You may have used Apple Pay or Android Pay, which are mobile payment and digital wallet services that let users make payments through their smartphones. Perhaps you’ve encountered robo-advisors, which are online wealth management services that offer automated and algorithm-based portfolio management advice. You may have even heard of the on-board diagnostics (OBD) of a vehicle, whose self-diagnostic and reporting capability can be used by insurance companies to price auto insurance. These technologies make both customers’ and businesses’ lives generally simpler and more efficient, and are all attributed to FinTech – financial technology. Each of these is an example of one of the many areas of FinTech, which also includes other major areas such as digital lending (e.g., Lending Club, a peer-to-peer lending company) and blockchain (e.g., Bitcoin, a virtual currency for peer-to-peer transactions that take place between users directly without an intermediary).
FinTech is an industry comprised of companies that use technology to deliver financial services. The advent and development of FinTech is due to the conflict between the increasing demand for more efficient financial services and the limited access to incumbent financial service companies. For example, some consumers and small businesses have difficulties borrowing money from traditional banks, or the due diligence process takes too long, or the amount granted fails to satisfy their financial needs. However, marketplace lenders such as Prosper and Lending Club enable borrowers to create unsecured personal loans by providing a platform for investors to select loans that they want to invest in based on borrowers’ information. Investors receive interest and digital lenders charge fees. Another example is that some young people cannot afford the financial institutions’ high service fees for in-person wealth management. Meanwhile, robo-advisors solve this issue because they are relatively cheap and offer intuitive user experiences. Currently, most robo-advisors employ complex algorithms to evaluate risk tolerance and allocate assets.
There was rapid industry development over the last few decades as FinTech became increasingly more helpful and utilized worldwide. According to KPMG’s report, The Pulse of FinTech – Q3 2016, FinTech companies obtained a total of $10.3 billion in the first three quarters of 2016, compared to $3.1b, $7.7b, and $14.5b in 2013, 2014, and 2015, respectively. However, virtual capital (VC)-backed FinTech funding dropped significantly year-over-year from $5 billion in Q3 2015 to $2.4 billion in Q3 2016.
Over the past five quarters, North America completed the most deals, although Asia competed with and occasionally surpassed North America in terms of VC-backed investment value, as shown by the graphs below. Most notably, Europe remained the smallest continent by these metrics throughout the observed time period, suggesting it’s not as primed for an era of FinTech development and implementation as other continents.
Recently, insurance technology (insurtech) investment declined each quarter since Q1 2016, blockchain investment trails insurtech and payments tech significantly every quarter, and payments technology remains a prominent area, even after peaking at nearly $1.2 billion in Q3 2015. Jeremy Welch, KPMG subject matter payments expert, said, “Online and mobile payment technologies are attracting significant investments globally…This is going to continue to put pressure on the infrastructure and business models of established players, including banks, card networks and remittance companies.” We’ve already seen this occur with the recent announcement that various major commercial banks would adopt Zelle, a real-time person-to-person payments network to compete against the growing popularity of popular FinTech competitors like Venmo 1.
FinTech’s digital lending segment also presents opportunities for ARM industry. According to the FTC’s highlight of its FinTech Forum from last year, “marketplace lenders often use consumer data outside traditional measures like FICO scores to make credit decisions.”2 In short, this information could be gathered from consumers or perhaps collected from public sources by the lender. Because these lenders’ credit algorithms are proprietary, their lending practices may significantly differ from standard creditors’ models that utilize FICO to observe potential borrowers’ credit scores. They also have different models when dealing with a loan default, and observers have noted that they have yet to be tested through a down credit cycle. Therefore, the ARM industry should monitor the FinTech industry, specifically the digital peer-to-peer lending segment, as it’ll be important for private collection agencies to enter the market as first-party collectors so they can influence the development of regulations and capture the greatest return on investment as this rapidly developing market continues to mature.
Comments are closed.