Over the past years, the Fintech sector has consistently gained importance and is as popular and omnipresent across all areas of financial services and business processes of private and public organizations. Financial institutions increasingly rely on financial technology, while organizations move financial processes to the cloud and use software to automate processes.
Emerging technologies around data analytics and artificial intelligence allow substantial improvements in existing products. New technologies enable completely new Fintech business models and companies across all sub-sectors of the Fintech space. Most prominently, these sub-sectors comprise payments, banking, lending, insurance and wealth management as well as business process outsourcing.
Additionally, a number of entirely new sub-sectors have and will emerge, including blockchain technology, cryptocurrencies, tech-enabled servicing of verticals including real estate, regulation and security and authentication. Over the next years, the borders between traditional financial services and Fintech will dissolve at an even faster pace, as it has become impossible to operate financial services without latest technology.
Overview of the Sector
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Payments represents the largest and one of the most active sectors of Fintech, as it touches a number of different processes and end-users. Exchanging goods and services increasingly requires some sort of electronic payment, while special software, hardware and processing solutions are required to accept, approve and settle electronic payments. This includes payments from consumers, merchants, corporations, financial institutions and government, both on offline and online channels.
Some of the largest Fintech companies are payment networks, such as Visa, MasterCard, American Express and Discover, which play an important role in facilitating payment transactions between consumers, financial institutions and merchants.
In addition, merchant acquirers such as Fiserv, Worldpay and Global Payments enable merchants to accept credit card payments. Some of the large payment processors have evolved from rapidly growing eCommerce service providers (e.g., Adyen and PayPal). Some players focusing on the SME segment, such as Square, have evolved in the physical environment similar to PayPal in the online acceptance environment.
Some other critical service providers include remittance providers such as MoneyGram and Western Union as well as cross border business payments and FX providers, such as Fleetcor. Consumers are also increasingly adopting mobile wallets as a means of payment, rapidly taking share from traditional financial institutions.
The exponential growth in eCommerce and the resulting expansion of card not present (CNP) transactions has led to an increasing need for specialized transaction security and fraud prevention solutions, which are playing an ever more important role in payments.
In addition, the rise of eCommerce has served as a catalyst for many alternative payment methods (APM), which include pay later methods, as well as direct bank payments to mention only a few. Offering the right APM for the right product mix and geography is often essential for merchants to increase conversion and revenue.
Other important sub segments in the payments sector are loyalty, rewards and coupon providers, as consumer rewards essentially represent their own digital currency, which needs to be processed. This especially applies to airmiles and other consumer loyalty programs, are typically vary depending on the region.
Also, a number of specialized hardware providers operating point of sale systems, such as VeriFone, Worldline, NCR and Poynt, as well as non-bank ATM operators like Cardtronics and Euronet, play an important role within the payments ecosystem.
Most recently, a couple of players providing payment services based on crypto currencies have evolved, which however are at the crossroads to the wealth and markets tech sub-sector, given similarities with securities exchanges and broker service providers. Players include Crypto.com, Bitpay, Bitcoin Suisse, to mention just a few.
The digital banking sector covers companies focusing on deposit taking and lending services, which are typically offered by traditional financial institutions. Key categories within the digital banking sector are enterprise banking technology, consumer oriented financial services, real estate technology and bank payment solutions, which is the link to the payment sector.
Enterprise banking technology comprises a number of services like account processing, online and mobile banking solutions, as well as fraud detection / verification / security / AML / KYC compliance solutions. Some of the large companies in this vertical are Fiserv, FIS, Jack Henry and Finastra, to mention a few.
Consumer oriented financial services include credit data providers such as Equifax, Experian, CRIF, etc., as well personal finance management solution providers like Credit Carma, or Bonify. One of the most prominent segment of consumer oriented financial services are tech-enabled challenger banks such as Revolut, Fire, N26 and Lunar, etc.
Real estate technology providers focus on making the real estate buy and sell process more seamless. As real estate transactions typically require some degree of lending, real estate tech includes players from the online mortgage lending space (e.g., LoanDepot, Better Mortgage), mortgage servicing solutions, commercial real estate management platforms, online tools, data service providers simplifying the real estate and mortgage evaluation process, and related service providers.
Alternative lending represents a new, bank-independent source of capital for consumers and businesses. Additionally, they provide an alternative asset class for private investors seeking to allocate funds. Some alternative lenders have a broad focus, while other providers target specific niche credit markets, such as home improvement loans, student loans, etc. Some consumer-focused alternative lenders include Lending Club, while SME focused alternative lending providers include Kabbage and BlueVine, among others.
