FinTech – its older than your great grandma


A. – its older than your great great grandma

“Financial ” or “FinTech” is often seen today as a new phenomenon. However, the interlinkage of finance and technology has evolved over three distinct eras. FinTech 1.0, from 1866 to 1987, was the first period of financial globalization supported by technological infrastructure such as transatlantic transmission cables, SWIFT interbank transaction communications, ATMs, Credit cards etc. This was followed by FinTech 2.0 from 1987-2008, during which financial services firms, just like most other traditional industries, increasingly digitized their processes. Internet usage spread across the world and all industries, including banking, came online during this period. Since 2008 a new era of FinTech has emerged that is defined not by the financial products or services delivered but by who delivers them. The key difference in this era of FinTech 3.0 is that many of these innovations are led by start-ups.

However, it is not right to think of FinTech only as a start-up phenomenon. FinTech now refers to a rapidly growing industry representing between US$12 billion and US$197 billion in investment as of 2014, depending on whether one considers independent start-ups (FinTech 3.0) or traditional financial institutions (FinTech 2.0). McKinsey’s proprietary Panorama FinTech Database tracks the launch of new FinTech companies – i.e., start-ups and other companies that use technology to conduct the fundamental functions provided by financial services, impacting how consumers store, save, borrow, invest, move, pay and protect money. In April 2015, this database included approximately 800 FinTech startups globally; now that number stands at more than 2,000.

B. Its an , not a revolution… but there is something different this time

One key feature of the FinTech 3.0 era is the unbundling of financial services. FinTech start-ups are cherry picking specific segments of financial products and consumers segments to design their offerings. At a high level, these can be categorized as –

        i.           Debt Funding Platforms– online platforms that help small businesses and entrepreneurs to get loans. These can be crowd funding platforms or credit marketplaces using institutional money of various types. Some examples are – Lending Club, OnDeck, GroupLend, Kiva, Capital Float, Neogrowth, Indifi, LeningKart etc.

      ii.           Equity Funding Platforms– online platforms for crowd-sourcing of equity investments in start-ups and early stage businesses. E.g. – Fundersclub, Globevestor

     iii.           Wealth Management Platforms– technology driven solutions for automated wealth management recommendations. E.g. – Wealthfront, Betterment, Intelligent Portfolios

    iv.           Payment Processing solutions– products for simplifying and/or automating various steps of the payment / cash flow value chains. E.g. – Currency Cloud, Square, Tipalti, Flint, Check, Zipmark, Stripe , Astropay, WePay

      v.           Others – various other kinds of solutions like personal finance tracking and fraud monitoring (e.g. BillGuard ), virtual banking (e.g. BankingUp), alternate Credit rating services (using big data, social profiling etc)

And then there is the whole ecosystem of virtual currencies / digital wallets and the platforms built around them. Each one these categories has a world of depth in its own right.

C. FinTech 3.0 is driven by some big changes in the market

Banking has historically been one of the sectors that are most resistant to new start-up driven . Since the first mortgage was issued in England in the 11th century, have built robust businesses with multiple moats: ubiquitous distribution through branches, unique expertise such as credit underwriting underpinned both by data and judgment, even the special status of being regulated institutions that supply credit, and have sovereign insurance for their liabilities (deposits). Moreover, consumer inertia in financial services has traditionally been high. Consumers have generally been slow to change financial services providers.

The Global Financial Crisis of 2008 was a watershed moment and is part of the reason why FinTech is now such hot area of growth. The key factors driving this rapid growth of FinTech start-ups right are –

1. Demand side

        i.           Loss of trust in banks – One big reason why banks continued to hold a monopoly over financial services was because consumers put a large trust premium on established banks while entrusting them with their money. However the 2008 banking crises caused by reckless actions of bankers made consumers loose that trust. People are now willing to trust non-bank entities with their money decisions. A 2015 survey reported that American trust levels in technology firms handling their finances is not only on the rise, but actually exceeds the confidence placed in banks. For example, the level of trust Americans have in CitiBank is 37%, whilst trust in Amazon and Google respectively reaches 71% and 64%.  Digital entrepreneurs are viewed as more trustworthy champions of consumer interest as compared to over-paid bankers who are perceived to be manipulating the system to make fat profits.

      ii.           Expectation of ‘one click’ delivery – In an era where people get simple single click fulfilment of their day to day needs, traditional banking feels way too outdated. The millennial generation is now used to the user experience levels of iTunes for listening to music, Amazon for same day delivery of online shopping, Expedia for global travel bookings, AirBnB for economical international lodging, Uber for inter-city transport, Whatsapp for communication and Tinder for dating. Traditional banking feels way too bulky and outdated in this context. Consumers have no patience for an industry that takes weeks to process mortgage requests and small working capital loans; nor do people accept silently the non-transparent charges for services like cross-border money transfers and investment brokerages etc. There is a strong demand for simple, fast and transparent financial solutions that can be accessed at a click of the mobile phone touch-screen.

