Finding the Future of Fintech

August 29, 2016         By: Sean Riley

The term “fintech” has long been tied to the idea of disrupting the existing financial services industry. While that spirit remains, we are seeing a maturation of the market and a growing realization from investors and startups that there is a greater value in collaborating with the industry rather than trying to supplant it.

According to a recent report from Accenture, the investments in fintech startups with an eye to working with financial services institutions rose by 138 percent in 2015, representing 44 percent of total fintech investments. In contrast, there was a mere 23 percent increase in funding for those still taking a combative stance against incumbent industry players.[1] Looking across the fintech landscape, it is easy to see a continuing trend of startups and existing players working together to guide the financial industry into the future.

“The data shows that we’ve moved from Fintech 1.0., where new tech companies were operating on the outskirts of the industry, to Fintech 2.0 – where large players like Discover are partnering with new companies to bring consumers new alternative payment solutions in a secure and convenient environment,” said Matt Johanson, Senior Vice President, Discover Global Network. “Fintechs are agile and can test for commerce experiences quickly. Players like Discover offer the infrastructure and resources to bring their strategy and vision to life from a scale, security, risk, and compliance standpoint.”

Incubators and Accelerators

There are other significant signs of an increased desire to foster fintech in the financial services industry. These include the proliferation of corporate-backed incubators and accelerators focused on the segment. Dozens of these programs have sprung up in the U.S. alone, with Europe and the Asia-Pacific region following suit. Startups don’t just get access to capital, they also benefit from industry connections and mentorship that many are finding crucial to success. Global fintech investment hit an all-time high in 2015 at $19.1 billion, according to a report from KPMG International and CB Insights. It was up from less than $3 billion in 2013.[2]

Payments

Payments remain a large focus in fintech — an area that naturally garners a great deal of attention from existing platforms. It’s also the most visible for consumers, and combined with the lending sector, has generated the majority of fintech startup “unicorns,” or those valued at over $1 billion. Payment startups can benefit tremendously from integrating with the industry. The appropriate partnership can attract the users needed to give credence to new payment methods, and build trust for both customers and payment recipients.

Industry consortiums have begun taking strides in the payments vertical – major players like Discover are members of the Center for Financial Services Innovation, which seeks to catalyze innovation in the financial services industry to meet the needs of the underbanked. The group also counts dozens of other payments and financial industry companies and fintech startups in their membership base. Plus, around the world, many major cities are making commitments to fostering financial innovation and supporting start-up growth. Discover, a Chicago-based company, sponsors up-and-coming organizations such as FinTEx, whose mission is to expand Chicago’s role as a center of innovation in financial services and financial technology.

Lending

The second major pillar of fintech today is lending, with peer-to-peer lending at the forefront of this segment. While this is another area that, early on, sought to exist outside of the current system, that simply wasn’t sustainable in the long-term. Traditional lenders have the capital and existing network that can help a startup scale rapidly, while startups are capable of the more highly targeted customer experiences that may elude larger companies.

Personal Finance Management

A rapidly rising area of interest in fintech is due in no small part to Millennials finally surpassing Baby Boomers as the largest generation in the U.S.,[3] and they have shown a different approach to managing their finances than previous generations. Fintech startups are well situated to tap into this demographic with a mobile-first approach coupled with automated and algorithmic systems that mirror the apps that already appeal to this group.

Just one example is mobile banking – in recent research from Salesforce, three-quarters of Millennials “are at least somewhat reliant on a mobile banking app to interact with their bank for tasks such as depositing or sending checks, checking their balance, and paying bills,” and more than a quarter are completely reliant on them.[4] This can be seen in practice in the example of Discover, an incumbent player, but one that has just one branch location and instead focuses on creating the best possible online banking experience for customers.

Blockchain

Bitcoin is the high-profile face of cryptocurrency, but blockchain is the underlying technology that offers far more in the world of fintech, as it has a wide spectrum of potential use cases. The most basic definition of blockchain is a distributed ledger that records every transaction (financial or otherwise) in a network. Through cryptography, it allows secure updating of the ledger without a central administrator. The promise of both transparency and security make it no surprise that both fintech startups and financial institutions are looking to harness the power of blockchain.

It is clear that even the world’s largest financial institutions are paying attention to fintech startups and are ready to embrace the power of innovative technologies. For their part, startups are increasingly happy to work within the industry as it offers them the ability to deliver potentially transformative ideas at a speed and scale virtually unachievable on their own. The future of fintech is shifting from the idea of disruption to the promise of collaboration.

“Startup and corporate companies ultimately have the same goal in mind to deliver exemplary products and services to their customers,” Johanson said. “One of the biggest areas of opportunity is speed to market. When expectations are aligned, it’s amazing to see how much and how quickly startup and corporate companies can deliver innovation with a customer-centric focus.”

This article is brought to you by Discover Network. To read more on the world of commerce, visit Discover Network Perspectives.

[1] Accenture Fintech Innovation Lab, “Fintech and the evolving landscape”

[2] KPMG, March 9, 2016, “Fintech funding hits all-time high in 2015, despite pullback in Q4: KPMG and CB Insights”

[3] CB Insights, February 8, 2016, “Millennial Personal Finance: 63 Fintech Startups Targeting Millennials”

[4] Salesforce, March 17, 2016, “4 Important Stats about Millennials and Mobile Banking”