The fintech industry is booming. It’s turning the financial industry upside down… and if it hasn’t already found its way into your life and your investments, it will soon.
Fintech is about using technology to make financial services more efficient and accessible. And it’s growing rapidly. Last year investment in fintech increased by 60 percent to US$20 billion.
In Asia growth was even stronger – investors put a record US$4.5 billion into Asian fintech companies in 2015. That was almost quadruple the sum that was invested in 2014.
From lending and asset management services to payments and ledgers, fintech is transforming the financial services world as we know it. It’s disrupting big, established financial institutions. This will mean lower fees and easier access to financial services for the average saver, borrower and investor.
The rise of fintech
Fintech improves on what banks and wealth management companies currently offer – often at a lower cost. And in some cases, it even involves introducing an entirely new product or service.
The growth of fintech is a recent phenomenon. The 2008 economic crisis exposed a lot of flaws in the global financial system. This opened the door for new, innovative banking and finance models.
Both borrowers and lenders have been keen to explore alternative, cheaper financing methods. And with the finance industry also being slapped with tighter lending regulations since the crisis, smaller businesses have found it more difficult to get a loan through traditional channels.
Investors also want services with lower fees and smaller initial investment requirements. They also have a more “Do-It-Yourself” (DIY) mindset and are comfortable using online tools to manage their investment portfolios.
The demand for alternative, innovative financial solutions from investors, businesses, borrowers and lenders is what brought on the current fintech boom.
What fintech looks like in the real world
One example of fintech are robo-advisors – investment management companies that use trading algorithms to automatically manage your investment portfolio. Robo-advisors are an attractive, low-cost investment option that’s good for people who like to manage their finances online. They also let you set up an account with a smaller initial investment than traditional wealth management firms normally accept.
More and more robo-advisory options are now beginning to spring up around Asia, particularly in Singapore and Hong Kong.
Another fast-growing Asian fintech sector is peer-to-peer (P2P) lending. This normally involves a fintech company providing an online platform for borrowers and lenders to connect with each other.
Until now, much of Asia’s growth in P2P lending has been confined to China. A recent study calculated that the total value of P2P transactions in China last year was just over $100 billion.
P2P lending is catching on in countries like India and Singapore as well – with companies like India’s Faircent and Singapore’s Crowdo growing rapidly.
Crowdo, for example, connects investors around Asia to borrowers that are either individuals or small medium-sized enterprises (SMEs).
These platforms allow borrowers to borrow money at lower interest rates than what they’d get from a traditional bank, while investors could lend with returns ranging from 8 percent to 25 percent per year.
To speed up the lending process, these platforms have developed their own in-house credit scoring system. Before requesting a loan, borrowers first provide their financial information for the platform’s credit scoring purposes. Then, investors decide who to lend to, depending on their risk profiles, or credit score.
The fintech disruption
The lending world is no longer just the domain of banks and loan sharks. People and businesses can now borrow money from new, non-traditional fintechs. This is having a hugely disruptive influence on the world of finance. Banks now have to adapt and collaborate with fintech companies to keep market share.
For instance, Singapore’s DBS Bank, the largest bank in southeast Asia, recently joined forces with U.S. fintech company Kasisto to create Digibank, India’s first branchless, mobile-only bank.
Technology is at the forefront of this venture. No paperwork is involved in opening a Digibank account. Instead, a biometrics-enabled ID (biometrics involves things like finger prints, retinal scans, face recognition and voice prints) is used for customer authentication.
If they’re not collaborating with fintech companies, banks are trying to compete with them by bolstering their own technology capabilities.
For instance, Swiss bank Credit Suisse recently launched a private banking app that provides its Singapore and Hong Kong clients with a range of online functions to help them manage their wealth. It also allows clients to access the bank’s library of investment and research publications.
Fintech’s potential in Asia
Asia will lead the world in fintech growth over the coming years. Hundreds of millions of people in Asia don’t even have access to formal financial services… and – similar to the way that entire countries leapfrogged fixed-line telephony in favour of mobile telephony – many of them may not ever use traditional financial services, in favour of fintech.
Asia is home to half the world’s internet users. So, fintech companies are well-positioned to take advantage of this technologically advanced – but financially underdeveloped – region.
With a few taps on their smartphones, people in Asia will be able to bypass the big banks and open their first bank account or make their first investment. And they’ll be able to do it at a lower cost.
Existing fintech companies are already eyeing Asian expansion. The U.S. fintech company Robinhood, which offers commission-free stock trading on U.S. stock exchanges, launched a Chinese version in April. And it recently partnered with Chinese internet search giant Baidu to allow Chinese citizens to buy and sell U.S. stocks from their phones… with no fees and no account minimums.
Fintech is changing the way people bank and invest. It’s giving people new opportunities to invest and bank that were not available before.
Expect to hear more about fintech, in the form of robo-advisors, P2P lending or other financial services in the coming months. It may not be the solution for everyone, but it will be playing a bigger role in the world of finance.