Fintech: Catalyst for (r)evolution
Globally, investor interest in financial technology (“fintech”) is at an all-time high. From mobile payments to robo-advisory services, from P2P lending to the mythical blockchain; demand for fintech solutions is exploding as once-quixotic ideas are coalescing into viable products that even conservative financial institutions want a piece of.
But a question that entrepreneurs and investors alike often overlook is how the global appetite for fintech is distributed. Namely, which geographies have already embraced fintech? Which geographies are ready for disruption? Perhaps most importantly, how do fintech solutions align with the existing financial infrastructure and cultural norms in different regions?
For instance, although it is well-regarded as a technologically advanced nation, Japan’s stubborn reliance on cash has made it difficult for e-payments to gain traction. In India, the large rural population could benefit from mobile banking solutions, but the current lack of mobile and internet infrastructure stand in the way of mass adoption. In Africa, the lack of a cohesive financial services sector has allowed fintech to build the industry from the ground up. And it’s clear that fintech is in the African financial services sector’s DNA: some banks that were trying to emulate the brick-and-mortar model pioneered in developed markets reverted to digital solutions in the face of shrinking profit margins due to the cost of maintaining a physical presence across a vast geography with a rural customer base.
The impact of fintech on these markets varies along many dimensions, and it’s clear that a more nuanced approach to evaluating fintech’s influence is needed. One way of beginning to think about its potential role in a given market is by comparing the maturity of the financial services sector to the penetration of fintech within that market.
For instance, consider the US. The financial sector is highly mature, characterized by sophisticated (read: old) incumbents like big banks and insurance companies. But the arrival of millennials, who were raised by Facebook and Google, onto the financial scene has ushered in a new wave of technological literacy and demand for better financial products. Not surprisingly, the emergence of fintech closely tracks the rising influence of millennials, and so fintech has only recently built enough momentum to begin to overcome the inertia carried by incumbents.
On the other hand, a market like China’s stands in sharp contrast to that of the US. The financial services sector is much younger and, much like millennials in the US, has evolved concurrently with big tech companies. That’s why you see BAT (China’s triumvirate of tech titans, Baidu, Alibaba, and Tencent) dominating almost every technological space, including fintech. Take Alibaba, for example. It began as an e-commerce platform in the late 90’s, but has since grown into an empire that rivals Amazon. In 2012 it spun off its popular Alipay payments system into Ant Financial, which now claims over half of the payments market in China (the world’s largest), boasts the world’s largest money market fund in Yu’e Bao, and is moving beyond payments into wealth management, insurance, credit scoring, and even media. In China, it’s not fintech that’s disrupting the financial services ecosystem. Rather, the digital financial services ecosystem is being woven into all aspects of the Chinese consumer’s life. It’s this notion of an extended, omnipresent “finlife” that will guide the continued evolution of financial services.
It’s helpful to visualize fintech’s impact on various markets using a matrix, with the penetration of fintech on one axis and the maturity of the financial sector on another. Low maturity and high penetration (think Africa and China) yield the potential for significant impact, while more mature sectors coupled with hesitant adoption (the US) reduce fintech’s potential to reshape the space.
Markets in between these extremes present an interesting opportunity. Key to using fintech to unlock value in these markets will be identifying and brokering strategic partnerships between existing market players and innovative startups. Entrepreneurs, incumbents, and investors alike see the potential value in these sorts of deals, but it remains to be seen where the partnership model will be perfected first.
Globally, we’re at an interesting inflection point, where the advancement of technology is forcing established industries to rethink their core business models. And because technology has become such a fundamental driving force, this leaves room for comparatively less developed countries with high technological penetration to undergo rapid evolution, as young industries employ the solutions technology offers to catapult them to the cutting edge of their respective fields.
Developments in the financial services sector are just one instance of this larger trend. But this instance nevertheless highlights the important fact that regardless of geography, there’s room for the financial services space in particular to evolve, and fintech will be the catalyst for explosive growth.