juniperresearch FINTECH LIBERATION OR LIABILITY Whitepaper 1 FINTECH LIBERATION OR LIABILITY 1.1 Market Introduction 1.1.1 What is Fintech? Juniper defines fintech as the use of technology to underpin delivery of financial services (bank accounts, payments, insurance products, financial planning and trades). This research covers both B2C (business to consumer) and B2B (business to business) application across the below sectors: x Banking (current, business and savings accounts, overdrafts, loans) x Payments (payment processors, payment cards and billing) x Money transfers and remittance x Lending (underwriting loans and providing lending platforms) x Equity financing x Insurance (supporting underwriting and claims processing) x Wealth Management (helping individuals manage their money) There are numerous factors driving the adoption of fintech products. In the developing world, suppliers are looking at ways to provide services to individuals who previously have never used financial services (often referred to as unbanked). As mobile phones penetrate rural areas suppliers are helping people obtain credit and store their income. Figure 1: Fintech Market Segmentation Source: Juniper Research Furthermore economic growth fuelled by a young and educated population and a growing middle class overall has fuelled a desire to replicate lifestyles in the developed world. Rising income levels have driven demand for insurance and wealth management products, plus lending levels are expected to rise rapidly because lenders have more datapoints to evaluate as individuals increasingly use cards and mobile payment platforms. 2 FINTECH LIBERATION OR LIABILITY The drivers of fintech adoption in the developed world are different to those of the developing world. The last financial crisis resulted in a mistrust of FIs (financial institutions) this, coupled with a perception that the financial behemoths provide a poor service, has fuelled consumers appetite for products and services from new providers. Many products utilise cutting-edge technologies such as data analytics, machine learning and automation to provide services that are more tailored to the individual and delivered in a timelier manner. These developments have not escaped the attention of VC (venture capital) firms who have been investing heavily in fintech companies. VC investments reached $13.8 billion in 2015, up by 106% year-on-year. Furthermore the large technology firms are offering financial products in the form of digital wallets (Apple, Google, Samsung, and Tencent etc), working capital to suppliers in their ecosystem (Amazon) or helping to provide advertisers with ways to convert consumer interest into purchases (Facebook). All in all, the traditional ways of providing financial services are set to change forever. 1.1.2 Finance Products Are Built On Trust Financial products are built on trust, so there needs to be transparency between the customer and provider. However trust can easily be undermined. In June 2016, at least 400 customers at Germanys challenger bank, N26, had their accounts terminated without warning. N26 enables customers to make cash withdrawals at ATMs, but the bank incurs a fee each time such a transaction takes place. Customers with unusually frequent withdrawals from ATMs therefore had their accounts terminated. As the fintech market evolves consumer protections will become paramount. After mishaps by rogue lending providers, the Chinese government is strengthening its consumer protection laws. The new regulations tie in with the Chinese governments desire for its economy to move away from the manufacture of clothing and establish a reputation for providing modern technologies and solutions. The Five Year Plan for 2016-2020 prioritises regulating and promoting innovation in the world of finance. Regulators are reinforcing consumers trust in FIs regarding their processes for data privacy, verifying customers (often referred to as KYC know your customer) and the provision and enforcement of electronic contracts. As transactions are conducted via smartphones safeguards need to be in place to enforce them Some countries have tight laws surrounding data privacy; the Canadian authorities stipulate that even publicly available personal information is subject to Canadian privacy laws. For fintech providers this means that publicly available personal information cannot be collected and used without the consent of the person or subject. Banks are ramping up their security protocols. In future, longwinded passwords and pin numbers will be replaced by biometrics (fingerprint, iris, voice recognition, palm, vein, heartbeat). Biometric ATMs have already been introduced in the UK, Brazil, China, Portugal and Japan. 3 FINTECH LIBERATION OR LIABILITY Millennials will also be a factor the financial industry. Many surveys and research studies indicate that this cohort have little loyalty to financial providers, but look for services that offer convenience, speed coupled with a highly personalised customer experience, all based on a mobile app. 1.1.3 Impact on Various Financial Sectors The financial services market is ripe for disruption. The behemoths are hindered by the need to retain physical branches, the complexity of their internal IT systems (requiring billions of dollars to be spent on maintenance which leaves insufficient funds for more innovative projects) and often their revenue streams hinge on the performance of an expensive salesforce. The days of banks and insurance companies being all things to all people are numbered. By not having the traditionalists overheads and using analytics and machine learning, the new breed of fintech suppliers are able to offer products that are more tailored to the individual at prices that undercut the traditionalists. The challengers typically further differentiate themselves by offering a better customer experience via a well-designed mobile app backed up, if necessary, with excellent customer service. Table 2: The Fintech Effect Financial service Disruption from Fintech Impact Banking Consumers no longer need to visit a bank branch. They can have all their banking needs catered for via a single mobile app. Medium: Most consumers are staying loyal to their existing provider for now. Lending P2P (Peer to Peer) lending has enabled individuals who do not fit banks criteria to obtain credit. High: Fintech firms offer a compelling alternative to traditional providers Financing Equity crowdfunding has meant that more individuals can invest in start-ups and has expanded the potential sources of finance for the firms. Medium: Compelling alternative from start-ups but more established firms are likely to value their relationships with their bank. Wealth Management Wealth management is no longer the preserve of the super wealthy. Firms are supplying products to enable the middle classes to gain access to a wider range of products and services. High: Traditional providers will struggle to justify their fees. The newly affluent are likely to favour a tech-based approach. Insurance Consumers are now able to buy insurance products tailored to their circumstances and the challengers are able to process their claims quicker than the traditional providers. High: Traditional providers cannot match the speed of service and personalisation offered by the new breed of suppliers. Source: Juniper Research 4 FINTECH LIBERATION OR LIABILITY 2 Segment Focus x crowdfunding becoming a viable alternative to traditional lending mechanisms; x the deployment of next generation analytics platforms. Figure 3: Global Lending & Financial Fintech Platform Revenues ($m) Split by 8 Key Regions in 2020: $10.5 Billion Source: Juniper Research North America Latin America West EuropeCentral & East Europe Far East & China Indian SubcontinentRest of Asia Pacific Africa & Middle East