Gaurav Sharma

FinTech Founder, Product and Business Builder

"FinTech Wave-2 isn't Digital, It’s Hybrid." Lessons from Wave-1 and What’s Next?

Fintech represents the collision of two worlds — Financial services and technology, and with this union comes, both disruption and synergies. Fintech came of age in the aftermath of the 2008 financial crisis. New regulations and changing consumer demands began to emerge as the world tried to pick up the pieces of the “great recession”.
2008–18 constituted the formative decade for FinTech ‘Wave-1’, which irreversibly set the foundation for Wave-2 (2019 >onwards). 

More innovation will happen in the next 10 years than the previous 100 years.

Asia is the epicenter of all fintech innovation, and within Asia, Singapore, and India, in particular, have taken big and bold moves towards the development of its FinTech landscape.
There are three key takeaways from FinTech Wave-1 and what it means for India and Southeast Asia.
1. China is the real fintech story, and that success story is divided between WeChat and Alipay. China has shown the world what is possible, and the world can’t go back.
There are also some hiccups in this journey, during 2018, the shakeout in China’s $192 B peer-to-peer (P2P) lending industry accelerated at a rapid clip. In many ways, this regulatory crackdown is a step in the right direction towards industry standardization/clean-up.
Chinese fintech ecosystems have scaled and innovated faster and are structurally different from their counterparts in the US and Europe.
Outside China, the most successful fin-techs are typically attackers that have focused on one vertical, such as payments, lending, or wealth management, deepening their core offering and then expanding geographically.
2. The payment-wallets in Asia (*ex-china) continue to face ‘the moment of truth. The challenge remains. The opportunity is HUGE. In India & Indonesia, 90%+ microtransactions are still ‘CASH’ based. UPI is an extraordinary success in India.
ASEAN countries are a very unique and heterogeneous ecosystem. Situational awareness is critical to “win the game.”
3. Lending is/was a ‘hot favorite’ for India and SE-Asia. The opportunity is MASSIVE, but some apparent mistakes are being made. The size/scale of alt-lenders is minuscule (%TAM) right now.
Startups trying to copy the China model will be disappointed. The marketplace/aggregators in the lending business face an uphill task. Debt Collections will get a big focus in the coming months. Alt-lenders should “read the tea leaves” and understand some unique factors, For e.g. the banking crisis in India. [1]

A CLOSER LOOK AT THE SIX SECTORS IN WAVE-1

Fintechs have seized the initiative — defining the direction, shape, and pace of innovation across almost every subsector of financial services — and have succeeded as both stand‐alone businesses and crucial parts of financial value chains.
They have reshaped customer expectations, setting new and higher bars for user experience. Let’s take a closer look:
1) Alt-lending
The transactional and commodity nature of lending is making it hard, therefore, the investment community re-rated some startups from technology companies to lending companies.
Moving forward, only the companies that can build profitable and scalable business-ecosystem models, and can withstand the test of a credit-cycle will lead the new wave.
2) Payments
The original disruptors have gotten to scale and their playbook is changing. Rapid e-commerce growth, the digitization of payments, enabling regulations, are causing rapid growth of payment companies in Asia. A growth that has seen Asia-Pacific accounting for nearly more than half of global payments revenue growth in the world at more than $900 billion.
Also, the market is in a consolidation phase, signaled by Fiserv Inc.’s planned $22 billion purchase of First Data Corp and Fidelity National’s $43 billion acquisition of WorldPay Inc.
3) Insurance
Insurance startups are really at a pivot right now. Fast growth is leading to full-stack solutions. Historically, insurance startups were simply brokers or managing general agents.
There’s a compelling case that insurance-tech startups need to become carriers.
However, the ROE for carriers tends to be low(~9%). Insurance-tech players will need to figure this out.
4) P2P Lending
Many peer-to-peer (P2P) lending companies — among the earliest to list in the US — saw valuations drop drastically in the public market. A number of Chinese lending fintechs, listed on the NYSE and Nasdaq in 2017, are trading much lower than their IPO prices, driven by reports of bad loans and stringent regulations in China.
Accountability and better governance are critical for P2P lending to truly hit its potential.
Understated risks, maturity mismatches, and illegal practices have to be addressed to restore faith and prove the viability of the business.
5) Wealth Tech
One of the more interesting trends right now is that all the Wealth and investment companies that have achieved scale are adding a checking account and trying to become banks. Not necessarily licensed banks, but rather, a consumer’s primary financial partner.
Chinese wealth-tech companies have proven that the winning operating model — is “a platform for your whole financial life”. 
Asia-Pacific is the world’s largest wealth management market, with >US$61 trillion in assets — bigger than the US or Europe — and growing at 3x the rate of the rest of the world.
However, for markets like India and Indonesia, The key challenge (opportunity) is to transition existing users- “from part-time savers to longer-term investors.”
6) Decentralisation
We are still in the very early days. In 2017, blockchain tech was a revolution In 2018, it was a disappointment. In 2019, it is becoming mundane. But with a greater focus on the “fairness” of Bitcoin and other Cryptocurrencies, it’s inevitable that we will see new distribution-focused experiments. The previous two years were about the infrastructure needed to build these products, the next two will be about scaling and attracting users.

