Fintech game is now global
Historically, financial services was a local player’s game.
Just look at the top 5 banks in Canada, US, UK, Canada, France and China in the chart below, ranked by total assets. There is nearly no overlap.
|JP Morgan Chase||HSBC||Royal Bank of Canada||BNP Paribas||Industrial and Commercial Bank of China|
|Bank of America||Lloyds||TD Bank||Credit Agricole||China Construction Bank Corp.|
|Citigroup||RBS||Bank of Nova Scotia||Societe Generale||Agricultural Bank of China|
|Wells Fargo||Standard Chartered||Bank of Montreal||Groupe BPCE||Bank of China|
|US Bancorp||Barclays||Canadian Imperial Bank||Credit Mutuel||Bank of Communications|
In fintech, historically, the same appeared to be true.
However, things are changing.
The new generation of fintechs is going global earlier in their journeys. For example, some of the European digital banks like N26 and Monzo have built pan-European operations, and have announced their launch to North America. Emerging market born companies are making South-South expansion at the top of their agendas, like Nigerian fintech Paga recently did, announcing plans to expand to Mexico. Some fintechs are building a multi-market strategy from the get-go as Branch and Tala have demonstrated and collectively raised hundreds of millions in the process.
This fintech trend will only accelerate. More and more fintechs will be global, driven by three mutually reinforcing reasons: an evolution towards regulatory openness, a rise of fintech enablers and a growing global outlook.
- Evolution towards regulatory openness
One of the reasons fintech was historically so locally dominated was regulation.
For example, to offer insurance in the US requires the cumbersome process of getting regulatory approval in every state. Going to another country is even more complicated.
However, increasingly, regulators are making it more feasible for fintechs to experiment, and expand into new markets.
For instance, fintech laws like those that were recently launched in Mexico offer regulatory certainty and a framework. Sandboxes like those launched in the UK, Singapore and Malaysia offer a structured construct within which to experiment, at a much lower cost. In Europe, PSD2 is a regulation that standardizes how financial services institutions must share customer data, making it simple to expand across markets. A common European banking licensing allows players to ‘passport across the country’.
There is also a desire for innovation. The Alliance for Financial Inclusion includes member central banks from nearly 100 countries, who share lessons and best practices on managing financial services. Fintech has become a key agenda item.
Regulators are increasingly taking a more pragmatic and practical approach to regulation, allowing innovation to flourish without stifling it, and decreasing barriers to launch.
- Rise of fintech enablers
At the same time, a range of players is emerging in major markets that provide infrastructure for fintechs to expand.
This includes on the one hand specialized firms that facilitate regulatory compliance. For instance, firms like Alloy in the United States allow startups and companies alike to easily comply with AML/KYC regulation with a simple API. Similarly, firms like Railsbank and Bankable in Europe offer API driven open-banking platforms.
Of course, this fintech infrastructure extends beyond regulatory compliance. For example, companies like Plaid and Stripe make it easy for fintechs to connect with customer bank accounts or payment rails. Companies like Rapyd and Flutterwave make it easy to connect to payment networks and mobile banking platforms in emerging markets.
To offer regulated financial products and services, fintechs can partner with organizations like Cross River for loans, Bancorp for bank accounts and Boost for insurance. Whereas historically loans were funded by deposits, and insurance policies by customer premiums, today, specialized capital providers have grown to support fintechs. Specialized funders and hedge funds (e.g. Victory Park and Colchis) fund marketplace lenders, and Insurance Linked Securities provide an alternative to traditional reinsurance.
Taken together, these enabling layers decrease the friction of expanding into new markets.
- Growing global outlook
Regulators may decrease the friction, and infrastructure players may provide the piping. However, ultimately, it is the entrepreneurs that choose to take a global strategy.
One reason is practical. Looking at successful fintech exits over the last decade (defined as >$100m), the vast majority, over 75% were below $800m. Only 3 exceed $5 billion: Lending Club, (IPO, 8 years old, though today trades at ~$1.3b), Adyen (IPO, 12 years old) and Qudian.com (IPO, 3 years old). The vast majority of these were single market players. Those that scaled globally did this slowly and over time.
All the while the list of top banks in different countries has virtually remained unchanged in the same period. Even venerable Paypal, whose revenues were $15b in 2018 is dwarfed by JP Morgan Chase’s revenue of $135b, nearly 10x larger in the same time period.
Outside countries with huge domestic markets, like China, U.S. or India, fintechs can target multiple markets to find a suitably large TAM (“Total Addressable Market”) to create massive outcomes. Becoming global is a necessity.
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