Will fintech change the face of banking?
Fancy new apps have become popular for everything from making a payment to buying insurance and shares. Should the big banks be worried? Simon Wilson reports.
![Simon Hu, CEO of Ant Group © Shutterstock](https://cdn.mos.cms.futurecdn.net/CUUZT9Dj8nbW8jLpn3bdvA-415-80.jpg)
What’s happening?
In one of the year’s most eagerly anticipated share offerings, China’s biggest fintech business, Ant Group, is expected to list 10% of its shares on the Hong Kong and Shanghai stockmarkets within weeks. If all goes to plan, it hopes to raise $30bn in cash, making it the biggest initial public offering ever in terms of cash raised and valuing the firm at $300bn. That’s more than the market cap of any bank in the world. Ant, which was founded in 2004 as a payments service on the e-commerce giant Alibaba, has had a profound effect on China’s financial system, boosting access to credit for both businesses and consumers.It has more than a billion active users, and last year handled $16trn in payments, about 25 times more than PayPal, the biggest online payments firm outside China.
So it’s a digital payments platform?
No. The secret to Ant’s phenomenal growth is that payments are merely a gateway that lets users borrow money, choose from 6,000 investment products, and buy health insurance, among many other things. From its beginning in payments, Ant has built the most integrated fintech platform in the world, says The Economist: “think of it as a combination of Apple Pay for offline pay, PayPal for online pay, Venmo for transfers, Mastercard for credit cards, JPMorgan Chase for consumer financing and iShares for investing, with an insurance brokerage thrown in for good measure, all in one mobile app” that almost everyone uses. Ant has brilliantly exploited the abundance of consumer data in China to build credit-risk models with more than 3,000 variables. It says its automated systems allow it to make lending decisions within three minutes – a “claim that may seem far-fetched, but for Alibaba’s proven ability to handle 544,000 orders per second”. In just the past five years Ant has built its credit business from next to nothing to 1.7trn yuan in outstanding consumer loans, about a 15% share of China’s consumer-lending market.
What exactly is “fintech”?
It’s just a shortening of “financial technology”, but the term is normally used to mean something more specific – namely the range of software and digital technologies developed by (typically) start-up and challenger businesses over the past 20 years or so to provide more automated or non-traditional financial services to tech-savvy customers. This means everything from peer-to-peer payment services to digital payment wallets – and it’s a global development. In southeast Asia, for example, Grab and Gojek, two ride-hailing services, are becoming “super-apps” with financial arms. In Latin America, innovators such as Nubank and MercadoLibre are shaking up the banking sector. And In Europe the biggest fintech player is now Sweden’s Klarna, the buy-now-pay-later finance group. New funding of $650m last month valued the group at $10.6bn (£8.1bn), making it the fourth-largest private fintech in the world.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
![https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg](https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748-320-80.jpg)
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
What about British firms?
Many of the next biggest European players are London-based, including the payments group Checkout.com, which is an intermediary for merchants and other payment providers such as PayPal and Apple; Revolut, one of the world’s most popular “neo-banks”, which has attracted ten million customers with such features as seamless bill splitting, virtual cards, and even stock trading; and TransferWise, a currency-transfer business that has been profitable since 2017 and was valued at £3.9bn following a second funding round in July. Other big London-based names include Monzo, the banking group valued at £1.25bn, and its rival Starling Bank; and OakNorth, a five-year-old start-up valued at £2.2bn, which provides loans of £500,000-£45m to small and medium-sized businesses. It also sells an artificial intelligence (AI) system that helps other lenders decide if they should lend to a given firm.
How big is the fintech sector?
It’s still a small part of the overall global banking and financial sector – but it is growing rapidly, and as a share of the sector’s total market value, fintech has doubled in value this year alone to around 11%. Conventional banks account for 72% of the value, a sharp fall from 81% at the start of the year, and 96% a year ago (according to data collated by The Economist). And conventional non-bank payment firms (such as Visa) are also growing, and make up the other 17% of the global market value. Investor confidence in the sector took a knock this year from the Wirecard accounting scandal in Germany, but Britain should be one of the winners, says Katherine Griffiths in The Times, due to “its reputation for robust business practices and regulatory oversight”.
How has the pandemic affected fintech?
The Covid crisis has boosted e-commerce and digital payments globally, but hit short-term confidence in the prospects of some fintech firms. For example, digital payments surged by 52% at Venmo, a US network, in the second quarter year-on-year, and by 142% at Mercado Pago, a Latin American fintech. In Africa, many governments declared mobile wallets to be essential services, banning transfer fees. And Santander says that, in the first half of 2020, use of its digital channels rose by 20% in Europe, 30% in South America and 50% in Mexico, year on year. For all that, a McKinsey report published last month warned that the sector faced an “existential threat” from the drying up of funding due to the Covid slump, and should look to partnerships with more conventional players. “Core banking – that is heavily regulated, capital-intensive activities such as running a balance-sheet – makes $3trn in revenue worldwide, and returns on equity (ROE) of 5%-6%,” notes The Economist. By contrast, “freer-wheeling lines of business, such as payments or product distribution, yield $2.5trn in sales but ROEs of 20%. Fintechs are after the tasty bits. But for this, they need banks to stay alive.”
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Simon Wilson’s first career was in book publishing, as an economics editor at Routledge, and as a publisher of non-fiction at Random House, specialising in popular business and management books. While there, he published Customers.com, a bestselling classic of the early days of e-commerce, and The Money or Your Life: Reuniting Work and Joy, an inspirational book that helped inspire its publisher towards a post-corporate, portfolio life.
Since 2001, he has been a writer for MoneyWeek, a financial copywriter, and a long-time contributing editor at The Week. Simon also works as an actor and corporate trainer; current and past clients include investment banks, the Bank of England, the UK government, several Magic Circle law firms and all of the Big Four accountancy firms. He has a degree in languages (German and Spanish) and social and political sciences from the University of Cambridge.
-
Regulator moves to protect access to cash amid branch closures and disappearing ATMs
News The Financial Conduct Authority has told banks to start assessing if local communities have adequate cash access from mid-September
By Marc Shoffman Published
-
VAT hike on private school fees could come earlier than previously expected
The government could start charging VAT on private school fees as soon as January 2025, according to the latest reports. What does it mean for parents?
By Katie Williams Published
-
UK mid-caps: an improving outlook
UK mid-caps have perked up and the rally may run further, but long-term investors should remain selective
By Cris Sholto Heaton Published
-
The tobacco industry is going smoke-free - how to profit from it
Tobacco companies have realised their traditional products are on the wane. But new opportunities have opened up – and should prove lucrative
By Rupert Hargreaves Published
-
Is it time to invest in creative industries?
Any industrial strategy should not overlook the creative industries, one of our top national assets
By David C. Stevenson Published
-
Is Mercia Asset Management set for success?
Mercia Asset Management helps the government fund smaller companies in Britain’s regions. Should you invest?
By Rupert Hargreaves Published
-
British stocks set for a boost
British stocks are due for a bounce as the UK looks more stable compared to many economies
By Alex Rankine Published
-
Ocado shares jump by a fifth
Ocado takes a turn for the better after attractive profit forecasts were announced
By Dr Matthew Partridge Published
-
The AI boom is on borrowed time
The hype around the AI boom could be on its way out – but why?
By Alex Rankine Published
-
Diploma: a blue-chip set for strong growth
Diploma, whose niche products include seals and fasteners, serves an array of growth markets. Should you invest?
By Dr Mike Tubbs Published