To disrupt financial services, fintech requires international scale. Fintech companies that operate in regional markets will most likely fail. Why is that?
Uberization of Financial Services
What is “Uberization”?
Regional fintech companies will fail because of the “uberization” of financial services. So what does that buzzword mean?
Uberization is when an industry begins shifting from owning products to providing services. This means that companies focus on connecting those that can provide services with those who seek them. If you have ever heard a start-up pitched as “an app that connects people looking for…” then you have seen uberization in action.
In the last decade, companies like Uber and Airbnb have shown that many industries are ripe for disruption. Any industry filled with middlemen who contribute only by checking boxes is currently vulnerable. These bureaucratic industries are slow and inefficient.
Disruptive technologies can change that. Uber bypassed the hassle of dealing with traditional taxis by providing a sleek, intuitive, and fast technology.
How the Financial Industry is Cutting Middlemen
The financial industry is no exception to these trends. Financial services rely on many intermediaries, such as insurance agents, bank tellers, and financial advisors. In many places, you cannot open a bank account without physically going to a branch! Complex financial operations, such as refinancing a mortgage, sometimes consume weeks of time and tons of paperwork. Well, fintech promises to change that.
Fintech companies replace middlemen with efficient algorithms and make financial products and services more accessible to consumers than ever.
This trend is occurring with several applications:
- Robo-advisors are replacing financial advisors and agents.
- Physical branches are being swapped out for mobile and online banking.
- Peer-to-peer (P2P) payments are replacing traditional wire transfers.
- P2P lending is making loans available to those who couldn’t traditionally access them.
Companies that make money by enabling simple financial transactions, will fail when other services can provide the same access at nearly zero cost.
The Race for Financial Products and Services
One might wonder, who will win this race between fintechs and banks?
The Role of Data
Well, for an answer, let’s look at Uber.
Services like Uber work by collecting vast amounts of data. For that, they need a large population of smartphone users and the capacity to gather and process a large amount of data. The more data and service providers Uber gets, the more efficient it becomes, making it more attractive to consumers. Uber continues dominating the market because of its scale.
We are going to see the same trends play out in financial services. Companies that have vast networks of users are more convenient for P2P payments. Robo-advisors trained on large datasets can give better suggestions, bigger lender pools enable P2P lending, etc.
In financial services, big data is going to win.
Diversifying Product Offerings
In addition to larger data sets, the financial industry itself is partial to economies of scale.
Multiple studies have found that increases in the banking sector output result in lower costs. By their very nature, banks tend to diversify their product offerings because large amounts of financial products and services can be offered using the same distribution network. A bank becomes the one-stop financial solution for a vast majority of its users, providing credit, savings, money transfers, and loans.
Fintech companies can compete with banks by bundling up products from multiple providers. This way, a fintech company can become a one-stop financial solution. In fact, it can provide better quality services because they are maintained by specialized providers. A large fintech can continue diversifying, becoming more and more lucrative in the eyes of the consumer.
Disparities in Size of Fintech Markets
The last considerations are geographical. Not all fintech markets are created equal.
Countries with well-developed economies have much larger fintech markets, for three main reasons. One is the simple availability of venture capital and entrepreneurship support.
Large and developed economies like that of the United States provide more funding to new businesses and support to promote their growth, such as accelerator and incubator programs. In these countries, regulations also tend to be more favorable towards the creation of new businesses, with less red tape required to start and develop a new venture.
The second factor is that more developed economies, by their very nature, have more demand for financial services. In more developed economies, residents tend to have more access to capital and thus need access to more services to help them manage that capital, such as asset management and financial education tools.
More developed economies tend to have more active stock markets, which increases the demand for relevant fintech solutions and pour more money into venture capital.
The third factor is the availability of technology required to make fintech work. Not everyone around the world has easy access to smartphones and fast, reliable internet connections. People in richer countries are more likely to have phones and be able to use fintech applications.
Because of all of these factors, fintech companies operating regionally in most markets (with the notable exceptions of the US and the EU) are doomed to remain small.
Why an International Play is Key
Given the apparent limitations of emerging markets, why would a fintech company even want to expand beyond developed countries?
There are three main reasons.
First, the markets of developing economies are growing, with more people becoming potential consumers for fintech solutions. More and more people gain access to mobile phones and banking services every day. A player that can come in and meet that demand as it arises, will win significant market share and get a competitive advantage.
Second, an expanding network of fintech services across regions is valuable in and of itself. A large international player can create a large distribution network of financial services that cater to the needs of each region, with better security and infrastructure powering the technology behind those services.
Third, legal divisions between emerging market countries and lack of common economic zones for financial services makes it very difficult to expand beyond the scope of an original region. A startup would need to acquire licenses for every region it would wish to operate in, which with already narrow revenue potential could be impossible.
But a company that can succeed at expansion, wins. By combining the data of multiple regions, a fintech player can gain access to more data and provide more sophisticated financial solutions, than any company operating only in developed markets.
A company with a presence in multiple countries can offer services regional players cannot, such as cheap international transfers or stock portfolios across multiple stock markets.
It is inevitable that a few Uber-like large players are going to emerge on the global fintech scene and capture all or most of the small markets, continuing to enjoy the increasing benefits of scale.