America and the World | N5
Fintech in the World
Since the beginning of the digital revolution, the Fintech industry has been experiencing a gradual and accelerated growth — which has taken an even bigger leap in recent years.
In this whitepaper we analyze the world of Fintech, from what makes them special, through their competitive advantages and their impact on the economy, to the disruptive ways in which they are changing the world today.
What is a fintech?
Fintech arises from the combination of the terms “finance” and “technology” and refers to any business that uses technology to improve an aspect of the financial sector. The term encompasses a rapidly growing sector that serves the interests of consumers and businesses in multiple ways.
From mobile banking and insurance to cryptocurrency and investment apps, fintech has a seemingly endless array of applications.
A driving factor is that many traditional banks support and embrace the technology, actively investing in, acquiring or partnering with fintech startups, because it is easier to give digitally minded customers what they want, while also moving the industry forward. and stay relevant.
Fintech companies integrate technologies (such as AI, blockchain, and data science) into traditional financial sectors to make them safer, faster, and more efficient. Not surprisingly, it is one of the fastest growing technology sectors, with companies innovating in almost every area of ??finance; from payments and loans to credit scoring and stock trading.
How do Fintechs work?
Fintech is not a new industry, but has evolved very rapidly. In a certain way, technology has always been a fundamental part of the world of finance, whether we are talking about credit cards, databases, or ATMs.
The depth of the world of financial technology currently varies greatly depending on the area. However, the most recent advances use complex machine learning, blockchain, and data science algorithms to do all sorts of things; from processing the risks of granting credit to managing hedge funds.
In fact, there is now a whole subset of regulatory technologies dubbed “regtech” designed to navigate the complex world of compliance and regulatory issues in industries like, you guessed it, fintech.
As fintech has grown, so has concern for cybersecurity in the fintech sector. The massive growth of fintech companies and markets globally has led to increased exposure of vulnerabilities in fintech infrastructure, making it a target for cybercriminal attacks.
Fortunately, technology continues to evolve to minimize existing fraud risks and mitigate emerging threats.
What is the role of Fintech in the economy?
Technology-enabled financial solutions, such as mobile telephony, data analytics, new digital products and approaches, and the deployment of agent networks, have the potential to radically enhance and foster financial inclusion.
These technology solutions are essential to reduce operating costs, increase efficiency and reach people in remote and rural areas.
Fintechs have expanded their reach far beyond traditional microcredit products. They are harnessing technology to design, customize, and distribute a broader range of financial products tailored to the needs of low-income people — such as microinsurance, microsavings, or remittance products.
They can help financially excluded people build a credit score so they can access the financial system. And they can support those who can’t meet their financial obligations by consolidating debt, offering cheaper rates and providing personalized advice to help over-indebted clients achieve financial stability.
Competitive pressure for traditional players
The traditional financial inclusion market that is based on the concept of physical stores and human interaction is increasingly concerned about Fintech.
As a Finance for All 2018 report points out, financial service providers consider that the arrival of new technologies poses the greatest risk to their business due to its complexity, its high investment cost and the profound change it is bringing to financial services.
What many actors do not take into account, however, is that Fintech companies are here to stay. For this reason, the best way to compete in the new financial environment is not by sticking to the traditional, but by incorporating new technologies that improve the user experience.
Fintechs in Latin America
Latin America is the fastest growing fintech market in the world. Latin America’s demographics and lack of established advanced financial services present a huge opportunity for the sector.
According to the World Bank, Latin America has a $1 trillion-a-year financial services market. It is estimated that 135 million people in Brazil, Colombia and Mexico were unbanked in 2017.
At the same time, the region has a massive use of mobile Internet. Already in 2019, there were 343 million mobile internet users in Latin America. The figure is expected to increase to 424 million in 2025. Brazil and Mexico are among the five countries where users spend more hours daily on mobile applications (around 5!).
La escasez de servicios financieros, la enorme población no bancarizada y el elevado uso de las aplicaciones móviles crean el entorno perfecto para la adopción de las tecnologías financieras.
Muchos de los nuevos usuarios de servicios financieros en América Latina son nativos de las tecnologías financieras. Los adolescentes y los adultos jóvenes representan el 52% de toda la población que se están incorporando rápidamente a las plataformas fintech — muchos de los cuales nunca han utilizado la banca “tradicional”. Entre mayo y septiembre de 2020, 40 millones de personas en América Latina se bancaron con la banca en línea.
