So what are the challenges faced by the fintech industry?
Challenges in 2017
INVESTMENT SHAKE-UPS – Everyone loves fintech now, and that's a good thing indeed. But it means there are more investors interested in the opportunity than ever before. Many new investors, even within established venture capital firms, lack an understanding of how the industry works. Their actions are creating noise and interference in the marketplace.
However, there has been one area where we’ve observed a demonstrable slowdown in the investment pace: early-stage companies. While capital across the board has seemingly dried up in the sector, the VCs that have been longtime investors in this space continue to invest at an aggressive pace. We believe many successful companies will continue to find funding despite the broader slowdown.
REGULATION – There's also an abundance of regulation. Governments at all levels have taken an increasing interest in the financial services industry, post the global financial crisis. Old and new policies will have a significant effect on the success and failure of new companies.
Following the U.S. presidential election, there is a widespread belief that the incoming administration may rein in existing regulations in the banking and financial services industry. A regulatory retreat will be positive for the early-stage fintech entrepreneurs as the burdens they face to launch their businesses will wane.
TECHNOLOGY WOES – Then there's cannibalization. The financial services industry is largely automated on old technologies. New technologies present the opportunity to have superior products and services, but it can be challenging to get industry participants (banks, merchants and consumers) to give up old and dated solutions. It is important to understand this dynamic when rolling out a new product to make sure there is a plan in place to address. This is a blind spot for many of the new fintech investors.
Business cycles can take a long time. Often fintech companies try and build revenue streams on a 'per use' basis. As they wait for concentric circles of buyers and sellers to overlap, creating transactions they can be paid on, many do not survive.
But enough about challenges. Here are seven key opportunities to look out for during the rest of this year.
Opportunities in 2017
A JUMBO-SIZED MARKET – Financial services is a very large market ($25 trillion annually globally). Technology is deeply embedded in the industry, making the industry comfortable with deploying technology. However, that technology is, for the most part, antiquated and ripe for disruption.
THE DIGITAL AGE – The digitalization of financial products removes the physical constraints associated with legacy financial institutions. Therefore, financial products can be designed today with modern technologies that allow them to be more convenient and portable globally.
HYBRID MODELS – Given the portability of digital financial products, finding new, optimized, cross-industry/hybrid business models opens up new frontiers for remixing people skills, institutional distribution channels and proprietary customer sets. The result is an entirely new market for financial products.
MORE ACCESS – Access to technologies (mobile, cloud, networks, analytics) is rapidly making financial products and services more available to all consumers and businesses.
AN ONGOING NEED - The need and demand for financial services and products is as robust as ever. It is a critical industry that provides a core function in the lives of every consumer and business in the world.
VOLATILITY – With the recent market turbulence, the 'unicorn' mania is beginning to subside, and valuation expectations of entrepreneurs have shifted down substantially.
The number of new fintech businesses being created is at an all-time high.
WILLING INCUMBENTS – The major participants in financial services are actively seeking new technology solutions to remain relevant and gain competitive advantages. Their willingness to adopt new technology provides tailwinds to startups looking to engage the industry.
The number of new fintech businesses being created is at an all-time high. This year will undoubtedly be a watershed one for new entrants, new technologies and new dynamics in the fintech and payments sector.