As innovations from digital wallets to Bitcoin gain popularity worldwide, fintech has moved from a buzzword to a ubiquitous presence in everyday life.
Companies across industries and geographies are using fintech to offer customers payment options outside the traditional banking system as well as more convenient ecommerce. Solutions range from platforms like Venmo, whose name has become a verb thanks to widespread adoption, to newer offerings like UK-based StyloPay, which equips businesses to empower their customers with multicurrency e-wallets, and Ukraine-based Pri-Num, one of a growing number of companies leveraging near-field communications, a form of short-range wireless connectivity, and tap-to-phone technology.
Many innovations which rose to the fore as a response to COVID-19 may be here to stay. “We’ve thought a lot about payment experiences in the pandemic, where for many Americans in particular, they discovered for the first time the power of tapping to pay with cards that have chips in them,” said Ben Savage, a partner at Clocktower Technology Ventures, in an article for the MIT Sloan School of Management. “These are experiences that, once you switch, you don’t go back.”
During the pandemic, natural disasters, and other tough times of the past two years, millions banded together through crowdsourcing platforms like GoFundMe to pool funds or exchange money. Companies also found a lucrative business niche creating such platforms for others. U.S.-based software development group Chetu augments its offerings for charitable organizations and debt and equity firms with social networking tools, video pitch support, investment tracking, and security features like ID verification, Know Your Customer (KYC) modules, and e-signatures.
Meanwhile, countless other fintechs helped consumers make more informed financial decisions. In Sao Paulo, Brazilian startup QuintoAndar enables renters to compare prices by neighborhood. From its Atlanta headquarters, subscription-based app Greenlight is equipping kids (with parental supervision) to track chores, create budgets, make charitable donations, and even try out investing with fractional share purchases, thanks to a partnership with JPMorgan.
Fintech services also give internal operations a competitive edge. In Latin America, local payment processing services like Ebanx of Brazil and dLocal of Uruguay enable companies to send and receive funds without having to set up local legal entities, while fraud detection solutions like Riskified help them operate with greater confidence. Meanwhile, as platform as a service (PaaS) applications replace on-premises systems , businesses worldwide are recognizing the power of cloud-based financial management tools to increase income and expenditure visibility as well as sustainability.
Is 2022 the year for your company to leverage fintech innovation for your global operations?
A deep dive follows of what to look for when evaluating a potential fintech use case, as well as regional market spotlights and trends on the horizon for 2022. Finally, because great opportunity always brings great potential for criminal malfeasance and scams, you’ll find red flags to watch for—to keep your hard-earned money in your wallet, digital or otherwise.
Ready to conduct a fintech feasibility study?
Research your market’s “digital currency maturity”
As fintech represents a transformative shift in banking, nations vary widely in terms of adoption, proactive encouragement, and support. On one end of the spectrum, the Bank of Canada reported no plans to introduce a digital currency—but may change its mind “if people began using physical cash less.” On the other end of the spectrum is Nigeria, where a third of the population reports either using or owning cryptocurrency. Here, as in Vietnam and the Philippines, digital currency offers a cheaper solution to sending money across borders.
One quick way to scan the environment is through the Atlantic Council’s online Central Bank Digital Currency (CBDC) tracker. Defined as “virtual money backed and issued by a central bank,” CBDCs have surged in popularity over the past year. In May 2020, only 35 nations were considering them; by October 2021, this number had skyrocketed to 87 nations representing over 90% of GDP, including major economies like China and South Korea, which are now in the pilot stage.
Is a digital Euro on the horizon? In 2018, in a move toward more competition and innovation, the European Commission adopted a FinTech action plan with proposed steps toward scaling innovative business models, increasing cybersecurity, and supporting new technologies such as AI, blockchain, and cloud services in the financial sector. In July 2021, this plan entered the investigation phase, with an evaluation of various design options, user requirements, and possible services.
The “digital currency maturity” of your potential fintech market matters for several reasons, starting with the very important considerations of registration and regulatory compliance.
