Fintech trends of the outgoing year
2018 has become quite eventful for the development of financial technologies. We have pointed out several trends of the outgoing year, which will have a significant impact on the world market in the foreseeable future.
2018 has become quite eventful for the development of financial technologies. The beginning of the year turned out to be highly symbolic. On January 1, the results of a bet made 10 years ago between Warren Buffett and CEO of investment company Protégé Partners Ted Seides were summed up. The subject of dispute was advantages of active and passive investments. According to Buffett, on the horizon of 10 years none of the existing hedge funds can surpass the S&P 500 index in terms of profitability. The results proved his point: profitability of passive investments was more than twice as high as that of hedge funds. Experts remind fairly that the reason of the success is that the world economy was showing a positive trend for 9 out of 10 years of the bet. Now a number of signs indicates approaching of financial crisis, and it is not worth copying the 2007-style strategy. The information that over the past six months Buffett’s holding Berkshire Hathaway has invested about $600 mln in the Paytm (India) and StoneCo (Brazil) payment systems looks more relevant. Nevertheless, a clear demonstration of poor effectiveness of hedge funds will surely affect investors’ policy. We have pointed out five more trends of the outgoing year, which will have a significant impact on the world market in the foreseeable future.
- EU — the year of unprecedented growth. In January 2018 the PSD2 Directive came into effect in the EU. New opportunities brought by the common rules for operation of financial companies and open banking have significantly increased investment attractiveness of the European fintech. According to the report of the venture company Atomico, 69 financial companies from the EU joined IPO in 2018, and the cost of their shares increased by 222%. As a comparison, during that period 28 companies placed their shares in the US, and the growth of their cost amounted to 42%. 17 new European fintech unicorn companies appeared, compared to 9 in 2017. Despite strict rules of the GDPR, significant investments in the European fintech are made by investors from China. It is necessary to emphasize particularly that investments are growing despite the uncertainty created by the situation around Brexit. It can be expected that any final resolution of this issue will give an additional incentive for further growth of fintech in the EU.
- United Kingdom — pension savings and world expansion. Development of fintech in the United Kingdom over the last years has been heavily influenced by the prospect of Brexit. On the one hand, regulators seek to maintain the dynamics of development of fintech companies in isolation from the EU market. This is solved by attracting fintech in public-private partnerships and elimination of excessive regulatory restrictions. A vivid example in this area is involvement of P2P companies in the formation of pension savings by means of Innovative Finance ISA (IFISA) program. It suggests a possibility to open an individual savings account in one of the accredited P2P companies. The received income is not taxed, and the investments are generally used for lending to small and medium-sized enterprises or mortgages. The program is very popular, and 2018 was the first full year of its functioning. In 2016 the volume of investments in the IFISA, which was offered by only one platform at that time, amounted to £31 mln. In 2017 £290 mln was invested. Experts expect that the growth rate will be preserved as of the end of 2018. Another development trend is the presence expansion of British companies in the world market. An example of such policy would be Funding Circle, one of three leading P2P-companies of the United Kingdom. After a successful IPO in October, the company that now has representative offices in the UK, USA, Germany and the Netherlands announced its plans on further international expansion in 2019. The UK government supports external expansion of the leading fintech companies by concluding intergovernmental agreements.
- USA — focus on further growth of fintech industry. The issues associated with abuses of the management of the largest P2P-lending company LendingClub in 2016 raised doubts regarding the future of the entire industry. “This is bad news not just for Lending Club, but for the entire industry. Really bad”, — the founder of the Lendit conference Peter Renton estimated the situation at the time. However, the company managed to maintain the position of the leading American P2P-lender. According to the published report for the 3rd quarter of 2018, the number of applications for loans increased by 30% and the net profit — by 20% compared to the same quarter of 2017. The issues of Lending Club became an incentive to improve the fintech-regulating legislation. In August, the Ministry of Finance published a report calling for optimization of regulatory framework for non-bank financial institutions. Implementation of these proposals is expected to be quite complex, but as a result, it will help the US to maintain its leadership in the development of fintech startups.
- China — regulation on the verge of prohibition. The actual ban of P2P and microlending in China became an unexpected shock for the global fintech market. The People’s Bank of China announced extremely strict requirements for the companies dealing with online lending and attracting funds of private investors. According to experts’ estimate, maximum 50 such companies out of about 1500 will be able to meet the regulator’s requirements. Almost at the same time, blockchain technologies, the introduction of which was called untimely, came under official criticism. The formal reason for it was the danger of emergence of pyramid investment schemes. However, concerns about the increased loan debt burden of the population amid reduced economic growth rates seem more likely. The existing situation pushed Chinese fintech companies to enter the international market. Internet giants such as Alibaba and Tencent are investing heavily in projects around the world, small startups prefer creating branches in geographically and culturally close countries of Southeast Asia. It can be predicted that the inflow of investments and technology will give a significant impetus to the development of fintech in the entire SEA region.
- A tough year for cryptocurrency. Throughout 2018 there was an unprecedented hype around the cost of the most popular coins. In December 2017 the price of one Bitcoin came close to $20,000, after which a period of prolonged decline started. Medium-term cost predictions of 1Ƀ ranged from one million dollars to zero. This situation significantly complicated the integration of cryptocurrency into the global financial system, the development of such promising areas as reduction of transaction and conversion cost. P2P-lending in cryptocurrencies also became an issue, as most of the tokens issued by P2P companies were using a binding to Bitcoin or Ethereum. Now it is possible to say that the situation has stabilized and the effective demand for basic cryptocurrencies has been preserved. In December, bills were presented in the US Congress giving the Commodity Futures Trading Commission in the United States (CFTC) the authority to regulate the cryptocurrency market to protect against manipulations. Adoption of such measures can make cryptocurrency rates much more predictable and will allow for a wider use of these tools for the development of fintech.
Prospects for development. In October the International Monetary Fund and the World Bank Group presented “Bali Fintech Agenda” — an ambitious programme of 12 items defining goals and objectives of fintech development on the global scale. According to IMF Managing Director Christine Lagarde, today, about 1.7 billion adults do not have access to financial services: “Fintech can have a major social and economic impact for them and across the membership in general.” First of all, efforts will be focused on expanding the availability of fintech products in low-income countries. Participation of such large international organizations allows to take a fresh look at the development prospects for financial technologies. These are new markets such as India, countries of Africa, Southeast Asia, Latin America and a fundamentally new audience. It can be assumed that in the near future fintech will become not only a cheap and effective alternative to traditional banking, but will also acquire an independent social role.