FinTech – Disrupting Traditional Financial Services

(This Blog Post is originally written for an internal blog of University of Edinburgh Business School)

FinTech (Financial Technology) has been a buzz word for the last couple of years in finance industry as well as the tech industry. The rapid growth of online banking services and online transactions have encouraged the best brains in the tech industry to bring out innovative products for financial services.

With high flow of venture capital funds, new technology companies are emerging in the financial sector in the fields of crowd funding, peer-peer lending, wealth management and so on. Goldman Sachs has estimated that the industry has a total worth of $4.7 trillion. Like other disruptive businesses, FinTech companies are growing very fast and the inward flow of investments are growing exponentially. It attracted $12 Billion in 2014 which is 3 times increase in investments from 2013.

The following chart gives an idea of growth in investments in FinTech

Screen Shot 2015-11-09 at 11.38.45 AM

Source: The Economist

Fuelling  FinTech

FinTech is relatively a new sector that has emerged after the financial crisis of 2007-2008 and gained a lot of popularity during the last 3 to 4 years. As in many new businesses the major source of funding in FinTech is also from Venture Capital funds and Angel investors.

Major Venture Capital funds investing in FinTech

  • Sequoia Capital
  • Accel Partners
  • Meritech Capital
  • Baseline Ventures
  • Greycroft Partners
  • Funding Circle
  • FinTech Collective

Apart from Venture capital funding there has been a huge inflow of capital from crowd funding, which comes within the FinTech sector.

A few FinTech companies have done an IPO recently which includes the major companies like Lending club and WorldPay.

Disruption caused by FinTech and How Banks adapt

FinTech is a highly disruptive development in the financial services market. FinTech ventures are changing the way the whole system of financial services. It has made financial services more accessible, cheap and customer friendly. FinTech companies have brought most of the financial services to the customer’s fingertips.

It has created a risk to traditional banking and financial services. Banks and other institutions have started responding to the change in the market by adding new models to their businesses. If the traditional institutions are not pro-active in responding to the changes, FinTech is a serious threat to their future.

There are views that Banks and FinTech have to go hand in hand.  Both banks and FinTech have their strengths and weaknesses, and both will be better off by cooperating and combining the best they can offer to cover each other’s weaknesses. Banks can guarantee rapid scaling with significant funding and access to demand. The FinTech sector can offer the most innovative and efficient solutions for better customer service. Santander, recently in one of the papers they published, used a term called FinTech 2.0. As stated in the paper, while some FinTechs today are focused on the race to build standalone “Unicorns”, FinTech 2.0 represents a far broader opportunity to re-engineer the infrastructure and processes of the global financial services industry

Banks have realized the need of FinTech in their operations. Banks are doing everything possible to adapt to the new scenario. As a result of this, we may anticipate more investments by banks into developing their technology side and more research into efficient operations. We may even expect a few acquisitions of FinTech companies by major banks and financial services companies in the near future. This would be a more efficient way traditional financial services can keep up with the changes in the business environment.

Appendix

A Few Emerging FinTech Companies

Screen Shot 2015-11-08 at 1.59.30 AM

Source : FinTech Future, A Report by UK Government Chief Scientific Adviser

 

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