The rise in fintech start-ups

The number of fintech startups has nearly doubled in the last year. What's behind this growth? And which regions are leading the way?

The fintech industry is seeing a surge in start-ups. According to data gathered by Swedish company, part of Finixio's personal finance comparison network, the number of start-ups in the sector almost doubled in 2019, reaching over 21,700 companies globally.


What's driving the rise in fintech start-ups?

This flood of new businesses comes off the back of the fintech industry's rapid growth, which has been powered by rising demand for financial technology solutions.

There are three main drivers behind the growth in fintech start-ups says Elias Ghanem, Global Head of Marketing Intelligence at Capgemini Financial Services. These are changing customer expectations, fintech start-ups' disruptive nature and traditional financial institutions looking for new ways to stay relevant.

"One of the most pertinent growth drivers is changing customer expectations - especially among the millennials - towards digitised services. More and more millennials and tech-savvy consumers are turning towards non-traditional players such as fintechs, bigtechs and challenger banks for an enhanced digitised experience in areas such as payments and lending," he says, noting that traditional banks struggle to provide this.

"Secondly, fintechs have shown an agile mindset coupled with risk-taking behaviour in exploring disruptive technologies. With their innovation-oriented start-up culture, they are attracting funding, [from those] who want to be part of the next disruption in the financial industry. In a way, fintechs are like an extended body for the banks to take risk and bring in innovation."

Ghanem notes that the above are also pushing banks to rethink and collaborate more and various banks, such as BBVA, are exploring and investing in the fintech ecosystem more rapidly to integrate qualified start-ups within their value-chain.

"Driven by the digital gap present in traditional banking, this is leading to the rise of fintech and even more collaborative opportunities for banks to remain relevant."


USA leading the way - but for how long?

Data gathered from statistics portal Statista shows that in both 2018 and 2019 North America had the largest share of fintech start-ups, but EMEA has seen the most significant growth.

North America is currently home to 40% of fintech start-ups, with the number of new fintechs growing at around 55% year-on-year.

Ghanem puts this down to the response to North America's 2008 subprime crisis, when banks faced uncertainty and closure. "They become highly risk-averse and catered to a selected section of the population, which had better credit score or were asset-rich. Fintechs capitalised on this opportunity to serve the underserved population with limited access to loans or debts."

"The US simply had a better ecosystem to create companies that reap the benefits of digitlisation," adds Stefan Wagner, associate professor of strategy at ESMT Berlin.

"[Plus] Europe had a significant disadvantage both in terms of availability of talent as well as regulatory environment. While financial regulation is a major burden to start-ups around the globe, the mix of pan-European and national regulations complicated the situation in Europe," he says.

However, things have begun to change and Europe's fintech industry has benefited from progressive regulations around open banking, such as PSD2, which has led to EMEA seeing fintech start-up growth of 116% year-on-year.

"These regulations helped fintechs gain significant market traction by launching new innovative products and better customer experience. This resulted in higher customer adoption of fintech products and positioned them (with banking license) as competitors to traditional banks. This further prompted incumbent banks to collaborate with fintechs to innovate their operating model and product portfolio," Ghanem points out.


Fintech trends as the market matures

We're now seeing the fintech sector mature and a survey by Capgemini found that 44% of consumers are ready to shift to digitally native firms in the next 9-12 months.

With the rise in demand for digital banking, fintech firms aren't just concentrating on the technology front, but also trying to connect with customers to meet the unmet banking needs by trying new approaches.

For example, insurtech start-ups, such as Duck Creek Technologies and UNQORK, are collaborating with incumbents to meet customer expectations and demand for digital solutions and to attract millennials.

On the digital banking front, B2C business models are gradually taking a back seat as B2B cases such as RHO, Cogni and Tribal emerge. "The early-stage US challengers are targeting bank accounts and credit gaps for SMBs, freelancers, and start-ups," Ghanem notes.

And as the payments sector has grown significantly in the last few years, the industry could witness a surge of companies providing secured digital transaction, he adds.

"One such example is Radpay, an online payment platform combining Ethereum blockchain technology and secure card payments, enabling users to make easy and personalised financial transactions. The company uses advanced fraud resistance features to protect confidential information and allows payments in cash, via eWallets or cryptocurrency."


How many start-ups can survive?

With the industry now saturated with start-ups, how many are likely to survive? As Wagner points out, survival rates of start-ups are notoriously low - typically in the one-digit percentage range - and that's without the additional issues that have come from the Coronavirus global pandemic.

Given the severe impact this has had on economic activity it will only get harder for a start-up to transform into a successful business.

The pandemic has resulted in a never-before-seen economic situation, impacting fintech funding and deals. Ghanem says that global disclosed funding to fintech companies declined by 25% in Q1 2020 year-on-year, and the number of global deals in March 2020 decreased by almost 48% year-on-year.

"We can expect to see an accelerated shake-out of the market, where companies with weak business models and short histories will suffer most," says Wagner, something Ghanem agrees with.

"Many early-stage and aggressive cash-burning start-ups may not survive the funding deficit. However, scaled-up fintechs could partner up with banks to help them bridge the digital gap, with changing consumer behavior towards contactless and digital banking. Going forward, effective collaboration at scale with banks with a focus on industrialised innovation is a survival imperative for fintech start-ups."

Interestingly though, this uncertain environment has resulted in an unplanned checkpoint, stalling the growth of fintechs towards a bubble, says Ghanem.

"Now, more than ever, the focus will shift to fintechs who can demonstrate the ability to survive and scale-up to produce mass market innovations," he concludes.