Wells Fargo: The Rise of Fintech And the Frontier of Finance
Article Synopsis :
This Wells Fargo paper looks at the opportunities and risks presented by the presence of fintech – or insurtech – in the financial services industry.
Using Pitchbook data it offers a potted history of fintech and offers some interesting insights into the development of this potentially disruptive technology.
One of the most disruptive elements of fintech is that delivering software as a service (SaaS) takes longer than the typical three to five-year venture capital timeline. So it is potentially disrupting its opportunity to raise funding from a VC market that is hungry for startup unicorns.
Partnership through collaboration
IPO is therefore not the typical exit route, instead looking to mergers and acquisitions particularly with institutional buyers.
This collaborative relationship between fintech and institutional partners has grown considerably over the past two years. It provide the startup the room and funding to develop and unencumbered by the processes of the established player.
Being nimble should allow these firms to respond more quickly to client demands and ensure faster speed to market.
Happy hunting ground
The primary growth of fintech has been among direct lending, wealth management and insurance platforms, each of which is dominated by large incumbents.
It is easy to forget that PayPal was a startup 20 years ago and the first one in the financial space. Its growth was based on the demand for a secure means of paying for online purchases. It has stayed the course because it did what it was intended for very well. How many other dotcom brands survived and flourished after the crash?
Alternative lending and wealth tech have grown steadily, initially as disruptors to legacy products and services, though traditional banking features have been added as they establish themselves.
The insurtech model
Insurtech carriers today can become full-stack insurance providers, though whether that is their intention or would be commercially sensible has yet to be tested.
The cost of entrance is high, as the margins are low. Insurance can burn through four or five times the cash compared to standard financial services products.
Automated underwriting has allowed some carriers to compete on price whereas others seek to hit niche or underserved parts of the market. This includes occasional car drivers, gig economy workers and a wide range of small business owners who would benefit from a product tailored to their specific needs.
The M&A market is where proven insurtechs are most likely to partner with fully established insurance providers, which can buy the technology and apply it at scale.
VC financing of insurtech has grown from almost $1 billion for 150 in 2013, through $5.6 billion into 333 startups in 2015 with 2018 seeing $6.3 billion pumped Into 310 businesses.
The rise of regtech
Regtech may not be the most exciting aspect of the market, but it offers one of the most compelling business cases.
It allows systems to sift through compliance data, prevent fraud, streamline audits and monitor employee activity. These metrics are in huge demand following the financial crisis.
But no one player will dominate this space, as development is very capital hungry. Startups in regtech will, therefore, target specific issues such as fraud prevention, data tracking, reconciliation and will become sustainable IPO candidates down the road.
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Digital Insurer's CommentsThis is an interesting run through where fintech has developed in recent years.
The fact that regtech could become such an important element of insurtech won’t be lost on an entity like Wells Fargo.
Having been put through the ringer by the regulator, it is seeking to plot a new course with its third CEO in as many years.
The Bank of England is just one entity to have committed to adopting insurtech and fintech in general in recent months. This does strongly suggest that the future of regulatory compliance, disclosure and oversight will be grounded in this tech.
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