Financial Technology, more commonly known as 'fintech', describes a business that aims at providing financial services by making use of software and modern technology. As of today, fintech companies are directly competing with banks in most areas of the financial sector to sell financial services and solutions to customers. Mostly due to regulatory reasons and their organizational structures, banks still struggle to keep up with fintech startups in terms of innovation. Fintechs have realised early that financial services of all kinds – including money transfer, lending, investing, payments etc; need to integrate in the lives of the tech-savvy and knowledgeable customers of today to stay relevant in a world where business and private life are becoming increasingly digitalised.
Where Are Fintech Firms Headed?Fintech startups are looking to serve as substitutes for the old order of financial services firms, and, indeed, in many areas they are complementing the products and services that are already on offer. They are also leveraging regulatory norms, although navigating the web of disparate regulatory frameworks is not always easy. That said, globally, regulators have been paving the way for easy access to enable disruption in the financial services sector and to encourage competition.
Fintech in Southeast Asia Is on the Move
Fintech investment in Asia Pacific was modest in 2019 after experiencing a record-shattering level of investment in 2018. Both venture capital investment and M&A activity in Asia Pacific came down significantly during the first half of the year. A lack of megadeals in China accounted for most of the decline — with investors holding back given both the US-China trade tensions and the increasing regulatory focus being given to fintech and fintech companies.
2018 was a record year for deals and funding in Southeast Asia—an increase of 143 percent YOY. The number of funding deals in the region increased from 19 in 2014 to 68 in 2018. In general, Southeast Asian fintech startups are attracting higher funding and foreign investors, according to a recent CB Insights report. The largest recipient in 2018 was Vietnam-based fintech major Momo, which secured $100 million in Series C funding from Warburg Pincus. China’s Ant Financial (an affiliate of the Alibaba Group) is seeking to aggressively expand its reach in Southeast Asia. Ant provides a suite of financial services spanning payments, insurance, credit, wealth management and others through various subsidiaries. Ant Financial alone made investments worth $14 billion which is approximately 35 percent of total investment in 2018.
Asia on Track to Claim Fintech Reign from the U.S.
Global venture capital-backed fintech investment reached an all-time high in 2018. Fintech companies backed by venture capital secured $39.57 billion in 2018 across 1,707 deals globally. While the number of deals increased by 15 percent year over year, deal value surged 120 percent, according to a recent CB Insights report.The number of unique fintech startups that secured funding touched an annual high of 1,463 companies, while the number of total unique investors was 2,745, supported by a rush of corporate investors.
The U.S. retained its position as the top fintech market with 659 investments worth $11.89 billion in 2018, but Asia is catching up. Asia registered a surge in early-stage and mega-round investments and witnessed the biggest boost in deals—growing 38 percent YOY. Fintech companies in Asia were also recipients of record levels in funding, securing a massive $22.65 billion spanning 516 deals. In fact, Asia is likely to surpass the U.S. as a center for fintech investment soon. (Source: CB insights report)
Fintech in Bangladesh
Bangladesh’s undeveloped financial system, huge unbanked population, and increasing smartphone penetration rate, have fueled the development of innovative digital finance solutions. Bangladesh’s startup sector is at an emerging stage but evolving rapidly with several accelerators, incubators, startup events and some state sponsored programmes being introduced in recent years. Increasing mobile phone penetration has played a key role in stirring the startup scene where mobile phone has emerged as a strong medium to do many other business activities besides interaction and communication.
Non-banking Fintech company like bKash is the market leader in mobile money services in Bangladesh since last few years followed by iPay, another online payment platform where payment can be made from mobile phone or computer.Some banks are offering similar services (Rocket, mCash, Ucash) but their market share is very low. Apart from mobile money services, other banking services like account opening, loans, insurance and internet banking services have not been automated in most of the conventional banks and financial institutions.
The modern financial services industry is more than 400 years old. Cheques were introduced in the seventeenth century for settling payments and insurance contracts were used a few centuries before that. Over the years, financial services institutions have enabled more people to subscribe to their services. Yet, today, more than 35 million people in Bangladesh don't have a bank account and their economic activities are not part of the formal economy of the country. Fintech can change this scenario, if adopted with the right regulatory framework and technological support. Fintech is poised to accelerate financial inclusion in emerging countries like Bangladesh. Financial institutions in other emerging countries like India have already adopted many components of FinTech and are reaping its benefits.
Fintech can reform payments processing activities within the economy of Bangladesh. Today, a significant amount of payments are made through cash or through informal economic transactions. Facilitating payments through specialised financial institutions will help bring a large segment of the informal economy into the formal economy. Increasing payments through the formal economy will improve transparency within the economic system and will improve the effectiveness of tax collection. Fintech-enabled payments processing will also reduce the amount of cash required for the printing and distribution of currency notes. Additionally, it will help mitigate the risks of counterfeit currencies getting circulated in the country. Reduced requirement of cash will help the central bank reduce costs and manage risks.
Fintech has the capability to automate traditional financial activities in a significant way. Retail financial activities such as granting of loans or approval of an insurance proposal require verification of the applications using standardised techniques. Fintech can automate these verification processes entirely. Thus, an individual can submit a loan application or an insurance proposal online with all the supporting documents digitally, and the verification and approval process can be completed within minutes. The applicant will receive a response regarding his/her application online or via email as soon as the process is complete. Such a technology-led service brings consistency in business operations and reduces the risk of error and bias. Moreover, it reduces the time to sell a financial product significantly and, thus, improves the satisfaction of customers. Fintech has the capability of redefining customer interactions in financial services institutions. In Bangladesh, the common form of interaction between customers and financial services arebranches or call service centers for any assistance or service. Now, customers of some financial institutions have the option to chat with their financial service providers online. On Fintech-enabled platforms, chat discussions are facilitated by software robots, also known as chatbots. Similarly, when customers call service centers, their calls get answered by digital voice assistants or humanoid software. Newer technologies like machine learning and artificial intelligence have made such achievements possible. Such technologies help financial services institutions reduce costs and improve the speed and consistency of their services.
Bangladesh is at an advantageous position and can benefit greatly from Fintech. The country has a large younger population who can adopt technology faster and potentially become avid users of FinTech. The mobile subscription density of the country is at an all-time high, thereby reducing the last mile connectivity challenge. Macroeconomic growth factors are also favourable to catalyse the joining of more people into the formal financial services network. With encouragements from the regulators, the financial services institutions of Bangladesh should embrace and adopt FinTech in their transformation journey.
As banks are lagging in automating financial services, new non-banking financial service providers, such as Fintech startups can reach the customers and grab the market. Having said that, the truth is Fintech is at an early stage in Bangladesh and adequate support and funding is required to fuel the growth rate. Financial inclusion has been a key concern in Bangladesh and experts believe that fintech and digital finance have the potential to play a fundamental role in bringing basic banking and financial services to the masses.
The writer works for National Australia Bank, Email: [email protected]