For a number of years now, fintech start-ups have successfully capitalised on the digital technology boom by building customer-focused offerings in areas where traditional providers had become complacent.
These businesses have been designed with innovation in mind. They also may have the luxury of operating outside the regulatory frameworks and legacy systems which burden traditional financial institutions.
It is for these reasons that there has been significant interest in the sector and capital has poured in. In fact, global investment in fintech ventures tripled to $12.21 billion in 2014 from the previous year.
The latest data from PwC and the National Venture Capital Association also shows that US investment in financial start-ups increased by 183 per cent from 2014 to 2015.
And yet fintech start-ups aren’t done. The next phase of growth is set to cause major disruption and will be characterised by greater collaboration between the old world and the new. Here are four predictions for the year ahead:
Aussie banks will get more involved
In Australia, some of the major banks are already aligned with the fintech industry. Some provide venture capital funds; others get behind start-up incubators or engage in one-to-one partnerships.
Last year, we saw the first partnerships between major banks and fintechs emerge and others are sure to follow.
By the end of 2016, I predict all four of the major banks and a number of smaller financial players will be aligned with a fintech business in some capacity. My money's on the fintech SME lending space.
Why SME lending? Because the current SME lending model doesn’t bode well for the banks or their customers.
Legacy structures make it difficult for banks to profitably service small businesses, particularly smaller, unsecured loans.
This is essentially why Australian Bureau of Statistics data indicates that small business loan applications are rejected at roughly twice the rate of those from medium-size businesses.
Fintech lenders can service this need and they can do so quickly and easily – problem solved.
Super funds will get involved
This year, we will see superannuation funds become a powerful backer of fintech.
Last year, First State Super announced it will invest tens of millions of dollars into fintech start-ups over the coming years through a direct partnership with H2 Ventures, a specialist fintech incubator and VC fund. They were the first but they won’t be the last.
These partnerships may involve a direct relationship where a superfund provides a fintech access to its client base or alternatively invests in up-and-coming fintech start-ups.
Capital will continue to flow
There has been some discussion recently about a slowdown of investment in Australian fintech; I believe these concerns are largely unwarranted.
Just recently, Spotcap raised close to $50 million, which demonstrates our capacity for continued, long-term growth and sustainable development. I’m sure we won’t be the only ones to raise substantial capital this year.
I firmly believe that fintechs with a strong business model and market position will continue to attract substantial investment and that capital will continue to flow into the sector.
Other non-bank partnerships
Although much has been reported on the tension between fintechs and the banks, the non-bank financial institutions are also grappling with the fintech revolution and are looking for opportunities in the sector.
Some, like Liberty Financial, have already invested in a fintech business and we expect more of these relationships to crop up this year.
Fintech will also continue to bridge the gap between financial services and a range of other industries by partnering with agencies, government bodies and corporations with large scale client bases.