McKinsey thinks fintech is about to enter a period of massive change

A new report from consulting firm McKinsey argues shifting dynamics will shake up the fintech market in the coming years and suggest seven critical aspects of this new environment that must be understood to thrive in the shifting market.

Increasing market consolidation among fintech firms and more collaborative partnerships between financial incumbents and digital disruptors are two of the most pertinent and likely trends for the nascent fintech industry in the coming years, according to a new report by McKinsey.

Fintech has continued its march on traditional finance in 2016 so far with a notable uptick in involvement by traditional banking and financial firms as well several significant bumps in the road.  This new report from McKinsey – who are active in the fintech space – says its rapid maturation in recent years is prompting the industry to enter a new phase of development.

“With no signs of the industry’s growth abating, its reach is likely to broaden quickly to embrace even newer technologies and offerings, blurring the boundaries now delineating financial services,” the report’s authors said.

“As the momentum continues, some aspects of fintech are likely to reach into a broad swath of the global economy, much like how digital technologies have become a necessity, rather than an option, for every industry,” they added.

Goldman Sachs and Deutsche Bank have been among those leading the charge with a raft of investments by both firms into the sector this year. The former notably launched its own Main Street-focused online lending platform Marcus while the latter’s chief executive John Cryan told staff in July they should “think like a tech firm”.

In the UK, the market leader in ‘robo-advisory’ services Nutmeg, which provides automated recommendations with little human input on personal investing using tested technologies to meet customer needs, just received the largest tranche of investment yet since Brexit for any fintech firm with a £30m injection.

Of course the Brexit vote has also been a point of concern for many in the fintech world with a notable drying of investment in the months leading up to the vote as well as several other concerns around the future health of London as a leading hub with the UK leaving the European Union.

There have also been a lower number of newly launched firms in the wider space compared to the heady days of 2012-14 as well as P2P and marketplace lending suffering somewhat from a crisis of confidence owing to a blow-up at the US market leader Lending Club.

The future is bright however, McKinsey argues, with more and more tie-ups becoming increasingly profitable as fintech companies seek scale and traditional financial institutions seek digital expertise. This will bring about an expanding roster of services offered by fintech firms also. They identify more than 30 key areas, shown in the chart below.

McKinsey’s key areas of fintech growth

Source: McKinsey

These shifts will bring fintechs away from a focus on frontline activities to a broader engagement “throughout the value chain”, McKinsey said.

“The very concept of what comprises fintech will shift. This new fintech era is being shaped by changes in market conditions, new regulations, and shifts in consumer demands and behaviours. As a result, the industry, generally, is becoming more cautious, even as it becomes more diverse across technologies and products.”

Shifting regulations and emerging ecosystems

Regulation has been a relatively benign dynamic so far for fintech, not particularly surprising for a new industry, but the regulatory regimes affecting fintech firms are also evolving swiftly and will significantly influence how the industry develops.

“In many markets, regulators are playing a more proactive role in overseeing the industry, often encouraging its development, for instance by following a sandbox—or test and learn—approach that allows fintechs to experiment without impacting the entire financial system,” the report said.

In the United Kingdom, for example, the country’s Financial Conduct Authority has launched Project Innovate, a program that guides technology start-ups through regulatory processes and pushes for speedy responses to applications and questions.

As the various branches of fintech offerings become more mature and interconnected they conclude that vast ecosystems will develop that span multiple industries.

“In many instances, fintechs will become submerged in these ecosystems, representing, like many others, a component of a much broader digital network.”

“Ecosystems will likely develop to follow customer needs, rather than conform to traditional industry lines. Leaders in these ecosystems will need strong data-analytic capabilities to develop useful insights from the torrent of customer information available, and they will likely use fintechs and others to develop the system and extract maximum value.”