Say you’re registering a fintech company to operate in Europe. Be prepared to present a business plan and risk assessment and demonstrate monitoring and surveillance of your operations. And be ready to put a range of regulatory bodies on your radar, starting with the European Commission and European Securities and Markets Authority and potentially including:
- Financial Conduct Authority (UK)
- Autorité de contrôle prudentiel et de résolution and Autorité des marchés financiers (France)
- Commission du Surveillance du Secteur Financier (Luxembourg)
- Federal Financial Supervisory Authority (Germany)
- De Nederlandsche Bank (Netherlands)
Even within a single nation, fintech’s regulatory landscape can be highly fragmented. Take India, for example. Their regulatory patchwork includes:
- The Payment and Settlement Systems Act (2007), which requires prior authorization for the initiation and operation of any payment system
- Peer-to-Peer Lending Platform Directions of 2017, which outlines lender exposure norms and borrowing limits of P2P lending platforms
- The UPI Procedural Guidelines that regulate mobile applications and money transfer services through the United Payments Interface developed by the National Payments Corporation of India
Latin America is also seeing an incremental rollout of guidelines and policy:
Brazil’s Open Banking project went live in early 2021, requiring large banks to provide APIs that enable third-party developers to build applications with consumer data (shared with their consent). This and the PIX smartphone money transfer system are part of an initiative by Brazil’s central bank to restructure and modernize the nation’s financial and payments systems to encourage competition, financial citizenship, cheaper credit, and more modern legislative frameworks.
Chile announced a preliminary framework around open banking, as well as initial parameters around regulating crowdfunding, robo-advisors, and payment agents, with registration requirements anticipated for loan advisors, custodians of financial instruments, and anyone intending to provide services as crowdfunding platforms, alternative transaction systems, or order routers.
Columbia has adopted a new regime for low-value payments systems and a “regulatory sandbox” for fintech testing and licensing. Policymakers have proposed legislation for modernized payments legislation and conducted public/private dialogues on open banking.
Mexico was a front-runner in fintech regulation with Ley Fintech, which governs mobile payments, digital wallets, crowdfunding, and cryptocurrencies, as well as open banking and APIs. Other countries, such as Peru and Argentina, are expected to follow a similar path.
Cybersecurity and data protection
Regulations governing the security of fintech solutions occupy a niche of their own. In the EU, the Carnegie Endowment points out that “there exists not one major European cybersecurity legislation for the financial services sector, but rather a multitude of different European and national regulations and sector-specific standards.”
This multitude includes critical infrastructure regulations, general European legislation surrounding topics like data protection, and specific financial sector regulation and standards. Examples include the Directive on Security of Network and Information Systems (NIS Directive), the General Data Protection Regulation, and the proposed Digital Operational Resilience Act, which aims to introduce a harmonized and comprehensive framework for mitigating risk and achieving operational resilience.
Evaluate regional adoption and investment
The regulatory environment is just one aspect of a broader conversation. Evaluating fintech viability in a given market also requires broader considerations.
If you’re planning to offer or rely on digital payment solutions:
- Is sufficient connectivity and enabling infrastructure, such as 5G, available?
- Does a local talent ecosystem exist for developing, maintaining, and growing fintech solutions? What does the educational and skills landscape look like in areas such as blockchain and AI?
If you’re investigating potential investments or partnerships:
- What fintech solutions are in the market right now?
- Have potential users (employees, customers, partners) adopted fintech solutions—and if not, what are the barriers and how steep is the potential learning curve?
- How committed is the government and private sector to future innovation?
A brief overview follows of what three major world regions look like in these areas right now.
Asia Pacific: China tightens the reigns as India ascends
The Asia Pacific region is in many ways a fintech front-runner, leading the way with the Singapore Financial Data Exchange, the world’s first public–private open banking solution, and Hong Kong’s ZA Bank, the first virtual bank to offer a digital-only banking service.
Growth has skyrocketed. For example, the region has seen the emergence of more than 150 e-wallet providers, and in many nations, shopping by smartphone is a way of life, with some reports putting adoption rates in China and Thailand at 86% and 67% respectively. Backing much of this fintech innovation are tech giants like Singapore Telecom, Malaysia’s AirAsia, and China’s Tencent Holdings and WeChat, which expanded WeChat Pay to Malaysia in 2020.
