The increase in the power of technology, greater and more equal access to information and other factors have fostered unprecedented growth in the financial technology (fintech) industry. One report (via Globenewswire) estimated that the market would be worth $305.7 billion by 2023. Much of the innovation I've seen in the fintech space is coming from non-bank entities, such as venture-backed startups. In fact, research from CB Insights (via CNBC) found that VC-backed fintech companies raised $39.6 billion in 2018, which is a 120% increase from the previous year.
These companies are focused on leveraging technology and the power of the internet to create better solutions for their clients, such as those that offer lower asset management fees and greater transparency. Throughout my time working in the venture capital world, I was able to watch many high-growth technology companies. Many of the high growth potential companies I came across used the power of technology to disrupt industries in a similar fashion to the way I see fintech companies doing today. Here are three of the key trends I've noticed.
Leveraging Computers And Online Platforms
Through computers and online platforms, fintech companies such as Betterment are able to offer their clients traditional banking services as well as personalized products and services without even meeting them in person. And Wealthsimple recently launched an application called "Wealthsimple Trade," which allows anyone in Canada to buy and sell stocks with $0 commissions. Compared to commissions many traders charge, this advancement is significant.
Fintech companies may be able to build better client solutions by allocating more of their internal resources to hiring software engineers. These software engineers can then build scalable services and investment products. Unlike traditional banks with physical locations on every corner, fintech companies communicate with their clientele strictly (or primarily) through technology, which could save them money -- which, in turn, can save their users money. That's a win, win situation.
Developing Analytical Tools
Rapid progressions in technology have fostered the creation of analytical tools that can collect and integrate data to support decision making, risk management and process optimization. Today, fintech companies with agile and scalable quantitative investment strategies could challenge the ability for traditional money managers to deliver value and justify their rates. Even some larger Canadian banks are catching onto this trend and are adding technological tools and fintech solutions to their offerings. One of these banks is BMO, with their robo-advisor BMO SmartFolio.
Removing Financial Barriers
Fintech companies are evolving at a fast pace and removing barriers the financial world. For example, Wealthsimple helped innovate on the financial landscape in Canada by eliminating account minimums. Additionally, fintech companies like Nest Wealth, WealthBar and ModernAdvisor -- online wealth management and financial advisory companies -- offer benefits like financial advice and access to an advisor or manager with their fees. At traditional banks, access to a financial planner or advisor can be quite costly and eat away at the wealth that you're trying to build. Creating solutions through technology has allowed these fintech companies to contend with long-standing banks and investment firms.
To be clear, I believe active investment managers play a key role in the financial markets. However, they may be handicapped by higher fees and costs when compared to the services offered by fintech companies. While an investment manager can only offer their solutions to a limited number of clients in a given period, the tools and programs that underpin financial technology investment firms can generally be offered to more individuals without any effect on their functioning. Technology has increased the speed and quality of information flow and removed geographical constraints, allowing fintech firms and other tech companies to appeal to individuals with lower fees and easier communication.
I am very interested to see what the next few years have in store for the fintech space. I believe we will see continued growth and investment into non-bank entities and startups who are using the power of technology to create better solutions than those offered in the market today. Although the future of fintech is very promising, there are certainly still challenges -- for example, a 2017 report from the Ontario Securities Commission found that 53% percent of Canadian millennials have no investments. As more fintech startups emerge and banks such as BMO and RBC (with a mobile app and online calculators) release their own technology solutions, I am optimistic that these hurdles will be overcome. Overall, individuals should be excited to see the continued rise of fintech companies as they can reap the benefits of better financial solutions.
