How FinTech Start-ups take over the Financial System | KPMG | NL

Bank-less future: how FinTech Start-ups might take over the Financial System

How FinTech Start-ups take over the Financial System

Since the crisis in 2008, the Financial Technology (FinTech) is again experiencing an enormous rise and it is not the first time that technology is an important disruptor in the financial world as we know it.

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Since the crisis in 2008, the Financial Technology (FinTech) is again experiencing an enormous rise and it is not the first time that technology is an important disruptor in the financial world as we know it.

Earlier our Fintech team did an exercise of the mind when they wrote a blog on the bank without employees. Although that would already be a hard to imagine development, when we look at the start-up FinTech investment market, there might be no banks in the future at all.

Technology and financial crisis
Technology caused both positive and negative developments, but technology has been making waves in the evolution of the financial system. In 1967, it was the first ATM and financial calculator that led to the big shift from analogue to digital financing which would change the way we handle money forever. Twenty years later, in 1987, it were the first financial trading computers, that according to many, were the cause of the next disruption in the ‘money business’: the “Black Monday” market crash. Almost 30 years later, when the financial crisis of 2008 started, again many pointed their finger at the underdeveloped technological infrastructure that could not keep up with the increasing complexity of the financial system. More recently in 2010, algorithmic trading (high-frequency trading), which is a form of electronic trading, caused the Flash Crash were the American stock market experienced the highest intra-day drop in history.

Where innovative technology is thus often the cause of economic disruptions, it is also the bridge to restore confidence in that same financial system. Prior to the most recent crisis, this bridge was built by the established financial players such as banks and financial regulators. But in 2008, another group of people stood up to help and reinvent the financial system: Start-ups.

 

We become busier by the day and besides knowledge, we do not have the required time to manage our own financials, regardless of how important we find this. Exactly that conflict is where the rising FinTech start-ups come into play.

 

The rise of FinTech start-upsThe most recent financial crisis created a coherence of conditions that shifted the attention from financial institutions to financial start-ups. Consumers lost their trust in banks and the urge to have more control over one’s own finances arose. At the same time, we become busier by the day and besides knowledge, we do not have the required time to manage our own financials, regardless of how important we find this. And exactly that conflict is where the rising FinTech start-ups come into play. But why are these small start-ups able to challenge those established financial institutions?

Power is where the money is at
The above is mainly from a consumer perspective, but also businesses and capital providers are looking for new alternatives. The 2008 financial crisis also resulted in stricter regulations for capital markets that did not benefit the efficiency for capital providers. Again, FinTech start-ups jumped into these negative side-effects and came up with innovative services and products so that businesses could meet both their own, and their customer’s needs. This combination of interest from both consumers and businesses, ultimately led to a year after year exponential increase of investments in this sector and provided the much needed capital and attention for the FinTech start-ups in order to be a strong competitor for the established financial system.

FinTech deal explosion
In the past year in Europe alone, the number of FinTech start-up exits (an acquisition/merger or IPO) quadrupled from 11 to 44 deals. Globally, almost $14 billion was invested in over 821 FinTech companies. Proof that not only consumers are looking for alternative financial service providers, is evident from the fact that the number of unique investors that invested in FinTech start-ups rose from 223 to 894 in the last five years. Furthermore, these deals are not only pure money making transactions but also prove to be strategic: non-financial companies like Google, Intel, Salesforce and global players like SalesBank, Naspers and Ping An insurance are significantly active in the FinTech mergers & acquisitions (M&A) market. Google Ventures alone, made 37 FinTech deals in the past five years.

A war of many
Knowing that FinTech start-ups are becoming more important in the financial sector and knowing why this is happening, one question is still remaining: how? Exactly the above smashing numbers explain how FinTech start-ups are becoming so immensely popular. Since the 2008 financial crisis early stage (seed capital) investments in FinTech start-ups increased from $328 million to $1.3 billion in 2015. The increased availability of funding, in combination with the decreasing cost to set-up a new business (in 2000 this would cost you around $5 million, in 2015 not even $5k), led to an explosion of new FinTech start-ups all focusing on specific financial services. While before the crisis, the financial system was controlled by a few big banks, nowadays thousands of companies within this market are rivaling, specializing and being better at the many products and services that the big players all used to provide by themselves. And it is not just happening at one place, it is happening all around the world: CBinsights has even unbundled all services and products from both a US and a European bank and tied a FinTech start-up to all of them.

 

FinTech start-ups are owned by individuals who deliver what customers want, instead of what the system needs or requires.

 

More is coming
While investments and M&A deals within the payment sector of FinTech exponentially grew and skyrocketed in 2015, the adoption of it has only just begun. It is estimated that by 2017, 50% of all payments will be done by mobile phone. The same goes for money lending. Crowdfunding platforms and other peer-to-peer lending platforms increased in popularity amongst start-ups as an alternative for traditional bank lending. Only recently, consumer lending businesses like LendingClub and Prosper, who provide algorithm based interest rates and higher returns for individual investors, received attention from large investors. Furthermore, as the world becomes more connected and the Internet of Things will increase the amount and different kinds of data that can be used and analyzed online, the FinTech sector could achieve huge advantages of these developments when adapting their financial products and services to the daily interests and choices of individuals. As the number of FinTech M&A deals rose by 66% in 2015 and the army of innovative FinTech start-ups is only increasing, more deals within this sector is expected for the coming year. In fact: January 2016 already counted 112 FinTech deals, covering a staggering $7 billion.

FinTech start-ups are owned by individuals who deliver what customers want, instead of what the system needs or requires. It is them who enable individuals to manage their own financials more closely in a way they choose and they enable businesses to handle capital more efficiently and directly with their customers. They allow businesses, wealthy people and even common individuals to invest in each other, without mediators. All of the above explains why so much money is going into this market and why even non-financial businesses like Google are only starting to shift their capital to FinTech. To remain in this competition, banks will also need to adapt to, and more importantly, change the financial system that becomes more dependent on data and technology by the day.  So knowing how FinTech startups become increasingly important within the financial system, it is only time that tells us when banks as we know them will be superfluous and technology takes their place.

 

Author: Laurens Kolkman, executive - Deal Advisory Transaction Services

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