Everyone Wants Fintech Investment: Here’s Why.

Financial technology, or Fintech, is one of the fastest-growing industries, both due to its high rate of evolution as the world goes digital, as well as the wide range of solutions it encompasses. The Fintech industry is broadly defined, ranging from online banking applications to cryptocurrency to chatbots for companies providing financial services. Any company that uses technology to improve financial services falls under the large umbrella of Fintech.

This umbrella is set to only grow larger in the years to come, at a remarkable CAGR of nearly 25% over the next five years. Fintech has the unique advantage of playing a key role in the digital transformation of existing industries as well as the emergence of new ones. Where there is money to be sent, spent, saved, or borrowed, financial technology will help move it online.  

The Economy Moves Online

As the name implies, financial technology touches all aspects of the digital transformation of money. Every year, more people bank online, pay for goods using virtual wallets, and make purchases over the internet. Financial technology is driving this change.

The pandemic accelerated the move toward digital payments, as consumers opted out of using cash due to its potential as a viral vector. This shift may have been sped up by COVID-19, but it was already happening in the US and abroad and is set to continue. By 2022, cash is expected to be the least used payment method in the United States, a remarkable change from being the most common just four years earlier.

Most Americans now bank digitally, and in time, virtually the entire country will adopt online banking. FinTech firms will help to provide this solution, as well as reducing friction and boosting security across all financial activity. As online banking matures, we will likely see consolidated platforms to manage different bank accounts and other financial assets, as China has done. The one certainty in the Fintech industry is that its services, products and the technology it employs will continue to change in unexpected ways. The one easy prediction is robust, resilient growth. 

Resilient Growth in Fintech

The economic shock of the COVID-19 pandemic gave us some extreme insight into how different industries will fare in a tougher economic climate. While the circumstances of the year were unique, and certainly favored digital solutions to everyday problems, Fintech proved resilient to the economic downturn and many segments even saw accelerated growth.

This year inspired confidence that the industry, which favors agility and innovation in the face of new problems, can weather economic storms without shedding value or jobs. While certain negative indicators, such as loan defaults, increased, the World Bank reports that the industry saw transaction volumes increase by 11% YoY in the first half of 2020. Despite massive job losses in the larger economy, total Fintech jobs actually grew by 2% in 2020, with significant growth expected in 2021.

What’s happening in Fintech around the globe?

Fintech is a global phenomenon, both in terms of new adopters and emerging firms. In a departure from the historical trend, the developing world has kept up with or even outpaced American adoption of many financial technology services. A key theme in the Fintech landscape is that leading firms are popping up all over the world, disrupting the industry, and taking charge in their local markets. In this spirit, innovation and cutting-edge solutions are no longer just coming from Silicon Valley. The new solutions in other markets can provide clues as to how the industry will change in North America.

Due to the unique regulatory and cultural makeup of each region, it is common for local Fintech companies to do well in their respective markets, often outperforming much larger multi-nationals. For example, Argentinian eCommerce and digital payment giant, MercadoLibre, enjoys dominant market share for both services in Latin America, squeezing out foreign behemoths like PayPal and Amazon. The same is true for China, whose unique laws protect Chinese companies from significant competition in its Fintech market.

Both China and Latin America have seen robust adoption of alternative payment platforms, and have pioneered new solutions unique to their countries’ needs. They also have both leapfrogged the sophisticated banking infrastructure of the Western World, favoring digital wallets, often without any bank account tied to them.

Latin America sees an extremely high volume of remittances, and most of this money is now sent digitally, often without the need for a formal bank account . It is also the norm to pay for goods and services in installments, and local payment platforms make this much easier than in the United States and Canada. In a region that sees low rates of bank membership, digital payment services offer much-needed access to credit and online purchases.

In its own right, China has largely done away with cash-based transactions in favor of new payment solutions. In the process it has leapfrogged the card system, using phones and QR codes to revolutionize transactions, and making sure its own companies are at the forefront of that revolution. It is expected to far outpace the United States in digital payment volume by 2024, surging to $3.5 trillion vs $1.5 in the US. Two Chinese companies, Alibaba and Tencent, control nearly all market share in the digital payment space.

Fintech Cities to Watch

Predictably, much of the capital in Fintech is concentrated in major cities like New York, San Francisco and Toronto. However, much of the growth in the industry is now coming from lower-profile cities, offering insight into what startups are looking for in a place to set up shop.

Cities like Charlotte, Salt Lake City, and even Detroit have emerged as industry Meccas. Charlotte actually has the second highest number of job postings for jobs in the financial technology industry, only behind the Big Apple. The city’s relatively low costs and history as a major financial center spurred a major tech boom over the last 20 years. Salt Lake City’s natural beauty, low regulatory burden and abundance of young talent have enabled a similar status. An intentional effort by Detroit’s leadership to transform its withering industrial economy into a financial technology hub has borne fruit, with major Fintech companies like Benzinga and QuickenLoans calling the city home.

At both a global and national level, we’re seeing a much more widely distributed development of the Fintech industry. Wherever there are brilliant minds and a friendly environment for entrepreneurs, industry startups are taking root. Rather than the metropolises of the last decade, tomorrow’s hotspots for Fintech will be places with abundant human capital and high quality of life, coupled with low costs and regulatory burden.

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