2. Supply side

        i.           Abundance of skilled financial entrepreneurs – As the financial crisis morphed into an economic crisis, large numbers of highly skilled professionals lost their jobs or were now less well compensated. This under-utilized educated workforce found a new industry – FinTech 3.0, in which to apply their skills. These highly skilled individuals were inspired by the success stories of high profile digital start-ups in other industries. There was also the newer generation of highly educated, fresh graduates facing a difficult job market. Their educational background often equipped them with the tools to understand financial markets, and their skills were well adapted for FinTech 3.0 start-ups.

      ii.           Regulation – after the 2008 financial crises, regulators have become more acceptable to opening up the financial industry to specialized players who serve specific parts of the financial value chain. This can be seen happening both in developed and developing countries. E.g. in the US, the JOBs Act assisted small businesses to by-pass the credit contraction caused by banks’ increased costs and limited capacity to originate loans. The JOBs Act made it possible for start-ups to raise directly the finance to support their business by raising capital in lieu of equity on P2P platforms. UK’s FCA is facilitating innovative FinTech’s through Project Innovate and its ‘Regulatory Sandbox’ that provides these FinTechs to operate in safe spaces to test their models. South Korea is developing a specific regime for online-only banks. In India, the banking regulator recently created two new types of banking licenses that are specially tailored for FinTech companies – The Payments Bank License and The Small Bank License. Similarly Chinese government issued Internet Finance Guidelines in July 2015 to continue growth of FinTech innovation. Similar examples of financial technology innovation friendly regulation can be seen across many developed and developing countries.

     iii.           Telecom revolution – In many parts of developing world, mobile phone has become ubiquitous. Mobile phone ownership far exceeds formal banking coverage in these countries. E.g. while only 40% of Indians have active formal banking relationships, 80% of Indians have mobile phones. For these unbanked people, the “reputational” factors that provided an edge to banks for offering banking services are not relevant. Mobile based financial services are often the only, and the preferred, means of reaching these populations. For these populations, “banking is essentials, banks are not,” as it was rightly captured by Bill Gates.


D. Banks are not dying – Pioneers get killed, settlers prosper

While the headlines may give the impression that FinTech start-ups are coming to eliminate traditional banks, that may not be the case yet. Unlike startups, banks have had decades to build extensive infrastructures, develop solutions for compliance and regulatory challenges and establish close networks with other financial institutions. Banks also have leverage over startups because someone still needs to hold the world’s money, ensure compliance and so on, and building a mature institution’s full technology stack — or its equivalent — from scratch is expensive, difficult and time-consuming. As can be expected, banks are also investing heavily in financial technology innovations. E.g. approximately one third of Goldman Sachs’ 33,000 staff are engineers – more than LinkedIn, Twitter or Facebook. Paul Walker, Goldman Sachs’ global technology co-head that they “were competing for talents with start-ups and tech companies”.

FinTech start-ups that are solving superficial problems without strong defendable USPs will run out of steam at some point. As an illustration, why would a small entrepreneur want to take a working capital loan from an independent start-up when his regular bank, where he maintains his savings / current account, implements its own FinTech solutions and offers its customers a loan at similar or lower rate with as user friendly a process as the independent FinTech startup does?

While the current situation of exponential growth in FinTech start-ups differs from the earlier dot-com boom, the failure rate for FinTech businesses is still likely to be high. However, FinTechs focused on specific market segments and solving real world consumer problems will break through and build sustainable businesses. They will reshape certain areas of financial services – ultimately becoming far more successful than the scattered and largely sub-scale FinTech winners of the dotcom boom. In five major retail banking businesses – consumer finance, mortgages, lending to small and medium sized enterprises, retail payments and wealth management – from 10% to 40% of bank revenues (depending on the business) could be at risk by 2025. FinTech attackers are likely to force prices lower and cause margin compression.

