Trends and Challenges - Fintech

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Fintech Trends

The dominance of fintech solutions for payments, the evolution of fintech solutions for cybersecurity, the advancement of digital banks, the entry of technology giants, and the shift in focus from inclusion to financial health are five current or predicted trends in the United States fintech industry.

Dominance of Fintech Solutions for Payments

  • More and more transactions are becoming electronic, and as a result, the way payments are processed is changing across numerous verticals and customer types. Several technologies that improve how payments are made are emerging.
  • Professional services firm KPMG noted this trend in its latest biannual report on fintech. In said report, the firm wrote that it expects payments to continue to be a strong area for investment. It highlighted as well that interest in deals involving B2B payments has increased as can be seen from Mastercard’s acquisition of Transfast, a peer-to-peer and business-to-business money transfer company, and JPMorgan’s acquisition of Instamed, a medical payments technology company.
  • As a consequence of this trend, payments are expected to remain the most dominant segment of the United States fintech industry. It is projected as well that investors will continue to funnel money into fintech for payments because they know that the segment has potential for long-term growth.

Evolution of Fintech Solutions for Cybersecurity

  • Cyber risks and the technologies for detecting these risks are evolving, and the United States government is paying more attention to the potential impact of these risks on the country’s infrastructure.
  • This is a fintech trend to watch for in the country, according to KPMG. In its latest biannual report on fintech, the firm wrote that cybersecurity has grown in prominence as a fintech segment, thanks to evolving cyber risks and detection tools. Fintech investors have also expressed interest in a variety of cybersecurity solutions, including mobile identity verification, tokenization, and fraud detection.
  • Alex Lazarow, a Forbes contributor who writes about fintech, also recently wrote that security is one of the biggest fintech trends in 2020. He added as well that, between 2017 and 2018, the percentage of firms in the United States that have experienced a cyber attack grew from 41% to 61%, and losses from cyber attacks grew from $229,000 to $369,000.
  • KPMG expects that cybersecurity will continue to be a strong area for fintech investment as a result of this trend.

Advancement of Digital Banks

  • Digital banks, otherwise known as challenger banks or neobanks, are growing in prominence, with some becoming more valuable than some traditional banks in the United States. Chime, the country’s number one digital bank, now has a valuation of $5.8 billion. Digital banks, together, were able to raise over $3 billion in funding from venture capital firms in the first three quarters of 2019 alone.
  • The advancement of digital banks was identified as a fintech trend by both Frank Rotman, founding partner at QED Investors, and Mitch Siegel, principal at KPMG. Rotman expects this trend to continue up to 2022 when it is projected that digital banks will become mainstream.
  • According to Siegel, personalization will become key as a result of this trend. Siegel believes personalized offers are what will set a digital bank apart from its competitors.

Entry of Big Tech

  • Technology giants, such as Apple, Facebook, and Google, are making a foray into fintech. Apple has partnered with Goldman Sachs to launch a credit card, Alphabet, Google’s parent company, has teamed up with Citigroup to launch a checking product, and Facebook has taken steps to create its own cryptocurrency.
  • Both Rotman and Matt Harris, partner at Bain Capital Ventures, indicate that this is a fintech trend. Rotman says this trend should be seen not as “tech getting into finance” but as “‘customer-facing organizations’ offering their customers banking products.”
  • Both Rotman and Harris expect that this trend will result in more partnerships between technology companies and banks, and between technology companies and fintech startups. More and more technology companies will take advantage of their relationship with customers, and incorporate banking products and services, such as insurance, lending, and payments, in their business models.

