Fintech – What’s inside and what comes next

Everyone is talking about Fintech, but what exactly is it? An inventory of the status quo and a look into the future.

Thomas Puschmann

The market of fintech solutions is diverse and there is no common sense what fintech solutions do cover. For this, a framework can help to classify different fintech solutions.

Such a framework may differentiate the provider type, whether services are provided from banks and insurance companies or non-banks/-insurance companies, and the interaction type, where business-to-customer (B2C), customer-to-customer (C2C) and business-to-business (B2B) solutions can be distinguished.

Third, fintech solutions differ regarding the banking and insurance processes they support. Table 2 gives an overview on existing fintech solutions and classifies them along the following two dimensions ((Alt and Puschmann 2016), (Puschmann 2017):

1. Banks: Many of the recent fintech solutions were developed from start-up companies from the non-banking sector, although many banks started to adopt some of these fintech solutions, too. The bank-driven fintech services either focus on interaction between customers and banks (B2C) or among customers only (C2C).

Among the B2C examples are video conferencing (advisory), robo-advisory (investments) and online credit application (financing). In contrast to B2C services where banks are the primary provider, C2C-solutions focus on peer-to-peer-services and platforms. Examples are peer-to-peer-payment or online customer communities.

2. Insurers: Insurance industry related fintech solutions focus on processes like advisory, life and non-life insurance, claims and risk management as well as cross-processes. Well known examples are pay-as-you-drive solutions (non-life) or drone-based claims analysis (claims management).

Other important areas are the use of big data analysis to improve risk management and to offer more personalized premiums as well as automated policy management (cross-process). In contrast to banking, most of the solutions in the insurance industry currently focus on B2C, while C2C services are rare.

3. Non-banks: The market sector of non-banks covers both start-up companies and large IT companies like for example Apple (AAPL 165.48 -3.2%) or Alibaba (BABA 149 -1.64%). In contrast to banks, non-bank’s fintech solutions focus on disintermediation and very often concentrate on single activities where a single provider typically does not cover all processes.

In addition to the B2C and C2C interaction models, non-banks provide B2B fintech services which focus on cooperation among incumbents and non-banks. Prominent examples are digital client advisory (advisory), personal finance management (payments), digital identity (cross-process) or stock analysis and prediction (investments).

4. Non-insures: Most of the recent fintech innovations stem from non-insurers. They do cover all relevant insurance processes for B2C interaction, but in addition provide new business models for C2C and B2B interaction. Examples for B2C business models are solutions for insurance broker management (advisory), on-demand insurance products (life insurance) or big data-based catastrophe models (risk management).

While the B2C area focuses on disintermediation, the C2C approaches could provide more radical changes to the industry in the future. A first example is a crowd-life insurance approach, where a policyholder pays a premium only after an incident happens to a fellow member.

Although almost all areas are covered by the fintech market today, the maturity level of the different fintech solutions differ regarding the process areas covered. For the banking industry, a recent study for example identified, that the most important sector of the emerging fintech market is financing, followed by payment, cross-processes and investments (Haddad and Hornuf 2016, p. 21).

An Outlook

Although we could observe many fintech solutions evolving over the last decade, the potential areas of innovation enabled through fintech indicate some future potentials where we can only see the tip of the iceberg. The three identified fintech dimensions may serve as a guiding structure for the identification of future fintech trends and related questions (Puschmann 2017):

First, many fintech innovations concentrated on incremental improvements such as mobile payment solutions based on «mature technologies» (e.g. mobile phone camera).

A next step are so-called disruptive innovations which are often induced by a new so-called »pacemaker technologies» or by the convergence of two or more of them (Hacklin et al. 2004, p. 32). One discussed pacemaker technology in the context of financial services is the blockchain.

Potentially relevant questions in the context of fintech are: What are the strategic implications of disruptive fintech solutions on financial services with regard to innovation objects, namely business models, products and services, organizations, processes and systems?

Which technology-induced innovations have a disruptive effect and what is their technological, political, economic, legal and regulatory impact on the industry’s value chain? How can lessens learnt from other industries be used as analogies to deduce the impact on financial services?

Second, innovations affect different kind of fintech objects. An example are new services like chatbots, artificial intelligence-based advisory services or mobile bank accounts.

But, since many of these fintech solutions are still in their early phases of development, it remains unclear how consumers will adopt them.

Potentially relevant questions in this context are: What innovations patterns with regard to single objects can be observed (products and services, processes etc.) and what are the interrelations among them (e.g. what are the interrelations of systems and new business models etc.)? Additionally, an important question will be how clients will adopt fintech solutions that are offered by non-banks / -insurers in contrast to those ones offered by the incumbents?

Third, the innovation scope encompasses both, micro-economic issues and macro-economic impacts. The micro-economic perspective could lead to a transformation of banks and insurers towards more decentralized, networked entities, each of them focusing on single tasks, a development recently termed as crowdsourcing.

In such scenarios electronic service marketplaces for c2c, b2c and b2b interactions play an important role to match demand and supply in highly specialized value chains.

On the other hand, from the macro economic perspective the line between established industry sectors are blurring and it may lead to a re-definition of the well established Standards Industrial Classification System (SIC) which defines industries such as e.g. «Retail Trade» or »Finance, Insurance and Real Estate».

Potentially relevant questions in this context are: What are future organizational forms of banks and insurers supporting this new order? Which standards are needed to provide a higher degree of specialization in the financial services industry? What are the components of a distributed financial infrastructure supporting these evolving innovations along all innovation objects and among all involved market actors (e.g. regulation, logistics, price comparison, etc.)?

Summarized, the described developments enabled through fintech have already had and in the future will have an even stronger impact on the financial services industry, leading to a fundamental reorganization of the whole industry.

But, as could be shown, many questions remain open for the future which makes fintech an interesting field of development for the coming decades.

After the internet of information (with hypertext as the primary standard), the internet of services and things (with web services standards), the internet of value and ownership will soon be covered by fintech as the last missing piece in making digital ecosystems complete.

Because Switzerland has a long tradition in service-based economies and the country has always been among the early adopters of innovations, fintech again offers a great chance to position in the newly evolving competition among global fintech hubs like London, New York or Singapore.

References

Alt, R, Puschmann, T. (2016) Digitalisierung der Finanzindustrie – Grundlagen der Fintech-Evolution. SpringerGabler: Berlin/Heidelberg.

Haddad C, Hornuf L (2016) The Emergence of the Global Fintech Market: Economic and Technological Determinants. University of Trier: Lille & Trier.

Puschmann, vT. (2017) Fintech. Business & Information Systems Engineering 59(1): forthcoming.