Financial technology (fintech) is one of the fastest growing sectors in the industry, with global fintech investment rising from $US100 million in 2008 to $US19 billion in 2015. Digital disruption is changing the competitive landscape, lowering entry barriers for new players, and creating new business models. It is more critical than ever to invest in digital innovation to meet increasingly demanding customer needs. In order to do this, many established financial institutions are forming a strategic response by partnering with and sourcing capability from fintech companies.
Fintech developments are affecting all sectors of the financial services industry, such as banking, capital markets, payments, wealth management and real estate, as well as industry platforms, systems, and infrastructure. Emerging fintech in the past 10 years has enabled and continues to enable the delivery of new and innovative services, through digital channels, redefining the customer experience and creating new business models.
In 2015, there was more than six times the level of funding deployed to VC-backed fintech companies as there was in 2011.
Figure 1: 2015 Global Fintech Investment trends
Source: Venture Pulse, Q4’15, Global Analysis of Fintech Venture Funding, KPMG International and CB Insights (data provided by CB Insights), February, 2016
However, after 2015’s record setting $US46.7 billion in total global funding to fintech companies, 2016 experienced a decline in the market with a 47.2 percent slide in fintech investment according to KPMG International’s The Pulse of Fintech— a quarterly report on global fintech investment. The 2016 fintech funding total of $24.7B was still significant compared to pre-2015 investment levels.
How Fintech Will Shape Financial Literacy
As millennials, and even younger people, continue to rely on their smartphones and mobile applications, fintech is becoming more powerful. This, in turn, is having a strong effect on the way that millennials use and manage their money.
In the coming decades, more than 80 million millennials in the U.S. are bound to inherit and earn tens of trillions of dollars and are the generation most attuned to the banking industry’s shortcomings. However, 33% of millennials believe that they will eventually not need a bank at all, according to the Millenial Disruption Index, a three-year survey of over 10,000 millennials. According to a recent survey by Blumberg Capital, 60% of Americans feel banks fail to keep up with their needs and 57% believe traditional financial institutions will not exist as they do today within their lifetime.
As a generation, millennials statistically have the fewest savings accounts; 75% of college graduates have prolonged student debt; and they will on average see a 13-year delay in their retirement date (on top of recent Social Security Administration reports claiming millennials may only receive 75% of their Social Security benefits when they do retire). As a result, it should come as no surprise that millennials want new and innovative financial products and services from tech companies to help them get out of their savings slump and to work towards a healthier financial future. Millennials grew up and live in a time when technology enhances and improves their everyday experience. They value products, services and people that show transparency, deliver convenience, and simplify their lives – and expect banking to provide both automation and real financial guidance.
For example, the fintech investment application Acorns is changing the way that millennials are saving their money. The application allows users to link debit or credit cards to their Acorns account, and with every transaction that occurs, the application will automatically store a specified amount into a savings account. Acorns not only saves money, but also invests money into stocks and bonds automatically, sparing users the time and energy of having to manually invest.
Acorns not only invests money for millennials, but also offers guidance and assistance. Recently, the startup launched Grow magazine, which provides financial literacy to millennials, or anybody using the application, in the form of articles, videos and interviews with financial figures or celebrities. In doing this, they are providing necessary knowledge that any person needs to understand and use to their advantage.
Other fintech companies, like You Need a Budget (YNAB), enable consumers to create and manage their household budget. YNAB doesn’t let you create budgets around money you don't have – it forces you to live within your actual income. If you get off track YNAB helps you see what you need to do differently to balance your budget. Online classes with a live instructor for Q&A to help you learn budgeting basics are also included. YNAP reports that their app is so effective that the average user pays off $500 in debt the first month.
It is through such fintech companies, like Acorns and YNAB, that millennials are able to gain easier access to increasingly more complex financial markets and products. As they continue to accept fintech startups as the standard, they will continue to form their financial literacy skills around fintech.