Since its rise in 2008, Financial Technology, or FinTech, has been disrupting the banking industry, reshaping businesses, and transforming the way consumers manage and use money. Innovators and entrepreneurs are storming what was once considered an inefficient, inflexible arena, and plenty of investors are following close at their heels. Investment in FinTech skyrocketed from $928 million in 2008 to $3 billion in 2013; since then, the numbers have soared even further. FinTech’s myriad of advancements signal an increasing momentum for the movement on a global scale.

So, what is FinTech, exactly? The National Digital Research Center in Dublin, Ireland defines it simply as innovation in financial services. More specifically, FinTech companies often use technology to disrupt incumbent financial systems. Let’s examine the last few years in FinTech and consider its potential to shape a brighter future in finance.

FinTech’s first opportunity came knocking in 2008, after the global financial disaster, subsequent bank bailouts, and banker bonus scandals marked a major turning point in the financial services sector.  Industry experts and consumers began questioning the future of traditional banking. Gallup polls now reveal that just 26% of people have high confidence in their banking institutions. As a result, banks are now bleeding their sharpest minds to the rising FinTech sector, as plenty of former banking experts trade in six figure salaries and rigid work structures for freedom to shape the future. In fact, four of the U.S. and U.K.’s largest banks reduced their total headcount by almost 350,000 in the past 7 years.

Johan Lorenzen, CEO of Finnish FinTech startup Holvi, sees this decline as a call to action for FinTech to close the gap between broken banking and the globe’s financial needs. “Banking has become so disconnected from the way we live our lives, the most important opportunity is to change banking to better match the shift in society,” he says.

FinTech offers a host of solutions, and has become increasingly paramount to the evolution and improvement of financial tools previously controlled by banks. Money transfers and merchant credit card payments – once cumbersome processes – now have user-friendly digital interfaces, as companies continue to create attractive alternatives. TransferWise, valued at around $1 billion, has taken the expensive act of transferring money and spun it into a cheaper, less-stressful alternative. And what’s best of all, according to the company’s founders? The process bypasses the banks.

“Banks are really bad when it comes to building consumer-centered products,” says Transferwise co-founder Taavet Hinrikus. “We believe that the future of money is digital.”

Similarly, Stripe and Square have disrupted the merchant payment collection process – the former allowing developers to build credit card payment functionality for e-merchants, and the latter providing hardware for instant credit card payments in the physical realm. Payments is the hottest area of FinTech, and Stripe is at the forefront, aiming to “increase the GDP of the internet.”

But payments and transfers is just one of many booming areas of FinTech. Another is personal finance management. On the frontlines are companies like Wealthfront, who have propelled algorithmic asset management and thus reduced the need for face-to-face wealth advisors. Even traditional financial service giant Charles Schwab & Co. has taken note and isn’t going away quietly; it has launched its own “roboadvisor” to compete. Additionally, popular personal budget management tool Mint has inspired plenty of unique spinoffs including LearnVest and Personal Capital, which all decrease the need for personal wealth advisors. For the average consumer who deals with the daily trials of traditional banking, these products are welcomed alternatives.

In addition to transforming existing sectors, FinTech has plunged into uncharted waters by creating entirely new types of products and services. Crowdfunding has become a household term after Kickstarter perfected an easy method to allow people to raise funds via the internet. Peer-to-peer lending is soaring in popularity thanks to companies like San Francisco’s Lending Club. While there are still risks involved, P2P initiatives offer lower interest rates and fewer limitations than bank loans. People from all walks of society, from students to small business owners to artists, have found a new freedom in peer-to-peer services.

A particularly promising area of FinTech involves big data and data collection. We’re already seeing monumental changes in analytics, data storage, data-driven-marketing, cloud computing and SaaS business models as they relate to finance. BillGuard, for example, has forged a pathway in financial security by using data analytics to identify deceptive or erroneous lines on credit card statements. Kreditech has spun data collection into a different kind of financial beast altogether – one that offers algorithmic banking, big data credit scoring and a final push to say goodbye to your physical banking branch. Hundreds of other companies now have something unique to say with data, and as the amount of information increases in upcoming years, so will the abilities to harness it.

