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Introduction
Finance has been visibly transformed over the past decade as emerging fintech companies leverage cutting edge technology to deliver innovative experiences aligning with how modern consumers and businesses expect to manage their financial lives in a digital world.
The first phase of fintech focused heavily on areas like peer to peer payments, marketplace lending, personal finance management and crowdfunding. However, fintech is no longer an emerging niche.
Today we have entered an era defined by a rapidly growing sector that has applicability and relevance across the entire financial services spectrum. Fintech is driving material disruption within core banking, investing, capital markets and even crypto now challenges existing paradigms for how we exchange and manage value.
In this research article, we analyze key trends shaping the constantly evolving landscape including explosive growth projections and funding momentum for fintechs pursuing diverse new business models with special attention given to emerging use cases powering the next wave of innovation.
The Fintech Market Today
Broadly defined as technology innovations aiming to compete with or enhance financial services, Global fintech adoption rates sit at 64% amongst digitally active adults while typical interactions average over 4x per week, per the World Fintech Report. As an emerging industry sector, fintech has experienced massive growth recently which is likely to continue.
Venture Funding Growth
According to latest KPMG research, global fintech funding grew at a blistering 58% CAGR from 2018 to 2021 to hit $210B as over 2,700 deals were completed last year.
The Americas led 2021 funding value with $112B compared to $65B into EMEA and $27B into ASPAC markets, although growth rates exceed 50% across each region.
At a category level, payments companies attracted the most investment dollars although strong interest exists across verticals like banking, personal finance, investments, crypto and cybersecurity.
Regional Trends
The UK and US account for nearly 80% of fintech investments into Europe and North America respectively.
However, emerging markets pursuit significant opportunities to leverage technology to broaden financial access.
Southeast Asia generates strong deal traction with progressive regulation in Singapore combined with rapidly growing digital economies and underbanked populations amplifying adoption for payments, lending and neo-bank solutions.
Latin America exhibits similar dynamics with early fintech movers like NuBank achieving $100B+ valuations offering mobile-first banking given high smartphone penetration rates.
Even Sub Saharan Africa exhibits enormous potential with lesser known startups facilitating payments, micro-lending and expanding access.
Business Model Innovation Driving Disruption
Underpinning mind-bending growth projections is a shift towards highly scalable digital business models leveraging cloud, AI/ML and API-connectivity shaping how services are built, distributed and consumed.
Embedded Finance Platforms
Perhaps the most profound trend is embedded finance which injects banking and payments capabilities like accounts, money movement, card issuance, credit and expense management directly into non-financial environments.
Embedding financial tools allows non-finance companies to deeply integrate relevant services to streamline customer experience flows inside their own platforms and apps.
For example, gig economy firms can embed earned wage advances or tax withholdings while e-commerce providers facilitate instant point-of-sale credit promoting higher conversion and order values. Even IoT platforms can now integrate usage-based insurance natively.
Advanced API connectivity allows firms like Bond Financial to equip enterprise clients "out of the box" to embed customized financial products using ready-made building blocks supporting quick launches and rapid experimentation.
The appeal for end users includes contextualized experiences while enterprises benefit from new revenue streams and stronger engagement.
McKinsey estimates nearly 60% of global financial services revenue pools face disruption from embedded models projected to reach $7 trillion by 2030.
Super Apps Consolidate Services
Originating in Asia, "super apps" converge multiple everyday services from communications to ridesharing, food delivery and crucially financial services including banking, lending and investing into single one-stop platforms.
Powerhouses like Grab, Go-Jek and PayTM command loyal user bases across Southeast Asia leveraging payments initially before expanding into adjacent services and achieving massive scale in customers along with recurring interactions and user data.
Globally, standalone neo-banks like Revolut, Davey and Varo Money emulate this strategy offering integrated mobile money management, bill pay, peer-to-peer payments, and debit cards powered by apps uniting daily financial operations.
Autonomous Finance Leverages AI
Sophisticated artificial intelligence and machine learning algorithms enable personalized financial recommendations and automated decisions aligned with customer needs.
Early robo-advisors like Betterment displace expensive human wealth managers using algorithms offering automated portfolio management, rebalancing and tax optimization serving up the democratization of investment management.
As predictive modeling and decision engines improve, expect autonomous finance to transform banking, insurance and business finance using semi-autonomous agents overseen by humans.
Applications Expand Across Financial Sectors
While early fintech activity focused heavily on areas like peer to peer lending and payments/remittances, innovative companies now pursue opportunities across nearly every financial vertical.
Wealthtech and Investment Management
An emerging class of fintechs aims to transform wealth management for affluent and retail investors.
For example, Personal Capital offers holistic wealth supervision combining portfolio monitoring, financial planning and retirement blueprints while upstarts like YieldStreet and PeerStreet enable direct participation in alternative asset classes like private equity, commercial real estate and shipping loans outside the domain of Wall Street.
Cryptocurrency also opens new paradigms for programmable money flows and decentralized finance without centralized intermediaries.
