NCFAs innovation and funding ecosystem

Synergy and disruption: Ten trends shaping fintech

McKinsey&Company | Dec 2018 | By Jeff Galvin, Feng Han, Sarah Hynes, John Qu, Kausik Rajgopal, and Arthur Shek

global fintech growth VC investments - Synergy and disruption: Ten trends shaping fintech

As the fintech landscape continues to evolve, a look at the newest developments from across the globe.

Fintech, the portmanteau of finance and technology, represents the collision of two worlds—and the evolution of the use of technology in financial services. Financial services and technology are locked in a firm embrace, and with this union comes both disruption and synergies.

Insight:  What fintech can learn from Robinhood’s ‘epic fail’ of launching checking accounts

Financial institutions are engaging with fintech start-ups either as investors or through strategic partnerships. Almost 80 percent of financial institutions have entered into fintech partnerships, according to McKinsey Panorama. Meanwhile, global venture capital (VC) fintech investment in 2018 has already reached $30.8 billion, up from $1.8 billion in 2011 (Exhibit 1).

Average deal size is growing as well, particularly in Asia, where it is almost twice as large as the global average, due largely to a number of mega deals.1 The investing public is also enamored of fintechs: Zhong An made waves with its $11 billion IPO valuation last year, while Ant Financial is reported to be raising a pre-IPO round valuing the company at $150 billion.

However, the aggregate investment figures belie a more nuanced set of developments. “Fintech” covers a range of different models. We see four distinct variants, each operating in different niches, with different modus operandi (Exhibit 2):

  • Fintechs as new entrants, start-ups, and attackers looking to enter financial services using new approaches and technologies. These firms seek to build economic models similar to those of banks, often targeting a niche or particular product. The primary challenge for fintechs in this group is the cost of customer acquisition.
  • Fintechs as incumbent financial institutions that are investing significantly in technology to improve performance, respond to competitive threats, and capture investment and partnership opportunities.
  • Fintechs as ecosystems orchestrated by large technology companies which offer financial services both to enhance existing platforms (e.g., AliPay supporting Alibaba’s e-commerce offering) and to monetize current user data or relationships. Because of the very high level of engagement these technology platforms have with their users, they often have a tremendous customer acquisition cost advantage relative to other firms.
  • Fintechs as infrastructure providers selling services to financial institutions to help them digitize their technology stacks and improve risk management and customer experience.

See:  What fintech can learn from Robinhood’s ‘epic fail’ of launching checking accounts

We believe the future will develop in different ways for these varying types of fintechs, and that they will face very different hurdles. For instance, while infrastructure providers will often succeed or fail based on product or technical capabilities, consumer-oriented start-ups most commonly grapple with customer acquisition costs.

For incumbent financial institutions, the biggest hurdles relate to organization and skills as much as investing in technology at scale. Shifting traditional mindsets and operating models to deliver digital journeys at a start-up pace is no easy feat for a financial behemoth.

For established technology players entering the fintech ecosystem, regulatory challenges may prove a hurdle. The “move fast and break things” approach that disrupted the advertising industry is unlikely to be tolerated in financial services. And concerns about monopolistic behavior could well prevent Western tech giants from developing the sort of integrated financial services offerings we see from Ant Financial or Tencent in China.

To cut through the headlines and buzzwords that saturate the discussion of fintechs, we now take a closer look at current trends, and the implications for both incumbents and attackers.

TEN GLOBAL FINTECH TRENDS

1. High level of regional variation in fintech disruption

Winners in fintech are primarily emerging at a regional rather than global level, similar to traditional retail banking. Regulatory complexity within countries and across regions is contributing to regional “winner take most” outcomes for disrupters. Firms need to invest more in regional compliance rather than launching a global effort on day one.

For example, in money transfer, regulatory approval in a single EU country can be passported across the other EU countries. This encouraged many cross-border payments start-ups, such as WorldRemit and TransferWise in the UK, to expand into neighboring European countries before moving across the Atlantic, which requires additional regulatory investment. Individual US states require licenses for money transfer, which makes US expansion more cumbersome for European operators. This also explains why money-transfer operators in the US, such as Xoom and Remitly, were slower to come to Europe and are not yet operating in Asia as sending markets.