One thing is clear about the past two years in finance: they’ve positioned FinTech for a global takeover. In fact, many believe we’re entering into the golden era of FinTech. A question that had pervaded the landscape was whether or not sufficient capital could keep up with the enormous rate of innovation. 2014’s investment trends taught us the answer: yes, the money is flowing where the ideas are going. According to a report by Silicon Valley Bank, the FinTech market saw 211 acquisitions in 2014 alone. The fourth quarter of 2014 was the busiest time in FinTech history, with $1.27 billion of venture capital invested in 82 deals. Finally, quality venture capitalists are jumping at the opportunity to back FinTech – especially in areas involving lending, personal finance management, payments, and Bitcoin technology.

Another indicator of FinTech’s rapid growth is its blossoming network of entrepreneurs, experts, startup team members, and sponsors. All of these key players are contributing to a number of high quality meetups, conferences, and industry-specific events around the globe. While much activity is still centered in the UK and Silicon Valley, global buzz is evidenced in headlines and meetups in cities around Europe. FinTech’s international boom seems imminent; the key, many believe, is that finance startups must first cater to their specific regions when it comes to developing products and attracting funds.

While these may be your final years at a bank teller window as FinTech innovators gradually repackage bank services into neat little apps, it’s possible that banks will take notice of the digital revolution and adapt accordingly. FinTech need not be used to replace banks, but rather improve financial services as a whole. Chris Skinner, author of Digital Bank, discusses the changes needed for banks to scrap old models and plunge head-on into the digital sphere. In essence, banks must use the latest technology to proactively and predictably serve customers.

“The difference is that the digital bank does not think about devices, but about the capability to have the Internet embedded in everything,” Skinner says. “Walls, windows, chairs, ceilings, headscarves, handbags, jumpers, jam jars. You name it, you can digitally interact with anything today. That’s where the thinking really opens up the mind to the possibilities.”

Will banks move quickly enough to close the gap? They certainly have the resources and the power. But they’ll have to compete directly with the likes of Simple and Number26, companies that have already created an entirely electronic banking experience from scratch. The world is slowly but surely catching on to this simple, ideal model.

As entrepreneurs grow bolder in tackling issues using ever-evolving technology, it’s safe to say that the most impressive transformations will come to fruition before the decade’s end.

“Over the past year we’ve seen FinTech evolve from an exciting buzzword, into a lucrative industry that’s even causing the government to sit up and pay attention,” says Currency Cloud VP of Marketing Todd Latham in our interview. “As transparent, flexible, technology-focused alternatives eat into the margins of traditional players, banks will need to consider their next move carefully – managing the right balance between collaboration and competition.”

[bctt tweet=”What is FinTech? The Story of Broken Banks, Innovation, and the Future of Finance”]

(Photo source: GotCredit via Creative Commons)

What is TransferWise’s mission statement?

International money transfers are more expensive than meets the eye. Although banks and brokers often claim there are ‘no fees,’ many take as much as 5 percent of the money being sent. TransferWise is the clever new alternative that allows people to transfer money abroad at a lower cost than ever before. It uses technology developed by the people who built Skype to remove all the fees the industry have kept hidden for decades. Customers have transferred £3bn using the platform – an approach that has put over £135m back in their pockets. We aim to grow this service until TransferWise becomes everyone’s go-to international money transfer provider.

Where are you headquartered?

We have our headquarters in London’s Tech City. There is a real sense of community amongst the startups here and young companies help each other grow. London has also got a huge pool of people with the right skill and expertise. The only challenge would be that competition for such talent is high – we’re focusing on building an expert team.

Who do you think will be the most influential figures (or companies) in Fintech, in 2015?

The solutions offered by fintech companies such as Nutmeg and Funding Circle help ordinary people overcome hurdles that come from an outdated system. We have no doubt that they will continue to form an important part of disruptive fintech force in 2015.

What kind of year do you foresee for your company, and the industry as a whole?

We’ve grown 15-20% month-on-month over the past year, and will focus on sustaining our growth in the coming year. We’ve just launched in the US, opening offices in New York and Florida. We’ll also be opening offices in Berlin and Australia by the end of the year, so global expansion is a big focus for us. Fintech companies everywhere are disrupting industries that are in need of a change and we’re happy to be a part of that.

What are your key targets for 2015?

Grow, and then grow some more. We are opening up an additional 200 currency routes this year, and opening up offices in the US, Germany and Australia.

What will be the most important opportunities for FinTech in 2015?

