Harmonization of regulation, aggregators comparing costs of other internal transfers offered by other FinTech companies, clustering of services towards a complex product offering, and growing amount of services for Small and Medium Enterprises are selected by three trends, which might impact CEE in the next 24 months.
Traditionally, the FinTech industry has been represented by small incumbents that concentrated their business models around a single simple product, service, or technology. Thus, FinTechs were able to provide services neglected by banks and support them with a user-friendly interface and well-thought through branding. This strategy helped FinTech startups to occupy a particular niche and outperform traditional financial institutions in both innovation and profit. However, FinTech companies have grown in complexity and value added in the past several years. They expended their portfolio from providing just payments in 2008 to the inclusion of InsurTech, RegTech, and ICO’s services in 2018. The tendency to provide increasingly elaborated products is only expected to grow.
Teambrella’s venture concept of Ethereum-enabled peer-to-peer insurance is an example of the complexity of contemporary FinTechs. Instead of providing the insurance itself, the platform enables its users to create “insurance teams” that have control over the entire process, from admission to decision-making over the reimbursement amount. The company claims that its concept solves agency problems arising in the insurance industry and increases transparency.
This picture will continue to change in 2018 in several ways. As traditional financial institutions started to introduce new technologies, FinTechs faced increasing competition. Although large conventional financial institutions are still investing or partnering with FinTech startups, the trend is changing towards developing their own FinTech products or launching FinTech subsidiaries. Recently, Elly Hardwick, who is the Head of Innovation at Deutsche Bank, pointed out the communication gap between FinTechs misperception of the onboarding process as potential partners of the bank.
The bank desires to publish an agenda to inform why, how, and if potential FinTech companies can see a partnership with the bank to better facilitate each other's expectations. Such closure of communication gaps is both needed, expressed, and desired by different participants in CEE.
FinTechs have expanded their product line, partnered with their peers and other financial institutions to compete beyond the niche of their initial use case. 'Credit Karma', which originated from the payment method provider 'Klarna', is an example of such a development. It was started as a provider of credit score reports and monitoring service. In 2017, it acquired OnepriceTaxes and introduced a tax preparation software that has been used by approximately one million US customers in the first tax preparation season. In January of 2018, Credit Karma has entered into a partnership with MetaBank to provide the first entirely online refund advance in the form of a no-fee, no-interest loan from the latter.1
According to CBInsights, aggregate FinTech funding in Europe grew by 120% from $1.21 million to $2.676 million in 2017. Also, European FinTechs are expanding to overseas markets. Thus, Klarna raised over 500 partners among US-based online retailers since launching its first credit product for US customers in October of 2016. In January of 2018, TransferWise launched an international account that allows users to hold up to 28 currencies on through one account.
The current situation in China provides an exclusive opportunity for FinTech startups, specialising in wealth management. According to CBInsights, the total individual investable assets in China has increased from $4 trillion in 2006 to $26 trillion in 2016. Observing this trend, Tencent has gradually expanded into wealth management by first investing on WeChat in 2014, followed by entering into a partnership with China Rapid Finance and investing into Chinese broker, CICC, in 2017. In January of 2018, Tencent received a license to sell mutual funds via WeChat.
Significant opportunities for early-stage FinTech startups are available in Latin America and Southeast Asia, where such companies can address current gaps in the traditional banking model. These areas are characterised by a large number of persons excluded from the traditional banking system. At the same time, the access to the internet, especially from mobile devices is widely spread. This trend has been visible since 2017, with the number of FinTech deals in South America (38 deals) exceeding the ones in Australia (21) and Africa (14) combined.
The opportunity to speculate on cryptocurrency has lead to the growth in popularity of cryptocurrency exchanges. Thus, Coinbase saw an increase in the number of users from 200K to 13.3 million in half a year. However, total ICO funding substantially exceeds total blockchain equity funding ($2.8 billion and $0.4 billion, respectively), meaning that speculation on cryptocurrency tends to be more attractive than its development and adoption.
FinTechs providing financial services software have the potential to change capital markets’ infrastructure and replace traditional technologies by leveraging cloud computing and newer programming languages.
Although financial institutions investing in RegTech is still in early stages, some trends can be observed in this area. As PSD2 and MiFID II have come into force in January 2018 and GDPR is approaching, investors tend to support relevant compliance solutions.
In 2017, the most significant deals were made in InsurTech. However, the distribution of entities on different stages of maturity is unequal. Although activity remains high on Seed/Angel level, mid-stage activity has stayed constant over time. This situation leads to back-end startups looking for new ways into the InsurTech industry by partnering with brokers and reinsurers.
Overall, the current situation in the FinTech industry is characterised by tightened competition with traditional financial institutions, as well as among Fintechs themselves. To overcome the competition companies innovate, enter partnerships, or attempt to expand their services to other markets.
The environment is ripe for early-stage FinTechs in Southeast Asia and Latin America due to existing gap in banking services, while the Chinese market provides opportunities for more sophisticated companies specialising in wealth management. Cryptocurrency and ICO are in the center of media attention nowadays and, correspondingly, attract significant investments. However, speculation on blockchain technology outpaces investing in its development. Financial services software, FinTechs, and RegTechs foresee a rise, while the InsurTech market has started to satiate.
Essay by Michal Gromek, Researcher on FinTech from the Stockholm School of Economics. Author of Stockholm FinTech Report 2018, co-author of the Report: Next Wave of FinTech - Insurtech and RegTech and the Book: Rise and Development of FInTech, Accounts in Sweden and Beyond