Government support and fintech-friendly regulation are also leveling the playing field for new entrants. In 2018, Mexico created a framework for fintech companies (“Fintech Law”) to compete with traditional financial institutions in terms of regulatory requirements. Brazil approved its Open Banking project in 2019 and the first phase became operational in early 2021; other countries, such as Peru and Argentina, are also on the way.
For this reason, the panorama of startups and fintech ventures is booming. Funding has already reached nearly $6 billion invested in 2021, a nearly 3x increase from 2020, and a 24x increase from 2016. Global investors are flocking to back new successes in the region
Fintech distribution in Latin America
Growth of Fintech in the World
The disruption at a social level that new technologies imply also echoes in the financial world, which has been experiencing enormous growth in recent years.
ust take a look at the following statistic to see the impact of Fintech around the world.
Adoption of financial technologies in the world
Three of the most important reasons for its growth today are the emergence of Open Banking, the ability to easily reach the unbanked sector, and the impact of the Covid-19 pandemic.
Open Banking
Open banking has become the biggest innovation in the financial sector since the invention of payment cards. For years, banks have stored every transaction we make, from buying a cup of coffee to paying a mortgage. Until recently, most of that information sat uselessly on bank servers.
Open banking makes this information available to third-party service providers. In other words, it gives people power over their data.
Both payment and account information service providers can now access the data stored in a customer’s bank account. However, both require the explicit consent of the data owner first: the account holder.
The UK has forced 9 of its biggest banks — HSBC, Barclays, RBS, Santander, Bank of Ireland, Allied Irish Bank, Danske, Lloyds and Nationwide — to open up their data in a secure and standardized way. In 2018, the UK government created the Open Banking Implementation Entity which oversees technical standards and guidelines for the UK FinTech sector.
Across the Atlantic, regulators have been slow to adopt the new standards. Without centralized regulation, US FinTechs have been left alone to adopt Open Banking, creating both confusion and opportunity.
The three largest financial companies in the United States – Fiserv, JHA and FIS – have launched open banking strategies. The APIs they provide open up the data and functionality of their core offerings (often using older technologies). American fintech companies are applying different solutions. Some are building modern platforms that prioritize APIs, while others, like Temenos or Finxact, are building their own APIs that sit on top of older systems to abstract away complexity.
The Unbanked Sector
We tend to take access to basic financial services for granted. Some countries like South Korea, Sweden and Norway are moving towards cashless societies, where everything is paid for with plastic cards.
However, the same is not true for the 2 billion people around the world who do not have access to financial services. Most of these so-called “unbanked” come from developing countries like China, India or Mexico. However, even Western countries suffer from financial exclusion. In the US alone there are almost 4.5 million unbanked people.
Also, owning a bank account is not the same as having financial services. The old school banking system can be very expensive. Bank fees and overdraft penalties prevent billions of people from taking out a loan or having a savings account. In total, there are almost 4 billion underbanked people who do not benefit from the full range of financial services despite having a bank account.
As stated in Accenture’s 2015 report, banks could increase their revenue by more than $380 billion simply by converting the unbanked into customers.
There are already some highly successful tech companies serving the unbanked. Tala, for example, is a Silicon Valley company dedicated to granting microcredit through an easy-to-use mobile application.
While working for the UN, its founder, Shivani Siroya, interviewed 3,500 people to assess the impact of microcredit in Africa. He was surprised to see how many people were turned down by financial institutions when they applied for a loan of as little as two hundred dollars.
This experience gave him the idea to create an app that could check a person’s creditworthiness through daily routines recorded on their phone. The app uses over 10,000 unique data points: things like calling your mom every night or paying for utilities on time indicate your reliability. The algorithm seems to work: 90% of people pay back the loan in a month. Tala now has more than 4 million customers and has reached a valuation of $516 million.
Such is the weight that alternative credit scoring has when it comes to providing financial services to customers.
The Impact of the Pandemic
The pandemic became a black swan that changed the Fintech industry. 2020 saw the largest wave of new accounts created in financial, banking, and mobile payment apps. European Fintech products and services saw a 72% increase in usage, while the top 7 North American neobanks increased their customer base by 39%.
