Where is the future of fintech headed?

The fintech space is booming and as finance and technology converge further, investors will continue to pour billions into new innovations that deliver services more efficiently. Typically, the big banks have been major players in terms of providing financial backing to promising start-ups, supporting them through incubator functions, and even just buying them outright.

However, with traditional banks being forced to spend more on upgrading their outdated systems, the FT has reported a change in the way banks invest in fintech firms. Increasingly they’re making fewer but larger investments, favouring partnerships over acquiring majority stakes.

As banks such as RBS now focus their attention on developing their own digital offerings, an open question remains as to whether fintech will unseat the big players in finance, or if the legacy firms will be home to where most of the successful fintech innovation actually happens?

Much has been made of the potential threat to banks posed by the big technology firms. From Apple launching its own credit card, to Facebook’s proposed digital currency Libra, there has been plenty of noise in the space. Silicon Valley’s foray into financial services has however, so far been relatively gradual.

Google has said it plans to work with existing financial services providers, such as Citigroup to drive greater adoption of Google Pay. For now at least it seems the strategy is not to disrupt or replace banks as such, but to act as partners. While banks in the US and Europe may not yet have felt the full force of disruption from the big tech players, in China and across south-east Asia it’s a very different story.

According to John Thornhill, the FT’s innovation editor, “technology is completely redesigning finance in China from the smartphone user’s perspective.” The use of mobile payments is fifty times greater in China than the US and this staggering growth has largely been facilitated by two tech giants, Alibaba and Tencent, who have benefitted from powerful network effects. To put their growth in perspective, since being founded in 2014, Alibaba’s financial arm Ant Financial is today worth roughly fifty percent more than Goldman Sachs.

Although the overseas expansion of China’s major tech players has been slow and hampered by regulatory hurdles, Jan Metzger, Asia Pacific head of banking, capital markets and advisory at Citi highlights the need for incumbent banks to be weary of the threat they pose.

If Asia is to be a ‘time machine’ for the west as far as digital banking is concerned, the biggest task will be to persuade consumers to switch from tried and trusted banks to an app. The UK is often cited as an example of where digital entrants have had success, however the likes of Monzo and Starling are largely regarded as useful for specific purposes, such as commission-free spending abroad.

FT retail banking correspondent Nicholas Megaw has reported on the struggles of the early banking “challengers” such as Metro Bank, highlighting the difficulty of breaking the dominance of the UK’s big four lenders.

In markets such as India and China, digital entrants have been aided by “decades of aloof, inefficient and expensive service from traditional banks and other financial institutions” and even smaller start-ups are capturing significant market share. The message for traditional financial institutions in Asia is clear: adapt now or risk becoming irrelevant.

Ultimately, whether banks in Europe and the US are subjected to similar levels of disruption is difficult to predict, however as John Thornhill notes, China’s “late-mover advantage” makes its tech giants the leaders in the race to capture those consumers without a bank at all.

The world of fintech is vast, but through the FT’s international network of journalists, fintech professionals and those involved with the sector have a view on emerging themes and developments on a global scale.

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