FinTech Series | Key Segments
Part 3 — FinTech Segments and Big Data
Over the last couple of weeks I have covered the FinTech market taking a high level of the industry and market dynamics. Here, in the third part of the series, I will look at some of the key segments of the FinTech industry and, firstly, the role of Big Tech.
ALTERNATIVE FINANCE (AltFi)
Alternative finance refers to financial channels, processes, and instruments that have emerged outside of the traditional finance system. Examples of alternative financing activities through ‘online marketplaces’ are reward-based crowdfunding, equity crowdfunding, revenue-based financing, online lenders, peer-to-peer consumer and business lending, and invoice trading third party payment platforms
The recent study by the Alternative Finance Department of Cambridge University found that the total European online alternative finance market (including the UK) grew by 36 per cent to reach $11.7 billion in 2017.
P2P Business Lending retained the top spot as the largest market segment in online alternative finance with $2.5 billion in transaction volume in 2017 and a 66% year-on-year growth rate.
P2P Consumer Lending recorded just over £1.4 billion in 2017, whilst P2P Property Lending achieved £1.2 billion and Invoice Trading registered £787 million. Equity-based Crowdfunding grew by 22% year-on-year to reach £333 million, but Debt-based Securities stagnated to £79 million, a drop of £5 million compared to 2016. Whilst Real Estate Crowdfunding increased by more than 200% to grow to £211 million, Donation-based Crowdfunding only grew by 2.5% and Reward-based Crowdfunding decreased by £4 million year-on-year to register £44 million for 2017.
Payments and Fund Transfers
The rise of financial technology and digital payment solutions is helping the world to go cashless. Cashless payment methods cover a wide range of technologies — there are physical cards, online gateways, mobile apps, and digital wallets. Blockchain enabled payments and cryptocurrencies are also on the rise.
Mainly driven by the Asia Pacific corridor and China’s fast-growing market, global payments are being accelerated by growing electronic transactions, increasing mobile use, web and social commerce and greater cross-border commerce activity.
According to a recent report from McKinsey & Co, global payments generated $1.9 trillion in 2017, 11 per cent growth. Within five years, global revenues are expected to approach the $3 trillion threshold.
The main global payments activities involve the following:
❏ consumer apps and solutions (Apple Pay, Alipay, Samsung Pay, Google Wallet, etc.) focused on transactions and which are supported by payment methods (Visa, Mastercard, PayPal, American Express).
❏ business-to-business-to-consumer platforms that offer a selling option for brands and payment flexibility for consumers (Klarna, Affirm, Afterpay, PayPal Credit).
❏ B2B solutions that are helping to drive global commerce and facilitate cross-border transactions (Payoneer, Adyen).
❏ P2P apps and platforms to send cash to friends and family such as Venmo, PayPal, Square Cash, Zelle and Google Wallet.
Some of the innovations which are tackling issues in the banking and payments space include:
❏ E-Wallets
Such as Paypal and Google Wallet, which are built on the existing infrastructure of payment systems. While these solutions improve the user experience of the payments process, they still fundamentally rely on banking infrastructure.
❏ Mobile Money
Mobile money schemes place mobile operators in the position to offer payment services, where cash is accessed via a cell phone, not necessarily smartphone.
For example, M-Pesa (Safaricom) in Kenya granted exceptional access to limited budget services, including payments made for school fees or utility bills.
❏ New Currency & Credits
These currencies allow communities to develop their own independent economy,
unhindered by a world of compliance and regulations. Real-life examples include the Brixton Pound in the UK or BerkShares in the US.
❏ Digital Currency
Digital currency is a digital unit of value and performs three distinctive economic roles
similar to physical currency; as a medium of exchange, a unit of account and as a
store of value.
Big Tech’s Approach
Technology firms such as Alibaba, Amazon, Facebook and Google and have grown rapidly over the last two decades and ventured into the world of financial services. Their business model depends on enabling direct interactions among a large number of users.
An essential by-product of their business is the large stock of user data used to offer a range of services that exploit natural network effects, generating further user activity some have ventured into financial services, including payments, money management, insurance and lending.
So far, FS is only a small part of their business globally. But given their size and customer reach, their entry into finance has the potential to spark rapid change in the industry.
Next up in this series is Distributed Ledger Technology or blockchain, the emerging tech which has seemed on the cusp of offering so much to the FS industry, yet, as I will discuss, there are still a number of fundamental obstacles before enterprise-level adoption becomes widespread. On Medium, you can catch up and review the first part of this series.