D. The real disruptors

The FinTech startups best positioned to create lasting disruption in the financial industry will be distinguished by the following six markers:

        i.           Lower cost of customer acquisition – FinTechs that are able to acquire customers at a lower cost and at a faster speed have major competitive advantage. That may mean developing win-win partnerships with other players in the value chain. E.g. during the dot-com boom, eBay, a commerce ecosystem with plenty of customers, was able to reduce PayPal’s cost of customer acquisition by more than 80%. Today, many business lending FinTech players are partnering with various electronic networks, like e-commerce portals, centralized air-ticketing platforms, credit card transaction processing platforms etc to acquire consumers in bulk. The start-ups that are able to execute such unconventional approaches have a higher chance of sustainable growth.

      ii.           Lower cost to serve – FinTechs start-ups are providing their services with no or very little physical infrastructure. Online lending platforms conduct most of their processes online in an automated manner. In some cases such online lending platforms have an upto 400 bps advantage over traditional banks in their cost to serve consumers. Similarly, FinTechs in PoS payment processing space are providing innovative solutions that significantly reduce the time and cost for small business owners to set-up electronic payment systems at their premises.

     iii.           Innovative uses of data – Traditional business and individual credit rating systems seem outdated today. They also lost their credibility during the 2008 financial crises. Many FinTechs are experimenting with alternate credit scoring methods that involve looking at online transaction history, educational backgrounds, social media activity, travel patterns, mobile phone usage and so on. Big data and advanced analytics offer transformative potential to predict “next best actions,” understand customer needs, and deliver financial services via new mechanisms like mobile phones. Credit underwriting in banks often operates with a case law mindset and relies heavily on precedent. In a world where more than 90% of data has been created in the last two years, FinTech data experiments hold promise for new products and services, delivered in new ways.

    iv.           Segment-specific propositions – The most successful FinTech start-ups will not begin by revolutionizing all of banking or credit. They will cherry pick, with discipline and focus, those customer segments most likely to be receptive to what they offer. Across FinTech, three segments – Millennials, small businesses and the under-banked – are particularly susceptible to this kind of cherry picking. These segments, with their sensitivity to cost, openness to remote delivery and distribution, and large size, offer a major opportunity for FinTech attackers to build and scale sustainable businesses that create value.

      v.           Leveraging existing infrastructure – Successful FinTech start-ups will embrace “co-opetition” and find ways to engage with the existing ecosystem of established players. E.g. PayPal partners with WellsFargo for merchant acquisition. Some business lending platforms enable banks to participate as credit providers on their platforms. Conversely, some banks partner with P2P lending platforms to provide credit to those borrowers who would otherwise not qualify for banks own credit lines. Some enterprising banks may even realize that running a banking framework might be very lucrative if it is done thoughtfully and cost-effectively. A few could embrace being an infrastructure firm supporting today’s new wave of fintech companies, becoming banking’s equivalent of Amazon Web Services. Others may open up more to startups through their own “App Store,” offering customers startup apps running on their infrastructure.

    vi.           Managing risk and regulatory stakeholders – FinTech start-ups are flying under the regulatory radar so far. However that may change in the near future. Regulatory tolerance for lapses on issues such as KYC, AML, compliance, and credit-related disparate impact will be low. Experience of microfinance industry in many developing countries the past is a good indicator of the high impact of regulation on an unregulated industry. Those FinTech players that build regulatory capabilities will be much better positioned to succeed than those that do not.

The path to FinTech nirvana will invariably be covered with blood of thousands of wannbe disrupters. But as in nature, so in business – Protein is never wasted when death occurs. Good ideas put into motion by some of the failed start-ups will be picked up by more mature players and taken to their logical conclusion.

The start-ups that play successfully on combinations of the above six dimensions are the start-ups that have the most potential to disrupt the financial sector — something that’s difficult to see in a large infographic of hundreds of FinTech start-ups today.

About the Author

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Rantej Singh“]

Rantej Singh is a creative ‘ideas to execution’ professional who has successfully blended blue chip MNC management career with innovative entrepreneurship for the last 15 years. He has worked with Thomson Reuters, Bank of America Merrill Lynch and ICICI bank in Strategy, Innovation, Product Management and Operations roles, and founded / co-founded two high impact businesses. He currently works with a boutique Swiss management consulting firm specializing in emerging market financial institutions. Rantej is a co-author of ‘Practitioners book on Trade Finance’, the recommended course book at Indian Institute of Banking and Finance.

References –




·        McKinsey Report – Cutting Through the FinTech Noise: Markers of Success, Imperatives for Banks

·        Economist – The fintech revolution (May 9th, 2015 Edition)