What is fintech? Fintech, or financial technology, refers to a broad range of technological applications in the financial services industry.
Fintech, or financial technology, refers to a broad range of technological applications in the financial services industry. Of course, there’s more to the market than a simple definition, so what is fintech?
To start off with, fintech companies are often startups intent on creating disruptive technologies that transform the financial sector through software innovations.
Mobile payments, big data, cryptocurrencies and alternative finances are some of the big buzzwords currently dominating the sector. In that regard, here the Investing News Network (INN) provides a (brief) overview to better answer the question to “what is fintech?”
What is fintech? Market size
While a variety of reports have given different numbers with regards to fintech investments, one thing that is prevalent is that 2018 is a ‘record year’ for global fintech investments.
Case in point– FinTech Global pegs global investments in fintech for the first half of 2018 to be at US$41.7 billion. These numbers are higher than total fintech investments in 2017 which was US$39.4 billion.
Fintech investments have been steadily increasing ever since 2014 when that number totaled US$19.9 billion. By 2015, investments reached US$27.1 billion and by 2016, it had gone up slightly more to US$30 billion.
However, the number of deals has decreased despite the increase in investments. In 2014, there were 1,901 deals and peaked at2,251 in 2015. By 2016, that number declined to 2,139 and then 1,798 in 2017. The number of deals for the first half of 2018 stands at 788.
Meanwhile, a report from KPMG says the total investments for the first half of 2018 were US$57.9 billion spread across 875 deals. When compared to 2017 levels of US$38.1 billion, the firm says it’s a ‘significant increase.’
Further, a report from Statista highlights that digital payments are the largest segment of fintech with a transactional value of US$3.2 trillion as of 2018. The report predicts that the segment is set to show a compound annual growth rate (CAGR) of 13.5 percent to reach US$5.4 trillion by 2022.
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 payment process.
For example, companies like VersaPay (TSXV:VPY) fall into this category. VersaPay offers an intuitive pay-as-you-go, cloud-based service that provides payment solutions to businesses by streamlining processes and delivering clear, efficient results.
The report from KPMG terms payments and regtech as the ‘most mature’ subsectors of fintech with the firm saying more players would emerge.
“Leading players in payments and lending will continue to emerge in the most mature markets, focusing their growth efforts on expanding the breadth of their product and service offerings,” reads the report.
In 2016, TechCrunch anticipated that the next big trend in the payments sector will be efforts to embed transactional efficiency into platforms that currently don’t support sophisticated payments systems — think of big social media sites like LinkedIn (NASDAQ:MSFT) and Pinterest.
True to this report, social networking sites have started testing out payment options,led by Facebook (NASDAQ:FB) through its platforms Instagram and WhatsApp. In May 2018, Instagram added payment options in a move that was tipped by its CEO, Mark Zuckerberg on numerous earnings calls.
Meanwhile WhatsApp was close to launching its payments gateway in India in Q2 2018, however the messaging platform is facing regulatory hurdles in the country. That said, Facebook has indicated this feature will be rolled out in a variety of countries within the next few years.
What is fintech? Cryptocurrencies
Cryptocurrencies are another major component of fintech. By definition, cryptocurrencies are digital currencies that rely on encryption technologies to regulate and verify transactions and the creation of new units of currency.
According to Coinmarketcap.com, there are 1,944 cryptocurrencies with the top five in terms of market cap include Bitcoin, Ethereum, XRP, Bitcoin Cash and EOS.
Michael Sonnenshein of Grayscale Investments described to INN that bitcoin is a type of “digital gold” because many investors view bitcoin as a store of value. In fact, the rise of bitcoin has recently posed the question of whether or not it will become its own global currency over the next few years.
A report from Greenwich Associates reveals that 72 percent of institutional investors believe cryptocurrencies have a place in the future and that they are here to stay.
Blockchain, the technology underlying bitcoin, is also gaining a following in its own right as financial institutions seek out more opaque and efficient methods of verifying and recording transactions.
A report from PWC say that 84 percent of the organizations have at least some involvement with blockchain and no one wants to be ‘left behind’.
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 scaring investors off, this dynamism should encourage investment. Fintech is a rapidly growing market that presents multitudes of opportunities for brave, tech-savvy investors.
This is an updated version of an article originally published by the Investing News Network in 2016.
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Securities Disclosure: I, Bala Yogesh, hold no direct investment interest in any company mentioned in this article.