Fintech (financial technology) is the business sector where companies use new information and communication technologies to offer less costly and more efficient financial services.
Fintech companies are often subject to specific and stricter regulations in comparison to other sectors. It is explained by the need to eliminate the risks and protect the actors and consumers in the financial market.
Nevertheless, to promote the growth of Fintech, legal, financial or banking constraints tend to be relaxed.
Services provided by fintech
Fintech mainly expands the services of financial players, insurers (see Insurtech), and real estate professionals.
Even though most people don’t even know what fintech is, these new financial technologies are part of daily management. Fintech companies provide management of bank accounts, dematerialized invoicing, project financing, investment banking and management, etc.
Online banking apps allow access to the bank account via a completely dematerialized system. However, these encounter major challenges in terms of reliability, simplicity, and information security.
But there’s an upside to it as well. Fintech is proving to be both an alternative to known services and a compliment to the traditional banking systems. In many countries, banking is still done traditionally, with visits to actual offices. Fintech introduces opportunities for these banks to grow and improve their customer service.
Examples of top online banking companies: Baskbank, LendingClub, CITBank (according to Forbes)
Thanks to fintech, consumers can also take advantage of aggregators that allow clients to consolidate their bank accounts from different institutions — all in one app. Thus, banking aggregators allow to
- make transactions between different financial entities,
- share and access financial data between banks,
- assess whether the borrowers are credit-worthy.
Aggregators have forged close and secure ties with incumbent banks. On the one hand, aggregators attract and improve the comfort of users. On the other hand, traditional banks allow complete and secure access. Partnership is therefore central to the success of these new apps.
Examples of top aggregator companies: MX, Finicity, Fiserv (previous CashEdge) (according to hevodata.com)
Crowdfunding connects funders, investors, and project creators (B2B2C, Business to Business to Customers). Thus, it facilitates interactions between economic actors and contributes to changing the rules of the financial market.
Crowdfunding allows individuals to take part in investments in the economy (donations, loans, equity participation) without significant regulation. In turn, startup founders and creators of new projects can receive financial support without giving up shares in their companies.
Examples of top crowdfunding platforms: Indiegogo, GoFundMe, Patreon (according to investopedia.com)
Online payment and other financial services
The evolution of banking services in B2C has given rise to innovations, such as online payment services and insurance comparisons.
Fintechs compete in ingenuity to improve the user experience and thus facilitate the use of applications. The Research and Development departments of major banking institutions are trying to keep up with this upheaval.
B2B is not left out. Fintechs are gradually investing in this area by offering intuitive digital means to currency exchange, dematerialized factoring, and fulfillment of needs specific to certain fields of activity.
Examples of top online payment companies: Authorize.net, Stripe, Paypal (according to thebalancesmb.com)
It is difficult to say with certainty in which direction the industry will develop, but we can assume what services and functions the fintech industry will provide in 2022.
The new payment frontiers
The payment industry will undergo innovations around two major themes in the coming years: account-to-account payments and B2B payments. The first include all payment methods that offer a cheaper, faster, and safer alternative to bank cards. The second concerns payment platforms that offer new experiences to business customers.
We have already seen a revival of the experience for account-to-account payments: innovative approaches from players like GoCardless or Yapily are on the verge of making payment cards obsolete. 2022 will unveil the potential of these new payment experiences, either through the publication of new standards, such as Instant SEPA, or through technological innovation. Either way, the payment industry is likely to shake again.
The second major opportunity lies in the B2B sphere, a payment segment which weighs around 100,000 billion euros but is still largely dominated by paper processes. The opportunities are great, from marketplaces to cash management. The rapid development of cloud-based accounting solutions and productivity software, coupled with the wave of innovation triggered by PSD2, has enabled fintechs to innovate across all layers of SME financial management — with payment being the biggest opportunity in terms of market size. Startups like Libeo in France and Billhop in Sweden have started to pioneer this segment, and newcomers will soon enter the market.
The B2B marketplaces that are beginning to emerge (such as ManoMano or Mirakl) open up enormous prospects for new players of payment facilitation and independent vendor software (including financial tools) in order to enrich the experience for businesses.
B2B SaaS momentum for bankers and insurers
The need to diversify innovation strategies was felt long before the pandemic hit banks and insurers (B&A). On the one hand, B&As had to adapt quickly to telework and do everything possible to facilitate its adoption. On the other hand, they faced an increased use of their digital interfaces (via their websites and applications). This is the perfect opportunity for independent software, especially cloud and API-based ones, to increase their market penetration, also expanding their product range.
