It might be young, but the FinTech sector (a contraction of ‘finance’ and ‘technology’) is growing fast. Hordes of startups are simultaneously thrilling and shaking up the most firmly established financial institutions. And the epicentre of this new revolution is located in Asia. Let us give you a quick reminder of everything you need to know about FinTech, and we’ll also explain why Asia is set to take over this booming sector.
FinTech is the word on everyone’s lips. And if you still think that this strange term is the name of the latest IKEA stool, you’re in the right place. But there’s a surprise in store for you. FinTech refers to a whole ecosystem of startups that want to revolutionize the world of banking and finance.
What is FinTech?
FinTech startups have two aims: to use technology to make financial services accessible to everyone, and to make these services more effective. A happy medium between Goldman Sachs and hiding money under the mattress, if you like.
Three factors led to the appearance of FinTech:
- The emergence of new technologies – big data, blockchain, smartphones, etc.
- Changing consumer behaviour with the adoption of the smartphone (the ‘digital native’ generation feels more comfortable with a smartphone in their hands than waiting their turn at the bank counter)
- The subprime crisis of 2008 and consumers’ growing distrust of traditional banking and financial institutions.
Now let’s take a quick look at the new financial services that have been created by FinTech startups.
Digital payment solutions
Mobile wallets, mobile points of sale and peer-to-peer (P2P) payments – these new services have made our daily purchases a great deal easier.
It’s now possible to buy goods without using cash or cards – just your smartphone. That’s the aim that mobile wallets are trying to achieve. Mobile wallet apps allow you to save your bank cards onto your mobile phone and make in-store payments directly from your mobile. However, retailers must be fitted with a mobile point of sale – a tablet with software that replicates the features of a traditional cash register. It’s an end to long evenings counting the day’s takings.
You can also use P2P payment apps to pay back your friends by making transfers directly from your mobile.
Cyber-currencies and blockchain
Cyber-currency is another big focus for FinTech startups. Thanks to blockchain, a secure distributed database, we’ve seen the rise of Bitcoin, a digital currency. Blockchain and cyber-currencies are a way of making secure exchanges between individuals without involving a trusted third party, such as a bank, for example. They’re going to revolutionize financial exchanges at every level and shake up the banking model as we know it today.
Peer-to-peer loans and insurance
Just like with peer-to-peer payments, FinTech startups are also offering P2P loan solutions. Following the subprime crisis in 2008, banks became timid and getting a loan became a difficult task.
In today’s world, people can simply submit a loan request on an online platform and wait for other people to agree to provide finance. It’s quick and easy, especially for consumers with a good credit score (which represents a lower risk for lenders). So it’s goodbye banks – the return for investors is higher and the interest rate for borrowers is lower. SMEs and micro-businesses can also access this type of loan.
The peer-to-peer system is also used for insurance – online platforms bring individuals together to mutually insure each other against a specific risk (vehicle, health or property insurance, for example). With no brokerage fees or unending administrative processes, insurance is quicker and cheaper – even for extremely short periods.
These examples are an excellent illustration of the current changes under way in the banking and financial systems. In this innovation race, Asia is establishing itself as the frontrunner in global FinTech.
Asia, the promised land of FinTech
Asia is racing ahead of other global regions when it comes to the FinTech sector. This is partly due to the continent’s low rate of bank account ownership, Asian consumers’ trust in new tech companies, high smartphone penetration rates and flexible financial regulations.
Low rates of bank account ownership
According to a World Bank report, in 2015 there were around 2 billion people worldwide without bank accounts – 50% in Asia, particularly in India. To give you a point of comparison, 99% of people in France have a bank account. And while a report from Ernst & Young records bank account ownership rates of over 96% in Hong Kong and Singapore, this figure falls to 78% in China (population: 1.4 billion) and 53.1% in India (population: 1.3 billion).
This means that in India, 47% of people don’t have a bank account – a total of 611 million individuals. The European Union is home to 510 million people – so there are more people without bank accounts in India than there are EU residents. In China, 308 million people still have no access to financial services.
So the Asian market is far from saturated – a big understatement given the continent’s huge potential.
Trust in new online companies
Another defining feature of Asian countries is consumers’ trust in new online companies. These businesses often stand in for non-existent financial infrastructure. They fill a gap and give people access to services that previously did not exist.
Western countries, on the other hand, already have well-established banking infrastructure and institutions in place. New arrivals are often viewed with distrust because they haven’t yet built a reputation for security and expertise in the sector.
For FinTech startups, it’s therefore much easier to win over an Asian customer base than one in Europe.
High rates of mobile penetration
High mobile telephone penetration, especially smartphone penetration, is another key factor in the emergence of FinTech in Asia. Forrester predicts that there will be almost 2 billion unique smartphone users in the Asia-Pacific region by 2019.
The lack of financial infrastructure is offset by mobile technology. It means that coverage can be extended to remote areas more quickly and at a lower cost.
Another interesting fact is that the Chinese government plans to invest $320 billion in high-speed internet infrastructure by 2020. Smartphones have a bright future ahead of them in Asia.
Flexible financial regulations
In Asia, and in China in particular, regulations are developed at the same pace as FinTech. Startups launch new services, and the government then legislates. This flexible way of working favours the creation of new businesses and technologies.
In Western countries, the opposite is true: the rules already exist, and companies have to work with them – hence the benefit for Asian startups. Essentially, it’s a lot easier to start from scratch than to comply with up to 2,500 pages of financial and monetary regulations, as is the case in France.
This means that China is currently at the cutting edge of regulatory developments in the FinTech sector, and it could even be the one calling the shots in the future.
FinTech arose because the tech world decided to take on the world of finance – not the other way around. This is of key importance for the future. It means that to prevent being overtaken by startups, major financial institutions will need to integrate innovation and technology into their business model. As we’ve seen, competition is sure to come from Asia and its flourishing FinTech sector.