The fintech industry is exploding, and turning the world of finance upside down. If it hasn't already impacted your life and your investments, it will soon.
Fintech is an industry that uses technology to make financial services more efficient and accessible. From lending and asset management services to payments and ledgers, a new generation of fintech start-ups are taking aim at the heart of the global financial industry. It's disrupting big, established financial institutions by improving their current offerings -- often at a lower cost. In some cases, it even involves introducing an entirely new product or service.
Investment in fintech companies is growing globally, and a sizeable chunk is winding up in Asia, where the industry is poised to take off.
Investment in Fintech Is Growing Rapidly
Last year investment in fintech globally increased by 60% to $20 billion. Growth was even more robust in Asia, with investors putting a record of $4.5 billion into Asian fintech companies in 2015. This was almost quadruple the total amount invested in 2014.
The demand for alternative, innovative financial solutions from investors, businesses, borrowers and lenders is driving the current fintech boom.
The 2008 economic crisis exposed a lot of flaws in the global financial system and created significant consumer distrust of brand-name financial institutions. The crisis, and how big banks responded to it, helped open the door for new banking and finance models.
Both borrowers and lenders have been keen to explore alternative, cheaper financing methods. And with the finance industry severely limited from tighter lending regulations since the crisis, smaller businesses and consumers have found it more difficult to get a loan through traditional channels and are seeking innovative solutions.
Many investors, already comfortable using online tools to manage their portfolios, welcome fintech services that offer lower fees and smaller initial investment requirements.
Fintech Sectors to Watch
Two sectors within fintech stand out: automated investment services, or "robo-advisors", and peer-to-peer online lending platforms that match lenders directly with borrowers.
Both services compete with their nondigital counterparts in efficiency and cost. And a growing number of these companies now service Asia.
Online wealth management companies called robo-advisers use trading algorithms to automatically manage investment portfolios. Robo-advisers are an attractive, low-cost investment option that's good for people who like to manage their finances online. They also let users set up an account with a smaller initial investment than what traditional wealth management firms normally accept. More and more robo-advisory options are now beginning to spring up around Asia, particularly in Singapore and Hong Kong.
Another fast-growing Asian fintech sector is peer-to-peer (P2P) lending, or online platforms for borrowers and lenders to connect with each other.
A recent study calculated that the total value of P2P transactions in China last year was just over $100 billion, indicating that much of Asia's P2P lending growth has been confined to China. P2P lending is also catching on in countries like India and Singapore, with companies like India's Faircent and Singapore's Crowdo growing rapidly.
Crowdo, for example, connects investors around Asia to borrowers who are either individuals, or small- and medium-sized enterprises.
When compared to traditional banks, P2P lending platforms allow borrowers to borrow money at lower interest rates. Investors can also use these platforms to lend to borrowers and earn returns ranging from 8%-25% per year.
To speed up the lending process, these platforms have developed their own in-house credit scoring system. Before requesting a loan, borrowers first provide their financial information for the platform's credit scoring purposes. Then, investors decide whom to lend to, depending on their risk profiles, or credit score.
Fintech's Disruptive Impact on the World of Finance
Fintech is a threat to traditional lending institutions' dominance of global finance. Individuals and businesses now have more borrowing and investing options. Traditional banks must adapt and collaborate with fintech companies to keep market share.
A number of banks have already employed fintech to transform their operations. Singapore's DBS Bank, the largest bank in Southeast Asia, recently joined forces with U.S. fintech company Kasisto to create Digibank, India's first branchless, mobile-only bank.
Technology is at the forefront of this venture. No paperwork is involved in opening a Digibank account. Instead, a biometrics-enabled ID (biometrics involves things like finger prints, retinal scans, face recognition and voice prints) is used for customer authentication.
If large banks aren't collaborating with fintech companies, they're trying to compete with them by bolstering their own technology capabilities.
For instance, Swiss bank Credit Suisse recently launched a private banking app that provides its Singapore and Hong Kong clients with a range of online functions to help them manage their wealth. It also allows clients to access the bank's library of investment and research publications.
In Asia, Fintech Will Reign
Asia will lead the world in fintech growth over the coming years.
Hundreds of millions of people in Asia don't have access to formal financial services, yet the market is home to half of the world's internet users. Similar to the way that entire countries leapfrogged fixed-line telephones in favour of mobile ones --many of them may not ever use traditional financial services, in favor of fintech.
With a few taps on their smartphones, people in Asia will be able to bypass the big banks and open their first bank account or make their first investment. And they'll be able to do it at a lower cost.
Existing fintech companies are already eyeing Asian expansion, seeking to exploit this technologically advanced -- but financially underdeveloped -- region.
U.S. fintech company Robinhood, which offers commission-free stock trading on U.S. stock exchanges, launched a Chinese version in April. And it recently partnered with Chinese internet search giant Baidu to allow Chinese citizens to buy and sell U.S. shares from their phone with no fees and no account minimums.
What Fintech Means for Investors
The fintech industry is still in its early growth stages, but it's already changing the way people bank and invest. It's giving people new opportunities to invest and bank that were not available before. And most significantly, it's fundamentally challenging long-standing lending structures on a global scale.
Expect to hear more about fintech, in the form of robo-advisers, P2P lending or other financial services in the coming months. It may not be the solution for everyone, but it will be playing a bigger role in the world of finance, especially in Asian markets.
Kim Iskyan is the founder of Truewealth Publishing, an independent investment research company based in Singapore. Click here to sign up to receive the Truewealth Asian Investment Daily in your inbox every day, for free.