The FinTech Effect

December 20, 2018


The year of 2018 is proving to be an explosive one for global FinTech investments: in H1 2018, the global FinTech community raised more than $61.86 billion in a combination of VC/PE investments and acquisitions/buyouts. In terms of YoY growth, global FinTech VC/PE funding grew by a staggering 150%, from $12.25 billion in H1 2017 to $30.66 billion in H1 2018. In Q3 2018 alone, FinTech startups around the world raised more than $22.66 billion in VC/PE investments and acquisitions/buyouts.

With an ever-increasing scale of financial investments, 12,000 FinTech startups operating globally across 50+ segments are tightly woven into the fabric of local economies, thereby shaping the future of a wide array of industries.

Moreover, financial technology innovation facilitates structural changes across markets, plugging previously untouched groups of the population into the formal financial system. Safaricom’s mobile-money platform, M-Pesa, reaches an estimated 96% of households in Kenya and is credited with lifting at least 200,000 Kenyan households out of poverty. Indian mobile wallet Paytm has nearly 200 million users, including women and rural families that can now participate in the digital economy.

Financial services such as robo‑advice have the potential to extend financial advice beyond HNWI to a much wider cross‑section of the community. The Bank of Japan calls this effect globalization of financial services – not only in advanced economies but also in developing & emerging economies where financial services are not yet widespread; cell phones and smartphones are now spreading rapidly and FinTech has opened up the possibility of providing basic financial services through these new instruments.

The individual user is not the only beneficiary of the FinTech effect. The democratization of startup financing has an even more profound impact on all aspects of local economies – creating jobs, enabling innovators, and ultimately boosting the efficiency of public & private sectors. Additionally, FinTech is reducing information asymmetry in the marketplace, helping to mitigate risk and promote efficient allocation of scarce resources.

While certain overheated FinTech segments have controversial long-term effect on markets, generally, accelerating the pace at which the institutional world implements advanced technologies after years of R&D and pilots will yield noticeable results much sooner than previously expected. In both his 2015 and 2016 Chairman & CEO letters to shareholders, Jamie Dimon, Chairman & CEO of JPMorgan Chase, emphasized the role of FinTech in the future of the financial services industry and the future of JPMorgan Chase.

In 2016, we spent more than $9.5 billion in technology firm-wide, of which approximately $3 billion is dedicated toward new initiatives. Of that amount, approximately $600 million is spent on emerging FinTech solutions – which include building and improving digital and mobile services and partnering with FinTech companies. The reasons we invest so much in technology (whether it’s digital, big data or machine learning) are simple: to benefit customers with better, faster and often cheaper products and services, to reduce errors and to make the firm more efficient. – 2016 Chairman & CEO Letter to Shareholders, JPMorgan Chase

In the 2015 letter, Dimon said that it is unquestionable that FinTech will force financial institutions to move more quickly and that banks, regulators & government policies will need to keep pace. Dimon emphasized that services will be rolled out faster, and more of them will be executed on a mobile device.

The Financial Stability Board (FSB), an international body that monitors and makes recommendations about the global financial system, has taken an optimistic view of the FinTech effect. The Board identified three elemental promises common to a broad range of FinTech innovations:

  1. Greater access to and convenience of financial services,

  2. Greater efficiency of financial services,

  3. A push toward a more decentralized financial system in which FinTech firms may be disintermediating traditional financial institutions.


Source: The economic impact of FinTech, BBVA

FinTech has been great at making it easier and often less expensive for customers and will likely lead to many more people, including more lower-income people, joining the banking system in the United States and abroad. – 2015 Chairman & CEO Letter to Shareholders, JPMorgan Chase

Not only does FinTech make financial services accessible for un/underbanked in developing countries and beyond, but also improves SMBs sustainability and chances for success as well as addresses common problems of large sets of the population like students. Today, a small business lender Credibly, for example, provided access to over $1 billion to more than 19,000 SMBs across the United States. Another lender focused on students and small businesses – CommonBond – attempts to help the situation 44.2 million Americans who collectively have more than $1.48 trillion in student loan debt find themselves in. As of March 2018, the company has funded more than $1.5 billion in loans, and, as the company claims, has experienced only two credit defaults.

