Opportunities and Uncertainties - The Future of Fintech

Christana Yang, Venture Investor, Sand Hill Angels

Christana Yang, Venture Investor, Sand Hill Angels

2018 was a banner year in financial technology. Global fintech funding growth remained robust, topping $40 billion, and the numbers of investors and fintech startups raising funds reached unprecedented highs. China’s Ant Financial alone raised about $14 billion in its last round of seed funding. The United States now has more unicorns in fintech than in any other industry vertical.

In addition to the mentality shift and generational factors that have fueled this momentum, artificial intelligence and blockchain technology have enabled fintech companies to compete and partner with incumbents.

Reshaping the Future of fintech

AI and blockchain technology have both been around for over a decade, but only recently have they been able to join forces in viable applications, thanks to significant decreases in the cost of computing power and massive increases in data accessibility. These applications show promise in a variety of areas within the fintech realm.

Digital Identity

Recent events such as the Equifax breach, the Facebook user information leak, and implementation of Europe’s General Data Protection Regulation all point to the many flaws in our traditional identity system.

Blockchain technology offers solutions that could fundamentally change the financial services industry.

Imagine an immutable, universal digital identity system where customers could log in to any digital service without a password and without having to create an account. A single identity validation would work in most circumstances. Consumers would own and manage their personal data, choosing when, where and with whom they share it. Concerns about large companies such as Facebook and Amazon abusing and monetizing personal data would diminish, making regulation less relevant.

Global payments

Sending money abroad is expensive and slow. Remittance fees ranging from 1.7 to 16 percent total $40 billion a year and cross-border transactions often take far longer than they should.

The legacy systems employed by traditional financial services firms limit their options for solutions, but blockchain startups are building new products that aim to reduce fees while streamlining remittances.

Blockchain technology offers solutions that could fundamentally change the financial services industry

Ripple, for instance, promises to lower fees by 80 percent while offering remittances that are faster than SWIFT and cheaper than Western Union.

Additionally, Facebook has been talking to exchanges about selling a new cryptocurrency for use by WhatsApp consumers. And J.P. Morgan Chase’s JPM Coin, the first cryptocurrency created by a major U.S. bank, is designed to enable institutional customers to settle payments instantly.

Insurance

Insurance is a $7 trillion market with a relatively high barrier to entry, but massively improved data accessibility is enabling disruptions that will help customers acquire faster and more accurate underwriting, including personalized policies designed to drive positive customer behaviors.

Farmers, for example, are largely underinsured. They depend heavily on each season’s output while having little control over it. With intelligent data analysis, insurance startups can set more accurate rain thresholds and pay off farmers when those thresholds aren’t met.

China is leading the innovation in this space, thanks to its large population and less data regulation. JD.com, one of the largest e-commerce platforms in China, is now applying AI and machine learning to insure pigs and chickens, opening up a huge new customer base.

Investing

Wealth management is a $79 trillion industry, and one study found that 99 percent of wealth managers plan to implement AI in the next two years. Startups Wealthfront and Personal Capital disrupted the industry by launching robo-advisors, spurring incumbents Vanguard and Morgan Stanley to follow with their own machine-advisor solutions.

Venture capital firms once traveled extensively to find interesting investment targets. Now, we build data analysis platforms to identify those targets. This innovative software is designed to find the right companies based on whom they’re hiring, the products they’re developing, and the traffic on their websites.

Digital lending

By 2020, the annual volume of loans originated by digital lending platforms will rise to $90 billion in the United States. AI and machine learning make the lending process faster and cheaper, but banks still offer the lowest cost of capital.

Opportunities and uncertainties

The definition of fintech is expanding. Even Airbnb arguably falls into the category, as it processes massive numbers of cross-border financial transactions for its customers. Fintech is playing an increasingly critical role in almost every industry, with opportunities often exist in large markets led by vulnerable incumbents.

In China, where the financial system is still developing, WeChat and Alipay have built financial products from the ground up. With an astonishing 70 percent adoption rate, they have created a nearly cashless market.

Nevertheless, the highly regulated financial services space is still dominated by banks, which have historically been resistant to technological disruption. Data breach and regulatory risks add more uncertainties for innovators and investors in the space.

The good news is, while it took PayPal 20 years to join the ranks of global financial powerhouses, the next one is likely to arise much more quickly, along with an exponential growth in the trajectory of financial technology in the coming decade.