More and more people are becoming aware of available fintech solutions to everyday problems. It’s up to fintech companies to capitalise on this and build products which are cheaper and more consumer friendly than the traditional system.

What are the key hurdles for growing your business this year?

Our biggest challenge is still getting people to know that banks are ripping them off. Banks have profited off people’s ignorance for decades and a lot of our work goes into making people aware of the problem.

What are your thoughts on the current state of fintech?

It’s great to see that the fintech community is growing and that more consumers are choosing fintech alternatives over the service their banks offer. Fintech offers consumers a fairer, more transparent service – I look forward to seeing more disruptive innovation in the sector this year.

In 2014, we witnessed the first IPOs of fintech companies, setting parameters of other fintech deals and finally uprising the status of fintech to a serious venture industry. The first to undertake IPO was the largest P2P-lending platform LendingClub, which raised $870M at $5.42B valuation. It was followed by Ondeck, SME lending service, which became listed on stock exchanges, raised $200M and was valued at $1.3B. Another evidence of the serious attitude of investors to fintech startups is the increasing number of companies which this year exceeded the valuation of $1B – Lending Club, Stripe and Square were joined by Transferwise, Kreditech, Credit Karma, Wonga, and the abovementioned Ondeck.

Leading sectors in terms of the funds raised in 2014:

• Online lending ($1.8B)
• Online acquiring and mWallets ($1.649)
• PFM/PFP-services ($959M)
• Services for small and medium business ($783M)
• Mobile acquiring ($491M)

Largest venture rounds of 2014:

• Dutch online payment platform Adyen ($250M)
• US mobile payment service Mozida ($185М)
• Chinese P2P-lending platform Renrendai ($130M)
• New rounds of global mPOS-leader Square in the amount of $150M, and Swedish online payment service Klarna, which raised $122M.

The largest number of investments still account for the US ($4.04B), but it is worth noting that this year Asia for the first time joined the top five most funded regions with $0.79B raised in investments. The most popular fintech startups in Asia are online lending and scoring platforms, PFM/PFP-services, trading, and crowdinvesting services, as well as SME services. The largest venture rounds are investments in online lending platforms:  the abovementioned P2P-lending service Renrendai raised $130M from TrustBridge Partners, online lending service Fenqile raised $100М from a group of investors, the same amount was raised from BlueRun Ventures by a similar service called Qufenqi. The regional leaders in terms of fintech startups development and funding raised are China, Japan, Hong Kong, Singapore, Malaysia, and Thailand.

For the first time this year Life.SREDA VC made some calculations of mPOS-market: at the end of 2014 the total volume of transactions processed through mobile dongles was $55B, meaning that mPOS-technologies are serious competition to traditional POS-solutions, especially in countries where the penetration of POS-terminals is low. The most highly competitive markets for mPOS players are the United States ($4B) and Canada ($1B), where Square takes the lead, as well as the United Kingdom with the volume of transactions amounting to $1.5B and its market leaders are PayPal Here, iZettle, and Groupon. Life.SREDA puts special emphasis on East Asia and South America as new markets with low competition, but a large number of SMEs, large emission of bank cards and weak infrastructure for their acceptance. The most promising markets for new players are China with a turnover of mPOS transactions at $7B (leaders – local companies Qiandaibao and QFPay), Brazil with a turnover of $1B (leaders iZettle, Payleven, SumUp), Southeast Asia with a turnover of $70М (Plug’n’Play, AEON Easy Pay, iBox), and Russia with a turnover of $73M (key market players: LifePay and 2can).

“Last year we noted fold growth in FinTech VC investment, causes and consequences of which were increase of market confidence in the sector and expansion of the circle of investors, betting on FinTech. We witnessed explosive development of Asian markets, prospects of which Life.SREDA had repeatedly stated in “Money of the Future” survey. 2014 had a big significance for FinTech market – mature sector players started to pay attention to emerging competitors, while taking measures aimed to provide their future leadership, at the same time new wave of competitors, the FinTech itself, began to play a significant role in the market, facilitating shift from valuation against future potential to valuation on the basis of current multipliers and margins. Sensational IPO of 2014 aided much to sector transparency and perception on the part of analysts, investment bankers and policy makers. A whole pleiad of FinTech-dedicated funds, private and public, emerged last year, and one can hear recognized investors saying aloud what has definitely become a buzz phrase of the season: “FinTech is the next big thing!”. We expect to see yet larger volume of investments, splashy IPOs and truly disruptive technologies in forthcoming 2015.” says Vladislav Solodkiy, managing partner Life.SREDA VC.

