Fintechs Facts – Financial technology, or Fintech for short, refers to financial innovations that offer further developed innovations and generate new financial instruments or financial services. Fintech is thus a collective term for the entire financial industry, in which innovative technologies are used to optimise financial transactions and processes. This technology is mainly used in the banking, insurance and payment services sectors.
Aims and potential of Fintechs
Financial technologies are usually developed by start-ups to compete with the established banks and financial service providers. In doing so, they do not simply copy the processes of the existing providers, but pursue disruptive approaches in order to noticeably improve processes in the financial world. The resulting potential competitive advantage should not only secure market shares, but ideally renew or even replace existing processes of the entire industry.
Fintechs often operate without a banking licence, particularly in the initial phase, and in these cases are not subject to the requirements of banking regulation. In the case of fintechs in the banking sector, this initially simplifies market entry and enables fintech start-ups to compete for market share or occupy niches with the large financial providers with comparative ease. This has advantages for the consumer, for example, if every transaction can be conveniently followed in real time on a mobile phone. After all, Fintech’s users generally strive for friendly solutions that can generate improved service or even better profitability. On the other hand, criticism is voiced with regard to potential risks that are said to arise from the fact that the new providers are not subject to banking regulation, which also serves to protect consumers.
Example N26 Banking licence
The Fintech N26, for example, used the license from Wirecard Bank AG until it obtained its own banking license. N26 enables its customers to manage their entire account via smartphone. N26 customers can simply install the corresponding app with which they manage their current account. In this way, online payment transactions can be processed, money can be invested or loans can be taken out.
The young start-up companies also benefit from the fact that their customers have laptops, smartphones or tablets and are often online. Accordingly, the target groups are initially primarily young and educated customers before further target groups can be acquired in the next step.
The Fintech pioneers have been able to celebrate some successes in recent years and are increasingly conquering their place in the market. Currently, however, the Fintech companies’ share of the total market is still less than one percent.
Core areas of Fintechs
The financial technology is mainly used in the banking, insurance and real estate (PropTech) sectors. The PropTech sector has taken on a very strong role, especially in recent years, and thus has a large number of new companies with a corresponding number of venture capital rounds. In addition, the crowdinvesting area now has a very strong focus on real estate. However, the areas of risk management and payment processing in retail are also increasingly being expanded by Fintech solutions. Here the technology can help to automate many applications. All actions such as payment, investment, financing or provisioning are essentially to be simplified and accelerated by Fintech innovations.
Fintechs in the area of payment processing
>specially in payment processing, Fintechs are increasingly attacking existing solutions with lean and innovative developments. In this respect, Fintechs can confront existing providers with two main disruptive approaches. On the one hand, solutions are worked out that offer faster and more convenient payment procedures and on the other hand, these procedures prevent additional costs for customers. For example, customers are particularly interested in sending and receiving money free of charge, sometimes even across national borders. According to a study by Accenture from 2019, Fintechs’ triumphant advance in the field of payment transactions can no longer be stopped. The consulting firm estimates that by 2025, Fintechs will account for about one-sixth of the industry’s revenue.
Investment and securities trading
In the area of investment or trading, new electronic trading platforms attempt to support trading activities on the capital market for customers. Via networks, customers can observe transparently and up-to-date how other traders behave in the market and examine their strategies in trading with foreign exchange and capital investments. Anyone who uses these services requires only minimal prior knowledge and thus finds a potential alternative to conventional asset managers. The Berlin Fintech Trade Republik, which was founded in 2019, received special attention here. The online broker offers an extremely favourable service for investment clients. The platform is completely mobile and thus also focuses on a young target group. Besides the mobile approach, the cost structure in particular is innovative and disruptive. Unlike the established traders and bank offers, the order fee at Trade Republik is only one Euro. Therefore customers have to be content with a very narrow offer regarding the trading place for shares and derivatives. Orders can therefore only be placed at Lang & Schwarz Exchange (LSX).