In China, where regulation has been more accommodating, ecosystems were formed by technology giants such as Ant Financial, which have directly entered and are reshaping many financial sectors including digital payments, loans, and wealth and asset management. In the US and Europe, which have stringent regulatory requirements and well-established banking offerings, efforts have been more fragmented and large technology players have been limited to payments offerings and some small-scale lending offerings.

See:  UK banks publish fintech collaboration toolkit

As fintech markets mature, attackers that have established a regional presence are now eyeing international expansion. To successfully enter new markets, they must adapt to new sets of market dynamics and government regulations and select new markets based on a clear understanding of regional variations.

2. AI is a meaningful evolution, not a great leap forward for fintechs

The buzz surrounding artificial intelligence (AI) applications in fintech is intense, but to date few standalone use cases have been scaled and monetized. Rather, we see more advanced modeling techniques, such as machine learning, supplementing traditional analytics in fintech. While AI shows great promise, it is likely to be more of an evolution than a great leap forward into new data sources and methods.

For example, many credit underwriting attackers claim to use AI to analyze vast alternative data sources—ranging from mobile phone numbers to social media activity—but they have not yet displaced traditional credit underwriting methods. In many cases, traditional markers such as repayment history, are still better predictors of creditworthiness than social media behavior, particularly in markets where credit histories (and dedicated agencies to monitor them) are well established. As a result, while consumer lending platforms are increasingly incorporating iterative machine-learning approaches to steadily improve existing performance, they do not need to take a quantum leap in AI to do so.

At least in the short term, winners may not be characterized by completely new modeling approaches or the most complex algorithms, but by the ability to combine advanced analytics and distinctive data sources with their existing business fundamentals.

3. Good execution and solid business models can trump exotic technology

The most successful fintechs have evolved into execution machines that rapidly deliver innovative products, with dynamic digital marketing campaigns to match. Notably, winning start-ups often succeed without using completely new technology. Data-driven iteration, coupled with early and continuous user testing, has led to robust product-to-market fit for these firms.

While cutting-edge technology is exciting, it can also be complex; demand is also untested, which can result in long lead times with little opportunity to validate the business model. As an example, consider cross-border money transfer, a market that has traditionally been dominated by large incumbents such as Western Union. Despite much hype about fintech—particularly blockchain-based solutions—entering the space, no start-up has gained anywhere near the scale of TransferWise, a digital business built on top of traditional payments rails, rather than a reinvention using the latest tech. TransferWise used great user experience and distinctive marketing campaigns to grow rapidly, enabling it to successfully disrupt the space, and to report £117 million in revenues in March 2018.

See:  While Canada debates, others are commercializing our most valuable asset: data

4. Scrutiny of business fundamentals is increasing as funding grows more selective

Years into the fintech boom, after many highs and lows, investors are becoming more selective. While overall funding remains at historically high levels, technology investors globally are increasingly investing in proven, later-stage companies that have shown promise in attaining meaningful scale and profits. Data compiled by PitchBook show that despite a clear increase in total VC funding, investments in early-stage fintechs decreased by more than half from a peak of more than 13,000 deals in 2014, to around 6,000 in 2017. The bar for funding is quickly rising, and companies with no clear path to monetization are going to have a harder time meeting it.

Indeed, several well-known and well-capitalized fintechs have yet to develop a sustainable business model and may need to find a path to more meaningful revenues quickly to continue to attract capital. This is especially evident for challenger digital banks. Some have raised significant sums but still struggle to monetize their products effectively; others have not yet delivered a current account product due to complications around licenses and regulations.

Customer adoption of truly innovative business models takes time, and smaller-scale attackers may require heavy infrastructure investments over a long period before revenues start coming in. Blockchain start-ups, for example, are attracting a significant amount of venture capital with radically new infrastructures for payments and other sectors. However, incumbents remain cautious, with blockchain remaining in prototype mode—and the leap to revenue-generation has yet to take place.

5. Great user experience is no longer enough

Back when banks had cumbersome websites that didn’t render on mobile, it was easy for fintechs to win over customers by building a half-decent app with a great user experience (UX). Today, most financial institutions have transformed their retail user experience, offering full mobile functionality with best-in-class design principles. Great UX is now the norm. Customers, as a result, require more reasons to switch to new fintech offerings.

