Post the 2008 recession, the BFSI industry has faced several challenges, with advancements introducing disruptive technologies, such as AI and blockchain. Moreover, stringent regulations, increasing competition among fintech firms and start-ups, and the high focus on customer experience have also changed the industry landscape.
Post the 2008 global recession, the BFSI industry, notably banks and NBFCS, has been strictly regulated with norms such as Basel III, Dodd-Frank Act, and CECL, among others. Additionally, with the advent of digital transformation in BFSI, the number of regulations is increasing, limiting the growth of financial services to a certain extent. The scenario has seen companies in the BFSI industry incurring additional expenses in compliance costs.
Disruptive technologies, such as Robotic Process Automation (RPA), Artificial Intelligence (AI), and Big Data, have gained tremendous traction in BFSI services. The adoption of cloud infrastructure, coupled with skilled expertise and digital infrastructure readiness in emerging and developed economies, catalyzes the adoption of these technologies.
The acceptance of disruptive technologies in the BFSI industry is restricted by the dependence on legacy systems by financial services personnel, which poses a more significant challenge. In emerging economies, rural areas are still observing demographic problems with antiquated businesses and manual processes. These areas still require to be transformed with digital methods to provide enhanced customer experience and maximize efficiency.
Security and privacy remain the primary concerns for the BFSI services industry. The increasing number of data breach cases associated with digital transactions, rising non-performing assets (NPAs) of banks on account of the lack of KYC norms, and the increasing number of money laundering cases have compelled players to redirect their focus on security and privacy. The high cost associated with technological solutions for the adoption of end to end encryption (E2EE), biometric authentication, and risk-based authentication has put small-scale NBFCs, banks, and other financial institutions under financial strain.
The emergence of start-up fintech firms, such as Braintree, Tencent, Ant Financial, Google Pay, and Paytm Payments Banks, has drastically changed the competitive landscape of the BFSI industry. Innovative solutions by these start-ups are exerting pressure on traditional BFSI services for market profitability. Goldman Sachs estimates approx. USD 4.7 trillion has been bypassed to start-ups from conventional financial services. This business environment has led to the adoption of an inorganic growth approach among traditional financial services and fintech firms to increase their customer base by offering attractive financial schemes. For instance, OVO and TrueMoney, fintech start-up companies based in Indonesia, have partnered with various conventional financial services to increase financial inclusion initiatives.
The COVID-19 pandemic has taken a toll on the global economy, and industry experts and financial consultants suggest the world is at the brink of recession at present. The scenario is expected to see several developments in the upcoming months and years. Micro, Small, and Medium Enterprises (MSMEs) across verticals will require financial liquidity with reduced interest rates. Commercial banks are expected to temporarily suspend loan repayments for small businesses and consumers, including credit cards, auto loan payments, and mortgages.
Declining interest rates are likely to positively impact mortgage and auto financing for the next two-quarters of FY2020–21. Digital transactions, which have already gained pace in recent years, are expected to see a tremendous growth spurt amid growing demand for cash alternatives that do not require physical proximity to complete payments. Additionally, e-commerce stores are expected to gain preference over physical retail stores. Thus, social distancing norms are positively affecting a few verticals within the BFSI industry.
Straits Research has helped several companies in the BFSI industry, notable those based on Western Europe and the U.S. The most common areas of study within the domain includelucrative avenues for business investment for mPOS,two-factor authentication in the BFSI industry, and fintechservices, with clients seeking comprehensive information on potential venture avenues, business drivers, and market challenges. Our solutions have helped companies in the BFSI industry identify investment opportunities and other technology trends.
We are currently working on technology trends adopted in the BFSI industry. This is due to increased investment funding in start-ups, which helps us gain access to the untapped market and further, deliver accurate insights regarding market dynamics, market competition, and business avenues. For example, a Germany-based financial solution provider inquired about market competitive players in two-factor authentication in the BFSI industry. Our research team identified the top 20 players in the market. It tracked every proceeding and investment activity of these players, which helped the client formulate effective growth strategies in the region.
The finance industry is facing a global recession, with the COVID-19 pandemic taking a severe toll on economies. With the gradual growth of the worldwide economy, the world could observe Japanification in the financial services sector, which refers to constant incremental growth, low inflation, and near-zero or negative interest rates. This could be particularly true in Europe, where developed countries such as the U.K., Germany, and Italy are severely hit. Therefore, financial markets must take precautionary and preventive measures to battle and lower the global recession risk.
Over the last few years, the capitalists (VCs) have been increasingly investing in fintech firms. Through this strategic partnership, fintech firms have been able to retain their customers and deliver excellent customer experience. This collaborative approach led the VCs to resolve growing regulatory compliance, which has allowed fintech companies to become their competitors. In the present scenario, innovative platforms for digital transactions, digital accounts, and digital wallets represent threats and opportunities for financial institutions. Accenture Research reports a rapid increase in global fintech funding across economies, propelled by Brexit, the U.S.-China trade war, and fluctuating currency exchange rates.
China accounted for the largest market share in 2018in terms of fintech investments owing to Ant Financial that funded USD 14 billion to Alipay mobile payment services. By product,fintech funding wealth and asset management held the highest market share of 30%, followed by 23%, and the lending market accounted for 19%.
Figure: Global Corporate Venture Capital-Backed Funding and Deals, Q1 2019 – Q1 2020
The year 2019 had also observed a decline in VC investments, and COVID-19 has further exacerbated the funding prospects for fintech firms. Investors remain apprehensive about ROI amid uncertainties raised by the pandemic. Our analysis indicates VC funding is expected to be affected till FY2021.
The decline of investment by venture capitalists in 2019 has created turbulence in financial markets. As per Genome, start-up,inChina alone, Q1 2020 observed a50% decline of venture capital deals than the rest of the world, which is attributable to the decrease in China’s industrial sector by 13.5% in January and February and retail sales by20.5% YoY.
The pandemic has created a novel opportunity for fintech companies as the fear of COVID-19 transmission is prompting a switch to virtual currency over hard cash, which requires physical proximity. Innovative solutions such as virtual cards are expected to gain traction in the upcoming months. For instance, Zaggle, a prepaid card firm, has introduced its virtual card back in 2018 and is currently optimistic about the product’s growth prospects. The demand for the firm’s virtual card is expected to grow a whopping 600%, as it will be used at POS terminals and digital transactions. With such innovations, investment firms are expected to turn to start-ups to provide them with a higher return on investments.
During the COVID-19 pandemic and its aftermath, companies engaged in integrating disruptive technologies such as Artificial Intelligence (AI) are expected to play a pivotal role in the financial sector. Robotic process automation (RPA), which includes call center chatbots, instant account opening procedures, loan automation, and KYC solutions, is expected to have strong growth prospects during this crisis. Social distancing norms in several countries recommend businesses, including those in the BFSI industry, to operate with 50% staffing, which will pave the way for the growth of RPA. These technologies can significantly reduce the workload and facilitate seamless operations, thereby improving customer experience.
Source: Straits Research Analysis