“Find a market that thrives on its lack of transparency and make it transparent.”

NEAR-TERM: 2019–2020

The global fintech ecosystem will continue to mature at an accelerated pace. With big developments ranging from Fintech enabled marketplaces, increasing regulatory clarity, and maturation of AI and blockchain phase, Wave-2 promises to be big for fintech.
Challenger banks will continue to grow their service offerings and expand across international borders. Supportive governments and regulators will become the foundation and bridge that enables a collaborative model between fintechs and banks.
Collaboration between fintechs and banks in Asia is expected to continue to grow, particularly in areas like KYC, AML, and digital identity management — including facial recognition and voice recognition. Companies that work in isolation will lose relevance and fade away. A shortage of digital and tech talent will be the biggest trigger to facilitate this joining.
Traditional banks and corporates will increasingly expand into digital banking, introducing nimble, standalone digital banks that operate independently and do not rely on their existing legacy systems.
Collaboration is key to the next wave of fintech. As the fintech ecosystem matures, it’ll become increasingly clear that the best path forward for the industry lies in collaboration among all stakeholders.

WAVE-2: NEW HORIZONS- WHAT’S NEXT? (2019- )

In Wave-2, the financial services sector will look beyond the current open banking ‘phase’ and towards a future of fintech enabled marketplaces and complete financial automation, where traditional banking model is turned on its head and requires a dramatic rethink, emphasizing:
1) Experience over Products;
2) Data over Assets;
3) Partnering over the build or buy;
4) Shared access over ownership.
FinTechs are now increasingly global, and threatening traditional banks by ushering in product-stack changes- from ‘un-bundling to re-bundling’, from ‘mono-line to multi-line’. Incumbent Banks will recognize the value of the financial-cloud and speed up their digital transformation efforts to meet customer expectations derived from fintechs with new operating and business models.
In the medium term, transactional banking (i.e. manufacture white-label versions of specific products and services) will gain traction. Distributed Ledger, API banking, and AI (Artificial Intelligence) will become critical building blocks for both banks and financial services providers — triggering ‘the age of Invisible Banking’ and unleash a new paradigm — where fintechs are the infrastructure providers. However, consumer-ready AI remains much more limited. We will witness the emergence of “vertical banks”; They will dominate a segment by offering a small number of world-class products that are hyper-focused on the segment’s needs.
The onset of Collaborative AI makes it possible to synergize financial services, where the line between deposits and lending will be blurred, and Cash-flow-as-a-service will be a reality.
In the next few years, some large fintech enabled marketplaces- curated with thousands of apps and APIs- will scale. Automation will increase and data security will become paramount. Big tech companies will continue to slowly move into finance, and some large Fintech firms will be acquired.
The “move fast and break things” approach that disrupted the ad-tech industry is unlikely to work in financial services. More challengers and incumbents will partner, and a high level of regional variation in fintech disruption shall continue.
Disruption starts with unhappy customers, not technology. In Wave-2, Human+Technology is the underlying theme. It is customers who are driving the disruption. New Fintech startups will enter markets not by stealing customers from incumbents, but by desidesign solusoluti around a select few customer activities. The focus will shift back to sound business and operating model innovation. As market landscapes get increasingly complex, choosing the right abstraction layers the company sits at becomes more important. Good execution and solid business models will trump exotic technology.
Extraordinary transformations are happening in the finance world. We’ve only scratched the surface of this revolution. FinTech in ASEAN is only 1% done. It’s a very long game, but ultimately worth it.
The coming “second wave” will be the one that drives lasting change.
FinTech Wave-2 isn’t Digital. It’s Hybrid.
Gaurav Sharma is a FinTech entrepreneur, product and business builder with operating experience across Asia in Online-Credit, Payments, Internet, Consumer Bankingand currently building a “Bank of the Future” for India and South-East Asia.
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