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Fintech startups bedding deeper into the banking value chain - McKinsey

15 November 2016  |  23053 views  |  0 Dollar note jigsaw

The fintech phenomenon is moving away from an obsessive focus on front-end customer experience, extending the reach of startups into at least 30 new areas of traditional banking activity, according to an analysis by McKinsey.

Where once companies focused on payment applications, lending, and money transfers, the shift has seen startup firms cut across a wide swath of financial services: retail, wealth management, small- and midsize enterprises (SMEs), corporate and investment banking, and insurance.

Industry boundaries are blurring says McKinsey, as new technology providers move beyond addressing a customer’s financial needs to offering a wider range of services. It points to the example of Finnish firm Holvi, recently acquired by BBVA, which began by offering banking services to SMEs and expanded to provide complementary offerings, such as an online sales platform, bookkeeping services, expense-claims systems, and a cash-flow tracker.

As the industry continues to mature, the fintech marketplace will likely enter a period of consolidation, says McKinsey, with larger players turning to mergers and acquisitions to satisfy their expansion goals.

Collaboration with banks is one option for startups seeking scale, but incumbents will have to move quickly to identify acquisition targets as the consolidation trend intensifies, says McKinsey.

"They will also have to reconcile differences in corporate culture that can limit the upside from such mergers," states the study. "The trend also offers fintech start-ups an alternative to initial public offerings for exit options."

One notable side effect from the rapid expansion in the fintech marketplace is a shrinking in valuations for hot startups.

Examining 44 fintech frims with valuations of more than $1 billion, McKinsey found that valuation growth has slowed considerably.

"Between 2014 and 2015, valuations for these companies grew on average by 77 percent, and then slowed to 9 percent from 2014 to 2015," says the analyst house.

In the United States, where more than half the companies in the study were based, the shift was even more dramatic. While valuations for large US fintech firms grew on average by 54% from 2014 to 2015, the trend moved into reverse between 2015 and 2016, shaving seven percent off market value estimates.

Ultimately, McKinsey believes, the fintech phenomenon will be swept up by a global trends towards digitilisation, becoming part of a vast ecosystem that spans multiple industries.

States the report: "In many instances, fintechs will become submerged in these ecosystems, representing, like many others, a component of a much broader digital network."

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