The Booming Fintech Industry

 

The Rise of the Fintech Industry: A Revolution in the Making

 

 

Have you noticed the explosive growth of the global fintech industry? Revenue has skyrocketed from $10 billion in 2020 to $79.38 billion in 2023, with projections of reaching to $141.18 billion by 2028. What’s driving this surge? Is it the surge in digital payments, the rise of cryptocurrencies, or the innovative banking solutions that are reshaping our financial landscape?

 

I was reading a newspaper article last week saying that more than 45% of real time global transactions are done in India that caught my attention. I asked Google Gemini that also confirmed this fact. In 2023, there were 266 billion real-time payment transactions globally—a staggering 42% increase from the previous year. Did you know that  India accounts for almost half of these transactions, with its Unified Payments Interface (UPI) processing over 117 billion transactions—the highest in the world!? 

Even in the face of market fluctuations, fintech firms in payments, lending, and B2B solutions are growing, particularly in emerging markets like Africa, which boasts 800 million mobile accounts—nearly half of the world’s total! 

Having worked in Financial Services and technology domain extensively and studied Masters in Finance and Financial Technologies at Henley Business School, UK , I was motivated to write an article on the booming global Fintech industry. This blog aims to provide a concise but broad level understanding of what is meant by fintech , it's evolution and the various areas and segments of Fintech Industry while highlighting the massive growth seen in this sector with some statistics. We will also see how the Fintech industry is powering the growth across many industries changing the landscape of economy globally. 

 

What is Fintech?

Fintech—a blend of "financial" and "technology"—represents innovative business models and technologies that enhance or disrupt traditional financial services. From digital banking to cryptocurrency exchanges, fintech encompasses a vast array of software and applications aimed at both consumers and businesses.

 

 What's the difference - A Traditional Bank and Fintech Company ?

While a traditional Incumbent bank has a large customer base and possess the entire infrastructure providing full range of banking and financial services, a Fintech company is essentially a technology company that focuses on adding value and innovating on some specific aspect of banking or financial service such as Payments, lending , trading etc as we will see in the next section.  Fintech companies are often also named as Challenger banks and Neo banks.  Challenger banks are usually larger and provides a suite of services as compared to Neo banks.  Neo banks are digital only banks that do not have a banking license but rely on partner bank to operate while adding or offering some technological innovative solution or service to users.

A Radical Transformation in Banking and Fintech Evolution

 

Although, the first modern credit card , called the Diners Club card was introduced way back in 1950 and the first ATM was installed by Barclays Bank in 1967 , the actual origin of Fintech industry can be traced back to GFC-2008 when banking system collapsed globally resulting in loss of trust in traditional banking systems. In the wake of this collapse, consumers began demanding alternatives—decentralized systems that offered greater transparency. It was then when Satoshi Nakamoto introduced Bitcoin – A complete decentralized and Peer-to-Peer Electronic Cash

system in October 2008. Although we won’t be diving into Bitcoin or GFC 2008 in this post, I find that understanding little history usually helps to grasp the complete context and the current modern landscape.

 

As the world was persevering COVID19 pandemic through advancements in web technologies and virtual communications software enabling many industries and employees worldwide to function remotely , it was Financial technologies (Digital) or Fintech services that became lifelines enabling digital banking , contactless payments – both retail and wholesale to keep our financial markets , financial ecosystem and global economy up and running. 

 

Although Fintech saw significant growth before pandemic , it really took off after Covid19 and has evolved to become mainstream and a transformative force in the global financial landscape.  More and more businesses and consumers turn to digital and innovative financial solutions fuelled by the rise of challenger and neo banks offering  user friendly, cost-effective services and innovative digital banking solutions & platforms  accelerating speed, accessibility, transparency, and customer satisfaction. Consumers are increasingly willing to trust FinTech’s with their financial needs, marking a significant shift in traditional banking relationships.  The banking industry is undergoing major restructuring, with both traditional banks and fintech companies competing in areas like everyday banking, investment advisory, and complex financing. 

Fintech's role in  Open Banking and banking-as-a-service (BaaS) is reshaping how financial products are delivered. Let’s understand – what do these mean. 

Open Banking and PSD2 (Payment Services Directive)

• Open Banking enables third-party access to financial data via APIs, fostering innovation and personalized services while giving consumers control over their data. PSD2 is an EU’s (incl. UK) regulation that became part of UK law in 2018 making customer data portable and open to third parties, promoting competition, enhancing security, and accelerating innovation in European financial services.

Banking as a Service (BaaS)

• BaaS leverages Open Banking and allows businesses (non banking financial companies such as Neo banks etc)  to embed and provide banking services such as opening accounts, providing cards , making payments and transactions, and money transfer features etc through APIs provided by licensed banks, enabling non-banks to offer innovative financial products , onboard customers on platforms and streamline customer experiences.