Financial technology also made a significant breakthrough in the state of international remittances. The fall in the cost of sending international payments over the last five years, driven by the entrance of new, cheaper alternatives, has saved customers more than $60 billion between 2010 and 2016. In Q3 2018, the global average cost of sending remittances was 6.94%. More importantly, in Q3 2018, the cheapest method of funding a remittance transaction was mobile money at 4.48%.


Source: Remittance Prices Worldwide, The World Bank, September 2018

Charlotte Petris, the Founder & CEO of Timelio, an Australian company that allows businesses to boost their cash flow by selling invoices online, took an attempt to demonstrate the far-reaching butterfly effect beyond inclusion and remittances.


Source: The FinTech Butterfly Effect by Charlotte Petris

Touching consumers, businesses & regulatory bodies, FinTech is predicted to add $1 billion to the Australian economy by 2020 and grow at a compound annual growth rate of 76%. According to Financial Sector Deepening Africa, the contribution of the FinTech industry to sub-Saharan Africa’s economic output will increase by at least $40 billion to $150 billion by 2022. Increasing the availability and use of financial technologies in emerging economies could create around $3.7 trillion in growth by 2025.

FinTech intermediaries help bring additional liquidity to the market, reduce information asymmetry, improve the ability to match investors, lenders & borrowers, and provide a more level playing field that allows retail investors to have greater participation in the market.

The Australian Government Treasury outlined some of the most important economic benefits of FinTech for national and international ecosystems, emphasizing that FinTech is not just about monetizing data – it’s about how we can create and capture the value‑add from data, previously limited by previously available technology. Businesses and authorities receive structured access to almost unlimited data, that permits previously unimagined insights and information that, in turn, allows more individualized products and services, and more efficient markets & systems.

Furthermore, the Bank of Japan also points the opportunity to dynamically customize financial services with new technologies. For example, buying an insurance policy can impair the policyholder’s incentives to be sufficiently cautious, and such a moral hazard is an inherent problem of insurance. Blockchain technology, which found dozens of financial and non-financial applications with all the hype around it, is expected to enable smart contracts for various purposes, such as continuously adjusting automobile insurance fees in accordance with driving behavior of each policyholder. Smart contracts, in this case, might have the potential to overcome the moral hazard by leveraging new information technology.

Moreover, FinTech can offer solutions that are efficient and effective at a lower scale, which will benefit SMBs and provide them with increased access to more diverse funding options. Innovative finance solutions can also significantly assist SMBs by providing them with better cash flow, improved working capital management, and more stable or secure funding. More digitized transactions support greater audit capability, transparency in payments systems and security in transactions by reducing risks along with the need for regulation.

A study of the FinTech opportunity by Thomas Philippon of The National Bureau of Economic Research suggests that while the key advantage of incumbents is their customer base, their ability to forecast the evolution of the industry, and their knowledge of existing regulations, the key advantage of startups is that they are not held back by existing systems and are willing to make risky choices.

In banking, Philippon explains, successive mergers have left many large banks with layers of legacy technologies that are at best partly integrated. FinTech startups, on the other hand, have the chance to build the right systems from the start.

Moreover, Philippon adds, they share a culture of efficient operational design that many incumbents do not have. A feature that is more specific to the finance industry is the degree to which incumbents rely on leverage, which is embedded in many financial contracts and subsidized by several current regulations. This gives the illusion that leverage is everywhere needed to operate an efficient financial system.

Philippon continues explaining that conceptually, one can think of leverage today as partly a feature and partly a bug. It is a feature when it is needed to provide incentives, but a bug when it comes from bad design or regulatory arbitrage, or when it corresponds to an old feature that could be replaced by better technology. The issue is that it is difficult to distinguish the leverage-bug from the leverage-feature.

FinTech startups can [therefore] help for two reasons. First, they will show how far technology can go in providing low-leverage solutions. Second, they are themselves funded with much more equity than existing firms. – The FinTech Opportunity, Thomas Philippon, the National Bureau of Economic Research

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