This piece is part of a larger whitepaper, Investing in Thematics From a PM Perspective.
Paper currency is dying a fast death as technology shifts how people access and interact with their money. Fintech solutions are expanding access and improving the efficiency of financial services. And user interfaces are fast becoming all-digital through online banking, digital wallets, crowdfunding, and buy now, pay later (BNPL) services. But digital disruption remains a work in progress at traditional financial firms. For example, transfers between banks or across borders can still take multiple days to settle. Over time, we expect fintech and blockchain solutions to become more integral across the financial services ecosystem resolving some of these inefficiencies. And as user adoption rises, so too will its prominence in portfolios.
Key Takeaways
We expect the digital transformation to bring financial services, including mobile payments, online banking, and alternative lending platforms to previously unbanked and underserved populations.
The pandemic put Fintech’s adoption into overdrive, with digital payments moving into mass adoption. But the Fintech market continues to expand with emerging segments such as BNPL, alternative financing, and blockchain solutions are key avenues for future growth.
Necessity will likely encourage more traditional financial services companies to incorporate cloud banking and blockchain solutions.
Why Fintech and Blockchain are Such Powerful Forces
The intersection of financial services and technology, or fintech, is where people go to spend, lend, borrow, invest, and trade. Fintech makes financial services more personal and inclusive. Over the last two years, fintech adoption has increased dramatically, and we expect innovation in the space will continue to increase access to the global financial ecosystem.
Importantly, traditional financial institutions are integrating fintech in their business models. Firms are under pressure to reduce their reliance on legacy infrastructure while strengthening core banking systems to create better consumer experiences. Additionally, the increased focus on data connectivity and analysis to improve corporate decision-making has increased interest in fintech. Global investment activity in fintech, including through venture capital, private equity, and M&A, increased from $124.9 billion in 2020 and $148.6 billion in 2019 to $210 billion in 2021.1
The rise of the digital payments segment illustrates consumer willingness to adopt new technologies and the enormous growth potential for fintech applications. For consumers, the ease and convenience of buying goods or services by tapping a device on a point-of-sale makes digital payments Fintech’s most recognizable segment. For companies, beyond the upfront costs of developing the program and infrastructure to conduct transactions, mobile payment technology is a consumer-friendly way to keep ongoing and variable costs low. With consumers more adept and willing to shop online, more integrated shopping ecosystems are developing.
Emerging segments like BNPL, cloud banking, blockchain-based solutions, and alternative financing solutions like equity crowdfunding and peer-to-peer (P2P) lending will likely be part of the next stage of the industry’s evolution.
Fintech: Growing adoption across generations and geographies
Fintech adoption remains most prevalent among younger generations. Ninety-five percent of U.S. millennials say that they use fintech applications. Adoption of new technology typically begins with younger generations, but older generations are increasingly adept with these technologies as well. Baby Boomers are the fastest growing demographic for Fintech, with use among individuals 56 and older doubling year-on-year to 79% in 2021.5
The global adoption rate of fintech solutions reached 64% in 2019.6 Particularly exciting for the industry is its growth potential in emerging markets (EMs) and economies with limited traditional financial infrastructure and unbanked populations. China and India have the widest adoption thus far, reaching 87% in 2019.7 Innovations in mobile payments, online banking, and alternative lending platforms bring financial services to previously unbanked and underserved populations. Without existing infrastructure in place, like traditional bank branches and credit cards, EMs can adopt the latest technology without forcing an old business model into obsolescence.
The chart shows the trend in fintech adoption globally across different traditional financial services prior to the pandemic. Since the pandemic, adoption has increased across categories.
Blockchain: A new avenue for growth
In its most basic sense, a blockchain is a type of database focused on recording and maintaining data. Its unique properties stem from its decentralized approach. In a centralized system, a singular authority controls all aspects of transaction verification and documentation. With blockchain’s decentralized approach, data is recorded in “blocks” on a digital ledger. Participants, called nodes, are the computers and devices connected to the network that distribute and validate the ledger on a peer-to-peer (P2P) network. While anyone can create data on public blockchains by creating a new block and chaining it to a previous block, the consensus-based approach to validation means nobody can edit or falsify the data after it’s received a sufficient number of block confirmations. The result is a structure that generates trust without the need for a third party.
It’s conceivable that blockchain networks eventually become embedded in the financial ecosystem because of this key feature: participants don’t need to trust a government to back a currency or to responsibly manage the money supply. For the developed world, the significance of this feature may be difficult to understand, though recent economic crises may facilitate comprehension. Trusted financial institutions operating within strong regulatory frameworks that protect investors is not a privilege enjoyed equally around the globe.
The blockchain network provides a mechanism for financial inclusion for unbanked and underbanked populations, particularly in countries struggling with political instability, corruption, or severe inflation. The onset of the war in Ukraine illustrated the benefits of a decentralized form of currency, as people with cryptocurrency wallets continued to have access to currency.
A February 2021 survey by market and consumer data firm Statista indicated that the top 10 countries with the highest frequency of cryptocurrency usage among their populace were all emerging market countries. Nigeria led the way with 32% of respondents indicating that they use bitcoin or cryptocurrency more broadly, followed by Vietnam at 21% and the Philippines at 20%.8 The U.S. reported an estimated 16% of adults own cryptocurrency.9 The average age of these potential buyers is 44, which suggests digital assets continue to gain acceptance in the mass market.10
Broad use cases for blockchain
In the short term, blockchain use cases will likely cluster in the banking industry, where financial institutions use the technology to facilitate cross-border payments and transaction settlement. Banking-related use cases accounted for nearly 30% of global blockchain spending in 2021.11 Beyond …
Full story available on Benzinga.com