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How fintech startups affect the banking market

Jorge Tavío Ascanio
Jorge Tavío Ascanio
Market Development Director for Wealth Management in EMEA, Refinitiv

Technology is forever changing the way we live our lives. In recent years, Kodak, record stores, Blockbuster and our local travel agents have given way to Instagram, Spotify, Netflix and TripAdvisor. And now the financial sector is in the spotlight as fintech startups move into the banking market.

  1. Over the past five years, there has been a consistent trend for investment in financial sector startups, and this trend is rooted in a long-term vision of an industry moving into a new era.
  2. The business models can be broadly split into four groups: Borrow (sell-side), Invest (buy-side), Insurance, and Transact (marketplaces).
  3. The three main challenges facing these fintech startups lie in the areas of branding, scalability and regulation.

Smart devices, the Cloud, Big Data, Blockchain, AI, and the global banking brands being splashed with scandals after the sub-prime crisis have created a level playing field for new ventures to arrive and the traditional bricks and mortar banking business to evolve.

How have fintech startups affected the market?

It is difficult to gauge how much of a dent fintechs are really making on the market share of incumbent financial institutions, and it is arguably not yet significant enough for the financial institutions to be intimidated.

For example, Statista estimates that robo-advisors manage about USD$400m today globally. Meanwhile, on its Global Wealth Report of 2018, Boston Consulting Group estimates that in 2018 the size of investable assets held by affluent individuals (which is the same market as those targeted by robo-advisors) should reach USD$18.5 trillion.

This means that while the robo-advisor market share is still insignificant, it is growing at 37.5 percent annually, while AUM held by affluent individuals is growing at 7.4 percent.

Likewise, if we follow the venture capital investments, there is no doubt that they are betting long on tectonic plates shifting into a new era in terms of the ways we borrow, invest, insure and transact.

According to data within Eikon, from all the investments carried out by venture capital firms in financial startups in the last 20 years, over half of them were invested in the last five years.

This investment trend is consistently stronger than prior to the dotcom bubble, and more globally diverse following significant investment from Asia (see chart below). Although the 2015 hype is gone, there is no question that investment in fintech startups continues to flow.

At this point in 2018, the levels are already ahead of 2016 and 2017 figures.

Global venture capital and early stage investments in financial sector (mio USD) How fintech startups have affected the banking market

We have studied fintech trends exhaustively during the past 12 months, and the conclusions outlined below are not overwhelming or ground breaking. However, it is useful to draft some common trends.

Business models and objectives in both B2Bs and B2Cs are diverse across the board. Many look for lucrative buyouts and seek to partner with banks rather than compete with them; others wish to be the next ‘Amazon of banking’ or to reinvent the dollar.

Our analysis focuses on those who would seemingly truly like to displace branch offices with apps, for example, B2C fintechs such as Monzo.

These encompass a wide variety of business models, which we will group into four large buckets for simplification (i.e. understanding that this is a simplistic and opinion-based grouping).The four types of business models. How fintech startups have affected the banking marketWe noted a common challenge across all these business models and entrepreneurial ventures:

  • Branding still belongs to the incumbent banks. You need to find ways to get your brand and reputation established inexpensively, with customers and investors.
  • Scalability is crucial to keep costs contained, otherwise you are just another financial institution.
  • Regulation affects everybody equally, including fintech startups. Beginning with a white piece of paper gives the opportunity to find a smart way of answering the regulatory problem, without the option to ‘throw’ lawyers at it.

How can we help your fintech startup?

The breadth and depth of data that we have under an open platform could be your crucial advantage in addressing the above challenges and making a bold statement in the market about your future growth and intentions. Having a single provider that is capable of covering multiple requirements allows for extra focus on your business.

How can our data can help you?