Alternative lending providers are characterized by a smooth customer journey, both on the funding and lending side, integrated credit scoring algorithms, some degree of capital protection / diversification for investors, as well as a clearly defined value proposition in terms of target audience.
Wealth and Markets Tech
Wealth and markets technology includes a wide array of players, ranging from middle- to back-office technology used by investment managers, trading firms, advisors and individual investors to research, recommend and manage investments and conduct transactions across all asset classes. This sector can be clustered into wealth management activities and capital markets focused activities.
Key categories in the sector include wealth management solutions, online brokers, trading and market making firms, liquidity pools, data and research firms, back- and middle- office technology providers as well as trading technology providers.
Wealth management solutions comprise consumer focused providers, incl. robo-advisers such as Betterment and Nutmeg, as well as tools and platforms enabling financial advisors to conduct their business, such as InvestCloud and InvestEdge.
Online brokers, trading and market making firms comprise online brokers such as E*Trade, TD Ameritrade, Charles Schwab, etc., as well as institutional trading firms like Virtu Financial and Jump Trading.
Liquidity pools basically represent stock exchanges where securities are traded (such as the traditional stock exchanges), as well as alternative trading platforms such as BATS and IEX. It also includes companies providing access to alternative asset classes such as private equity and hedge funds, such as Moonfare.
The data and research vertical includes firms providing data and analytics for the investment process. Companies in this vertical include Bloomberg, S&P Global, FactSet, amongst others.
Back- and middle- office technology providers include solution providers serving investment managers and investor relations functions of listed companies. Some players are State Street and Bank of New York.
Trading technology providers cover the field of software provision for institutional investors for executing trades as well as software platforms used by trading venues. Players include Bloomberg, Refinitiv and ION.
Insurance technology companies transform all aspects of the traditional insurance ecosystem, including new tech companies with an innovative offering for insurers as well as new insurance companies leveraging technology to disrupt traditional value chains. It includes technology utilized in the creation, marketing, underwriting and administration of insurance policies and processing claims. The insurance technology sector promotes new distribution models and new product providers, such as comparison websites, direct consumer insurance and on-demand, periodic insurance solutions.
New insurance ventures in the brokerage vertical include players competing with traditional insurance brokers as well as carriers for the respective underlying assets, such as Knip, Next Insurance, Insureon, Clearcover, Lemonade, Hippo and Ladder.
Data and analytics companies serving the insurance industry include players like LexisNexis, Cape Analytics, and Carpe Data, which uses proprietary algorithms and artificial intelligence to analyze data for insurance carriers.
In addition, there are selected telematics players focusing on the insurance industry, like Octo and Zendrive, as well as insurance software providers such as Applied Systems, Zywave, Britecore and TechCanary.
Financial management companies focus on the financial processes of organizations, governments and global institutions. Companies in this sector typically serve the finance and human resource departments. Providers increasingly move towards a software as a service (SaaS) or platform as a service (PaaS) delivery model, which is fully cloud hosted and hence remotely customizable and offer unlimited scalability. Key products and services include accounting and financial planning, ERP, working capital management, compliance and risk management, as well as payroll services, amongst others.
BPO / Financial IT Services
Business process outsourcing (BPO) and financial IT companies offer outsourcing solutions of any financial or financial related process in an organization. While historically, BPO entailed large numbers of outsourced employees, many providers are increasingly using tech-enabled processes to provider their respective services. BPO becomes more tech-enabled and the sector hence increasingly converges with the financial management sector.
BPO is often executed at offshore locations relative to the client locations. Examples of financial related outsourced business processes include collections, customer service, IT development, research and analytic tasks, accounting and financial reporting, tax and regulatory compliance.
Crypto Currencies and Blockchain Technology
A blockchain is a decentralized ledger of all transactions across a peer-to-peer network. Using this technology, participants can confirm transactions without a need for a central clearing authority. Potential applications can include fund transfers, settling trades, voting, and many other issues.
A crypto currency is a medium of exchange, created and stored electronically in the blockchain, using encryption techniques to control the creation of monetary units and to verify the transfer of funds. Bitcoin and Ethereum are the most well-known examples for crypto currencies.
Applications of crypto currencies range from payments to investment and speculation. Blockchain technology is used in a wide array of applications, primarily as next-generation business process improvement software.