 

Incumbent banks are recognizing the crucial role of fintech industry and have begun investing and collaborating with fintech startups, accelerating the industry's expansion at unprecedented rate. Many established and global Banks have launched their own fintech initiatives.

Evolution of Financial Technology: A Retrospective View

Figure : Imarticus, 2022

 

The 6 D's driving the fintech evolution:

1. Digitization:

The shift from converting Analog information and data to Digital processes of banking services with advancements in computers & electronics enhanced efficiency and accessibility in financial services. 

 

2. Distrust & Decentralisation:

The 2008 financial crisis led to loss of trust in traditional banking, driving demand for transparent alternatives.

Decentralised Finance (De-Fi) revolutionised by introduction of Bitcoin and Blockchain technology enable secure peer-to-peer transactions and financial services, without involving any intermediary.

 

3. Digitalisation and Digital Transformation:

Digitalisation involves leveraging digital technologies such as web , mobile and cloud computing etc. and Agile processes to modernise business models, enhancing processes, workflows, and customer experiences across the entire value chain. DBS Bank is a case study example of this transformation.

4. Data (Big Data)  

There has been a massive explosion of data ( called Big Data) as a result of social media, IoT , e-commerce etc propelled by advancements in web and mobile technologies , affordable computing as-well-as advancements in electronics & semi-conductor (chip) industry. The Data ( customer data , transactions data etc.) has become a very powerful commodity in extracting valuable insights and providing personalised services.

5. Disruption (Business Model and Emerging Technologies) 

The rapid advancements in disruptive and emerging technologies such as Artificial Intelligence including Generative AI and Machine Learning,  Blockchain , Big Data and Analytics , Cloud & Edge Computing etc. ( we will cover them in subsequent blogs) have revolutionised the fintech industry and have created unparalleled  possibilities never imagined before through extracting valuable insights from the data.  This emerging technology landscape is a powerful agent of change driving disruption in Fintech industry. We can think of data as fuel and technology as the engine driving this revolution.  Fintech startups driven and powered by these innovations and evolving regulations such as   Open Banking etc. have introduced innovative models, disrupting traditional banking and increasing competition. 

6. Democratization (Finance):

Driven by the advancements and lowering costs of technology and innovation in business models, the finance industry has become distributed , more accessible, and inclusive bringing a wide array of banking and financial services at the finger-tips of common man including digital banking, online trading, p2p lending, online money transfer , crowdfunding, and Microfinance and many others as we will see in the Fintech Areas and segments section.

Fintech Business Areas & Segments

·       Digital Banking: It  enables customers to access banking services through digital platforms such as mobile apps, online portals and computers allowing customers to perform traditional as well as innovative banking activities such as fund transfers  , transactions, opening new accounts and onboarding new customers, credit assessments and loan applications,  investment applications , trading including stocks and crypto among many others.  It comes with benefits like accessibility , low cost and attractive fees , innovative features, personalized services and customer support. 

 

• Investments  & Advisory: Robo-advisors such as Betterment etc. provide personalised wealth management, investment advice using algorithms, making financial planning more accessible and affordable.       

                  

What is a Robo Advisor ? It is an automated chatbot type of application that leverages cutting edge technologies like AI and ML to provide personalised wealth management and investment advisory services to customers based on their profile , history , risk assessment and preferences etc. 

 

·       Payments: Fintech has revolutionized payments introducing new methods and alternatives to traditional credit and debit cards such as virtual contactless cards, Digital Wallets , online payment interfaces and platforms etc enabling seamless Realtime contactless and voice-activated domestic and international payments and money transfers for both retail and wholesale sector. Some Fact: In the Digital Payments market, the number of users is expected to amount to 4,805.00m users by 2028 – that’s more than half of the world’s population currently.

·       Capital Markets : Credit Risk, Risk Modelling & Mitigation: Fintech utilizes AI and data analytics to improve risk modelling and mitigation in capital markets, enhancing credit risk assessment, fraud detection, and regulatory compliance. Advanced fintech tools, including algorithmic trading platforms, optimize trading strategies and enable real-time execution in FX markets, improving decision-making and efficiency.

·       Trading & P2P Lending: Platforms like Lending Club allow users to apply for loans without going through traditional bank branches. Energy & Commodity Trading Platforms: Blockchain and fintech platforms facilitate energy trading, where individuals and companies can buy and sell surplus energy in a decentralized, transparent marketplace. Fraud Detection & Risk Management: AI-driven insights enhance fraud detection, ,mitigate credit risk and improve processes like underwriting.