China in particular has been a digital finance powerhouse. “China’s transformation from a financial-technology backwater into a $46 trillion-a-year global leader in digital payments left most international investors watching in awe from the sidelines,” Bloomberg wrote in November 2021. But if you’re looking to offer, use, or invest in fintech solutions here in 2022, however, be prepared for big changes—starting with a digital version of the official state currency that’s rolling out in cities across the nation. The goal? To offer commerce without an internet connection, credit, or even a bank account.
The e-renminbi is one part of broad state action related to fintech in China. In July, China’s central bank announced a requirement that non-bank payment firms must report for overseas initial public offerings and other major events. The move was in part a reaction to Alibaba-affiliated Ant Group’s plans for a $37 billion listing, but the repercussions could be sweeping in terms of this market’s future fintech players, options, and prospects for innovation.
In July, a New York Times article posed a question on many minds: “What will regulation do to an industry that has thrived precisely because it offered services that China’s state-dominated banking system could not?”
One answer to this question could be taking shape to the south, in India.
“As online payments and digital loans in the second-most populous country soar at some of the fastest rates worldwide, money is pouring into India’s financial technology sector at an unprecedented pace,” Bloomberg reported in November.
To illustrate, mobile e-commerce website Paytm—backed by Berkshire Hathaway, Alibaba, and SoftBank, may become India’s largest-ever IPO, seeking a valuation of about $20 billion. This big money is chasing an end market of relatively modest means: consumers who earn about $2,700 a year who moved from cash to apps during the pandemic. In India, such digital payment services tend to cede regulatory responsibility to “traditional” banks. Look for a thriving partnership and M&A climate here.
Europe: Increased ubiquity amid heightened competition
From banking and lending to insurance to ecommerce, fintech companies have been disrupting business as usual in Europe, and COVID-19 just accelerated these trends, as we explored briefly earlier this year.
“Consumers are increasingly incorporating fintechs into their everyday financial lives such as managing funds, trading stocks and crypto, paying for food, or managing insurance,” financial card manufacturer CompoSecure writes. Couple these trends with a robust and growing 5G infrastructure, and the consumers of fintech services have a surfeit of options to choose from.
In just the area of touchless payments, for example, innovators and services span the region: FAMOCO and TagPay (France), StyloPay and Plutus and Curve (United Kingdom), BPC Banking Technologies (Switzerland), Cellum (Hungary), PriNum (Ukraine), and Fidesmo (Sweden), to name a few. Unicorns have been giving way to “decacorns” (startups valued at $10 billion or more), with Swedish “buy now pay later” app Klarna, and multipurpose finance app Revolut and digital payment solution Checkout, both from the UK, achieving this status in 2021. And global giants have been growing their European presence. Take, for example, PayPal’s expansion, via partnership with Mastercard, to Belgium, Finland, the Netherlands, and Portugal.
The other side of this opportunity story is investment. This is where Brexit, the other big trend driving European fintech, comes to bear.
With departure from the EU common market putting London’s financial leadership on the line, the UK has turned to the fintech sector as a lifeline—with powerful results. In 2020, UK fintechs raised $4.1 billion, bypassing Germany at $1.4 billion.
Other nations in the EU have been rising to the challenge. In the second quarter of 2021, two of the five largest funding rounds went to German-based companies. The Baltic region, though small, produces a high number of tech startups. Fintech funding in Estonia, Latvia, and Lithuania more than tripled in 2020. And right next door, Ireland has become an EU fintech hub, home to companies such as Coinbase, Stripe, Remitly, Square, Paysafe and Payoneer.
“Digital banks have started to gain more traction in Ireland,” said KPMG Partner Anna Scally. “Increased competition from challenger banks is certainly putting pressure on the pillar banks in Ireland who have responded and are investing very heavily in their own digital infrastructure. This healthy competition is good for consumers and business customers alike.”
Latin America: Bringing even more consumers into the financial system
We’ve examined the explosion of e-commerce in Latin America during COVID-19, how money continues to move online in Argentina, and the consumer mindset of Wi-Fi- connected Gen Z in Brazil.