Robinhood, a US-based stock-trading fintech, simplified stock trading by offering zero commissions through its easy-to-use mobile app with solid UX. But first, it built its user base with free product offerings. It initially made money by investing users’ cash balances. In late 2016, the company launched a successful premium offering called “Robinhood Gold,” which added charges for margin and out-of-hours trading.

See:  Blockchain’s potential will continue to spur public and private investment

Simple interfaces, ease of use, and free stuff no longer equate to a viable business model. Attackers now need to find more robust ways to differentiate themselves from incumbents.

Continue to the full article --> here


NCFA Jan 2018 resize - Synergy and disruption: Ten trends shaping fintech The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

Latest news - Synergy and disruption: Ten trends shaping fintechFF Logo 400 v3 - Synergy and disruption: Ten trends shaping fintechcommunity social impact - Synergy and disruption: Ten trends shaping fintech

FFCON21 ON-DEMAND VIDEOS NOW AVAILABLE!



FFCON21 on demand videos - Synergy and disruption: Ten trends shaping fintech

Support NCFA by Following us on Twitter!






Lou Kerner on Medium | Jun 20, 2021 In its June cryptocurrency report entitled “Digital Assets: Beauty Is Not in the Eye of the Beholder,” Goldman Sachs’ Investment Strategy Group opined for 60 pages on the cryptocurrency ecosystem with the purpose of providing “ … an objective and balanced view on the role of cryptocurrencies in a portfolio.” While the authors of the Goldman Sachs report believe that “It is likely that blockchain technology will be as high impact in the future as the internet has been over the past several decades,” they see a much more uncertain future for cryptocurrencies and how it will be used by their clients. For all the disappointment, I applaud the effort, and assume they’ll get it right over time. So I suggest serious crypto investors read the entire report. But recognizing that most people won’t read it, here are the 10 points made in the report that I found most telling: 1. Goldman Report Highlights A Wide Spectrum Of Thoughts On The Crypto Ecosystem At one end of the spectrum are proponents whose basic premise is that the U.S. government is on an inexorable march to currency debasement. Hence, the the world needs ...
Read More
bitcoin future - Synergy and disruption: Ten trends shaping fintech
BIS | Raphael Auer, Codruta Boar, Giulio Cornelli, Jon Frost, Henry Holden and Andreas Wehrli | Jun 24, 2021 CBDCs offer an opportunity to rethink some key features of cross-border payments. Central banks could ease current frictions by factoring an international dimension into their CBDC designs from the outset. For front-end retail uses, CBDCs could allow for use by non-residents in a jurisdiction, or abroad, if central banks permit this option and the transacting parties agree on using the CBDC as means of payment. Some CBDC designs could allow for transfers that are as frictionless as digital messages. Account-based CBDCs that link balances to identification could bring efficiency while mitigating any key risks that digital cash may otherwise entail (Carstens (2021a)). See:  Stablecoins: What’s old is new again – speech by Christina Segal-Knowles An alternative option is for various mCBDC arrangements, which are generally focused on wholesale uses. At least three models exist in principle to facilitate cross- border payments in this way, involving successively greater integration and policy coordination. Our survey finds that central banks are actively considering these cross-border issues around CBDCs. While a slight majority of central banks have not yet come to any firm conclusion on ...
Read More
CBDC research - Synergy and disruption: Ten trends shaping fintech
CSA | Jun 23, 2021 Vancouver – The Canadian Securities Administrators (CSA) today adopted harmonized rules for securities crowdfunding. National Instrument 45-110 Start-up Crowdfunding Registration and Prospectus Exemptions  introduces a single, uniform set of rules that replaces and enhances the requirements currently in effect in Alberta, British Columbia, Manitoba, New Brunswick, Nova Scotia, Ontario, Québec and Saskatchewan. “These rules expand the ability of small businesses and start-ups to use securities crowdfunding to gain access to capital,” said Louis Morisset, Chair of the CSA and President and CEO of the Autorité des marchés financiers. Following stakeholder consultation, the CSA made targeted amendments to improve the effectiveness of start-up crowdfunding as a capital-raising tool, including: Increasing the maximum total amount that an issuer can raise under the crowdfunding prospectus exemption in a 12-month period to $1.5 million (from the current $500,000). Increasing the maximum investment a purchaser can make in an offering to $2,500 (from the current $1,500), with a higher limit of $10,000 if a registered dealer advises that the investment is suitable for the purchaser. Removing barriers preventing federal and provincial co-operatives or associations from using the start-up crowdfunding prospectus exemption. Requiring funding portals relying on the registration exemption to certify on a ...
