January 17, 2017 12:00 AM
Given the prevalence of financial services across the globe – in both emerging and developed markets – the disruption opportunity for fintech startups is massive. As fintech startups battle it out to get their share of the business, the drive for innovation is spreading well beyond traditional tech hubs and basic banking products.
Following are several key trends the fintech industry will likely see in 2017 – and beyond.
Domestic remittances in US, UK and other mature markets have been moving towards same-day (or even real-time) transactions for the last few years, but the change in the cross-border remittance space has not been as visible. However, the fintech industry has seen customer expectations converge and most users look for the same “Venmo-like” experience even in cross-border transactions.
Finally, with the emergence of new global marketplaces and gig-economy business models that require instant payments (which result in better behavior from suppliers), there is a real need for speed.
Given existing banking infrastructure, it is unlikely that the industry will see real-time international bank-to-bank transactions in the near future. Nonetheless, alternative mechanisms ranging from corporate virtual or physical prepaid cards to e-wallets are finally ready for prime-time and able to achieve the ambitious goal of instant cross-border payments.
I think we can predict one trend with almost 100 percent certainty: Regulatory environments will not get any simpler this year. In fact, as many fintech companies gain traction, they attract increasing amount of regulatory oversight similar to larger incumbents. At the same time, new regulations, such as PSD2, are changing how different transactions are viewed by the regulating bodies. The difficulty comes with maintaining the right balance between fully complying with regulatory demands and keeping user experience simple.
This year will be a big year for all types of specialized payments providers. The fintech industry will witness two shifts. First, marketplaces and other online platforms that do not have payments as a core service will increasingly turn to specialized fintech vendors to manage the global payments complexity. Very few platforms can economically justify managing licensing, compliance and risk in-house and even the largest platforms typically do not want to deal with the risk exposure that might be different country by country.
Second, fintech companies will look for ways to efficiently scale their back-end operations which will lead to emergence of new regtech players. While many fintech companies have traditionally built these services in-house, there is a case to be made about why this functionality should be outsourced to specialists. The fintech industry has seen this trend over the last few years in areas such as identity verification or risk scoring, but the potential use cases and pain points for fintech companies are much broader. Regtech companies can play an important role in figuring out how this can be designed as a shared service that any fintech company can turn to. The benefit of working across hundreds of organizations will ultimately result in a more complete and accurate data set for analyzing risk.
Over time, fintech businesses have targeted Western, developed markets for the most part. But emerging markets all over the world provide fintech companies with new, expansive opportunities to build out new financial infrastructures. Take Africa, for example. As much as 80 percent of the continent is unbanked and up to 90 percent of retail payments are made using cash. This opens the door for fintech players to target consumers and workers who do not have access to traditional banking.
Because of this banking gap, it is likely that some countries will entirely skip one generation of payment types (e.g. cards) and start building a more innovative mobile-drive payments infrastructure. Everyone is familiar with early remittance success stories such as M-Pesa, but the opportunity is in every other sector where technology can help decrease the customer acquisition and management cost – insurance, lending, payroll, identity verification, acquiring etc.
Faster, safer and more global are just a few of the many themes expected for the fintech industry in 2017. And as new solutions are developed to address these trends, the fintech industry will continue to grow – the industry as a whole is projected to see market growth at a compound annual growth rate of 54 percent through 2020.