Beyond Bitcoin: Discovering FinTech’s Potential
Financial technology, or FinTech, allows businesses and ordinary people to leverage new technologies for the management of their financial affairs. While the term ‘FinTech’ encompasses various products and technologies, much of the recent press has narrowly focused on the digital currency, bitcoin. Yet focusing exclusively on bitcoin ignores the multifaceted nature of FinTech, including its many applications that are revolutionizing the financial services industry.
In this post, we determine:
- What is FinTech?
- In which areas is FinTech most active?
- How big is FinTech and what is its potential growth?
The Ecosystem: What is FinTech?
FinTech is a broad term applied to various digital tools that endeavor to make a financial service or product more accessible, efficient or affordable. Such technology is often deemed ‘disruptive’ because it upends the conventions of traditional solutions such as in banking and lending, to name a few. FinTech has also, however, empowered longstanding financial services firms to embrace tech-enabled solutions to remain competitive in the 21st century.
FinTech is not merely one type of solution. Rather, it is an ecosystem of digital tools designed to serve a multitude of needs. Well-established examples include mobile payments and integrated billing. More recent innovations like peer-to-peer lending and automated portfolio management are at the forefront of FinTech’s innovative underpinnings.
Everyday investors can engage with FinTech as they conduct their banking and investing needs. Businesses can use FinTech to understand their customers better, distil actionable ideas from big data, or streamline business practices.
The Big Six: In which areas is FinTech most active?
Broadly, FinTech serves several categories. The areas experiencing the greatest activity today are payments, funding, lending, investing, business services and digital currencies. Let’s take a look at each.
Digital payments have become a mainstay in the life of nearly all consumers. Research forecasts that growth in digital payments will climb from $635 billion in 2016 to over $1 trillion by 2020.1
Peer-to-peer lending (P2P) is a way for borrowers to access loans online without the intermediary of a traditional bank. Estimates show that the P2P market will be worth nearly $900 billion by 2024.2 P2P borrowers can seek loans for personal use, small businesses, home improvements, automobile financing, home purchases, and more.
Crowdfunding allows individuals to pool their capital to fuel a company’s growth. It can be easier for a company to raise money when it can tap into small investments from hundreds or thousands of individuals. Globally, crowdfunding efforts raised approximately $34 billion in 2015 and increased with every passing year.3
Robo-advisors use basic input from investors like risk tolerance, financial goals, and time horizon to establish an investment portfolio. This market is projected to carry a value of $500 billion by 2020.4 The trend has some estimating that robo-advisors’ assets under management will reach $2.2 trillion by that same year.5 Many asset management firms are beginning to offer robo-portolios along with human advice for a hybrid approach to managing client assets.
FinTech can amplify and streamline processes for financial institutions struggling to keep pace with a faster marketplace. These technologies can lend efficiency to recordkeeping and regulatory reporting requirements, a niche sometimes called ‘RegTech.’ Between 2011 and 2015 the share of FinTech firms offering enterprise solutions rose from 34 percent to 47 percent.6
Cryptocurrencies like bitcoin are enabling people to make secure, private payments. These digital currencies often regulate the creation of new currency supply, making devaluation less possible than those issued by central banks. In addition, cryptocurrencies often depend on blockchain technology, which keeps a public ledger of all historical transactions.
Tapping the Pipeline: How big is FinTech and what is its potential growth?
The convenience and broad appeal of many FinTech solutions has spurred global growth. Worldwide investment in FinTech reached $5.3 billion in the first quarter of 2016 alone marking a 67 percent increase over the same period last year.7 The power of the industry comes from its ubiquitous nature; individuals and businesses alike can appreciate the value of the technology. Exploring the future of FinTech the Financial Times wrote, “the opportunity for fintech in western Europe and the US looks to be enormous, if new entrants can tap it.”8
Recently, regulators have also been supportive of FinTech’s emergence, as they began to authorize specialty licenses which will “allow FinTech firms such as online lenders and payment processors to apply for a federal charter.”9 Moreover. ‘Project Catalyst’ from the Consumer Financial Protection Bureau seeks to invigorate efforts behind new FinTech tools.
The FinTech industry is much broader than just bitcoin, as it consists of a multitude of disruptive and efficient technologies. It is a marriage between Silicon Valley’s innovative technologies with Wall Street’s core businesses. As the financial services industry continues to recover from a debilitating crisis and extended low rate environment, we believe the FinTech industry is poised to continue to disrupt and permeate throughout the Financials sector.
Global X offers the Global X FinTech Thematic ETF (FINX), which is designed to provide exposure to a basket of FinTech stocks from around the globe.