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THE IYER REPORT

Understanding FinTech


THE UN(DER)BANKED OPPORTUNITY

August 20, 2017 Leave a Comment

The World Bank defines Financial Inclusions as follows (link):

> Financial inclusion means that individuals and businesses have access to
> useful and affordable financial products and services that meet their needs –
> transactions, payments, savings, credit and insurance – delivered in a
> responsible and sustainable way.

The empirical evidence collected by Consultative Group to Assist the Poor (CGAP)
shows that financial inclusion is positively correlated with growth and
employment. The evidence shows that individuals that participate in the
financial system, are better able to invest in themselves, manage risks due to
reliable access to capital. Access to capital empowers societies, especially
women and other minorities and has positive effects on consumption and
employment status. Greater access to financial services for both individuals and
firms can also help reduce income inequality and accelerate economic growth.

Global and national policy makers are making financial inclusion a key
development priority as evidenced by efforts like Universal Financial Access by
2020 (UFA 2020), ID2020 and World Bank Group’s Identification for Development
Initiative (ID4D) or India’s initiative to ensure access to financial services
in an affordable manner, called Jan-Dhan Yojana. In recent years more than 50
countries have set formal targets and ambitious goals for financial inclusion
(1).

The Federal Deposit Insurance Corporation (FDIC) conducts a biennial survey to
assess the inclusiveness of the banking system. The FDIC classifies the
“unbanked” as:

> Households that do not have an account at an insured institution, meaning that
> no one in the household had a checking or savings account.

and “underbanked” as:

> Households that had a checking or savings account and used one of the
> following products or services from an alternative financial services (AFS)
> provider in the past 12 months: money orders, check cashing, international
> remittances, payday loans, refund anticipation loans, rent-to-own services,
> pawn shop loans, or auto title loans.

In the US market alone, as of 2015, approximately 9.0 million U.S. households,
made up of 15.6 million adults and 7.6 million children, were unbanked and
approximately 24.5 million U.S. households, composed of 51.1 million adults and
16.3 million children, were underbanked. The unbanked and underbanked households
present an opportunity for banks to expand access to and utilization of their
products and services.

The Global Financial Inclusion (Global Findex) database, launched by the World
Bank in 2011, provides comparable indicators showing how people around the world
save, borrow, make payments, and manage risk. In this database, an account
ownership metric is used to measure the number of people globally, who would be
categorized as “unbanked” and “underbanked” as defined above.



As of the 2014 survey, the number of adults without an account—the unbanked—fell
from 2.5 billion to 2 billion. The largest opportunities still rest in
developing areas, such as the Middle East and sub-Saharan Africa where 86% and
66% of adults, respectively, do not have traditional bank accounts. In terms of
absolute population, 55% of the global un(der)banked — 1.1 billion individuals —
reside in Asia-Pacific countries, primarily China, India and Indonesia.



 

BARRIERS TO ACCOUNT OWNERSHIP

Based on an analysis of the barriers to account ownership, globally, the most
common reason is the lack of enough money to use an account, followed by a
limited need for an account and the existence of a family member who already has
an account. Affordability combined with extensive documentation requirements
also serve as barriers to financial inclusion. Fixed transaction costs and
annual fees combined with limited credit and risk metrics, tend to make
transactions unaffordable for large parts of the population in developing
economies. Similarly, documentation requirements may especially affect people
living in rural areas who are less likely to have formal proof of domicile or
wage slips.

EXPANDING FINANCIAL INCLUSION

Governments, policy makers, financial services and fintech companies can help
improve financial inclusion in their respective countries and markets by
focusing on financial education, improving affordability of their offerings and
embracing technology to provide ubiquitous reach or access to financial
services.

Governments and policy makers, can help provide a regulatory framework that is
conducive to expanding account ownership—through such actions as licensing bank
agents, introducing tiered documentation requirements, requiring banks to offer
basic or low-fee accounts, and allowing the evolution of new technologies such
as mobile money. Such initiatives can both help lower the cost of financial
services and help reduce the distance to financial institutions by making it
cost-effective for them to locate outlets in more remote areas.

Financial inclusion can be also expanded among the un(der)banked by moving
welfare and other cash payments to bank accounts. While this approach has the
benefit of improving the efficiency and speed of payments, thereby lowering
distribution costs, its biggest benefit will be the elimination or minimization
of financial intermediaries that engage in predatory practices that jeopardize
the security of these welfare/cash payments. This shift to digital payments can
provide a formal entry into the financial system, which can lead to significant
benefits to the newly banked individuals.

Sub-Saharan African countries are unique in the world in their significant use
of stand-alone mobile money accounts. Mobile money services like M-PESA in
Kenya, MTN Mobile Money in Ghana, have enabled the underserved to access
financial services. Establishing trust in stand-alone mobile money accounts is
critical. The ease of mobile payments can be used to build an initial level of
trust, which in turn can create entry points for ancillary savings products,
credit access, insurance, and other services.

Among the un(der)banked, peer recommendations are a significant factor.
Prospective service providers can leverage these peer recommendation networks
via trusted brand partnerships, community outreach programs, and distribution
through consumer-favored methods in order to establish trust and expand their
brands.

FUTURE OPPORTUNITIES

Beyond money services, opportunities exist in communal lending, insurance, and
savings. Financial services and fintech companies, need to develop solutions
that take into account the primary barriers to financial inclusion, such as,
limited cash flow, limited trust in financial service providers, and need to
adapt to changing consumer behavior, before further engaging these consumers.

In developing countries, many consumers borrow money from friends and family or
other sources of short-term credit outside the traditional financing world.
Aspects of this “communal lending” are the exact characteristics that underlie
the burgeoning peer-to-peer (P2P) insurance model and could serve as a strategy
for lending in un(der)banked populations. Many P2P insurance models rely on the
formation of groups that share common attributes — this is a proxy for social
responsibility in the model.

As development occurs, the necessity of insurance rises much faster than the
underlying GDP of the market. The un(der)served likely do not see the benefit of
the insurance. Local regulatory regimes play a huge role in the penetration of
insurance services in developing countries. Many emerging and frontier markets
still have restrictions on foreign entrants through requirements on maximum
foreign shareholdings or joint venture requirements. Initiative to educate
consumers on the value and benefits of insurance, simple product design,
affordable insurance solutions combined with the perceived ease of transaction
should lead to increased penetration of the un(der)insured.

Distributed ledger technologies (DLT) and Smart contracts, which aim to simplify
and automate the setup and execution of policies, can be used to facilitate
claims payments, reducing the time and transaction fees of traditional channels.
Identities maintained by distributed ledgers would create immutable records.
Smart contracts can address excessive cost burden without significant risk or
business model change, potentially enabling nearer-term adoption. Smart
contracts could also then be used to retrieve additional personal information
and send aid in the form of vouchers for goods and cash.

Filed Under: FinTech


TOPOLOGY OF FINTECH INDUSTRY

July 30, 2017 Leave a Comment

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





Fintech Industry TopologyVenngage Infographics



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.

Filed Under: FinTech Basics


FINTECH: WHERE DID IT START?

July 23, 2017 Leave a Comment

“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.

Filed Under: FinTech Basics


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