parallax background

Why Is Fintech Sector Expanding Rapidly and Where Is It Headed Next?

The Split – How to Build High Performing Teams?
December 21, 2023
Anti Money Laundering, Fraud Prevention, AML solution for banks and financial institutions
Anti Money Laundering Solutions Take Centre Stage In the World of Digital Payments
November 22, 2023

In the realm of financial services, there has been a global transformation in customer requirements that surpassed the adaptability of worldwide banking systems. As a result, new entrants focused on customer needs have emerged beyond the conventional banking framework, committed to enhancing user experience, transparency, and value for money. These fintech entities exhibit a remarkable ability to innovate swiftly.

As the fintech sector advances, a fresh surge of innovation is unfolding driven by two key trends:

  1. Highly customised financial services and product to meet the specific demands of the target market. This enables single-product companies to develop more focused offerings, enhancing their market share and diversifying revenue streams.
  2. The enablement of non-financial businesses to introduce financial products and services of their own to complement their existing non-financial products and services. This also leads the conventional financial service providers to redesign their back-ends.

As reported by CB Insights, the global fintech sector has attracted more than USD 350 billion in venture capital funding in the past five years, encompassing nearly 21,000 deals across the entire spectrum of financial services, including money transfers, banking, lending, payments, insurance, and financial business tools. This influx of capital has led to the emergence of numerous unicorns and decacorns in the fintech vertical.

Why is fintech vertical experiencing a sharp rise amid global economic downturn?

The answer lies in the need for innovation across the global finance industry that includes both banks and financial institutions owing to the never ending need for financial services in order to carry out transactions in daily life matters or businesses.

From offering simple payment and lending services, with the advent of startups like Stripe, Plaid and Lean Technologies, fintech industry has now stepped into the next wave where these companies are providing technology infrastructure to not just banks and financial institutions but also businesses in other sectors, particularly e-commerce and retail. The fintech landscape has now grown to include a large spectrum of verticals such as Digital Banking, Open Banking, NeoBanks, Bill management and payments, InsurTech (Insurance), Remittances, Trading & Capital Markets, Lending (such as Buy Now Pay Later business model), WealthTech (Wealth Management), PropTech (Mortgage and Real Estate), RegulatoryTech (RegTech), LegalTech, Blockchain and its B2B applications, and Enterprise Solutions and Infrastructure.

These verticals can be further broadly categorised into three types of fintech offerings:

1. Front-End Applications that include final products and services used by businesses to manage their in-house financial processes or conduct transactions.

2. Mid-Tier Applications that include final products and services used by businesses to overcome the need for integration with conventional, legacy tech infrastructure and other subsequent front-end applications.

3. Back-End Infrastructure that includes underlying products and services used by banks, financial institutions, fintechs and other businesses to provide core services, e.g. BaaS (Banking as a Service), Anti Money Laundering (AML), Corporate Governance, Risk and Compliance (GRC) and Know Your Customer (KYC).

Where is the fintech landscape headed next?

The near future of fintech will be defined by customer data and quick access to that data.

1. Growth of fintech infrastructure providers

In the past three to four years, the rise of financial infrastructure APIs has led to the growth of open banking. According to Research and Markets, open banking market will expand at a CAGR (Compound Annual Growth Rate) of 24.4% till 2026, as APIs enable larger corporations and financial sector companies to avoid the hassle of building new tech stacks from ground up. Moreover, it also allows SMEs to compete with large organisations.

Amongst API infrastructure players, BaaS (Banking as a Service) vertical will grow the fastest as it combines all of the components a business that it may require to launch financial services, making them accessible via API. BaaS providing fintech platforms typically charge a platform fee to their clients and/or have a share in profits resulting from a financial interchange at the client’s end. For businesses looking to deliver financial services such as fintech startups or vertical SaaS firms, resorting to a group of APIs is a low-cost, hassle-free solution to creating, testing, and deployment without having to put their resources into building a brand-new infrastructure.

For example, where like New York based Unit allows businesses and fintechs to build banking solutions in minutes, Berlin based Solarisbank offers a variety of financial services through its umbrella of 180 APIs that other companies can use to create end-user-facing solutions. On the other hand, Nymcard in UAE is a note-worthy startup in BaaS vertical that provides embedded finance infrastructure.

2. Personalisation of consumer finance

In the coming years, consumer fintech will grow to resemble traditional banking with large-scale platforms that will provide services focused on catering to fundamental but diverse consumer needs with varying value propositions.  Initially, consumer finance fintechs will be innovating in core functions such as savings, spending, lending, or investing, however, in the long-run, what will differentiate these fintechs will be the features designed specifically for a particular community or niche audience.

Zywa in UAE, for example, is a neobank for children through which teenagers are able to spend, receive and manage money without the need for cash, and parents on the other hand, can send money to their children and monitor spending.

3. Streamlining of employee benefits processing

Despite a low rate of employment opportunities worldwide, there is a rising demand for technology that requires talent to be hired and retained. Noticeable players in this space include Workday, JobandTalent, and Gympass. In the UAE, FinFlx (a cloud-based B2B2C employee financial wellbeing platform) is a startup that is ready to seize the opportunity in the niche of employee benefits.

4. Disruption in real estate financial services

Where the world is experiencing a liquidity crunch with scarce housing supply, in the near future the real estate sector will be disrupted by fintech startups that will enable seamless transactions and refinances. For example, Holo is a Dubai-based PropTech company that is digitizing the traditional mortgage and real estate buying process, enabling people to secure home loans through its app without having to go through any sort of paperwork.

5. Propelling of Finance Decentralisation

Although, currently a small percentage of financial transactions are conducted using cryptocurrencies as opposed to fiat (government-issued) money, soon, this number is going to rapidly increase with the rising need for quick and secure money transactions. DeFi (Decentralised Finance) will penetrate into traditional finance and crypto trading via three channels:

i. Lending and borrowing

ii. Decentralised insurance

iii. Decentralised exchanges

6. Sustainability & Cyber-Security

Additionally, in order to tackle the multiplying challenges of cyber-security and fraud, fintech is fast expanding from being customer-centred apps into providing products and solutions catering to the strict regulations faced by financial services companies. Recently, there is also an increasing concern about sustainability, social and governance aspects in fintech.

Research Source: Dubai Future District Fund