sachs, US$4.7 trillion in revenue for traditional financial services is at risk of being displaced globally by new technology-focused entrants. So this the the high tide for traditional banking and finance industry to pull up the socks and work in smarter way to save their business from disruption.