FinTech, or financial technology, can describe a broad range of financial interactions between an institution and their customers. We are going to look at 5 of the FinTech startups that have been making significant strides in both attracting startup investors and have continued to see their market capitalization grow in 2017. We will also look at some of the potential problems with their future growth as well as the future of the more traditional financial service providers.
One of the biggest challenges facing every financial institution is cybersecurity. Anything that sits out on the Internet, whether it is online banking or a FinTech company such as PayPal, the relationship between institution and customer is fragile. One major data breach can result in a significant loss of confidence in the institution. FinTech startups have no advantage in this area, so it is important to look at another aspect of financial services – deposit insurance.
Traditional financial institutions are insured by the federal government so in the event of a failure or other economic calamity, customers are guaranteed their money won’t be lost. There are limits, but most of those limits are applied on a per account basis. FinTech startups are not legally able to offer such guarantees, but it should be noted that traditional financial institutions both invest and use FinTech startups in their daily conduct of business.
PayPal has been around for more than a decade, but it only recently got its wings to fly solo from eBay. The market capitalization of PayPal is just under $88 billion, and most people who have been on the Internet have likely used it at least once to perform some type of financial transaction. When it comes to simplicity and safety of online financial transactions, it’s hard to find a more popular FinTech alternative. One possible reason for people preferring PayPal over a traditional bank is that banks offer a return on investment so pitiful that consumers feel ripped off when putting their money there. PayPal offers a 1% cash back for using their debit card, but basically the service is promise-free.
What PayPal is to the average consumer, Stripe is to larger corporations. Though many individuals use Stripe to conduct peer to peer money transactions, the company has established itself as an e-commerce success with major retail businesses such as Target and the NFL. It has also added European software giant SAP to its list of clients. Though its market valuation is small compared to PayPal – $9 billion – it is clear there is plenty of room for growth.
Another avenue of FinTech is the accounting service sector. Xero (pronounced zero) is an up and coming cloud-based software service that has primarily targeted small and medium-size businesses. It has a cap value of about $4 billion, and reportedly processed more than $1 trillion worth of transactions in 2017. Its current subscriber base is over 1 million. Members have discovered that in lieu of traditional bank and accounting services, Xero can offer them security and accuracy at a lower per cost transaction.
4. Ant Financial
AliBaba, the world’s largest e-commerce business, spun off Ant Financial to deal with the FinTech potential. The FinTech industry is growing at a very fast rate in China, and the current estimated market capitalization value for Ant Financial is more than $75 billion. You can look at the company as the Asian version of PayPal. AliBaba owner Jack Ma is making moves to make Ant a public company in the near future. It is certain to make a global impact on financial services once it completes the public offering process.
The last of the 5 FinTech startups that are making a splash is a company that has found a way to trade shares without having to pay a broker’s fee. This concept is perfect for small investors since broker fees can make a significant dent in the final profit count at the end of the year. Traditional thinking, which appears to be faulty, requires all companies to use a broker to buy and sell shares, resulting in a broker fee. Thus far, Robinhood has acquired more than 2 million subscribers.
There are some pros and cons to Robinhood. On the plus side, there are no storefront offices which reduce company overhead. On the minus side, the company does not do any research into company stocks, so the member is on their own when it comes to finding the best information about a company. Many small investors aren’t spending a lot of time in researching a bevy of companies but just have one or two personal favorites they want to invest in. Robinhood may not be for everyone, but it definitely meets the needs of a sizeable number of investors.
These 5 FinTech startups vary in their size and impact on the financial industry. What is clear is people are moving away from the more established financial institutions because for both business and consumer, it is all about the money. Time is money, so when a FinTech startup makes thing simpler and easier, people will flock to at least find out what possibilities are available. The subscriber numbers cited above demonstrate this impact. There is a shift going on in the financial industry, and the question is whether the shift will result in a rumble or a significant seismic event.