Read More
Equity crowdfunding harmonized rules - Synergy and disruption: Ten trends shaping fintech
The Alan Turing Institute | Joanna Dungate | Jun 14, 2021 A new report published today (Monday 14 June 2021): AI in Financial Services explores the use of artificial intelligence (AI) and the importance of responsible innovation in the financial services sector. The report was commissioned by the Financial Conduct Authority (FCA) as part of The Alan Turing Institute’s public policy programme collaboration with the FCA and has been launched at the accompanying CogX session. The authors hope it will provide stakeholders in the sector with the understanding needed to navigate the evolving AI landscape in pursuit of responsible and socially beneficial innovation. On-demand Video:  FFCON21: May 11 AI and the future of innovation in financial services AI is already having a substantial impact on the delivery of financial services and its role will increase in the years to come. The adoption of AI in financial services is underpinned by three distinct elements of innovation: machine learning (ML), non-traditional data, and automation. Each of these elements can enable significant benefits but also pose challenges that give rise to potential harms. The new report provides an introduction to AI, discusses general challenges and guiding principles for the responsible adoption of AI, and maps ...
Read More
Alan Turing report AI in financial services  - Synergy and disruption: Ten trends shaping fintech
CEBL | Release | Jun 17, 2021 The Canadian Elite Basketball League will allow players to receive portions of their salaries in bitcoin, through a partnership with Bitbuy. See:  NBA Top Shot launches in beta with tokenized, collectible highlights The Canadian Elite Basketball League (CEBL) announced Thursday that it has entered into a partnership with Bitbuy, a leading Canadian cryptocurrency platform, that will enable the league to pay players a portion of their salaries in Bitcoin. The partnership will be the first of its kind for any professional sports league in North America and comes as the league is set to tip off its third season June 24. “Innovation and delivering a new basketball experience have been a driving force behind our creation of one of the world’s most widely recognized pro basketball leagues,” said Mike Morreale, Commissioner and CEO of the CEBL. “Some of the best players outside the NBA, and some with NBA experience, have joined our league because we make player-first decisions. Our partnership with Bitbuy speaks to our commitment to players, and also to our forward-thinking approach to how we go about our business. We appreciate Bitbuy’s investment in helping us further grow Canada’s official national ...
Read More
CEBL and Bitbuy partnership - Synergy and disruption: Ten trends shaping fintech
McKinsey & Company | Jun 16, 2021 Companies that master the deployment of intangibles investment will be well positioned to outperform their peers. Investment in intangible assets that underpin the knowledge or learning economy, such as intellectual property (IP), research, technology and software, and human capital, has risen inexorably over the past quarter century, and the COVID-19 pandemic appears to have accelerated this shift toward a dematerialized economy. Are we seeing the start of a new stage in the history of capitalism based on learning, knowledge, and intellectual capital? As economies recover from the pandemic, could a wave of investment in intangible assets breathe new life into productivity and unlock more growth potential? See:  [Report] A New North Star: Canadian Competitiveness in an Intangibles Economy The research takes the broader definition of intangibles outlined by economists Jonathan Haskel and Stian Westlake, who include economic competencies such as advertising and brands, marketing research, organizational capital, and training. This more expansive definition of intangibles appears more relevant to the role they increasingly play in companies, sectors, and economies. Over the past 25 years, the investment share of intangibles has increased by 29 percent Looking in more detail at the different types of ...
Read More
intangible growth and productivity - Synergy and disruption: Ten trends shaping fintech
