The initial stage lasted from the formation of the Internet in the late 90s and up to the 2008 crisis. At this time, online payments and related infrastructure became the main model. Significant companies of this era are the current largest fintech companies in the world – PayPal (valuation – $ 50 billion) and Ant Financial (valuation – $ 60 billion), where the core business is the Chinese competitor PayPal – mobile wallet Alipay.
The next stage came after the 2008 crisis. Changes in the regulation of the banking industry and the general deterioration of the situation in the banking market led to the fact that many banks began to close entire lines of activity. This is how the lending to the SME segment suffered significantly: in the United States, banks still issue fewer loans to the SME segment than they did 10 years ago. Also, banks around the world began to raise requirements for potential borrowers, closing access to bank lending to a significant number of the population. All this paved the way for many young fintech startups trying to fill the niches left by banks.
Lending accounts for more than 50% of banks’ profits and it is in this segment that the largest number of fintech startups have appeared in the last 10 years. Due to the greater flexibility (often due to oversight of the regulator), the online model, the ability to work with alternative data not used by banks, and the availability of cheap funding, many startups were able to offer their clients better conditions than banks. For example, the main use of American P2P sites (LendingClub, Prosper) has historically been the consolidation of card debt in order to reduce the overall rate. In many other cases, fintech startups have opened up access to credit for those who have been historically cut off from the formal banking system. This trend was especially pronounced in Asian countries, where most of the 2 billion people live without access to banks.
At that time, asset managers also became a popular topic for “disruption”, many of whom historically did not want to work with clients who were ready to deposit less than $ 500,000 into an investment account. Everything changed with the arrival of the so-called roboadvisors. In the absence of payments to live managers, the algorithms could show comparable profitability, and the automation of the process made it possible to minimize operating costs.
One of the most famous fintech startups of this wave, Square, has also focused on liberalizing access to financial products for an audience that has historically been disadvantageous for banks. To do this, the company began producing its own card readers that could be used with smartphones to accept card payments. Whereas previously a card acceptance device cost a business $ 500 or more, now Square sent out readers for free.
As the scale of businesses grew, the first serious difficulties began to appear. What helped startups stand out from banks at one time – focusing on one key service in which the startup sought to achieve the greatest efficiency – has seriously limited the growth potential of fintech companies. Having a product line not only allows you to better monetize your audience, but also serves to retain your customer base. Lacking the opportunity for up- and cross-selling, many fintech startups were forced to compete on financial terms, which led to the fact that some models were simply unworkable.
The roboadvising industry is a good example. Analysts expect a sector that barely existed a few years ago could collect up to 10% of all global assets by 2020 – or an astronomical amount of $ 8 trillion. It would seem like an ideal environment for startups. But as practice has shown, with such low prices per client per year, companies in this segment have rarely managed to earn more than $ 50-100. The cost of attracting such an audience can often cost in the order of a thousand dollars per client.
As shown by Morningstar’s calculations, in order to simply pay off, roboadvising startups need to raise from $ 16 to $ 40 billion under management, and to justify the current estimates of industry leaders at $ 500-700 million, startups need to increase this amount to $ 50-80 billion. to understand how much this is, just look at the leader and pioneer of the roboadding industry – Betterment. Since 2008, Betterment has raised over $ 200 million in equity investments and raised assets under management to just $ 6 billion.