Originated in the United States, Fintech is a combination of “Finance” and “Technology” and refers to the use of technology to improve and automate the delivery and use of financial services. In layman’s terms, this includes e-commerce, online stock trading, P2P lending, and etc. The combination of finance and technology seems to be inevitable in the mobile Internet era. It has brought infinite possibilities to traditional financial services, and it has also brought tailored financial management and lending services to many small and micro enterprises and individuals who were not previously considered by traditional financial companies. Interestingly, in the exploration of Fintech applications, China and the United States have taken very different paths.
Although it is only in recent years that Fintech has gradually come into people’s attention, but in fact, Fintech has a long history. According to the CFA, the development of Fintech has three stages. In Fintech 1.0 stage (1866~1967), the invention of telegraph is the first time of the combination of finance and technology. Fintech 2.0 (1968~2008) witnessed the invention of ATM to the popularity of online banking. 2008 global financial crisis is the turning point of the development of Fintech. It made people re-examine the trustworthiness of financial institutions and set the stage for the future of Fintech. According to a 2015 survey in the United States, people trust tech companies more than banks to manage their assets. In China during the same period, even more than 2,000 P2P companies were born outside of the regulatory system at the time, showing wild growth. It is the change in people’s attitude towards traditional financial enterprises and the rapid development of technology in the same period of time together to promote the arrival of Fintech 3.0. In the era of Fintech 3.0, people are increasingly relying on the Internet to access financial services, while tech companies are also using algorithms to provide better financial services.Fintech 4.0 began in 2018, and in this phase, hordes of tech companies and startups are using blockchain, big data, cloud computing, artificial intelligence and the Internet, Iot and other technologies on the B-side and the C-side provides financial services that challenge the position of traditional financial institutions.
According to McKinsey’s research on fintech, fintech companies can be divided into four categories: infrastructure providers that use technology to provide the underlying architecture for financial institutions, challengers that take advantage of online platforms to compete with traditional financial institutions, technology companies that build ecosystems to empower their existing platforms, and traditional financial institutions that take advantage of new technologies to transform.
These four categories of companies in turn provide more than 30 financial services in six major segments: micro and small business services, capital markets investment, insurance, wealth management, retail and payments.
While technology has brought unlimited possibilities to the financial industry, it’s another matter for startups to implement and ground these services. The vast majority of existing Fintech companies receiving venture capital have a clear business model and have proven market share and profit growth potential in the past. According to data sourced from PitchBook, while the number of venture capital investments in Fintech is at an all-time high, the number of investments in startups fell from 13,000 in 2014 to 6,000 in 2017.This means that the success of startups is linked to the ability of their products to match market demand and good management.
This is why the vast majority of the top 100 fintech companies in existence are companies that offer payment and transaction-based services, rather than companies that take advantage of brand new technology.
Now that the public frenzy over Fintech is over, the industry is starting to settle down. Mature companies are starting to merge with smaller companies through q&a, and valuations of companies by institutional investors are becoming stable. But this does not mean that the industry is slowing down. Both large and small companies have shown a vigorous ability to innovate, and have attracted more and more capital to the industry.
On the one hand, traditional financial institutions are offering fintech services in order to comply with the trend. Among them, Goldman Sachs’ c-suite lending platform Marcus reached a loan of $1 billion in just eight months, compared to more than a year for marcus’ traditional competitors to reach this figure. In China, insurer Ping An of China’s Lujin, a lending platform that has successfully used big data and IT to build risk-assessment models, has grown to become the 11th-largest fintech company in the world.
On the other hand, tech companies are leveraging their existing user base and data to form an ecosystem and increase user stickiness by introducing financial services. For example, Ant Jinfu, which is based on Alibaba’s e-commerce, provides one-stop services from online transactions, financial products, insurance, lending and so on. Tencent also offers a wide range of financial services on its existing social media platform. These large companies use their own platforms to do big data analysis to better assess risk, estimate user habits, and recommend more appropriate products to users.
With so many possibilities presented by Fintech, how do Chinese companies behave differently than US companies?
According to McKinsey’s observation, successful fintech companies outside of China are generally the ones that do best in a particular vertical. For example, in the chart above, paypal and another b-side company, Stripe, are both the best companies in the payments space, while successful Chinese fintech companies are generally large companies that structure the financial ecosystem, covering all aspects of finance, payments, wealth management, insurance, and lending.
The few other successful Chinese fintech companies that do not rely on large companies are large-scale enterprises. For example, Funshop and PPdai went public in 2017 for $7.9 billion and $3.9 billion, respectively.
In the US, by contrast, building the financial ecosystem is a very slow process due to market fragmentation, as traditional financial institutions already provide quality financial services and solutions that are supported by technology. Building the ecosystem may require artificial integration on a larger scale.
References:
https://www.mckinsey.com/industries/financial-services/our-insights/bracing-for-seven-critical-changes-as-fintech-matures
https://www.mckinsey.com/industries/financial-services/our-insights/synergy-and-disruption-ten-trends-shaping-fintech
https://h2.vc/wp-content/uploads/2020/02/2019Fintech100.pdf
https://www.cfainstitute.org/en/research/foundation/2017/fintech-and-regtech-in-a-nutshell-and-the-future-in-a-sandbox?s_cid=ppc_RF_Google_Search_FinTechandRegTech