Another Fintech innovation in the investment area is the use of Robo-Advisors. A Robo-Advisor is a system that is based on algorithms and can use them to automatically give and execute investment tips. These systems are used to manage small portfolios automatically and cost-effectively or to support human advisors. In most countries, service providers using these systems must have them approved and monitored by financial regulators.
The market for consumer loans has been growing for years. The market conditions in this country are particularly attractive for Fintechs. In addition to reliable customers when it comes to repayments, the low interest rate environment for customers and the high loan interest rates are exciting for Fintechs. Credit comparison platforms in particular have been able to change user behaviour in the last decade. Whereas in the past customers had to spend a lot of time researching numerous credit offers themselves in order to find a cheap loan, today’s comparison portals do this in seconds. The comparison portals were able to noticeably expand their market significance through innovative product and service enhancements.
Decisive for the Fintechs’ success in the financing sector is the high market coverage. This means that a loan comparison can present and offer the customer practically the entire market. This makes it very easy for the customer to find the best offer for him at the aggregator. For the credit Fintech this results in a significantly higher conversion rate than individual banks could achieve. The comparison and the subsequent mediation of the customers to the respective banks is made possible by corresponding APIs to the connected banks. For this, Fintech uses specially developed algorithms so that the customer can be referred to the appropriate banks.
The comparison portals have meanwhile been able to build up large brands and achieve correspondingly high levels of awareness. However, the market share is still only five percent.
Well-known brands are the Berlin-based Fintech smava in the consumer loan segment of Interhyp’s mortgage segment. smava is of particular importance here since the portal was once launched as a pioneer in the area of P2P lending.
Fintech in the SME Mortgage segment
In addition to the consumer credit sector, a number of SME financing Fintechs have been established in recent years. Although the SME finance market is very competitive, it is nevertheless very interesting for Fintechs due to a number of market factors. SMEs still often have difficulties in obtaining necessary financing on the existing market. In particular, high regulatory constraints and process costs as well as lengthy approval procedures and below-average standardisation in the processing of financing lead to relatively high costs, especially for smaller financing volumes. Fintechs are now moving into this initially unattractive niche. Well-known providers here are Fincompare and Creditshelf
Development and perspectives of Fintechs
It seems that financial technology is expected to develop enormously. Around the globe, investments in Fintech companies are increasing rapidly. There are some hotspots, but they are shifting again and again. In 2014, most investments in Fintech companies in Europe were made in the cities of London, Amsterdam and Stockholm. A total of 1.5 billion US dollars was invested in this area in Europe in 2014, more than a third of this amount came from companies in London. According to the “Fintech 50” ranking list, in 2014 about half of the most promising Fintech companies in Europe were still based in the UK. Great Britain was therefore one of the driving forces behind this development. In 2012, just under a third of global investment in the Fintech sector was transferred to British companies.
With brexite, Lithuania is now also developing into a new stronghold for Fintech in Europe. Since 2016 alone, 51 new licenses have been granted in this area. In the Asia and Oceania region, Sydney is particularly noteworthy. The financial services sector in the Australian coastal city is now larger than that in Singapore or Hong Kong and accounted for a full nine percent of Australia’s gross domestic product in 2017.
Development in Germany
The advance of the Fintech companies continues at high speed despite the brexite and corona crisis. The capital Berlin plays a prominent role in this. One third of all German fintech companies are currently based in Berlin. In 2019 the Fintechs in Germany were able to double the amount of collected growth capital compared to the previous year. In total, over 1.2 billion euros were collected in Germany alone. At the same time we saw the largest financing round in Germany to date. Thus, the Fintech N26 was able to collect about 420 million euros.
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Ever larger financing rounds and higher valuations of the Fintech companies have now resulted in a number of strong companies being established here, which are also able to compete with established providers in terms of marketing budgets. In addition, especially in the start-up phase, these companies have also relied on innovative and performance marketing channels. The know-how built up in these areas can now often be used as a competitive advantage.