The Census results show that a record number of FinTechs (89%) believe that customers are open to adopting FinTech services and majority of them are optimistic about future growth of the sector (61%). As the financial services sector navigates its way through disruption and innovations, we have identified key emerging FinTech themes. These themes will determine how the FinTech sector will shape up globally over the next few years.
Globally, as well as within each FinTech jurisdiction, we observe that each FinTech sub-sector is at a varying degree of maturity:
- In Indonesia there are about 78 payments start-ups whereas c.20-30 start-ups are in the lending, and savings and investments sectors each, reflecting the latter sub-sectors’ potential infancy.
- In parallel, there are c.25 active payment FinTechs in Switzerland, and a similar number in Philippines (c.30), evidencing the differences in scale of the same sub-sector across global FinTech hubs.
Going forward, this trend will dictate where innovation is leading i.e., getting significant start-up interest, compared to where sub-sectors may be potentially getting too crowded i.e., room for innovation is depleting.
Payments has gained scale in certain markets
Payments as a sub-sector of FinTech has achieved significant scale in certain markets — developed countries such as London (~30% of number of FinTechs) and Singapore (~20% number of FinTechs), as well as developing jurisdictions such as China. Some of the world’s largest FinTech unicorns are from this sub-sector, such as Klarna from Sweden, Stripe from the United States and Adyen from Netherlands.
In Asia-Pacific, social media platforms, e-commerce players and on-demand service providers (e.g., ride-hailing) with large captive consumer bases, have already or are starting to offer payments as a differentiated service to its consumers. This trend has yet to play-out in the western world.
Current regulatory regimes have started to acknowledge this — PSD2 Directive in the EU aims to enhance consumer protection, increase competition and acknowledges that the payment sub-sector cannot persist as a standalone to traditional financial services sector.
We observe that there is strong policy support for promoting innovation and financial inclusion, which has been a key driver in many markets for the FinTech sector
- Both London and Singapore are proactively backing a FinTech push and have taken a number of regulatory steps to promote innovation.
- Other regimes might require more of such support and FinTech innovation in these hubs has been mostly bottomup (e.g., China, India, Indonesia). Only in recent years, they are ‘playing catch up’ in response to the recent success and increasing scale of the sector.
Taking advantage of geo-political positioning
Challenger hubs are coming up alongside relatively well established FinTech hubs. Some examples include: Malaysia neighbouring Singapore, Lithuania near Estonia, where they are leveraging their geographic proximity to capture any spill-over from an innovation and talent perspective.
- Malaysia pitches itself as low cost cousin of Singapore. The cost of living is a third of Singapore, which might see more companies putting non-client facing jobs like operations, marketing and technology support in Malaysia.
- Lithuania have been living under the shadow of tech savvy Estonia and at the onset of Brexit, leveraged its ability to offer single window clearance for getting EU licenses. For talent, it offers larger number of trained staff at a lower costs than Estonia where there is voluminous demand from a vibrant start-up ecosystem, driving the cost of acquiring and retaining talent even higher.
- We have started to observe sub-sector specialization themes in the investor community as well. As a complex and broad sector, investors realize that they cannot possibly create capability or expertise across the space, albeit they must pick their areas of focus.
- In a survey of 125+ investors in October 2017, all were active and very interested in the FinTech space. Investors expressed focus on average in six sub-segments out of a total of 14. Most sought after specializations include: Data analytics, Blockchain, Financing, Payment Solutions, RegTech and InsurTech. Investors have started to build teams around these capabilities across the globe, or hire experts to differentiate themselves.
More capital chasing less demand
- In a survey of 125+ institutional investors deeply interested and active in the FinTech sector in Asean, conducted in October 2017, it was noted that there was greater than US$2B in capital commitments available. On the flip side, a survey of 230+ FinTechs, conducted in the same timeframe for the same jurisdiction, capital requirements were established at just greater than US$1Bn.
- Effectively, there is currently two dollars chasing every dollar in potential FinTech opportunity. At the same time, while having capital is important, it is not the only factor that will attract FinTechs.
- In 2017, global VC backed FinTech start-ups raised US$16.6B across 1,128 deals. This compared to US$13.8B across 1023 in deals. Globally there are 25 FinTech unicorns valued at US$75.9B. (Source: CB-Insights_Fintech-Trends-2018)
Collaboration between financial institutions and FinTechs
- Till few years ago banks were wary of FinTechs as narrative in the industry was more around competition between FinTechs and financial institutions. However, as innovation swept across continents, both sides realized that collaboration and not competition is the way forward. FinTechs realized that they will benefit from deep pockets, regulatory prowess, huge customer base and trust enjoyed by banks. Banks also realized that it makes sense to collaborate with FinTechs rather than try to build everything in-house.
- In Asean, banks have been actively collaborating with FinTechs to drive efficiency and enhance customer experience. Most banks have an incubator, accelerator or innovation lab, which helps drive collaboration with FinTechs. Some Asean banks have also launched FinTech-focused investment funds.
Shortage of talent
- About 60% of FinTechs in our survey agree that there is shortage of required talent in their respective countries. Globally, retaining and attracting high quality technical talent is observed to be one of the most prevalent challenges faced by FinTechs.
- Technical talent most sought after includes Data Scientists, Financial Engineers, Mobile Marketers and Computer Programmers. Some countries like Australia are attempting to import technical talent from other countries. London, New York and San Francisco continue to jostle between one another for talent, with Singapore and Sweden closing in from behind.
- A more sustainable solution to talent shortage is to nurture domestic talent. Hong Kong and Singapore are already moving towards this direction by partnering with schools to train students to develop FinTech knowledge and capabilities.
Democratization of access to information and infrastructure
- To promote healthy competition, drive innovation and benefit the end customers, new regulations such as General Data Protection Regulation (GDPR), Payment Services Directive (PSD2) and MIFID II have been proposed by regulators in Europe. In the UK, open banking regulation came into effect in January this year.
- In Asia, Monetary Authority of Singapore (MAS) is encouraging financial institutions to adopt open APIs as a key foundational layer for innovation and interoperability. Hong Kong Monetary Authority (HKMA) has also launched the draft Open API framework. As more regulators embrace open banking, it will revolutionize the way the financial services are consumed and will be a key driver of the FinTech sector in coming years.
(By Ernst & Young)
- ASEAN SMEs Report: 6 Country Snapshots | Ernst & Young
- The future of FinTech in financial services white paper: What’s the next big bet? | Ernst & Young
- ASEAN FinTech Census 2018 | Ernst & Young