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Section 9. Economics of enterprises
Diordiiev Viktor, Ph. D. student, Institute for Market Problems and Economic-and-Ecological Research of the National Academy of Sciences of Ukraine E-mail: [email protected]
FINTECH AS THE DRIVING FORCE OF FINANCIAL INNOVATION
Abstract: The following article defines the fintech industry and describes its latest trends. Investment amounts into fintech and structure of these investments are analyzed. Particular attention is payed to large fintech subsectors, such as insurtech and regtech.
Keywords: fintech, insurtech, regtech, blockchain, financial technology, financial innovation, venture capital.
In the past several years, the financial services in- ed to a higher degree than the bank's products. Estab-
dustry experienced a significant impact of technological advancements. Mainly they were brought by startups that focused on financial technology, but the established financial companies have also contributed. Each firm from this array, as well as the entire financial sector they operate in, is called "fintech". There is no clear consensus in academic and business fields on whether to constrain fintechs definition to any size or period of existence of the business. For instance, Capgemini defines fintechs as financial services firms not older than five years with a relatively small customer base [8, 5]. Different definitions of fintech bring discrepancies to the fintech market analysis. This article mainly uses data from KPMG, that does not limit fintechs to any size or lifetime and publishes a profound analysis of the industry on a quarterly basis.
If you take an entire spectrum of a universal investment bank's value chain and divide it into separate elements, fintechs usually take one or two of those niches and try to create there an alternative that is more efficient, more customer-friendly and automat-
lished financial institutions have already realized that fintechs bring real threats to their old haunts, especially in payments, fund transfer and personal finance sectors, so many of them actively contribute to the fintech advancement. The recent Global Fintech Report 2017 by PwC questioned 1308 financial services and fintech executives from all around the world and found out that 88% of them were worried that part of their business was at risk in the face of standalone fintechs [4, 5]. The most active adopters from traditional banks' side include Citi, Goldman Sachs, Santander, UBS, BBVA, Barclays and some others. They participate through launching business incubators and accelerators, launching their own fintech solutions, and creating investment vehicles to maintain and scale up innovation [7, 5]. While fintechs have some advantages in this innovation process, banks obviously possess more capital, experience and customer trust. Therefore, banks and fintechs can be seen as potential partners as well as competitors.
According to KPMG, the global investment in fintech peaked in 2015, when the total deal value
reached $46.7 billion across 1255 deals [1, 9]. Even though in 2016 it dropped almost by half to $24.7 billion, the deal count did not decrease that dramatically and amounted to 1076 [1, 9]. The first two quarters of the current year saw $11.6 billion invested, similar to the last year's amount, while the number of deals stayed high [5, 7]. Such deceleration in the last two years is caused mainly by the fact that the fintech hype has been cooling down. Two or three years ago, many investors were trying to catch the fintech wave being afraid to be left behind the fintech disruption. The last two years saw more consistency in the fintech industry: earlier investors have been working on the efficiency of the projects they had invested in. It is worth mentioning that these investors represented mainly the private equity side, which dominated the market until 2014. In 2015, when the fintech market was already quite established, corporate venture capital (VC), that had been pretty passive before, almost tripled its investments to $4.9 billion [1, 15]. It was further increased to $8.5 billion in 2016, comprising over one third of total annual investments in fintech and 17% of the deal count [1, 15]. With $2.6 billion invested during the first six months of 2017, corporates are moving beyond traditional direct VC fintech investment and are working more on building partnerships and alliances with fintechs [5, 12].
At the same time, well-established fintechs are expanding. Many of them focus on growth, either geographically or through product or service development. For example, SoFi, a San Francisco-based online personal finance company, acquired Zen-banx in order to deliver more traditional bank functions, including customer deposits. As it also plans to expand its business to Australia and Asia, it acquired companies for a total of $450 million in the regions. As another example, following its massive record-breaking Series B funding round of $4.5 billion in 2016, Ant Financial, an affiliate of Alibaba Group, announced a $200 million investment in Kakao Pay in order to expand to Korea [2, 6].
