This is a syndicated post originally written for the technical consultancy Cohaesus
Once upon a time, the fintech industry was a trend all by itself. It started with peer-to-peer payment companies like PayPal, and before long the fintech sector was a legitimate and market-moving industry. Today, the fintech industry has proliferated into many smaller trends, which include online lending, digital banking, algorithmic-based investing, and more.
However, there are 5 specific digital trends that are changing the fintech sector with more speed than any others. In fact, these 5 trends extend beyond industry borders and are redefining the way companies do business and the way consumers interact with brands as well as each other. Below are the top digital trends that are altering the fintech sector.
1. Decentralised Blockchain Technology
The use of blockchain technology is the most important trend that’s changing the fintech sector. This is because blockchain isn’t confined to a specific niche but is instead a form of decentralised technology that will soon power most of the fintech industry and beyond. The blockchain is most commonly associated with cryptocurrency. However, any product or service that relies on contracts will benefit from blockchain.
Essentially, blockchain technology cuts out the middleman and encodes what’s known as “smart contracts” directly onto the blockchain via a decentralised ledger as if the contract/transaction is stuck in amber. This means that many financial products like futures contracts and insurance policies will become safer and more reliable with the blockchain. For a growth perspective, blockchain wallet users have grown by 100% YoY for the past 2 -3 years.
2. Algorithmic Wealth Management
Robo-advisors are fully-automated or hybrid services that advise consumers and/or invest a consumer’s investment dollars on their behalf. Robo-advisors rely on wealth management algorithms to evaluate risk and manage a person’s money based on their investment objectives. For example, advisors like Nutmeg and Wealth Horizon offer a unique mix of low-cost portfolios comprised of investments that are specific to an individual’s needs and automatically rebalance.
The idea of an “efficient market” is one where all information is readily available and investors act rationally. Until recently, this idea was nothing more than an economic theory. But now, private investors can use algorithmic wealth management companies to invest their money efficiently and effectively based on millions of data points that they couldn’t previously access. It’s estimated that robo-advisors will manage more than $8 trillion in global assets by 2020.
3. Alternative Lending Platforms
Alternative lending platforms are typically technology-focused non-bank lenders such as Funding Circle. These lenders usually crowdsource debt instruments via accredited investors and offer them to borrowers (businesses and consumers) who are in need of capital. Additionally, alternative portfolio lenders like OnDeck capital will often act more like a traditional lender and keep its loans on its balance sheet.
Still, since these are balance sheet loans and not conforming loans, there is more flexibility on behalf of the borrower, also making it easier to qualify. It’s estimated that the total loan originations of alternative lenders will exceed $90 billion by 2020. Whereas before, traditional banks had to originate loans. Now, these digital and alternative lending platforms spread lending risk across a portfolio of investors, making it easier to qualify.
4. Online-Only Commercial Banks
One of the major trends affecting the commercial banking industry is the movement away from brick-and-mortar institutions and towards online-only commercial banks. This helps drive down the fees that banks charge and even helps them offer higher interest rates to their consumers. Large digital banks have taken advantage of this tailwind, with online European institutions like Atom bank raising more than $135 million in business funding.
What’s more, thanks to banking regulations in Europe, many financial institutions now offer what’s known as “open banking.” This trend offers application programming interfaces (APIs) to third-party companies, allowing them to pull proprietary data in an attempt to create technologies that better serve financial customers. This benefits fintech startups, existing financial institutions, and the consumers alike, creating an entirely new industry known as “banking-as-a-service” (BaaS).
5. Sector Funding and Acquisitions
While the fintech sector has always been flush with investor capital, the industry hit a $19 billion high in worldwide funding two years ago and almost doubled that mark in 2016. The largest portion of this investment capital came from accelerators and incubators in the APAC region due to large funding rounds of Chinese fintech companies. This trend should continue in 2017 and beyond.
This has helped a lot of fintech companies build proprietary technology and scale to the point where we should see more acquisitions in the near future. Further, while there are 20 fintech companies currently worth $1 billion, companies like McKinsey expect valuations to correct, presenting traditional financial institutions with prime acquisition targets. For example, Goldman Sachs purchased fintech wealth manager Honest Dollar in 2017.
Overall, blockchain technology, robo-advisors, alternative lending platforms, digital banks, and increases in sector funding and acquisition are driving change in the fintech sector. However, this change isn’t confined to the industry alone. In fact, the trends of the fintech sector are now large enough to impact the world economy.