Success factors for fintech companies

David Igual , Professor of the Master's Degree in Finance and Banking

Fintech (companies that operate in the financial sphere with a technological component) are occupying, every time, a greater role in finance, promoting innovation through new forms and business models that represent an alternative to the classic services offered by banks. However, banks frequently develop lines of collaboration as they are considered a more useful formula to face the technological change demanded by the digital environment both from the user side and from the threat posed by the omnipresent technological operators known as bigtech [1].

It is relevant to highlight the existing consensus on this dynamic role of fintech in finance in recent years, as demonstrated by the commitment to these projects by investors who provide risk capital, which is the true measure of your success. Its capacity for transformation is also confirmed by public administrations themselves, which promote their creation and growth through the so-called sandbox which are spaces created under legal protection for the development of new business models that are still are not protected by current regulations.

While in 2010 the global capital allocated to fintech of the total investments in M&A was only 1%, in 2020 it was already 5%

Fintech target specific market segments called verticals, such as payments, wealth management, loans, insurance, etc. Their main characteristic is that they operate as start-ups in that specific area with digital proposals and their growth is only possible if they get risk capital that believe in the project and which, in return, expects to obtain results in the future. This feature is one of the reasons for its success, as forward-thinking and independent innovation approach is well received in changing markets. On the other hand, inside a financial institution this innovation is more difficult, since it needs to respond to a market immediately and financial markets, with daily prices and pressure on results, do not efficiently collect future projects that may have a bank based on technologies that ordinary investors themselves are not familiar with.

Recently in a study [2] by the Bank for International Settlements (BIS) [3] on financing trends of fintech and what drivers can be identified as factors of success provides relevant information consistent with the concept of fintech collaboration with banks, as well as the support provided by their location in environments favorable to innovation with sandbox.

According to this BIS study, in fintech since 2010 there have been around 35,000 M&A transactions with a capital investment of over a trillion dollars. While in 2010 the global capital allocated to fintech of the total investments in M&A was only 1%, in 2020 it was already 5%, which shows the confidence of venture capital in these projects that often require years of maturation and severe growth difficulties.

In fintech in which there is an inflow of capital by banks, they subsequently achieve investment growth 30% higher than the average for these companies

On the other hand, in the innovation of the digital economy, there is a risk that incumbents with a large user base and who have a huge advantage over new entrants, M&A activity may even tend to reduce innovation by acquiring (killer) shares to prevent new products from scaling up and users preferring the new rival proposition.

Following the BIS study in fintech in which there is an inflow of capital by banks, they subsequently achieve investment growth 30% higher than the average for these companies. This data is relevant and demonstrates the collaboration and interest of the banks in the successful fintech in which it participates in their capital. This data confirms that the banks see these projects as complementary and that having them in their orbit can help them innovate without having to dedicate specific internal resources to the development of multiple projects. The complementary offer may allow facing fintech that have a more challenging approach.

When a bigtech enters a fintech , their investments are limited in the future: they are perceived as direct competitors and projects are stopped.

On the other hand, the other conclusion of the BIS work is more surprising when it refers to the evolution of fintech in which there has been an inflow of capital by a bigtech. In these situations, there is no improvement in the future investments of fintech that see their investments limited in the future. The study suggests that large technology companies are more interested in new projects not prospering because their business models compete in their business model of having a network of users on their digital platforms. In this case, the fintech are perceived as direct competitors and the projects are stopped.

Finally, the study also highlights that location is another key factor. The geographical areas of the world with the greatest capacity for innovation and regulatory quality together with the promotion of sandbox are drivers and factors that drive the success of fintech.

--

[1] The most important bigtech operate through technological platforms that rely on the use of data and the intensive use of new technologies, have high resources and a great capacity to interact with their users. Its origin is thought of consumption through a smartphone through a user experience that surpasses traditional businesses. The main ones are identified with: GAFAM (Google, Apple, Facebook, Amazon and Microsoft) and BAT (Baidu, Alibaba and Tencent).

[2] Funding for fintechs: patterns and drivers . Giulio Cornelli, Sebastian Doerr, Lavinia Franco and Jon Frost. BIS. 2021

[3] The Bank for International Settlements is an international financial organization in which the main central banks of the world participate. It is based in Basel. Its mission is to support the search for monetary and financial stability for central banks through international cooperation and to act as a bank for central banks.