• Cryptocurrency, Digital Assets & Crypto Exchanges: Also known as Web3, there are ca 10,000+  cryptocurrencies in existence including the major ones like Bitcoin (BTC) , Ethereum, as well as stablecoins such as Tether  accounting for 90% of the market. This market driven by Blockchain technology is expanding at unprecedented rate, despite significant volatility,  with growth of many cryptocurrency exchanges , decentralized finance (DeFi) applications and NFT’s (Non Fungible Tokens) contributing to growth. Some Facts: According to Statista, The largest market will be Digital Assets with a AUM of US$80.08bn in 2024. The average AUM per user in the Digital Assets market is projected to amount to US$96.05 in 2024.

 

• Central Bank Digital Currencies (CBDCs) are also gaining traction, as governments explore digital versions of national currencies, aiming to enhance the efficiency of payment systems, improve financial inclusion, and offer a secure alternative to cryptocurrencies. This further expands fintech’s role in reshaping the global financial landscape.

 

• Regtech: Fintech enables Compliance and regulatory technology for financial reporting, data management etc for financial institutions for compliance to various evolving  regulatory and AML laws for domestic as well as global financial markets enhancing efficiency , mitigating fraud and enhancing transparency.

 

• Crowdfunding: Crowdfunding is a method of raising capital from a large number of people through online platforms, allowing individuals and organizations to secure funds for projects, products, or causes. It encompasses various types, including reward-based, equity-based, debt-based, and donation-based models, fostering community engagement and enabling market testing.

 

• Financial Data and Analytics: In fintech, financial data and analytics leverage advanced tools to analyse diverse financial information, providing critical insights for decision-making. Industry leaders like Bloomberg, S&P Global, and LSEG play a pivotal role by offering comprehensive and real time data and predictive analytics, enabling businesses to enhance strategies, manage risks, and optimise financial performance 

•  Insurance (Insurtech): Insurtech, a segment of fintech, leverages cutting edge technologies to transform the insurance industry by streamlining underwriting, automating claims processing, and enhancing customer experiences through digital platforms. Innovations such as Machine Learning , data analytics, IoT integration, and on-demand insurance products enable insurers to offer personalized coverage and improve risk management, driving growth and efficiency.

Role of Fintech in the Growth of Other Sectors / Industries

Fintech has significantly impacted various sectors, enhancing efficiency and fostering innovation.

·       E-Commerce: Fintech companies provide secure payment solutions, accelerating the shift to digital shopping, while Buy Now, Pay Later (BNPL) services boost retail sales.

·       Healthcare: Fintech streamlines payment processes for medical services and enables innovations in insurance, such as real-time claims and personalized health plans.

·       Real Estate: The rise of proptech has transformed real estate transactions with digital mortgages and crowdfunding, allowing fractional ownership through tokenization.

·       Renewable Energy: Fintech facilitates funding for clean energy projects via crowdfunding and peer-to-peer lending, while blockchain platforms enable decentralized energy trading.

·       Agriculture: Fintech innovations improve access to credit for farmers and optimize supply chains with real-time payments.

·       Small and Medium-Sized Enterprises (SMEs): Digital lending platforms provide quick loans, and payment solutions streamline transactions, improving cash flow.

·       Transportation: Fintech enables seamless, contactless payments for public transport and ride-hailing services.

According to research by McKinsey, fintech revenues are expected to grow three times faster than traditional banking, driven by digital transformation and an increasing demand for services, across industries and in emerging markets. But is this revolution confined to one region? Absolutely not! Fintech is a global phenomenon, with the U.S. and Americas leading the charge in unicorns, while the UK and EMEA experience a surge in innovation supported by technology and evolving regulatory landscape , and as well in Asia-Pacific, particularly India and China, emerging as key players driven by high demand for financial innovation and inclusion. Fintech Industry revenue un UK alone has grown at CAGR of over 20% over past 5 years estimated to cross £27 billion in 2024.

This article provided a comprehensive overview of Fintech and its rapid, unprecedented growth.  It underscores fintech’s transformative power in revolutionising financial services, democratising financial access, and driving financial inclusion on a global scale. Beyond reshaping the financial sector, fintech is fueling growth across numerous industries, and accelerating the global economy forward. However, regulatory challenges must be addressed for the industry for sustained growth and investments. With increasing collaboration between incumbent banks and fintech companies, along with the rapid advancements in technology,  the future of the Fintech industry not only looks very promising but also has the potential to redefine and impact the lives of millions of people globally.

This was first of the series of posts on Fintech. In the subsequent posts, we would deep dive into the emerging technologies and trends driving and reshaping the FinTech landscape. Stay tuned!