FinTech: How Far Can Disruption Go?


Technology is more important than ever in banking and insurance. This is highlighted by investments of over $200 billion this year. But will it be enough? Just like other sectors, the financial sector is under threat of disruption. FinTech companies and divisions are the new kids in town. Although only taking 1% of annual revenues in the US consumer banking, e-wallets, robo-advisors, peer-to-peer lending are closing the gap quickly. An interesting new niche is InsurTech that aims to disrupt the traditional insurance industry.

Fintech shows exponential growth

One key advantage of FinTech is that the sector invests a lot more than its traditional peers on a relative scale. Last year innovative FinTech companies saw investments increase to $ 19 billion, doubling since 2013 and up from only $1.8bn in 2010. 2016 will likely see bigger numbers, with already $6.7bn in investments during Q1-2016. A lot is heading to payment services, but investments in InsurTech take of as well. The first quarter saw 47 deals in InsurTech, amounting $650 million in total. Compared to last year, that’s an increase of 280%. A lot of these investments are moving to data analytics. That isn’t surprising, since the insurance sector heavily depends on calculating risk from available data. InsurTech companies that can add value by improving the quality and quantity of data analytics have a significant edge over others. Mispricing risk is costly…

Disruptor, ally or in-house competition?

To be fair: traditional insurance companies are not standing still. Some are also experimenting with online-only finance services which can also be considered as some form of FinTech. This indicates that there are multiple ways to transform the financial industry. As we showed in our piece on robo-advisors, established names are very active in other fields of FinTech as well. The roll-out of Robo-advisors is largely driven by cost reduction programs, but could also increase potential client base. Part of it is in-house development, but banks also acquired firms to intensify the efforts.

There are of course FinTech startups that eventually may become a big disruptor. Best example is PayPal (NASDAQ: PYPL) with a market cap of over $47 billion. Most will know the company for its e-wallet services, though it’s also expanding to the consumer lending market. But it’s another name in the consumer lending market that grabs the attention these days: Affirm. The San Francisco based lender recently raised $100 million in a new funding round, valuing the company at $800 million. Cleary venture capitalist are still interested in FinTech, despite overall weakness in funding for startups. The interest in Affirm could be explained by the people behind it. Max Levchin, who founded the company in 2013, was also CTO and co-founder of PayPal.

Another interesting development is the joint efforts of industry names with consumer technology brands. Samsung and Apple may be the perfect example of this with payment features on their phones. However, banks are also developing their own e-payment services. In particular, in markets with relatively high percentage of electronic payments, banks have the knowledge to be ahead of potential disruptors. But in some markets they are simply too late to the game. For instance, in China, 85 per cent of all online payments are executed by other players than the traditional banks.

FinTech strength may also be its Achilles heel

Now the big question may be why there’s room for disruption in the financial sector. First of all, established players lack the innovational spirit. That’s why Quicken Loans was able to grab second place in mortgage lending, being an online-only lender. But also regulatory issues are an important explanation. Especially in the aftermath the Great Financial Crisis with all the subprime mortgage troubles, established players wish to comply to the rules of consumer banking with little incentive to be all too creative with their activities. Make no mistake: e-wallets, peer-to-peer lending etcetera are high margin activities, so traditional players are keen to play a role in this market. But being a frontrunner in regulatory sensitive activities comes with a risk. Therefore, the industry prefers to be a little later rather than to be too soon to the game. Recent lawsuits and settlements show that mistakes on the regulatory field can be very expensive.

FinTech or not, financial services will change

Nevertheless, FinTech makes clear the financial sector may transform further. Electronic and online banking proved that financial services, despite their sensitive character, are open for huge innovations. FinTech simply brings the sector to the next level. Whether through disruptors or in-house innovation isn’t relevant for the consumer, as long our money is save.