SCET Explains – Where Fintech Looks Promising and Why


November 2, 2016



With 2016 fast coming to a close, many people are questioning where the largest proportion of fintech investments will lie heading into 2017. Whereas 2016 was the year of heavy VC investments in Blockchain, AI, Online Lending and a number of other sectors, funding is anticipated to cool down in 2017, given some sectors have lost both value and allure. However, at the same time, wealth management, back-office operations and wealth management have gained increasing traction, and promise strong returns to investors. Key technologies such as cloud, omni-channel services, APIs, IoT, Big Data, AI & cognitive science are all disrupting the fintech industry. This article aims to amalgamate various cited research and explores where companies are likely to get funded and why.

Cognition and AI in finance has become increasingly popular. AI startups received more than $1.6b from VCs in the first half of 2016 – predictive analytics and the use of Blockchain technologies carry with them the unique ability to learn from customers, provide unbiased advice based on huge amounts of data, and carry the ability to reshape asset management and other investing related products in the financial services sector. Brett King, the author of Augmented: Life in the Smart Lane talks about how AI and predictive analytics have the potential to eliminate many existing financial services in the workforce, and in the process of doing so can create real life responsive systems that are better responding than the personal element in real time. In automating product selling / buying processes, a key advantage is that the principal agent conflict (one where the need to sell a whole suite of products results in people being highly under or over covered) is avoided.

Wealth Management and the ability to better invest private and public funds in the economy is increasingly being put to the test. Many startups, such as Novus, now provide objective information about hedge funds, which consist of pension funds, sovereign wealth funds and endowments, to their customers – “Novus allows them to pierce the veil of hedge fund manager storytelling, and understand what their managers are doing, what risks they’re taking, and how they’re producing returns and the likely availability of those returns.” At the same time, robo-investing has also become increasingly demanded – it provides reduced error rates, better management of repeatable tasks, improved standardization of workflow and reduced financial friction, providing a strong opportunity for cost-cutting. Both, better digital investors and better tools to digitally invest are key in balancing the importance of the personal relationship clients have with their wealth managers and high net worth individuals (HNWIs) who demand to access their wealth relationship digitally.

Another core area fintech is expected to soon disrupt is the multi-trillion-dollar insurance industry. According to research conducted by American Banker, Arjan Schutte, a managing partner at Core Innovation Capital believes that the next decade will bring large disruptions in insurance – “It’s a massive, dormant, incredibly inefficient industry that will take a long time to unwrap.” Fintech startups are beginning to come up with better underwriting models, given the nature of change in housing; the emergence of IOT has led to the creations of “preventative insurance,” where since houses are connected to data analytics, real-time monitoring could lead to services by insurance companies – for e.g. if a furnace becomes increasingly hot, temperature analytics indicators can dispatch services to keep houses from damage, rather than just reimburse and evaluate post-cause. Other obvious examples of IoT penetrating finance can be seen in smartwatches and other devices – with Fitbit’s recent acquisition of Coin’s wearable payments division, and with the introduction of payments on Apple watches, we can see that devices are carrying increasing payment potential.

The rise of Blockchain is set to increase as awareness of the distributed ledger technology increases. Though significant hurdles remain in implementation, Blockchain is widely believed to be the future of financial infrastructure, and is most likely going to lead to rewiring. Most projects (a range of wallets and money transfers has appeared over the last half-year) are in their experimental and product adjustment stage and have a long way to go to influence the market.

There’s of course, the increasing focus on the underbanked – with customer acquisition and churn/ retention rates saturating in developing countries, many firms are now focusing on what they can do to acquire the business of the poor. This is coupled with the fact that “it is highly expensive to be poor” and that developing countries are being forced to use high-cost alternatives to traditional finance. Micro-lending, evaluating credibility, small transfer services from mobile devices are only a few of many areas of fintech that cater to the underbanked and unbanked, and with a total addressable market of about 2 billion people, this is becoming an increasingly popular sector for firms to look at.

Strongly linked with the developing world is also the remittance industry – in 2015, remittances exceeded $600b with almost three fourth of all remittances going to the developing world from high-income countries. New online players have emerged and have raised the bar in terms of customer experience (digital/mobile channel) and costs of remittance. Almost all major players successfully raised new funding rounds in the past six months: WorldRemit – $45M (total – $192,7M), TransferWise – $26M (total – $117M), Remitly – $38.5M (total – $61M), Azimo – $15M (previous round – $20M).

We now live in a world, where for the first time, credit card payments have overtaken cash payments – non cash transaction volume has been growing by about 10% YoY. Big cash-to-cash players wary of cannibalization are now incumbents that have been replaced by innovators powered by strong technologies. As the line between traditional banking and fintech becomes even more blurred, we are likely to see increased convergence between the two. API based services that allow both banks and fintech companies to engage and retain digital customers, wearables, and social media services are likely to change the face of fintech in 2017.