What is FinTech?
The only constant in the financial industry is that it’s always changing. When the changes are brought by technological innovations, it’s referred to as ‘FinTech’.
Three FinTech trends that are redefining the financial landscape are the areas of capital raising, payments and wealth management.
If you’re considering a career in finance you need to be aware of these trends and the implications they’re likely to have on the future of finance and the employment landscape as the line between technology and finance continues to blur.
‘Business as usual’ for lending and financing projects is a thing of the past. Alternative finance, capital raising outside traditional banking or capital markets, is here to stay. Two high-profile areas emerging in alternative finance are ‘peer to peer’ lending (for individuals) and ‘crowdfunding’ (for businesses). The main impetus of both initiatives is cutting out the middle-man and making things more cost-effective for both the borrower and lender.
Peer to Peer Lending
Peer to peer lending, still nascent in is its current form, was a $5.5 billion industry in 2014 but is expected to become a $150 billion industry by 2025, according to Price Waterhouse Cooper¹. The idea is certainly nothing new; one person lends money to another and charges interest.
But today, this is done mostly online as borrowers receive money directly from investors through some platform or marketplace. Lending Club is one of these most popular sites, and takes a 1% fee from the lender or investor, for access to the loan². Considering the interest rate on a Lending Club loan is often between 7.5% and 25%, this fee is gladly paid by the investor.
But these yields come with higher risk as lending standards are less regulated in these online platforms. Commercial banks are certainly taking notice and some are partnering with these platforms. That’s great news for individuals but what about for businesses?
For years, access to equity investments in private companies has only been allowed for high-net worth (accredited) investors. But Regulation-A of Title IV of President Obama’s JOBS Act now allows non-accredited investors a chance to invest in some of these private market deals³. But how do individuals find these deals? This is where equity crowdfunding comes in.
Equity or investment crowdfunding is a process of raising capital for a business project from donors or investors on an online platform. Crowdfunder and Kickstarter have allowed investors progressively increasing access to private companies and projects. A quick review of Crowdfunder’s website shows investment opportunities in private companies ranging from precision guided drones to micro-brews to telemedicine apps.
Crowdfunding is a threat to private equity firms and venture capital funds who charge lucrative fees to allow investors access to these private investments. Venture capital has long been the engine of private technology startups.
Previously, investors needed to wait until a company went public to participate, but no more. This is very desirable in the current financial climate where private companies are booming. The rise of Unicorns (private companies that have grown in scale and valuation to reach one billion in value) like Uber and Airbnb is a testament to this trend.
Regulations and high-profile IPO flops such as remain in the mind of startups. The result, more and more companies are choosing to stay private. Some private companies also prefer to remain private, foregoing the traditional route of going public through an IPO. For example in September of 2015, Elizabeth Holmes, the youngest self-made female billionaire and founder and CEO of diagnostic testing company Theranos, has indicated they have no plans to go public4.
The peer to peer lending industry has morphed out of the micro-finance trend that became so popular a few years ago. That idea was so innovative, one of the founders won a Novel Peace Prize.
Today, proponents say FinTech has given the capital raising power back to the people. But ‘marketplace’ lending still makes up just 1% of the world’s loans5. And some of the loans that end up on platforms like Lending Club are referral loans from banks (loans banks don’t want). Even if peer-to peer lending and crowdfunding are here to stay, partnerships and consolidation should allow banks to tap into this movement.
Mobile pay should revolutionize the world of consumer payments and services like Apple Pay has the potential to become widely adopted. Customers enjoy the ease of being able to execute transactions with their smartphone since it is already their most-used device.
Apple Pay is their version of the mobile wallet and they charge banks to be “in the wallet”. Not surprisingly, banks will do whatever they can to make their particular card the one on top so they can charge merchants and consumers the fees for usage. Ideally, banks want their cards to be the only ones used so they can enjoy repetition of use similar that whatever credit card is file on iTunes.
They also like the security features Apple Pay seems to provide. Recent security breaches at major retailers make headlines and frighten consumers. Perhaps playing on this fear, Apple’s security seems to be a key differentiator. User fingerprint ID scanning, tokenization and the ability to remotely disable Apple Pay if the phone is lost provide reassurance to consumers.
One day alternative online payments could challenge commercial banks bread and butter. Without the deposits, there’s less money to lend out and less profits. Use of Bitcoin and other crypto-currencies are also growing, which should have a massive effect on traditional money servicing.