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Reflection on 1H2017: Key Trends in the World of Modern Finance




By Gabriella Kindert on 5th July 2017


NN Investment Partners' head of alternative credit Gabriella Kindert reveals the hot fintech trends of 2017 so far.

 

The first week of July is a great time to go on a holiday. But before we do, let’s review the most significant trends in the world of finance. 2017 has already brought a lot of exciting developments. This article reflects on what has been going on in the ecosystem thus far.

 

Key Trend #1: Mobile payment remains in play

 Given the recently published projections for the mobile payment sector, it is not surprising that this remains an area of interest for investors. Proximity mobile payment transactions are forecasted to reach USD 314 billion in 2020.

 

 

Key Trend #2:  Prioritizing Cyber Security

According to the survey carried out by PYMNTS.com and InfoScout, the overall adoption of mobile wallets in the US has been slower than expected. Retailer acceptance, lack of familiarity with the technology and security concerns were some of the most quoted reasons behind this. The recently published survey by American Express revealed that 37% of consumers who tried mobile wallets have stopped using them over security concerns, while 73% of retailers reported persistent or increasing levels of fraudulent online sales. This highlights the fact that there is still a lot to be done by mobile wallet providers not just in terms of encouraging customers and merchants to embrace the technology, but prioritising cybersecurity as well.

 

Security is a concern not just for retailers and users, but also for the supporting banks – 71% of financial institutions have identified cybersecurity risk as a major risk factor hampering the collaboration with fintech companies.

 

Key Trend #3:  Partnerships

A common theme emerging in the payments space this year is partnerships: PayPal and Google, PayPal and WooCommerce/Xero, Alipay and First Data, Apple Pay and 40 new supporting banks.

 

Indeed, this increased collaboration allows fintechs to access new acquisition channels and enhance customer experience. It enables them to go beyond their home markets and expand overseas to boost growth and scale up their businesses. For smaller, less established fintech players, it provides the validation necessary to gain trust.

 

Here’s how partnerships played out among three major payment platforms. PayPal:  Improved customer experience, new service bundles and cross- over

 

PayPal’s recent partnership with Google allows users of Android Pay wallet to link their account with PayPal for in-store, online and in-app purchases, and introduces fingerprint transaction approval. This biometric authentication eliminates the need to enter any payment or account details and fosters a frictionless customer online shopping experience. The PayPal One Touch technology has already been adopted by 50 million users worldwide – a quarter of PayPal’s total user base.

 

PayPal has also opened Business in a Box, a new service specifically targeting SMEs. By partnering with Xero, an accounting software provider, and WooCommerce, an ecommerce building platform, the company aims to provide a comprehensive solution for online entrepreneurs seamlessly integrating the three business toolsets.

 

Last year, PayPal has also made a move into a lending space, with the launch of PayPal Working Capital (currently available in the US, UK and Australia). This week, PayPal announced that the financing scheme has provided more than GBP 400 million to over 22,000 British SMEs, representing a 116% increase from the last year. Business in a Box points out the company’s increasing focus on SMEs and exemplifies a wider trend of bundling services into all-inclusive tailored solutions for specific customer groups.

 

Apple Pay:  Gaining momentum

Apple continues to expand its slate of banks supporting its mobile wallet technology, with the latest addition of 40 institutions. Apple Pay is now supported by 1,938 banks and credit unions across the US, although most of them are regional in scope. In Europe, UK is leading the way with 24 banks (including Danske Bank), while Japan (133) and China (73) show the greatest integration in Asia-Pacific. With the expansion to Italy, Ireland and Taiwan in H1 2017, the technology is now available across 16 territories worldwide.

 

 

Alipay:  Going global 

 

This year, Alipay has made a bold step to accelerate its global expansion with its entry into the US market. Thanks to the partnership with First Data, Alipay users will now have an access to four million retailers across the US. First Data is the largest provider of payment solutions worldwide, processing 45% of all US credit and debit card transactions with 80% market share in gas and groceries. This will provide a scale-enabling infrastructure for Alipay, potentially also across other territories. At present, it is available across 70 countries and is particularly widespread in markets popular among Chinese tourists. A report by Visa and Oxford Economics forecasts travel spend by Chinese outbound tourists will reach USD 255.4 billion in 2025).

 

 

Key Trend #4:  Race to obtain a banking license

Marketplace lenders were set up to disrupt the traditional banking model; yet, many of them have applied for a banking license.

 

Acquiring a banking license can enable a marketplace platform to extend its range of lending products, for instance, by offering credit cards and overdrafts. In the UK, most major marketplace lending platforms have obtained regulatory approval.  Two of the largest marketplace lending platforms in the UK —Zopa and Funding Circle— have been authorised by the FCA to offer Innovative Finance ISAs (IFISA). This can boost the profits within the marketplace lending sector.

 

Key Trend #5:  Rise of institutional funds

In 2016, we witnessed a gradual shift from “P2P platforms” towards “marketplace lending platforms” as more SMEs started dominating the borrower base. In H1 2017, we observe that institutional investors are becoming more and more prevalent, not only in the US.

 

Reasons behind this trend: Platforms are finally achieving sufficient scale for marketplace lenders to invest. Indeed, scale has been a major obstacle preventing them from fully embracing fintech ecosystem. With scale came liquidity and a meaningful track record (loanbooks). This attracts larger players.

 

Key Trend #6:  Move towards balance sheet lending model

Consumer lending remained a dominant, accounting for 61% market share, although it appears to be slowing down. On the other hand, business lending through marketplace platforms has seen a rapid growth. In particular, balance sheet business lending has overtaken balance sheet consumer lending.

 

The likely reason behind this trend: the decision of several huge US marketplace platforms (e.g., OnDeck) to move away from marketplace models. This shift has been interpreted by industry thought leaders as a sign that fintech is moving towards more efficient, less risky lending models. The balance sheet lending model’s due diligence is more extensive and can protect fintechs from low investor confidence.

 

Looking Forward

 

The first half of 2017 has already brought some exciting developments in the fintech space, not only in mobile payments sector but across the entire spectrum of companies. The industry is undergoing a tremendous shape-shifting, with innovative solutions entering the mainstream and gaining legitimacy, as well as new methods of achieving scale, confidence and trust.

Clearly, 2017 is set to become a major milestone in the world of fintech!

 

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