What is Fintech?

What is fintech? Market size

Fintech investment has been steadily increasing ever since 2014, when it was valued at US$45.4 billion, but the fintech sector has experienced its most explosive growth in the past few years. In 2017, it attracted US$59.2 billion in investment, and the total investment for 2018 hit US$147.9 billion — a significant increase in such a short time. 2019 was another record year for the sector at US$215.4 billion.

COVID-19 has placed pressure on the fintech market, as evidenced by the US$121.5 billion in investment recorded in 2020. In a report covering H1 2020, KPMG points to a lack of mega mergers and acquisitions due to the pandemic, although it notes that global venture capital investment in fintech is still "robust."

However, 2021 is proving to be a rebound year for global fintech funding, according to CB Insights, with deals more than tripling year-over-year in Q3 2021 to US$100 million. These gains followed the record-breaking funding seen in Q2 2021, when US$30.8 billion was raised by global venture-capitalist-backed fintech companies.

A report from Statista highlights that mobile payments are the largest segment of the fintech industry, with a transactional value of US$5,204 billion as of 2020. The document shows that China is the largest market for digital payments, with a transactional value of US$2,496 billion that same year.

Marketplace lending, also known as peer-to-peer lending, has grown over the past five years as well. This new form of lending allows a platform to connect individuals with businesses looking to raise capital.

Research and Markets has forecasted that global peer-to-peer lending will see a compound annual growth rate of 31 percent between 2021 and 2026. “Increasing digitization in the banking industry is one of the key factors driving the growth of the market,” the firm’s analysts explain. “Furthermore, the emergence of small and medium-sized enterprises, especially in developing countries, is stimulating the market growth.”

What is fintech? Payments

Payments are one of the fastest-growing subsectors of the fintech market. This area encompasses mobile apps that facilitate quicker, easier and more flexible platforms for exchanging funds. It also entails other internet-based platforms that enable the mobile payment process.

An example of a fintech company in this category is VersaPay, which offers an intuitive, pay-as-you-go, cloud-based service suite that provides mobile payment solutions to businesses. Listed on the TSX Venture Exchange in 2010, VersaPay was acquired by private equity firm Great Hill Partners in 2020 for US$126 million.

KPMG's H1 2021 report states that payments, regtech — regulatory process management technology — and cybersecurity are the most diversified, growth-focused subsectors of the fintech market.

“We are seeing the payments space diversifying beyond person-to-person and bill payments, with solutions increasingly embedded into offerings, retail apps and ecosystem platforms keeping the sector in top spot for fintech funding,” analysts at KPMG said. “We are also seeing surging interest in regtech investments as this new era is making it harder for companies to stay on top of fraud and compliance requirements. Equally, cybersecurity is on pace to see a record level of annual investments by the end of 2021.”

In 2016, TechCrunch anticipated that the next big trend in the payments sector would be efforts to embed transactional efficiency into platforms that currently don’t support sophisticated payment systems — think of big social media sites like Pinterest (NYSE:PINS) and LinkedIn, whose parent company is Microsoft (NASDAQ:MSFT).

True to this report, social networking sites have started rolling out payment options, led by Meta Platforms (NASDAQ:FB) through its platform Instagram. Instagram launched its "Checkout with Instagram" feature for 20 major clients, including Kylie Cosmetics, in early 2019.

Today, social-based payment apps have taken this much further by enabling peer-to-peer payment. Some of the most popular of these apps include PayPal (NASDAQ:PYPL), PayPal-owned Venmo, Zelle, Apple Pay, Square’s (NYSE:SQ) Cash App and Google Pay.

Disruptive innovations are also extending to areas like international money transfers, loans and sales analytics.

What is fintech? Cryptocurrencies​

Cryptocurrencies are another major component of fintech. These are digital currencies that rely on encryption technologies to regulate and verify transactions and to create new units of currency.

According to CoinMarketCap, there are 15,389 cryptocurrencies, with the top five in terms of market cap being bitcoin, ethereum, Binance Coin, Tether and Solana.

John Wu, president of financial technology company Ava Labs, told INN that the younger generation of investors views bitcoin as analogous to gold as a way to store value.

“There’s about US$70 trillion of wealth in the next 15 years that’ll be handed down from basically the Boomers and the Gen X’ers to the new Millennials, and these Millennials, who grew up in the internet era, doing everything digital, they have a lot of trust in math and code. And I think they believe this is the new digital gold,” Wu explained.

A report from crypto asset insurance company Evertas reveals that 90 percent of institutional investors with nearly US$80 billion of aggregated assets under management believe cryptocurrencies have a place in the future and plan to increase their exposure to this market within the next five years.

Blockchain, the technology underlying bitcoin, is also gaining a following in its own right as financial institutions seek out more efficient methods of verifying and recording transactions.

A 2021 report from Deloitte shows that 76 percent of the 1,280 senior financial institution execs the firm surveyed think digital assets will serve as a strong alternative or replacement for fiat currencies in the next five to 10 years.

Firms in the financial services, wealth management, student loan and asset management sectors are all beginning to employ fintech innovations in their business models. The benefits of fintech are projected to impact financial inclusion, enabling unbanked individuals to access the financial industry through new alternative methods.

What is fintech? Concluding thoughts

Overall, the fintech market is a dynamic, multidimensional place. It’s difficult to place parameters on this market, because new technologies are continually expanding, disrupting and transforming the space.

However, rather than being scary, this dynamism should encourage investment. The fintech sector is a rapidly growing market that presents multitudes of opportunities for brave, tech-savvy investors.