Read the full report here.

(image credit: J R)

Leading online payment portal TransferWise has received heavyweight backing after 4 years in the market from one of the top investment firms- Andreessen Horowitz. Established by Taavet Hinrikus and Kristo Käärmann in 2011 TransferWise is climbing up the league of online payment options with their competitive exchange rates and transparent transfer policies.

Ben Horowitz expressed their excitement over funding the team “We are thrilled to be backing Taavet and Kristo. They discovered an important secret and are are uniquely prepared to pursue it. Not only is their solution 10 times better than the old way of exchanging foreign currency, it could not have come at a better time. We see massive opportunity for new financial institutions like TransferWise.

The duo stumbled upon the idea when they devised a simple scheme to receive overseas transfers sans hidden bank fees. Each month the pair checked that day’s mid-market rate on Reuters to find a fair exchange rate. Kristo put pounds into Taavet’s UK bank account, and Taavet topped up his friend’s euro account with euros. Both got the currency they needed, and neither paid a cent in hidden bank fees.

The funding will allow the business to expand and offer more people their services. TransferWise currently serves 292 currency routes.  This year 300 more are planned. With customers in more than 50 countries, they plan to reach out to a lot more.

The funding led by Horowitz also includes Richard Branson, Peter Thiel’s Valar Ventures, Index Ventures, IA Ventures, and Seedcamp. 16z founder Ben Horowitz also joins the TranferWise board of directors, his first seat in Europe.

Taavei in the online blog noted “We’re honoured to have the backing and mentorship of some of the world’s smartest and most esteemed innovators. We’re building a transparent, fair and truly global world of finance, but the bank’s party isn’t over yet.”

(image source: TechCrunch)

The London fintech scene is on the rise.

London is not only the financial hub of Europe, it has also taken the place of the global fintech capital. Building on its traditional strength in financial technology services, it is able to draw on the expertise of around 135k employees in that field.

One of the startups at the forefront of this boom is TransferWise, a company founded four years ago by one of the founders of Skype. TransferWise has started dismantling the long standing business model of the likes of Western Union and MoneyGram by offering a cheap alternative to the traditional means of remitting cash.

Amongst the other preserves being taken apart by new players are the mobile payments and asset management areas, in addition to crowdfunding, which has taken it on itself to provide liquidity to those unable to receive it. Photopay, for example, a company selected to take part in the FinTech Innovation Lab, uses a phone’s built-in camera to identify relevant information from payslips, and then applies them to execute payment. The regulatory implications that attach themselves to any business model in that sector are acting as brakes on business models new and old, however. While not limited to fintech startups in London, regulatory approval is often required when it comes to dealing with finance. Security and money laundering are among the concerns that come into play. TransferWise, for example, is regulated by the Financial Services Authority (FSA) in the United Kingdom. Once regulatory hurdles have been surmounted, significant new business opportunities await. Barclays’ payment transfer app, for example, is responsible for 20-30 percent of new corporate business.

According to Ismail Ahmed, co-founder of WorldRemit, London is unbeatable as a location for fintech startups. The existing finance ecosphere provides a wealth of talent, both tech and non-tech, that is unmatched anywhere else. Almost more importantly, London’s status attracts investors. Finding funding is always a bottle-neck for startups but the numerous success stories in contributed to a higher growth rate of funding than we find in Silicon Valley. A total of over $700m flowed to the British and Irish fintech universe between 2008 and 2013, with deal sizes growing at an annualized rate of 74%. In contrast, Silicon Valley’s growth rate was only 13%.

That being said, Silicon Valley is still playing an entirely different game. Silicon Valley’s fintech companies raised $950m in 2013 alone, in excess of a third more than the British market managed to raise since 2008. As a result, despite the ease of access to funding compared to the rest of Europe, London’s venture funding market is significantly less liquid than that of the Valley. The other big challenge is being accepted by the existing players. London’s finance industry is not particularly welcoming to new sources of irritation. London still has some catching up to do, but it’s doing so fast.

Image Credit: Information Age