Governments around the world began to encourage contactless payments as a way to combat infection. The proliferation of remote work, electronic commerce, telemedicine and e-learning have contributed to the rise of online payments.
As security becomes less of a concern, the desire for convenience will become the main driver of Fintech growth in the post-COVID world.
he positive impact of the pandemic on the sector is reflected in the valuations of some of its main companies. PayPal’s value skyrocketed from $143 billion in February 2020 to more than $340 billion in February 2021.
Robinhood was another big winner. The startup offers a gamified stock trading and investment app without most of the traditional fees. Despite suffering glitches during the COVID-induced sales frenzy, the app gained nearly 6 million new users in the first two months of 2021 and reached a market valuation of $35 billion.
What opportunities are there in the Fintech ecosystem?
Although the sector conjures up images of startups and industry-changing technology, traditional companies and banks are also constantly adopting fintech services for their own purposes. Here’s a quick look at how the industry is improving some areas of finance.
Banking
Mobile banking is an important part of the fintech industry. In the world of personal finance, consumers are increasingly demanding easy digital access to their bank accounts, especially via a mobile device. Most big banks now offer some sort of mobile banking feature, especially with the rise of “digital-first” banks, or “Neobanks.”
Neobanks are essentially banks without physical branches, offering customers checking, savings, payment and loan services on a completely mobile and digital infrastructure.
Cryptocurrencies and Blockchain
Parallel to financial technology, cryptocurrency and “blockchain” technology, known as block chain, have been born. This allows the existence of mining and cryptocurrency markets.
Although blockchain and cryptocurrencies are unique technologies that can be considered outside the realm of fintech, in theory they are both needed to create practical applications that advance fintech.
Some major blockchain companies to know about are Gemini, Spring Labs, and Circle, while some examples of cryptocurrency-focused companies include Binance, Coinbase, and SALT.
Investment and savings
Financial technology has caused an explosion in the number of investment and savings applications in recent years. More than ever, companies like Robinhood, Stash, and Acorns are breaking down the barriers to investing.
While these apps differ in their approach, each uses a combination of small-amount automated investment and savings methods to introduce consumers to the markets.
Machine learning and trading
Having the ability to predict the future of the different markets could well be the Holy Grail of the financial world. With billions of dollars at stake, it’s no wonder machine learning and predictive algorithms have become more relevant than ever.
The power of this subset of AI lies in its ability to run massive amounts of data through algorithms designed to detect trends and risks, enabling consumers, businesses, banks, and other organizations to gain a more informed understanding of investment and purchase risks earlier in the process.
Payments
Moving money is something that financial technology is very good at. The phrase “I’ll Venmo you” is now a substitute for “I’ll pay you later” in the United States. Venmo is a mobile payment platform similar to what Mercado Pago is in Argentina and other South American countries.
Payment companies have changed the way we all do business. It is easier than ever to transfer money anywhere in the world thanks to Fintech like Paypal or Wise.
Loans
Fintechs are also improving the credit industry by streamlining risk assessment, accelerating approval processes and facilitating access. Billions of people around the world can now apply for a loan on their mobile devices, and new data points and risk modeling capabilities are expanding credit to underserved populations.
Additionally, consumers can request credit reports several times a year without affecting their score
Insurance
Although insurance technology is quickly becoming its own industry, it still falls under the umbrella of fintech.
Insurance is slow to adopt technology, and many fintech startups are partnering with traditional insurance companies to help automate processes and expand coverage.
From mobile auto insurance to wearables to health insurance, the industry is seeing tons of innovation.
Conclusions
As you have had the opportunity to see, Fintechs are revolutionizing the world of finance like never before in history. Processes that were once slow and expensive now become much faster, more convenient, and more accessible.
Here are some of the main points to keep in mind:
- Fintechs are companies that focus on solving financial problems through technology.
- Actors that do not incorporate the new technologies of finance and stick to a ‘traditional’ model are at a disadvantage.
- One of the main roles of these companies is to make finance much more accessible even to the unbanked — as is largely the case in Latin America.
- Thanks to Open Banking, financial information is free and accessible to all actors — always with the user’s consent.
- The pandemic has only increased the reach of Fintech.
- There are many opportunities in the environment of financial technology companies that go beyond the traditional; cryptocurrencies, loans, insurance, etc
Editorial: Marcelo Frette
Access our downloadable: Statistics -Fintech sector in Latin America | N5now
