Are We in the Third Phase of Fintech?
The emergence of the fintech industry, and its eventual maturity, has been a fascinating event for observers and researchers globally. It was an opportunity to watch a new industry develop and scale in its entirety over a lifespan and test our knowledge of financial and consumer lifecycles in the process. Despite its parallels to the dotcom boom, the fintech industry has exhibited a more consistent, focused growth with a flatter curve, and with more impact on the existing traditional firms, blending ineffectively.
The first phase of fintech was all about disintermediation, disruption and competition. It was about niche players within payments and lending, primarily, that sought to change the existing financial value chain. Players like Square, Stripe, SoFi and Kabbage managed to prove how much a disintermediated value chain can help add value through better efficiencies, a captive customer base and lower costs. They were all niche players focusing heavily on a segment and offering, through innovation, a new and improved set of products and services.
The second phase of fintech, I believe, started in 2016 when fintechs proved that collaborative models can co-exist successfully with competitive models. I wrote about early models in collaboration in 2016 where the most popular means of collaboration was still observation. Banks around the world were launching accelerator programs, innovation communities and hackathons to identify and be part of the next best startup. Sometimes, large consulting firms joined the fray.
What was quite different about the second phase of fintech was the fact that there was less conversation about taking customers away from banks and into fintechs, and more on how to bring the mass market into the fintech ecosystem by bridging large financial institutions and startups. Along with the new customer base of millennials that the startups successfully cultivated, banks also tapped into their existing digital-friendly customer base to offer new products and service channels like chatbots. Customer acquisition and deep regulatory knowledge started becoming bottlenecks for the startups' innovation and product development focus, and they were only too happy to outsource this back to the partners - especially banks.
Central to this has been the ability of fintechs to unbundle many traditional banking services that revolves around improved customer services and experiences. It was only natural that banks sought to learn from these customer-centric models developed by fintechs and began integrating those capabilities into their existing systems (or replacing legacy systems with the help of the fintechs themselves).
As we jump into 2020 with dozens of fintech deals and partnerships being announced on a daily basis, I believe we are now seeing the beginnings of the third phase of fintech. There is very little conversation on competition and ‘destroying’ banks any more. Banks have come a long way from the observation model they adopted in phase 2 - we have seen several banks launching their own challenger banks just in the last year, including RBS, HSBC and Santander. All the observed lessons are now being put into practice. We saw the collaborative ecosystem widen to include BigTechs, wealth management houses, regulators, research organizations, aid agencies, mayoral offices, universities and media organizations. The most prominent defining factor of this phase is this wider ecosystem. There is also a heavy focus on skills and ensuring there is sufficient training, content and recorded case studies for academic as well as practical purposes. The funding rounds have changed beyond recognition as well - we now have over 20 fintechs that are unicorns and funding rounds and acquisitions now frequently exceed 500 million dollars.
We have been fortunate to observe the fintech industry from its very early days to the point of maturity. I believe there are three crucial factors that determine the success and the speed of maturity in any industry.
1.The availability of skills
2.The size of investment transactions
3. The total number of companies in the space
Phase 3 of fintech will be all about these three areas. There are currently approximately ten universities in the UK that offer fintech-only postgraduate courses. There are short term online fintech courses available from top tier universities like Harvard, MIT, Oxford and NYU.
In early 2020, the fintech startup Plaid raised USD 5.3 billion on its sale to Visa. Paris-based Qonto raised EUR 104 million, the largest round ever for a French fintech. 2019 also saw some really big investment rounds. Klarna raised GBP 349 million, OakNorth raised USD 440 million and SoFi raised USD 500 million. It is expected that the global fintech sector in 2019 saw 32,000+ deals and USD 300 billion+ value in investment in pre-seed startups all the way to scale-ups.
Despite the transformational changes in the purpose and outlook of the fintech industry over the past 10 years, the one constant that is driving the industry is its heavy focus on innovation. Regardless of firms scaling up and going on to bundle the very products they stayed away from, fintechs continue to place significant value on cultural shift and innovative processes. As the cycles of product development get shorter and the consumers demand ever more than before, I suspect the next stage of fintech will be here faster than the ones prior; all we know for certain is that fintech is here to teach, to excel and to continually fascinate.