Investment, innovation, and adoption in Latin America continued strong in 2021. In the first half of the year, total capital invested at mid-year exceeded the 2020 total of $2.9 billion, reaching an all-time high of $7.6 billion. Top fintech deals in the first half of 2021 involved wealth tech, payments and remittances, and real estate, as well as solutions in blockchain/cryptocurrency and marketplace lending. As one example, JPMorgan bought a 40% stake in Brazil’s digital C6 Bank.
“The growth in Latin America’s fintech adoption and demand can be attributed to the notoriously low adoption rates of financial services among consumers and Covid-19 induced acceleration for digital payments,” Fintech Global wrote. “These are setting the stage for fintech players who are able to serve existing customers better and introduce new underbanked segments of the population to the financial system for the first time.”
In November, Sequoia Capital made a fintech its first investment in Chile, participating in a series A round for Fintual, an online financial consulting company and digital platform operating in Chile and Mexico. Also in November, credit card fintech Stori closed on $200 million, one of the largest Series C rounds in Latin America to date.
Over the past three years, the Colombian fintech sector has seen 120% expansion and investments of more than $1 billion. Uruguay, a nation of fewer than 3.5 million people, is home to 63 fintech enterprises, including unicorns dLocal and Prometeo, as well as embedded finance company Inswitch, app and platform Bankingly, MiFinanzias for small and medium-sized enterprises, and open banking platform Paganza.
Keep trends—and risk—on your radar
Within the burgeoning fintech sector, where does emerging and comparatively uncharted territory still exist? “Touch to voice” payments, tailored financial products, collaborative financial technology (think multiplayer or Masterclass)—according to MIT Sloan School of Management, these are a few of the fintech trends to watch in the months ahead. Others include QR codes that use open banking infrastructure and opportunities to link fintech with sustainability. Meanwhile, fintech startups have been:
- Transforming the car-buying experience (London-based Carwow)
- Using AI to verify new customer identities and detect fraud (NYC-based Socure)
- Using blockchain technology to determine creditworthiness (California-based Spring Labs)
While seizing the next new technological innovation or application, however, it’s important not to let risk management take a back seat.
Areas of great opportunity bring great potential for scams, criminal malfeasance, or worse—and the fintech sector is no exception to this rule. It’s perhaps little surprise that two of the three fintech startup examples above deal with fraud detection and “knowing one’s customer.”
Just as individual investors evaluate the wisdom of putting money into NFT art or the latest “meme coin,” global businesses must apply the same spirit of due diligence to potential fintech solutions, partners, and ventures.
Scandal-ridden stablecoin Tether provided a particularly vivid example of fintech gone wrong, and it’s just one example of why global businesses should heed a philosophy of “buyer beware.”
Some fintech offerings may not perform as promised, as was the case with NatWest’s Esme Loans lending platform, closed in March, or Revolut’s Canadian operations, which were ultimately withdrawn from that market. In other cases, fintech providers or partners may be involved in compliance violations or even criminal activity.
For example, fintech lenders participating in the Paycheck Protection Program (PPP) in the United States were nearly five times more likely than traditional lenders to be involved with suspicious loans.
In August, cryptocurrency platform BitMEX agreed to pay $100 million as part of a settlement for multiple anti-money laundering (AML) violations. Meanwhile, the U.S. Securities and Exchange Commission charged Blockchain Credit Partners and two of its executives for deliberately misleading investors related to unregistered sales of digital currencies.
In June, TransferGo became the first fintech firm fined by the U.K.’s Office of Financial Sanctions Implementation for failing to report transactions with a sanctioned Russian bank, and crypto exchange Binance’s U.K. arm was banned from operating in the country after being deemed “not capable of being effectively supervised.”
Compliance can be an issue with fintech firms, according to Claire Simm, managing director at forensic specialist Kroll’s Financial Services Compliance and Regulation practice. Companies may not fully understand AML or KYC regulations, find them irrelevant, or fail to implement the right measures or precautions in the pursuit to deliver a cost-effective product to market fast.
Ready to incorporate fintech into your global business strategy? Contact 360 Zolo Solutions. Our consultants and advisors can help find the best solutions for you.