CFA Society Singapore
SINGAPORE (Dec 18): With financial technology (fintech) evolving considerably over the last few years, fintech investors will have to be increasingly selective in deploying their capital as some sectors and companies approach a “possible endgame”, suggests a new report by McKinsey & Company.
In its paper, Synergy and disruption: Ten trends shaping fintech, McKinsey postulates that various categories of fintechs will eventually either join forces or end up competing directly with each other as they mature.
These four categories of fintechs as outlined by McKinsey are:
1. New entrants, startups and attackers looking to enter financial services using new approaches and technologies to build economic models similar to those of banks;
2. Incumbent financial institutions investing significantly in technology to improve their performance and competitive/investment edge;
3. Ecosystems orchestrated by large technology companies, which offer financial services to enhance existing fintech platforms as well as to monetise current user data or relationships; and
4. Infrastructure providers selling services to financial institutions as they seek to digitise their technology stacks while improving risk management and customer experience
Among the trends identified by McKinsey, the firm observes increasing partnerships forming between incumbent financial institutions and fintech startups as many of the latter reach saturation point in their native digital marketing channels.
While newer entrants bring to the table a higher speed and risk tolerance as well as flexibility in reacting to market changes, incumbent financial institutions in turn offer large customer data sets as well as compliance and regulatory competencies likely to prove valuable to their smaller peers.
A global bank already on such a partnership path is JPMorgan, whose digital strategy includes recent partnerships with fintech firms OnDeck, Symphony and Roostify.
Conversely, China’s financial institutions tend to partner with large technology ecosystem firms as opposed to smaller fintechs. This is evident in the country’s “big four” banks having partnered with at least one ecosystem firm in 2017, such as Bank of China’s fintech joint fintech laboratory with Tencent.
Despite the generally poor historical performance of fintech firms in public markets, McKinsey also believes there may be a “change in mood” for this tendency, signaling a tentative return to public markets among fintechs.
One such example is Dutch payments fintech Adyen, which has seen its share price double in the year to date since its recent listing in June this year.
“With fintechs scaling and on the path to profitability, executives will have to balance higher liquidity and greater public scrutiny as they consider IPOs,” says McKinsey.
“With large technology companies knocking at their doors, incumbent financial institutions should proactively engage with fintech disruption, whether by building their own capabilities or by partnering or acquiring. For fintech attackers and infrastructure providers, the road to success is not easy. As the fintech markets mature, firms from the four categories of fintechs will compete directly in some cases, and join forces in others,” concludes the firm.