At the same time, banks and insurers have the opportunity to move “from a defensive innovation strategy to an offensive approach, thereby avoiding the risk of disintermediation that will threaten them in the years to come,” according to Alex Rampell of the American fund a16z. The adoption of an offensive strategy could result in an upsurge in M&A activity at a time when tech companies are very well valued by the market.
What targets could these actors turn to?
For banks: new generation core banking platforms (ThoughtMachine, Modularbank, Mambu), AML software (Salv, Lucinity), fraud detection software (Ravelin, Feedzai), partnerships with tech solutions to convert incoming customers (Pretto, Younited Credit).
For insurers: back-end solutions (Instanda, Tech11, Friss, Shift Technology), startups that allow insurers to expand their distribution networks (Penni.io), or to assess risks more efficiently (HyperXponential, Akur8).
The great return of IPOs for European fintechs
Recent rumors that announced the IPO of Transferwise for 2022 testify to the desire to see IPOs materialize in Europe. In the wake of US IPO success stories, many European tech giants could choose to follow the same path — and fintech would be no exception.
The debate on whether the IPO is relevant in Europe is not new: the absence of international investors or those competent on tech subjects, cumbersome processes, as well as the loss of agility for the company going public does not argue in favor of the IPO. Nevertheless, the current popularity of tech stocks in Europe coupled with the probability of seeing a drop in the number of acquisitions greater than 500 million euros (because of the extremely high levels of valuations) could encourage entrepreneurs and investors to choose the IPO as a financing and liquidity solution. Going public remains the only way, at present, to grow your business while remaining independent.
The question that then arises is that of the timing and location of the IPO. The London Stock Exchange is the naturally preferred option for many European companies, especially since the British government is lobbying to attract the best players to its financial center. It even considered authorizing a dual class action structure to compete with the Amsterdam Stock Exchange.
Nowadays the novelty concerns the way to go public: in the traditional way or by choosing direct listing, like Spotify. In addition, Europe could follow the trend of SPACs (“Special Purpose Acquisition Companies”) which was all the rage in the US in 2021 — we can already see the example of this with Xavier Niel’s 2MX Organic.
Even more innovation in the lending industry
There is a growing share of innovative credit solutions such as “Buy Now Pay Later” and “Revenue Based Financing.” In 2022, this trend will accelerate with an increased focus on traditional (but digital) lending models.
Why is that? First, the European Central Bank and its “helicopter money” strategy have increased the lending capacity of banks tenfold while ensuring compliance with the Basel Accords. To distribute these loans, banks are coming up against the limits of their traditional branch model, which has been undermined by the health crisis, and will therefore have to use digital solutions such as Younited Credit or Ezbob.
Second, digital banks and neobanks see more deposits accumulating to further be used for lending. This is also the path that Starling Bank seems to be taking.
Finally, the growing access to data, combined with specialized scoring solutions (such as Wiserfunding for SMEs or Koyo Loans for consumers) provides lenders with new opportunities to lower their file rejection rate without compromising their performance globally.
The new facets of wealth management
Wealth management is one of the areas of fintech that has never really been in the spotlight, aside from a few cases like robo-advisors and options trading. Despite its strong potential, wealth management in Europe is still very fragmented, which makes it difficult to create a standard solution (like Vise or DriveWealth in the United States).
Nevertheless, 2022 can be a game changer. We are thinking in particular of alternative asset classes and the rise of savings solutions that highlight compliance with ESG (environmental, social, and governance) criteria.
Regarding alternative asset classes, we believe that 2022 will be the year of crypto-assets, following on from the rise of bitcoin and Ethereum. The arrival of institutional players on these markets, such as Goldman Sachs, BlackRock, Fidelity, Generali, and Standard Chartered, only corroborates this weak signal.
Alternative asset classes like art, automotive, loyalty points, etc. could appeal to investors looking for higher-than-average levels of performance. This is the case in the United States, with the success of companies like Bakkt or Rally. In Europe, players could emerge, like WiseAlpha or Sorare — a game developed on the blockchain that allows you to buy, sell, and exchange virtual sports cards.
In recent years, the time has come for action against climate change, and neither asset managers nor financial players have been spared. At the same time, money is flowing into ESG funds (Europe recently surpassed the historic threshold of $1 trillion invested in them) — the opportunity for institutions capable of jumping on the bandwagon is real. Companies like Matter, Util, and Netpurpose, to name a few, could serve to support this trend with the new frameworks, compliance tools, and data they provide to asset managers.
As we can see, fintech is a very promising area, as there are still many unrealized mechanisms that would greatly improve customer service and B2B processes. These are the prospects in the field of cryptocurrency, international payments, and many other technologies that are currently being developed. If you are thinking about starting a fintech business, now is the time to conquer new markets!