Are companies able to keep pace with the rapidly changing fintech ecosystem?

Financial companies everywhere are trying to leverage how they can benefit from the rise of digital and the new “connected” reality. Financial technology – popularly known as “FinTech” – is everywhere. In the broadest sense, it is any financial transaction that uses technology, such as the way payments are processed, wealth is managed and investments are made. The term can also include the way finances are handled in-house at a company and in business-to-business transactions.

However, the playing field is not level. Startups that are entrenched in technology and focused on developing the next big thing often have an advantage over their larger incumbent counterparts, but that does not mean the incumbent “old guard” is excluded. Many long-established financial services companies are differentiating their services through FinTech, be it how they interact with customers, function internally or work with other businesses. Even governments are involved.

FinTech as an Ecosystem

Together, governments, financial services companies, and FinTech startups form an ecosystem. From an innovation perspective, one’s efforts help further another’s. Companies see what the other is doing and make similar adjustments to their product offerings. There is also increased acceptance of new technologies, as one’s addition of a certain technology helps fuel adoption. Ultimately, FinTech ends up being a very small world. The people with the financial expertise needed to inform FinTech projects and those with the technological abilities to make those suggestions come to life often move between companies, either through mergers, a consulting basis, or employment.

Sectors in FinTech

In March 2016, Venture Scanner identified 1,379 FinTech companies, which together account for roughly $33 billion in funding. The company currently recognizes 16 categories, but the industry is growing rapidly. In March 2014, Venture Scanner reviewed the FinTech industry and found just 248 companies responsible for a combined $3.4 billion.

  1. Consumer Lending: This is the section of FinTech responsible for lending money to individuals, such as through peer-to-peer lending companies. Examples: Lending Club, Prosper.
  2. Business Lending: There are also FinTech companies that provide ways for businesses to access additional capital through loans and peer lending. Examples: OnDeck, Kabbage.
  3. Personal Finance: FinTech companies also offer tools for individuals to manage their personal finances through better budgeting, tracking spending, and managing buyer rewards like credit card points. Examples: Mint, Credit Karma.
  4. Consumer Payments: FinTech powers payments as well, whether it’s business to business (B2B) or business to consumer (B2C). Examples: Apple Pay, Samsung Pay.
  5. Payments Backend: FinTech companies also process those payments and handle employee payroll. Examples: ProPay, ADP.
  6. Point-of-Sale Payments: Payments consumers make in a retail setting are called “point-of-sale” or POS. They also use POS FinTech services. Examples: PayPal, Square.
  7. Equity Financing: Financial technology companies also let businesses raise money through private equity. Examples: SeedInvest, Gust.
  8. Retail Investing: Retail investors benefit from financial technologies as well. FinTech provides crowdsourced investment advice and tools for making their own investments. Examples: Robinhood, Kapitall.
  9. Tools for Small Businesses: Financial technology companies also serve small businesses by helping with accounting and invoicing. Examples: Zenpayroll, Gusto.
  10. Institutional Investing: FinTech companies work with institutional investors as well, providing ways for companies to manage portfolios and tools for conducting analyses. Examples: SumZero, Contix.
  11. Banking Infrastructure: Some FinTech solutions benefit financial companies directly through big-data analytics or API integration. Examples: Mambu, Perzo.
  12. Financial Transaction Security: FinTech companies may also secure transactions through fraud detection and identity verification. Examples: Riskified, Centrify.
  13. Crowdfunding: Financial technology companies in crowdfunding help companies raise money without incurring debt or diluting ownership. Examples: Kickstarter, IndieGoGo.
  14. Retail and Commercial Banking: Some FinTech companies operate as alternatives to traditional banking services. Examples: Simple, Moven.
  15. Remittances: International money transfers are also included in FinTech. Examples: WorldRemit, Ebury.
  16. Financial Research: FinTech also includes information services that help investors stay up to date on company happenings and provide research. Examples: Seeking Alpha, Y-charts.

Going Forward in FinTech

One of the biggest challenges facing FinTech is funding. On the startup side, it can be difficult for a new company to gain access to funding. Many young companies have to look towards business incubators and venture capital, which have their own challenges. Private equity participants may have their own goals, and they don’t always agree with the founders’ intentions. Established companies may be able to find room in the budget, but without the right expertise in-house, it can be risky.

Labor availability and expertise is an issue too. There are not many people who understand financial markets and how to create technology-based solutions that will actually be adopted. If these circumstances continue, FinTech may experience a bubble like so many technologies before it, where the knowledge in the field is paid extremely high because it is so rare.

Also, in the FinTech ecosystem companies and solutions are somewhat clustered. Many functional areas are saturated. Digital solutions are so widespread that creating a unique value proposition can be as much of a challenge as developing the financial technology itself. This creates a unique environment for competitive companies.

FinTech faces issues of security as well. Companies working in financial technology need to be able to keep transactions private and guarantee that their systems will not be compromised. Government regulations may also exist. Keeping up with all of these requirements takes a concentrated effort, and it can be costly.

Lastly, financial technology companies face the challenge of “technology” itself. New devices are smarter, faster and more secure, but they only work as well as the programs are written to utilize those capabilities. Also, technological advances change the way capital markets operate, how payments are processed and how companies handle the volumes of information those transactions generate.