Insurtech Aligns with Modern Customers
Leveraging mobile, AI and Internet of Things connectivity, insurtech innovators like Next Insurance (commercial policies), Pie Insurance (workers comp), Alan (health) and Lemonade (renters/home) reconstruct insurance from the ground up promoting speed, personalization, improved economics and alignment with digital experiences.
Others like Metromile pioneer pay per mile auto insurance while Hippo leverages IoT connectivity for home insurance. AI underwriting, claims automation and embedded distribution via APIs will continue to transform insurance.
Crypto Banking Infrastructure Emerges
Despite crypto market volatility, the public blockchain wave drives major infrastructure innovation from self-custody wallet apps like MetaMask to crypto exchanges like Coinbase which recently achieved a staggering $100B valuation.
New crypto-native fintechs bridge digital asset markets with traditional finance like BitPanda offering wealth management for crypto and fiat currencies. Others issue crypto debit cards like Wirex and Crypto.com bridging real world spending utility.
Behind the scenes, blockchain connectivity infrastructure like Chainlink helps fintechs unlock blockchain data to power financing decisions and risk transfer across siloed networks.
Underbanked Markets Represent Major Opportunity
Expanding financial access powers an important use case. Over 1.7 billion adults globally lack access to formal financial services often struggling with cash-based workflows.
Fintech promises banking-as-a-service offerings tailored to base-of-the-pyramid demographics. Africa stands out with leading innovators like M-Pesa pioneering mobile money transfers, Branch facilitating micro-loans based on mobile usage analytics and Jumo offering customer financial management tools.
India stack startups like RupeeRedee tap unique national biometric IDs to underwrite and provide financing driving financial inclusion. Such models can expand worldwide especially where smartphones provide connectivity leapfrogging traditional infrastructure dependencies.
Payments Infrastructure Modernization
Much fintech innovation builds on evolutions from national payments infrastructure modernization efforts:
In the US, FedNow introduces real-time clearing and settlement between banks enabling richer overlay services for business invoices, micro-payments and instant transfers facilitating economic velocity.
The EU‘s PSD2 directive mandates banks open APIs giving authorized third parties direct access to user financial data and payment initiation capabilities. This turbocharges cash flow forecasting apps, account aggregation tools and automated business finance leveraging permissioned data sharing.
Instant Payments schemes similarly launching across Australia, India, Brazil and Nigeria will continue opening opportunities for tech innovators to build better solutions.
Incumbents Adopt Digital Transformation Strategies
Given the visible threat, incumbent banks, insurers and investment managers actively respond to fintech challengers by:
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Partnering – Plugging into platforms like Stripe, Synapse and Marqeta
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Investing – Participating directly in leading fintech venture rounds
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Innovating – Establishing innovation labs, incubators and accelerators to nurture new ideas and talent
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Acquiring – M&A of successful fintechs with proven business models
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Transforming – Major tech overhauls updating legacy systems towards API-connectivity, cloud and AI.
For example, Goldman Sachs now operates Marcus digital banking, offers bitcoin derivatives, invested in fintech unicorns like Stripe and Nubank while JPMorgan built a blockchain unit and acquired 55ip plus Global Shares for tech acquisitions.
Regulations Can Accelerate Innovation
Financial services remain heavily regulated yet certain policies aid fintech progress:
In the EU, PSD2 legislation forcing banks to open access interfaces continues sparking open banking models to leverage permissioned data access.
In the US, OCC interpretations allow Federal banking charters for fintechs accepting deposits like Varo Money or Figure lending nationally. This increases credibility.
Singapore‘s MAS issues banking licenses to select non-banks like Nium and Tonik spotlighting an openness towards entrepreneurs.
Crypto-friendly regimes adopted in Switzerland, Singapore and Portugal where targeted regulation nurtures innovation contrast with China‘s strict crypto ban – a reminder of diverging policy.
Globally, sandbox environments provide testing grounds for emerging ideas before full launch. Policy which finds balance between managing risk and spurring responsible innovation remains integral to fintech progress.
Future Fintech Outlook
Financial services face continuous disintermediation threats from entrepreneurial fintech challengers leveraging cloud, AI/ML, blockchain and API connectivity to test new models targeting frictions big banks and insurers struggle to resolve locked into legacy systems.
Incumbents now actively respond by partnering, investing, innovating and acquiring fintechs for modern capabilities. Customers gain from amplified choice, flexibility and low fees.
With over 2 billion unbanked adults plus Small businesses struggling from limited options, underserved segments present major growth runways as mobile connectivity reaches worldwide.
Both emerging and developed markets will Feel continuous impact from fintech competition although regulations play governing roles curating directions.
Dramatic expansions in connected devices, autonomous transportation, smart infrastructure and augmented lifestyles will necessitate embedded, flexible and interoperable financial tools built using future-forward architecture.
In this sense, fintech feels very much like an unstoppable movement led by software and algorithmic intelligence where the decentralization of money through code seems certain to reshape everything from how we earn, save and invest long into the coming Web3 decade.