What are the hottest fintech trends in banking?
Great deal of venture capital activity and interest in fintech is driven by web enabled or digitized business models looking to upend the traditional financial services provider. Think of Lending Club in peer to peer lending or much of the activity and interest in the payments space, digital wallets, and the democratization of wealth management. These companies are innovating to take share of wallet from traditional companies as a result of the reduced customer acquisition costs and barriers to entry of the digital, web enabled ecosystem. In various instances these new entrants are riding on the rails built by the incumbent financial services industry while stealing and ever more web enabled, digitized customer that is moving faster than what incumbent companies can accommodate.
As far as banks are concerned the trend is to modernize and enable legacy systems that don’t allow financial institutions to interact with customers in an increasingly digital world. Modernizing core systems to service oriented architecture (SOA, open systems) to integrate best of breed solutions that allow a financial institutions to interact and transact with customers through multiple channels – tablet, phone, branch etc. The critical element is how a financial institution creates value for a business or retail customer while leveraging technology to provide advice or a customized sale through a variety of channels.
What are the main categories of innovation that are driving private equity interest in Fintech?
The bulk of the activity I believe has been with the entrepreneurial and venture capital community in the US seeing an opportunity to finally disrupt the financial services industry not only because of developments in technology but also as a result of a perfect storm of events which include Financial Crisis, an increasingly digitized consumer, and shifting consumer perceptions of who can serve their financial service’s needs.
Much VC investment has gone into the payments space but other sub-segments of the financial services industry have also experienced influx of venture capital including asset management, capital markets/trading, and crowdfunding to name a few but there’s significant VC capital flowing to fintech over the last several years disrupting various segments of the financial service industry and their value chains.
What drives interest from the VC/PE industry is that even in disrupting narrow verticals in the financial services industry can create large, scalable companies given the size of the industry and its global reach. There’s also quite a bit of M&A activity in the sector should an IPO not turn out to be a viable route for a portfolio company. So routes to liquidity exist with incumbent financial companies having deep pockets for M&A to monetize an investment.