Bernhard Mueller via Medium | Jun 18, 2021 Tether’s USDT stable coin has experienced massive growth since the start of the ongoing bull cycle. There’s now an order of magnitude more USDT in circulation than during the height of the 2017–2018 cycle. This makes it worth re-investigating whether the crypto markets are robust against a potential Tether-related liquidity shock. In this article I attempt to address the following questions: How would a loss of confidence in Tether play out in the short term? Who would get most rekt if a Tether-related crash happens? Would a Tether confidence crisis be a black swan event* that would severely impact the market? * For the purpose of this article, we use “black swan” to refer to a massive event that would surprise most people. After all, 95% of people in the crypto space insist that Tether is fine. If you’re unhappy with that definition feel free to think of it as a white swan event. “What may be a black swan surprise for a turkey is not a black swan surprise to its butcher.”— Nassim Nicholas Taleb See:  A Visual Explanation of Algorithmic Stablecoins The shape of US dollar liquidity in the crypto ...
Read More
Black swan - Synergy and disruption: Ten trends shaping fintech
Guest Post | Jun 18, 2021 Day trading was hugely popular back in the 1990s but its popularity waned with the turn of the millennium. Now, it's starting to make a comeback in a big way, with more and more people taking an active interest in these unique forms of trading. Some hope to use it as a side hustle for a little extra money on the side, while others hope to turn it into a career or make enough money to live from. Whatever your dreams and aspirations for day trading happen to be, it's important to take some time, learn about your options and risks, research different strategies, and find all the help you can get before you get started. Becoming a successful day trader isn't something that happens overnight, but with patience and hard work, along with strong stock market analysis and strategy, you can get there. The More You Know The first tip to get off to a good start with day trading is to be willing to learn. As stated in the introduction, this isn't something you can rush into and succeed at without any planning, preparation, or education, and there are a lot of ...
Read More
Online Investing and trading tips 1 - Synergy and disruption: Ten trends shaping fintech
WEF | Stephen Stonberg | Jun 17, 2021 As with the feverish debate around Bitcoin and its carbon footprint, there has been no shortage of discussion surrounding cryptocurrencies and the energy they consume. But this back and forth around crypto’s environmental impact is missing a glaring point. It is important to recognize that crypto is still in its very early stages, not dissimilar to where the internet was in 2002. The entire space is going through its Amazon moment. The first decade of this cryptocurrency experiment has grown far beyond anybody’s wildest expectations. At the same time, it has allowed those of us in the industry to identify what works and what doesn’t. For example, the proof-of-work consensus algorithms (the mathematical problems that Bitcoin miners must solve) that power the Bitcoin network do indeed require a lot of energy. But what these arguments about Bitcoin’s environmental impact obscure is that the broader crypto ecosystem is in the midst of a shift towards a cleaner, greener, more sustainable future that will result in significantly lower carbon emissions. See:  Ethereum cryptocurrency to slash carbon emissions This can be seen with the launch of Ethereum 2.0 and the move from a proof of ...
Read More
Blockchain greener future - Synergy and disruption: Ten trends shaping fintech
Crowdfund Insider | JD Alois | Jun 15, 2021 The US investment crowdfunding industry received a boost this year as the Securities and Exchange Commission (SEC) adjusted the securities exemptions that platforms and issuers utilize to raise growth capital online. Along with other improvements, key changes include the adjustment of Reg CF (Regulation Crowdfunding) to allow for the funding of up to $5 million – from a previously anemic $1.07 million, and a boost to Reg A+ to up to $75 million from $50 million. Many, if not most securities crowdfunding platforms, utilize the three main crowdfunding exemptions – Reg CF, Reg A+, and Reg D 506c. Reg D, currently available only to accredited investors, remains the most popular securities exemption in the US powering a $1 trillion private capital market. Recently, Crowdfund Insider connected with Doug Ellenoff, Managing Partner of Ellenoff, Grossman, and Schole – a top legal firm engaged with the Fintech sector, as well as a leading SPAC advisor, for his thoughts on the future of online capital formation. Ellenoff has been engaged with securities crowdfunding since before the JOBS Act of 2012 emerged as the legislative path to legalize raising capital on a digital platform. Counsel ...
Read More
Doug Ellenoff - Synergy and disruption: Ten trends shaping fintech