Shift in Focus from Inclusion to Financial Health

  • Inclusion used to be the priority among fintech companies in the country. Now, the focus has shifted to an even broader concept: financial health. Prioritizing financial health means providing customers with more holistic offerings that enable long-term financial success.
  • Both Lazarow and the Forbes Finance Council have observed this trend. The prioritization of financial health was identified by Lazarow as one of the five biggest fintech trends and by the Forbes Finance Council as one of 14 fintech trends to look out for in 2020.
  • As a result of this trend, comprehensive financial health solutions that target certain verticals, such as seniors, kids, gig economy workers, and dental practices, have emerged. Luz Urrutia of Opportunity Fund notes that several fintech startups have made financial health a priority, with fintech startup LendingClub even adding a “chief financial health officer” position.
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Fintech Challenges

Out-of-date regulations, fundraising difficulties, cybersecurity and data protection issues, fintech adoption concerns, and the resource-rich competition are five challenges that the United States fintech industry faces.

Challenges Relating to Regulations

  • The United States lags behind other countries when it comes to implementing laws that enable and encourage safe financial innovation. While many governments overseas, including the Hong Kong, London, and Ottawa governments, have all taken concrete steps to update their regulatory system, the United States Congress has wasted precious time on trivial disputes concerning the revision of the Dodd-Frank regulations for conventional banks.
  • While other countries have begun formulating standards for fintech solutions, government officials in the United States have fought over which government agency should have the authority to regulate fintech companies. The United States government is yet to issue national licenses to fintech companies, and establish national regulatory standards for application program interfaces (APIs).
  • Zac Townsend, a Financial Times contributor, identified this as a challenge when he wrote that financial innovation in the country is hindered by old-fashioned regulators. He explained that existing laws only guard traditional banks from disruption and innovation. There is no legislation to help fintech startups to grow.
  • If this challenge is not addressed soon, Americans and the United States could be left behind by other financial markets.

Challenges Relating to Fundraising

  • It is not easy for fintech companies to raise strategic or venture capital financing. There are a multitude of questions that fintech companies must be prepared to answer when dealing with potential investors and finding the right investors.
  • This was one of the ten issues that Richard Harroch, a Forbes contributor, wrote in his article about the key issues that fintech startups face.
  • Fundraising issues can significantly derail the growth of a fintech startup. A fintech startup without funds would not be able to proceed with its plans.

Challenges Relating to Cybersecurity and Data Protection

  • Given that even big financial institutions struggle to stay on top of all data privacy and protection laws, smaller fintech companies must find it hard too to keep up with these laws.
  • More sophisticated hacking techniques have also made it more difficult for players in the fintech industry to detect cyber attacks and protect themselves from these attacks.
  • These cybersecurity-related challenges were among the key issues that, according to Harroch, are faced by the fintech industry.
  • A single data breach or a failure to report a data breach could have staggering effects. It could lead to both legal exposure and negative publicity.
  • The amount of personal information that fintech companies have access to makes these companies prime targets for cybercriminals. And when fintech companies connect their systems with those of established financial institutions, the interfaces between these systems create more cyber vulnerabilities.

Challenges Relating to Fintech Adoption

  • Even though fintech solutions are growing in popularity, some customers are still hesitant to adopt these fintech solutions. Indeed, getting early adopters is one of the key issues that fintech companies face, according to Harroch.
  • For example, according to S&P Global Market Intelligence, some people in the United States do not use mobile payment services because they find it simpler to use cash, checks, or cards, they have security concerns, they are not certain whether the stores they’re shopping at accept mobile payments, or they find mobile payment too complicated.
  • Additionally, some people in the United States do not use cryptocurrencies when making payments because they have security concerns, they find cryptocurrencies too complicated, they find other payment methods easier to use, or they find prices too volatile.
  • A slowdown in fintech adoption could lead to a slowdown in fintech industry growth.

Challenges Relating to Competition

  • The fintech industry competes with not only large financial institutions such as Citi, Paypal, and Goldman Sachs but also technology giants that are making a foray into financial services. These large companies have far greater resources and spending power, so they should not be underestimated.
  • According to Harroch, competition-related challenges are one of the key issues that fintech startup companies face.
  • To beat the resource-rich competition, the fintech industry must be quick in differentiating its products and services and implementing its solutions. The fintech industry should use speed to market to its advantage.