Moving focus to regions, investment in fintech is traditionally dominated by Americas with a total of $12.8 billion in 2016. The region saw a decrease of over 50% from 2015, as investors started to become hesitant whether the fintech market was already overcrowded. Payments and lending platforms especially experienced the drop in investments, as the two sectors attracted a major share of capital in 2014 and
2015. Consequently, many fintech investors in the US focused on scaling and improving business models of fintech companies that already were in their portfolios. Despite a drop in the region, Canada marked a record year of VC investment in fintech. At the same time, high volatility in investments volume year over year in Europe and Asia usually occurred due to the impact of outlier deals. European M&A and VC deal value fell by 80% from $10.9 billion two years ago to $2.2 billion in
2016. Thanks to the Ant Financial funding deal, investments amount in Asia was stable and increased from $8.4 billion in 2015 to $8.5 billion last year [1, 28-32].
The first two quarters of 2017 saw the rising activity in fintech investment in the US and especially in Europe. At the same time, investment in Asian fintech slowed down, particularly due to the newly introduced financial technology regulations in China, that fintechs and investors have had to spend some time on in order to integrate. While the lack of mega-deals in Asia stays unchanged, the pace with which the continent's fintech ecosystem develops and the growing interest in fintech in the region brings confidence that the delay is temporary. In the remainder of 2017, fintech investment is expected to grow, however, not reaching the benchmark of 2015. Maturing fintech companies will continue their expansion to new products and solutions, as well as new markets. Some even will try to obtain banking licenses, what brings more distribution opportunities together with tougher regulation requirements. From a technological point of view, blockchain and artificial intelligence will probably hold the main focus of investors, followed by smart data solutions and predictive analytics.
In 2015, a separate branch of fintech covering innovation in insurance evolved and was named "insurtech". The insurance industry, which is one of the most conservative in finance, has not seen much innovation over the last decades, so a new wave of in-surtechs is trying to disrupt it. Traditional insurers did not hurry to invest substantially into insurtech, particularly, due to their ongoing costly regulatory and IT transformations. However, they have begun to feel the pressure of insurtech disruptors. While overall fintech investment peaked in 2015, capital interest in insurtech reached its maximum in 2016 - $12.1 billion [4, 16]. After the record 274 deals last year, the first half of 2017 marked a rising number of deals at 155, but their total value dropped to just $2 billion [4, 16]. The majority of funds invested focused on seed and early-stage businesses. In the remaining of 2017, both insurers and insurtechs will be testing and piloting solutions across the entire insurance value chain, from peer-to-peer insurance, community-based insurance, life and health insurance - to employee safety programs, employee benefits, software-as-a-service models and comparison sites.
The pace with which fintech is changing the financial services industry created numerous additional legal challenges in a respective, already very complex regulatory field. As a result, a separate industry at the intersection of fintech and law emerged and got a name "regtech". It is easy to confuse regtech with legaltech, which infuses cutting-edge technology into the legal industry. Regtech companies, or regtechs, work on solutions that make use of technology to solve compliance and regulatory issues that fintechs face. There are four key areas in which fintechs can benefit from cooperation with
regtechs: cost efficiency, regulatory information accuracy, IT security and big data analytics [4, 72]. As jurisdictions realize the importance of fintech disruption in facilitating financial inclusion and increasing the banking system's efficiency, in 2016, the UK, Australia, Singapore, Malaysia and Thailand all launched their regtech sandbox programs. The UK was the most active in the face of Brexit and created fintech bridges to Australia, Singapore and China, with Belgium and Canada to follow. De-loitte identifies 80 regtechs around the globe. It is no surprise that the UK hosts 30 of those, while 28 regtechs are headquartered in the rest of Europe and 16 are located in the US [4, 73]. Almost two thirds of those 80 regtechs deal mainly with compliance or identity management and control [4, 74]. While 2017 promises to be a record year of VC invested in regtech with $591 million in the first 2 quarters, total value of deals in 2016 reached $994 million worldwide, a steep increase from the previous year's $582 million.
One of the core changes fintech will bring to society is financial inclusion. Today, according to the recent research by McKinsey, two billion people, mainly women, and 200 million businesses in emerging economies do not have access to the basic banking [6, 17]. By 2025, fintech is able to provide 1.6 billion individuals with access to financial services and to increase the volume of loans given to individuals and businesses by $2.1 trillion, at the same time helping emerging economies to save a total of $110 billion per annum while enlarging their annual GDPs by $3.7 trillion [6, 43-45]. At the same time, financial institutions could save $400 billion per year in direct costs and increase their balance sheets by $4.2 trillion [6, 47].
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