Not only is the financial technology industry changing the face and purpose of the technology sector, fintech is also playing an incredible role in supporting economic growth. From its quiet start during the economic downturn of 2007 and 2008, total investment in the fintech industry has grown to a robust $2.97 billion as of 2013 year-end. In the first quarter of 2014, year-over-year growth equaled an impressive 177% compared to the first quarter of 2013, and first-stage funding rounds for startups grew over 1,200% (yes, 1,200%). These numbers are meaningful, not simply because of their size, but more importantly because of what has been birthed from the industry’s consistent, explosive growth.
The fintech sector is clearly alive and well, and steadily pushing conventional methods of financing and banking closer to the proverbial edge. Banks are desperately trying to find a balance between collaboration and competition, while consumers and businesses alike are vying for more options in payment systems, banking solutions, financial management, lending and capital funding. It’s impossible to argue against fintech’s degree of influence in the marketplace, but who are the driving forces behind the industry’s thrust into the limelight?
Before we dive into what’s on deck for financial technology, it is necessary to take an intimate look at some of the major players in the fintech market. Knowing who they are and how they are shifting the financial sector and the startup universe will lead to a better understanding of where the shiny, new industry is headed in the upcoming year.
A decade ago, hardly anyone had heard of marketplace lending and it certainly wasn’t a buzz word in the financial or technology sectors. Thanks to the wildly successful IPO of LendingClub, marketplace lending has leapt to the forefront of fintech chatter, and businesses and consumers alike are clearly on board.
Simply put, companies like LendingClub have championed the peer-to-peer lending space, creating an inviting credit environment that is more transparent and far more efficient than traditional, antiquated financial institution offerings. Marketplace lending utilizing the all-powerful digital highway to connect borrowers who need financing directly to lenders who have that financing to give—it’s simple and beautiful really. In establishing this open market for credit, peer-to-peer lenders like LendingClub are able to provide loans at a much lower cost than traditional bank products all while providing investors a consistent return. Everyone wins—except, of course, big banks.
Instead of embracing the upcoming changes in lending, for both borrowers and investors or funders, banks turned a blind eye, standing firmly in the misguided belief that the concept of marketplace lending was just that—a concept with no foundation and no true demand among consumers. But with rapid growth in fintech and specifically the marketplace lending scene, it became more difficult for big banks to ignore the simplistic model that was poaching all of its loan prospects. Contrary to popular belief, marketplace lending is not solely a subprime market—it is, instead, a new, better way to bank. That was clear after LendingClub’s IPO did better than analysts’ expectations, bringing positive attention to the fintech sector as a whole.
Crowdlending for Business
It isn’t just peer-to-peer lenders raining on the traditional banking parade—companies like P2Binvestor have taken charge of the business lending marketplace, affectionately referred to as crowdlending. P2Bi’s approach to providing companies the working capital financing they need is based on the same founding principles of the fintech sector as a whole—bring those in need of funding together with those who have funding to give, and use the internet to facilitate every transaction while removing the barriers associated with conventional lending products offered by big banks.
Crowdlending provides an impressive opportunity for companies and investors alike, and to many, it is the sought-after unicorn in business marketplace lending. Credit lines are underwritten and offered to qualified companies (based on time in operation and annual revenue criteria) and then secured by an asset—that company’s receivables and future contractual revenue in the case of P2Binvestor. Investors are then given an opportunity to invest and a rate of return simply for helping move the process forward. Again, simple and beautiful.
A Fintech Startup for Everything. Yes, Everything.
In addition to marketplace or crowdlending platforms, consumers and businesses have a plethora of fintech companies ready and willing to provide a different breed of financial services. Companies like Betterment and LearnVest are changing the way individuals gain access to powerful financial planning tools, while a variety of technology-driven payment systems championed by companies like Square and The Currency Cloud are dramatically shifting how consumers pay and how businesses receive. Venture capital has also undergone a necessary facelift as far as the vetting process is concerned, piggybacking on crowdfunding for startups through platforms like Indiegogo and the almighty Kickstarter. If there is a need for it, the fintech sector has a company to match.
Bred from the evolutionary needs of consumers and business alike, each of these fintech heavy weights have taken a specific aspect of the financial industry and made it their very own. Instead of offering everything for everyone, like conventional banks provide credit cards, savings, investment advice and business financing, fintech companies choose what they want to be good at, build the necessary infrastructure planted firmly in the digital landscape and then provide that service well. Transparency in the process, clarity in disclosure, and above all a lower cost of doing business have all kept the fintech sector bustling while the banks find themselves approaching an appropriate state of panic.
But is it sustainable? As with any major shift in doing business, critics materialize. The fintech sector is no exception to this rule, but its success is hard to challenge. However, concerns about the current regulatory environment and the support that lends to fintech startups abound, and there exist questions surrounding the stability of platforms if and when regulation catches up with the times. For now, though, consumers and businesses have new, fancy, technology-driven financial tools within their reach, and big banks are losing ground at astonishing rates.
In our next fintech article, we’ll discuss the predictions in the marketplace for the upcoming year and how those may affect the current state of financial services