Digitising Finance: Fintech and H1'20 M&A
© BBVA, 2019
The Rise of Fintech
Financial technology, also known as Fintech for short, refers to the use of technology that seeks to improve and automate the delivery and use of financial services. Fintech’s appeal seems to stem from its focus on retail banking, often referred to as ‘personal banking’, which allows a consumer to manage their money by giving more control over their finances. Fintech offers services designed and tailored to individuals, and examples of its current employment include non-bank marketplace lending, which matches borrowers and lenders worldwide, and mobile payment services, where the pace of payments is accelerated through technological means.
Fintech has also introduced open banking, which allows banks, non-bank financial institutions and other financial services providers, to access users’ financial information digitally, through Application Program Interfaces (APIs). This is done with the aim of providing customisation of services, largely for determination of risk, as well as allowing the customer to determine their financial health and help in their budgeting.
Although fintech initially gained momentum as the ‘back office’ of banks and trading firms, it has recently taken the front seat in transactions, comprising an approximate 50% global adoption increase between 2015 and 2019 . Considering that fintech companies are smaller than incumbent financial institutions, they concentrate on the customer experience and make their services cheaper through the use of technology. Use of such technology replaces previously costly traditional processes, including fraud prevention, risk management and customer service.
A Swedish banker has described the rise of fintech as a challenge for banks “to develop even better services, doing so from a customer point of view, to be less bureaucratic” . In fact, incumbent financial institutions have seen a change in customer expectations, due to the offers fintech competitors make, which include enhanced customer capabilities, increased convenience and lower prices and fees.
UK H1 2020 Fintech
The digital transformation of activity and transactions brought by the COVID-19 outbreak, has harboured increasing use of digital financial services, while the growing number of fintech investments points to the importance of open data and APIs. As services are called to adapt to the digital environment, there has been increasing demand for fintech-related services including digital platforms, digital banking and no-touch payments.
This is showcased by Visa’s pending acquisition of Plaid for $5.3 billion, a fintech company which develops APIs with a focus on the customer experience through the use of data analytics products . Similarly, Mastercard has also announced its acquisition for Finicity for $825 million, in order to advance its open banking strategy. Mastercard’s president, Michael Miebach, described this acquisition as an opportunity to “enhance how [they] support and accelerate today’s digital economy across several markets”.
Also relevant is the recent funding raised by Sweden-based Klarna ($200 million), whilst the start-up has also seen use in the UK through its ‘buy now, pay later’ online shopping payment program. This comes after a rise of platform business models, e.g. digital payments models, which have infiltrated the financial services sector. Klarna was, in fact, the first large European fintech to gain a banking license. Notably, the vast majority of companies like Klarna, are not classified or regulated as credit card companies since they do not technically charge interest. As such, fintech allows new service providers to bypass traditional intermediaries and thus allows for start-ups and SME's to compete in the finance sector.
As for the UK government, Chancellor Rishi Sunak recently announced a strategic fintech sector review to explore how the government can support fintech “growth and competitiveness”. The managing director of investment platform Etoro hopes that this strategic review will lead to renewed and focused regulation for currently overlooked parts of fintech, including digital currencies and cryptoassets, as largely seen in Asia.
This follows the UK’s leading position in the European scoreboard in Fintech investment last year (£37.4 bn), while the Fintech sector contributes more than £130 billion to the economy annually . A government focus on fintech regulation could be a positive step towards both customer safety, and the fostering of sector growth and investment, either through customer privacy or licensing.
Emerging technologies, like the ones used in fintech, are becoming essential for the delivery of services in the current large-scale digitization of internal and external systems. In order to advise clients in this kind of industry, one should also, therefore, have a fundamental understanding of how the underlying tech system works. Such understanding of the technology will, in turn, aid understanding of the business models currently in use, which have been adopted due to the acceleration of digital trends caused by COVID-19. H2’20 could see an increase in mergers for fintech as large companies are looking to embrace digital business models and solutions in order to build their capabilities in a digitised market.
Want to learn more about the true cost of going cashless? You can find out the privacy concerns introduced by Financial Technology here.