Fintech, or financial technology, refers to a broad range of technological applications in the financial services industry. Of course, there’s more to the market than a simple definition, so what is fintech?
Fintech companies are often startups that are creating disruptive technologies that transform the financial sector through software innovation. Mobile payments, artificial intelligence (AI), automation, data analytics, digital assets and digital ledger technology are some of the big buzzwords currently dominating the sector.
With so many categories and so much discussion about the sector, investors outside of it may be asking themselves just what fintech entails. Here, the Investing News Network (INN) provides a (brief) overview to better answer the question.
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What is fintech? Market size
While a variety of reports have given different numbers, one thing that is prevalent is that 2018 was a record year for global fintech investment.
FinTech Global pegged global investments in the fintech industry for the first half of 2018 to be US$41.7 billion. These numbers are higher than total fintech investment in 2017, which was US$39.4 billion.
Fintech investments have been steadily increasing ever since 2014, when that number totaled only US$19.9 billion. 2015 saw investments reach US$27.1 billion, and by 2016, they had gone up slightly more to US$30 billion.
A report from KPMG says that the total investments for the first half of 2018 were US$57.9 billion spread across 875 deals. When compared to 2017 levels of US$38.1 billion, the firm says it’s a significant increase.
Further, a report from Statista highlights that digital payments are the largest segment of fintech, with a transactional value of US$3.2 trillion as of 2018. The report predicts that the segment is set to show a compound annual growth rate (CAGR) of 13.5 percent to reach US$5.4 trillion by 2022.
In addition, marketplace lending, also known as peer-to-peer lending, has grown increasingly over the past five years. Between 2014 and the first quarter of 2019, US$25.9 billion was raised in 1,239 deals. Lending deals in the first quarter of 2019 alone surpassed US$1 billion.
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Marketplace lending is a new form of lending in which a platform connects individual investors with businesses looking to raise capital.
What is fintech? Payments
Payments are one of the fastest-growing subsectors of the fintech market. This area encompasses mobile apps that facilitate quicker, easier and more flexible platforms for exchanging funds. It also entails other internet-based platforms that enable the payment process.
For example, companies like VersaPay (TSXV:VPY) fall into this category. VersaPay offers an intuitive pay-as-you-go cloud-based service that provides payment solutions to businesses by streamlining processes and delivering clear, efficient results.
The report from KPMG states that payments and regtech are the “most mature” subsectors of fintech, but that more players would emerge.
Regtech, or regulatory technology, refers to technological solutions focused on compliance, monitoring and reporting in the financial sector.
“Leading players in payments and lending will continue to emerge in the most mature markets, focusing their growth efforts on expanding the breadth of their product and service offerings,” reads the report.
In 2016, TechCrunch anticipated that the next big trend in the payments sector will be efforts to embed transactional efficiency into platforms that currently don’t support sophisticated payments systems — think of big social media sites like Pinterest (NYSE:PINS) and LinkedIn, whose parent company is Microsoft (NASDAQ:MSFT).
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True to this report, social networking sites have started testing out payment options, led by Facebook (NASDAQ:FB) through its platforms Instagram and WhatsApp.
Meanwhile WhatsApp was close to launching its payments gateway in India in Q2 2018, however the messaging platform is facing regulatory hurdles in the country including data localization compliance. That said, Facebook has indicated this feature will be rolled out in a variety of countries within the next few years.
Disruptive innovation in fintech are also extending to areas including international money transfers, loans and sales analytics.
What is fintech? Cryptocurrencies
Cryptocurrencies are another major component of fintech. By definition, cryptocurrencies are digital currencies that rely on encryption technologies to regulate and verify transactions and the create new units of currency.
According to Coinmarketcap.com, there are 2,322 cryptocurrencies, with the top five in terms of market cap being bitcoin, ethereum, XRP, litecoin and bitcoin cash.
Michael Sonnenshein of Grayscale Investments told INN that bitcoin is a type of “digital gold,” because many investors view bitcoin as a store of value. In fact, the rise of bitcoin has recently posed the question of whether or not it will become its own global currency over the next few years.
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A report from Greenwich Associates reveals that 72 percent of institutional investors believe cryptocurrencies have a place in the future and that they are here to stay.
Blockchain, the technology underlying bitcoin, is also gaining a following in its own right, as financial institutions seek out more efficient methods of verifying and recording transactions.
A report from PWC say that 84 percent of organizations of the 600 it surveyed have at least some involvement with blockchain, because no one wants to be left behind.
Firms in the financial services, wealth management, student loan and asset management sectors are all beginning to employ fintech technological innovation to their business models. The benefits of fintech are projected to impact financial inclusion, enabling unbanked individuals to access the financial industry through new alternative methods.
Concluding thoughts
Overall, the fintech market is a dynamic, multidimensional place. It’s difficult to place parameters on this market, because new technologies are continually expanding, disrupting and transforming the space. However, rather than scaring investors off, this dynamism should encourage investment. Fintech is a rapidly growing market that presents multitudes of opportunities for brave, tech-savvy investors.
This is an updated version of an article originally published by the Investing News Network in 2016.
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Securities Disclosure: I, Dorothy Neufeld, hold no direct investment interest in any company mentioned in this article.