In this episode, the FEI interviewed Miles Bird ’13, founder of VC firm T-Bird Capital. Through the podcast, Miles Bird shares his career path and gives some advice for students who are interested in a career in venture capital.
It’s Monday morning and the markets are open. You check your Robinhood account before you Venmo your friend for dinner last night. You head over to the local cafe and pay for your coffee using Apple Pay, which the store accepts with its Square terminal. Before heading off to class/work, your mobile banking app sends you a notification that you just got paid – today is going to be a good day.
Financial Technology, or FinTech, is the broad umbrella term for any type of technology that delivers financial services through software. At a high level, FinTech aims to disrupt existing financial services through automation and optimization. Think of the difference between going to a bank to cash a check and being able to cash it through your phone, and you will have the basic idea of how FinTech operates. In this example, the automation takes place in your phone, eliminating the need for a teller to process your check, while the optimization takes place in the sense that you cashed your check whenever and wherever you liked. This post aims to discuss the history, impact, and reach that FinTech has had and will continue to have on our society.
While the term “FinTech” became prominent over the last decade, the advent of financial technology dates back to the 1950s, when credit cards were first introduced. In the 1960s, ATMs replaced bank tellers, and the 1970s marked the beginning of digitization in the financial market. Leading up to the 21st century, FinTech was revolutionized by innovations in e-commerce, digital banking, and global financial markets. The pivotal years, 2006-2008, for the industry included two major events that would change the trajectory of financial services: the introduction of the smartphone and the Great Recession. Smartphones connected the general public to the internet and made financial services more accessible. The Great Recession caused a large distrust in traditional financial services that were meant to support the general public. This shift in mentality as well as the rise of smartphones created a demand for new players with more competitive services in the market – and FinTech started to blossom from an archaic industry.
Technological advances, like the widespread adoption of smartphones, have allowed archaic industries, such as finance, to reach mass scalability in just a short amount of time. Citibank is a behemoth with two hundred million clients, but it took them two hundred years to amass those two hundred million clients. Meanwhile, Alipay in China was established in 2004, and by 2018 it had eight hundred seventy million users. CreditKarma was established in the United States in 2007 and it currently operates with over one hundred million users. These FinTech firms have become giants like the incumbents but they have scaled but only in a fraction of the time the incumbents took.
Scalability brings about accessibility. It is commonplace for many of us to access our bank accounts, make trades on our personal online brokerages, and even pay with e-wallets through our smartphones. It is the ubiquity of smartphones and the customer-friendly UI/UX of mobile fintech apps that has allowed the FinTech pioneers to scale as rapidly as they have. These firms are even beginning to offer the same all-around functionality that banks used to offer all through mobile or web apps. This unbundling strategy, to offer one specific function and doing it well, then gradually rebundling with more offerings has yielded great results. For example, Robinhood, the popular investment platform, built its core business around being an easy-to-use trading application. However, the firm has started to introduce cash management products, including Robinhood debit cards, and access to cryptocurrencies as additional products.
The effects of this ubiquity are mutually beneficial for the FinTech companies and for everyday consumers. People living in poverty are faced with many barriers to banking access. Lack of transportation, illiteracy, and inaccessibility all stand in the way for those groups to join the part of the population that is banked. However, smartphones and easy-to-use applications offering e-wallets, with minimal regulatory requirements are allowing that part of the population to reclaim their financial independence.
Under the umbrella of FinTech fall many different verticals or niches where FinTech firms serve a specific set of needs. While there is no clear consensus about the number of verticals, firms can generally be grouped into the following verticals:
All of these breakthrough FinTech verticals are disrupting traditional industries and forcing them to adapt to these technologies. As the sector continues to mature and institutional players become more involved, it will be up to the most relevant FinTech companies to stay competitive and keep up with evolving consumer behaviors.
The applications of Financial Technology (FinTech) are numerous and widespread. One such application that has benefitted many underbanked countries is the adoption of online or app-based remittances.
Remittances are defined as a transfer of money, often by a foreign worker to an individual in their home country. In 2019, global monetary transfers from migrant workers reached an all-time high of $714 billion, specifically remittances to low and middle-income countries of $554 billion. Certain countries including India, China, and the Philippines have huge populations of overseas workers whose families rely on remittance services to receive money sent home. India alone had a volume of $83 billion in remittances in 2019, amounting to 2.8% of its GDP. Other countries with lesser remittance volume yet rely heavily on remittances include Nepal. $8.2 billion flowed into Nepal in 2019, accounting for 27% of its GDP. Because developing countries rely on remittances so much, it has constituted the largest source of foreign exchange since 2000.
The traditional process for remitting money is similar to depositing money at a bank. The remitter visits a physical location to speak to an agent that helps them process their money transfer to their beneficiary at a partnering bank or drop off location in the home country. For the remitters, paydays or the weekends after would be consumed with lining up long lines in order to remit their salary to family overseas. Delays due to huge volumes, unsecure transactions, and high fees made this process a truly cumbersome one. Additionally, because many people of these low-to-middle-income countries were unbanked, they had to rely on remittance partners that charged high fees and did not always provide secure transactions.
The dawn of FinTech has changed the playing field for money transfers. Today, while incumbents like Western Union and MoneyGram still dominate the market, new players like Xoom and Remitly have captured a significant market share through pioneering the digital remittance space. The combined market share of Xoom, Remitly, WorldRemit, and TransferWise went from 2.5% globally in 2015 to 11.4% in 2019. These digital remittance players have disrupted the industry by making the process of sending money home that much easier by making it accessible 24/7. With the rise of these digital giants also came the fall of high remittance fees. This reduction in fees has mainly been pushed by the regulations and agreements among the G8, G20, and the UN as well as competition among more players among the FinTech remittance market. Ultimately, these new advances have made the process of money transfers for remitters and their beneficiaries cheaper and more efficient. For developing countries like the Philippines where over 70% of Filipinos do not have bank accounts, but over 70% have smartphones, an app-based remittance service can break barriers and create opportunities.
In 2020, the flow of remittances worldwide was depressed from prior years due to lower migrant wages and susceptible jobs to the economic condition caused by COVID-19. Specifically, the World Bank predicted that remittances to low and middle-income countries would fall to $445 billion, a 19.4% drop from 2019’s numbers. Lower wages and lesser jobs in the wake of the COVID-related slump will lead to remitters requiring cheaper services and therefore, tighter margins for money transfer services. It remains to be seen how this further catalyzes the growth of the convenient, secure, and less costly service that these digital remittance players offer.
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