The barista hands you your afternoon pick-me-up and you reach over to pay with a tap of your phone, no cash or credit card required.
Back in the office, an email comes through with good news—the small business loan you applied for 48 hours ago has been approved, without any bankers or brokers involved.
Later that night, your friend picks up the tab for dinner and you transfer her your share via an app, without needing to rummage through your purse for change.
It’s all in a day’s work—made easier with the help of fintech.
Financial technology, as fintech is more formally known, refers to the broad array of financial products and services that employ the innovative use of technology. Fintech firms have made it easier for people to transfer funds, make payments, manage their wealth, seek investment advice and even obtain loans.
In 2015, fintech firms — with hubs in London, New York, Tel Aviv, Hong Kong, Sydney and Singapore, among others — attracted US$22.3 billion from investors around the world, and this figure is expected to exceed US$150 billion in the next three to five years.
Here are five things you need to know about the booming fintech industry.
1. Goodbye, middleman?
Fintech’s most powerful weapon, according to professional services firm PricewaterhouseCoopers, is disintermediation. “While financial service organisations have acted as intermediaries in the financial system by providing an invaluable service to clients, their functions are being usurped by new technology-driven business models,” PwC reported last year.
Fintech is making the middleman obsolete.
For example, individuals seeking investment advice no longer need to make an appointment with a bank’s financial advisor; automated robo-advisors such as WiseBanyan and Betterment can do the job. People and businesses no longer need to queue at the bank for loans and be subjected to stringent lending criteria; they can turn to marketplace lenders like China’s CreditEase for peer-to-peer lending.
“It’s a true disruption,” Richard Koh, co-founder of M-DAQ, a company that facilitates multi-currency trading across borders, told TechNews.
“Things you previously had to go to the bank or a broker for, you can now potentially bypass. Fintech is literally replacing an incumbent in the value chain.”
2. Shake it up, banks
“Fintech” may seem like a buzzword that appeared in the past two to three years, but the industry’s beginnings can actually be traced back to 2008. The credit crisis that year resulted in financial services facing heavy regulation around risk control, said Credit Suisse strategist Falguni Desai in a recent Forbes article.
The outcome: “a perfect vacuum of innovation in banks.”
When fintech firms first appeared on the scene to fill this void, banks and other financial institutions didn’t take them seriously, said Daniel Liebau, who founded Lightbulb Capital to help companies improve their performances by providing them with benchmark data and insights.
“The reaction was that these are just small technology companies, so our business is quite safe,” he told TechNews.“But more recently even very prominent banks like JP Morgan acknowledge that these firms are ‘trying to eat our lunch.’”
Banks today, aware of the threat posed by fintech firms, have tried to shed their traditional stuffy image and appear more innovative.
“Every bank these days has decided they need to embrace the culture,” said M-DAQ’s Koh. “Every bank has an in-house fintech unit — laboratory, incubator, or simply events halls with beer and pizza.”
3. It’s not all disruptive
But fintech firms don’t just exist to wreak havoc on traditional banks, insurers and large financial institutions. It’s true that some companies are ‘disruptors’ that use technology to take away business from established financial service firms, said Lightbulb Capital’s Liebau.
“But most companies are actually ‘enablers’ who have moved into providing services and products to sell to large financial institutions,” Liebau added. These firms partner with established companies to help acquire new customers (Australia’s Avoka), reduce fraud (Swiss-based NetGuardians), provide multi-currency payment solutions (Bankable in the UK), among other services.
4. Democratising finance
Fintech is said to bring about many benefits, and one of the most commonly cited is that it’s helping to tackle financial exclusion. Fintech firms have levelled the financial playing field, bringing banking services—once restricted to established companies and high or moderate net-worth individuals — to small businesses and the poor.
“Customers who fall below the threshold, the underbanked and unbanked mostly in developing economies, SMEs who need microloans — these are the ones that fintech could help,” said M-DAQ’s Koh.
For example, bKash has brought mobile banking services to Bengalis living in rural areas — seven in every ten people in the South Asian region — enabling them to send and receive money, make payments and top up their phone credits through their mobile phones.
5. Power to the people
Although fintech signals increased competition, the good news is that this often translates into more efficient products and services.
“Just like how Uber and Grab lowered taxi fares, and a fourth telco in Singapore helped reduce prices, fintech will lead to ultimate gains for the end customer,” said Raghav Kapoor, co-founder of Singapore-based SmartKarma, a firm that provides clients with investment insight.
“That’s actually excellent for consumption.”
With fintech competition set to heat up in the coming years, customers can look forward to more products and services that will make their financial dealings smoother, faster and more convenient.