In this article, we will explore the rise of fintech startups around the world.
A recent report by CB Insights predicted that “investments in financial technology (fintech) companies hit a record $23 billion last year, up 45% from 2014” and this trend is expected to continue with another projected 46% increase in investment for 2016.
It has been reported that China alone made deals worth over USD$11bn during 2015; double the amount it invested just two years before.
With such rapid growth, what are some of these startups doing?
We take a look at four different sectors within fintech: peer-to-peer lending, personal finance management software, money transfers, and crowdfunding platforms.
a). Peer-to-peer lending
Peer-to-peer lending is a sector in which an individual can lend money to another person or company.
The best-known service for this type of lending, Lending Club, claims that it has facilitated more than $25 billion USD worth of loans since its inception in 2007 and now serves as one of the few viable competitors to banks when it comes to personal loans.
On average these companies’ rates are lower than those offered by traditional lenders; Zopa charges borrowers between 0% and 13% APR (annual percentage rate) depending on their risk profile while some major banks charge up to 58%.
This peer-to-peer platform matches people who want extra liquidity with those looking for better returns and customers have successfully lent out over $200m USD.
Another company, SoFi (Social Finance), is trying to capitalize on a different opportunity with millennials by providing student loans and refinancing mortgages so they can refinance at lower rates.
These opportunities are attractive because low interest rates have made other types of financial products less profitable for banks.
It is worth noting that these companies don’t only offer loan services; some also provide credit cards or savings accounts which could potentially make them more competitive than traditional lenders in the future as well.
b). Personal finance management software
Then there is personal finance management software startup Betterment, which claims to have already saved more than $500 million in investor fees by constructing a well-diversified portfolio of low-cost exchange-traded funds (ETFs) for its customers.
The company is betting on the idea that consumers will be willing to pay them upfront as opposed to paying higher investment management fees over time
The business model proved so successful at first that it was able to raise capital from venture capitalists and other firms such as Wellington Management Company and Bessemer Venture Partners.
It is estimated that these investments amounted up to around $25 million but now they are worth billions because their valuation has ballooned upwards with success since then.
c). Money Transfer
Money transfer is done through a mobile app where customers can deposit and withdraw money, pay their bills using the service, or buy virtual currencies like Bitcoin.
Fintech startups around the world are usually companies that use advanced technologies such as blockchain in order to make financial services more efficient.
One of these is Transferwise which was founded by Skype co-founders Taavet Hinrikus and Kristo Käärmann back in 2011 with headquarters based just outside of London (United Kingdom).
The startup’s goal is to provide cheaper international payments without any need for currency conversion fees.
Customers gain access to this service when they transfer over £500 to their account.
Another fintech startup is crypto-currency exchange Coinbase which was founded in 2012 and headquartered just outside of San Francisco (United States).
The company has raised over $225M from investors such as Andreessen Horowitz, Union Square Ventures, DFJ Growth, NYSE Euronext Asset Management among others.
Customers are able to buy bitcoin and other cryptocurrencies through them with a simple registration process by linking it with your bank account or credit card number.
d). Crowdfunding platforms
These are other fintech startups that are changing the way people invest.
FundersClub is a company that connects investors and companies looking for funding by streamlining the process through technology, data analytics, and due diligence processes.
Their team of experts provides guidance to those who need it while upholding strict checks on quality investments.
In 2015 they have funded over $100M in new businesses from their platform alone with little or no investment capital required at all (they only charge an upfront fee).
Other examples include Seedrs which has raised close to £200m since 2008, Kickstarter ($240 million), and Indiegogo (£140 million), both of which are dominant players in crowdfunding platforms around the world today.
The Bottom Line?
The fintech space is booming and it has the potential to change all aspects of our lives, for better or worse.
A few examples of these fintech startups include:
- Personalized financial services – Investment decisions based on data analytics and risk management tools.
- The “sharing economy” (e.g., Airbnb) in which individuals offer goods/services via digital platforms as opposed to traditional methods such as hotels, etc.; these new ideas have given rise to companies like Uber who are now a dominant player in taxi transportation worldwide with operations in more than 400 cities globally.
- Alternative lending solutions that enable both small businesses and consumers without access to mainstream banking providers an alternative route into credit; one example being SoFi’s Social Impact Program.
- Digital currencies like Bitcoin and Ethereum are disrupting the way people transact with one another, challenging traditional concepts of money.
- Apps like Stash help you build a portfolio by investing your spare change from everyday purchases (e.g., coffee, lunch). Studies show it takes an average person 18 months to save $18K through their paycheck alone; this app has been able to achieve those same savings in about two years even while taking typical living costs into account.