FinTech Basics

This blog post outlines a topology to understand the rapidly growing fintech industry and institutions operating in the space.

MARKETPLACE LENDING

Online marketplace lending refers to the segment of the financial services industry that uses investment capital and data-driven online platforms to lend either directly or indirectly to consumers and small businesses.

Sub-sectors:

• P2P Lending
• Loan Securitization
• Direct Lending
• Platform Lending
• Merchant Lending
• Crowdfunding

Total Addressable Market (TAM):
~ US $1 trillion in the US

VC Investments in space: 
2015: ~US 2.7 billion
2016: ~US 623 million

Major Marketplace Lenders:

• Lending Club
• Prosper
• On Deck
• Square Capital
• Kabbage

PAYMENTS

Mobile payments allow consumers to use their smartphones or other mobile devices to make purchases and transfer money. Consumers and businesses use these devices to make and receive payments instead of relying on the physical use of cash, checks, or credit and debit cards.

Sub-sectors:

• Mobile Wallets / Payments
• Check Payments
• Merchant Payments (C2B payments)
• Payment Processors / Card Networks
• Subscription Management Software
• B2B Payments

Total Addressable Market (TAM):
~ US $178 trillion in the US

VC Investments in space: 
2015: ~US 3.7 billion
2016: ~US 13.5 billion

Major Payment Companies:

• Apple
• Google
• Square
• Venmo
• Stripe
• Vantiv
• Ariba Pay

DIGITAL WEALTH MANAGEMENT

Digital wealth management platforms, including robo-advisors, use algorithms based on consumers’ data and risk preferences to provide digital services, including investment and financial advice, directly to consumers. Digital wealth management platforms provide services including portfolio selection, asset allocation, banking and account aggregation, and online risk assessments.

Sub-sectors:

• Robo Advisors
• Personal Credit Services
• Personal Wealth Management

Total Addressable Market (TAM):
~ US $20 trillion in the US

VC Investments in space: 
2015: ~US 786 million
2016: ~US 657 million

Digital Wealth Management Companies:

• Betterment
• Wealthfront
• Sigfig Wealth Management
• Personal Capital
• Raisin

DISTRIBUTED LEDGER TECHNOLOGY

Distributed ledger technology involves a distributed database maintained over a network of computers connected on a peer-to-peer basis, such that network participants can share and retain identical, cryptographically secured records in a decentralized manner.

Sub-sectors:

• Blockchain
• Cryptography
• Cryptocurrencies

Total Addressable Market (TAM):

VC Investments in space: 
2015: ~US 441 million
2016: ~US 544 million

Major Distributed Ledger Technology Companies:

• Ethereum
• Circle
• Coindesk
• Ripple
• Bitfury
• Veem

The FinTech Industry is not a new industry, and its opportunities, risks and legal implications are not novel. The current concerns of policy-makers and industry arise not from the technology itself but from who is applying the technology to finance.

“Financial Technology” of “FinTech” simply refers to the application of technology to create new and improved financial services for consumers and businesses. Most consumers experience FinTech through activities like checking their bank balances online, executing trades through their online brokers or tapping their smartphone against a pay terminal by using services like Apple Pay, Android Pay, etc.

FinTech was the original name of the Financial Services Technology Consortium, a project initiated by Citicorp, a predecessor to today’s Citigroup. This term now represents a hyper growth industry in which global investments (VC and M&A investments) have increased from US $4 billion in 2012 to a staggering US $47 billion in 2015.

ORIGINS OF FINTECH

The confluence of finance and technology has a long intertwined history spanning more than 150 years. Developments in finance and technology have been mutually reinforcing. The history of FinTech can be viewed in three distinct time periods:

1. Precursors to the Digital Age of Financial Services (1866 – 1967)
2. Digital Age of Financial Services (1967 – 2008)
3. New Age Financial Services (2008 – present)

Precursors to the Digital Age of Financial Services (1866 – 1967)
The introduction of telegraph in 1838 and laying of the first transatlantic cable in 1866 provided the fundamental infrastructure necessary for the digital age of financial services. This time period culminated with the introduction of credit cards in 1950, the first handheld financial calculator, and the deployment of the first ATM in 1967.

Digital Age of Financial Services (1967 – 2008)
This time period saw the establishment of automated clearing houses in United States and United Kingdom between 1968-1970. NASDAQ, established in 1971, ushered in electronic securities trading platforms. In 1982, a company named TradePlus kick-started the online brokerage investment revolution and quickly started driving down the cost of online trading. The mainstream emergence of the internet greatly affected financial services. Wells Fargo became the first bank to offer an online checking account in 1995. By the end of this time period, a majority of banks’ internal processes, interactions with outsiders and an ever increasing number of their interactions with retail customers had become fully digitized. In fact, the Financial Services industry spent close to US$560 billion worldwide on IT in 2008.

New Age Financial Services (2008 – present)
The financial crisis of 2008 can be viewed as the turning point for FinTech. Three factors, distrust of banks in the minds of the general public, large pools of highly qualified financial professionals out of jobs and regulatory factors, resulted in the creation of the perfect incubator to allow the FinTech industry to bloom into a hyper-growth market.