The FinTech Boom after the Financial Crisis

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Let us see how FinTech gained traction and how it has evolved in the last 2 decades. As we all know that FinTech is not anything new that has originated from a Pandora's box and has existed since the 1950s. In this article, we'll focus on how has it grown in recent years, what was the need for FinTech and how it took such an elusive pace.

How the world started heeding FinTech?

As the saying goes "In the middle of difficulty lies opportunity", the FinTech startups saw the opportunities during the Global Financial Crisis of 2008. To understand this, let's understand what the global financial crisis was and how it impacted millions of people.  

The Global Financial Crisis centered in the US was a downturn in the housing market of the United States. Easier lending processes and the erroneous AAA accreditations of multiple mortgage-backed bonds were the catalysts for the financial crisis. Millions of peoples lost their jobs, multiple banks incurred losses and many were forced to shut down such as the Lehman Brothers, whose Chapter 11 Bankruptcy was over $600 billion, biggest ever in the United States. The global loss due to the crisis estimated by the former chief credit officer of S&P 500, Mark Adelson, is approximately $15 trillion.

In the amid of the crisis, came tighter regulations and a perfect vacuum of innovation in banks was created. Due to the heavy level of financial services regulation that followed the crisis, banks dealt with heavy fines for non-compliance. Regulators also forced the banks to contain their risk-taking which was done by imposing new compensation rules thus require more liquid assets and more Tier 1 capital. 

Tier 1 Capital: The minimum amount of money that the bank has to keep in Liquid form as protection against the loan defaults. The tier 1 capital before 2008 averaged around 5% and because of the new compliances, the Tier 1 capital currently stands at around 8%.

These new regulations have forced banks to spend more time in their back offices and invest more in compliance and risk management programs. 

How the boom has progressed after the Financial Crisis?

The boom is a global phenomenon for consumer-facing fintech startups. The total amount of fundraised by the FinTech sector from 2009 to the 1st half of 2019 is around $400 billion. Below is a graph by Statista to show the investment over the years in the FinTech sector.

Now, looking at the number of startups, America currently hosts the most number of FinTech startups which are around 8775. There are around 7385 FinTech Startups in Europe, the Middle East, and Africa, followed by the Asia Pacific region with 4765. 

Numbers as in February 2020

FinTech is the only tech-backed sector wherein Investment banks are longing to have a piece. This is how the Investment map of the FinTech startups from the 6 major Investment banks of America looks like. 

The map shown above was generated by CB Insights and as you can see that most of the well-known FinTech startups such as Square, FastPay, InvestLab, Betterment are funded by one or the other major bank. 

Betterment is a FinTech wealth management firm that has an AUM of $16.4 billion and this is just one amongst the many FinTech giants.

Will all this we can clearly see that FinTech is the next big thing and the financial services have no other option than to adapt the rapidly changing technology and implement machine learning and artificial intelligence to vanilla finance to bring out next-gen startups by using best of both the worlds.