Fintech Infrastructure and the Changes in the Financial Landscape
Understanding the fintech infrastructure industry's outlook
EDGE100 Report, 2022
What’s meant by ‘fintech’?
Many of us are familiar with fintech, whether we know it or not. Fintech can be defined simply as technology that replaces financial services, ones that were typically or traditionally done by people—making online payments, opening a bank account online, buying and selling stocks online, and investments as well. We’re all relatively familiar with something like this that has made its way into our daily lives.
The next question..
What does fintech infrastructure mean?
The fintech services that we interact with has to have some backend connection and activities that are successful for a particular fintech to function efficiently. For any banking service, for instance, there are invisible components that drive it.
Traditionally, all such infrastructure was built in-house. These developments are the key integrations and APIs used to access and create this 'backend'. Developers would have to spend significant money and time building this infrastructure. With fintech becoming more popular, third-party companies started saying, "if everyone needs infrastructure to make fintech function, why don't we build the it and let multiple players benefit from one product?" The main value proposition was that the fintech company could focus on client value rather than spending time and effort on building the backend infrastructure.
Let’s look at the figures
The industry is highly funded, with USD 22 billion coming in aggregate funding, and more than half of it being raised after 2021. This momentum shows that it's a recent trend, and it is an industry that is likely to continue gaining traction. The reason for this traction is that the addressable market and the potential growth, which we estimated as USD 78 billion (as the annual addressable market); also, the industry is likely to grow at a double-digit CAGR of 17% from 2020-2025.
We have divided the space into five main segments, based on the end service that is being offered.
- Payment and subscription
- Banking services
- Fraud prevention
- Investment and financial management services
All these segments have received over USD 1 billion in funding, but most are centered on the payment and subscription segment. Popular names like Stripe raised USD 2 billion in funding alone, and we see other known names like Flywire, Marqeta, and Cross River Bank.
We should note that some companies work across segments. Giant, Stripe is mainly in the payment space, but they also have Stripe Identity that caters to fraud and identity verification. Diversified players like Plaid offer banking and a range of services. It’s not uncommon for one player to work across multiple segments in this space.
So, we know what fintech infra is; we also know there's a big prospect in the market, have seen the numbers, and they've shown a positive and encouraging picture. We've also seen how payment and banking seem to be chief fundraisers, with other segments have had some substantial funding being raised as well. But what's next? What are we likely to see in this fintech infra industry as we venture into the future?
Broadly speaking, two aspects
One main driver is the ongoing shift to ecommerce. Since ecommerce is buying and selling over the internet, people need online payment support to function. So, with the shift to ecommerce, there’s going to be a demand for online payments that demand for payment-related infrastructure is likely to grow.
You may say that this isn’t an overnight development, so why does it get such strong funding?
This brings us to the second major pattern: fintech is continuing to expand in the market. Looking back at 2008 or 2009, when it came to the financial crisis, people were more open to using this fintech solutions because they didn't think they had to stick to legacy banks, with what happened in the crisis. The fintech companies were replacing legacy banks, going to the masses, and growing in popularity.
Now, we see fintech expanding horizons even further by catering to niche segments and emerging markets. Companies targeting SMEs or targeting banking services for minority groups that were traditionally excluded from banking for instance, we're seeing investment services popping up, democratizing spaces that previously favored high-net-worth individuals. Now, the direction is that it is trying to settle into this niche by catering to those traditionally ignored by the legacy financial system.
As they target underserved markets, we will see increased fintech, which demands more infrastructure. As they look to target specific markets, they will look for a third party to build the infrastructure, to release development headaches and resource drain.
What are the challenges?
It's not always rosy for the fintech infrastructure space. There can be privacy concerns around data usage, much like for the fintech that uses them— it will access personal information such as banking credentials, addresses, names, etc., which they will need to protect to ensure fair usage. Some companies we've seen have had run-ins and fallen short in certain aspects. Last year Plaid settled a lawsuit against an allegation that they were using personal information inappropriately.
Being vulnerable to hacking because fintech platforms are digitally native and are used by multiple platforms is another threat. If the infrastructure is hacked, it would impact all fintech solutions built on it—a stumbling block to using fintech as well. Developers may build the infrastructure in-house because such vulnerabilities exist. We’re not saying they won’t use them, but privacy concerns and protection will play a key role, going into the future, as it expands.
Have any comments or questions? Check out our on-demand webinar outlining equitable fintech players, making waves. You might want to know whether the ecommerce boom will continue to impact fintech and infrastructure, or find out more about the large financial companies that have entered the space. Watch the video to understand more!