The financial technology, or 'fintech', industry has long been touted as the future of financial services. Indeed, many would say that that 'future' is already here. And according to a recent Citi GPS report, China has already reached the tipping point of digital disruption of traditional banking services, with the US and Europe not far behind.
The industry as a whole saw a total investment of $19bn in 2015, according to Citi Research. That is a large increase from the $12bn invested the year before and the relatively measly $1.8bn invested only in 2010.
The US (and more specifically California and New York) has long been considered the leader in technological innovation. And the statistics suggest the fintech industry is no exception to this rule. The states of California and New York alone saw about $6.5bn-worth of investments between October 2014 and September 2015. China (mainly Beijing), saw a total investment of $2.7bn in this time, the UK (mainly London) saw a total investment of $690m, and Germany (mainly Berlin) saw a total investment of $511m, according to advisory firm EY.
Sweden, almost chiefly through capital city Stockholm, has also been a major player in the fintech sector. It has seen about $532m invested in Stockholm alone over the past five years, enough to make it the second most invested in city in Europe for the sector within that time.
Despite the US's current leadership status, many experts in the sector believe the prospects are much better for China and leading European countries. “The most exciting thing that has happened in the US is probably PayPal and that was 24 years ago. The US is definitely not leading the way when it comes to fintech,” says Erik Engellau-Nilsson, vice-president of communications for Klarna, a leading European payment services company based in Stockholm.
Mr Engellau-Nilsson cites areas such as China and Africa, as well as Europe, as being far more exciting for fintech. “If you look at Asia, Alipay is doing sensationally. We will never go to Asia and compete with Alipay because it is just too good. It is interesting in that most developments come from developing markets. You have Alipay in China, and you have really exciting mobile payments out of Africa, where penetration is ridiculously high,” he says.
“In Stockholm, you have a lot of really exciting things happening with [various] companies. In the UK, obviously London... has been able to leverage the strong financial sector it has in the City and combine that with tech and develop new exciting companies.”
However, owing to the recent EU referendum result, concerns are being voiced that London may lose its standing as Europe’s foremost fintech hub. London-based companies such as TransferWise and Revolut have already indicated they may be looking to move their headquarters elsewhere.
China at the forefront
In Asia, Alipay, a subsidiary of the Alibaba group, is a mobile payments system operating out of China. Despite being a relatively new platform, the system claims to already have 400 million people using its services. The Chinese are also the biggest peer-to-peer lenders in the world. It is estimated that $66.9bn-worth of peer-to-peer loans were initiated by Chinese nationals, according to Citi Research.
Where this has the ability to inflict the most damage is among more traditional banks. Fintech companies have the capability to not only simplify many traditional banking services but also make them more economical. These services mainly include payment platforms, peer-to-peer lending services and deposit services, especially as many payment platforms begin to acquire banking licences.
Payment platforms are also helping to drive another rising trend in the fintech sector right now: e-commerce. Companies such as PayPal and Klarna have largely been responsible for instigating payments between merchants and consumers on e-commerce sites.
A large part of the next chapter of the fintech story will revolve around how governments and banks adjust to these new developments. The UK and EU have both been very obliging when it comes to regulations. Recent regulatory measures taken by both have forced banks to open up their infrastructure to allow collaboration with fintech companies.
The same cannot be said for China, however, where governor Zhou Xiaochuan of the People’s Bank of China has announced the bank's intention to more closely study shadow banking activities with the threat of increased regulatory action looming. His comments came in an interview with IMF managing director Christine Lagarde.
This is most likely because Chinese banks stand to lose more from the rise of fintech companies, specifically Alipay. The penetration for bank membership is far lower in China than in the Western world, which means companies such as Alipay can completely circumvent the banking system. Mobile payment platforms in Africa enjoy a similar advantage, with bank user penetration even lower than they are in China. Alipay’s money management fund jumped from Rmb55.7bn ($8.37bn) to Rmb771.5bn between September 2013 and March 2016, according to Bloomberg.
So to what extent should banks be afraid? It seems highly likely that fintech is not only here to stay but has the ability to dominate the financial services sector in the coming years, leaving traditional banks with two options, according to Mr Engellau-Nilsson.
“There are two different kinds of banks right now. One kind of bank is doing what we call the ostrich strategy; they just put their head in the ground and pretend nothing is happening,” he says. “Then there is the other group of banks who are very curious, who are trying work together with different companies to open up their infrastructure and become much more modern. Those banks face a different future. If I was working at a bank right now, I would be very nervous.”