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Silicon Valley Comes to Banking

Technology is changing how money flows, creating concerns and opportunities

The growing area of financial sector technology bears watching. "Fintech" is primarily concerned with the way consumers move money (either between themselves as transfers or loans, or as payments to firms in exchange for goods and services). Service providers are aiming to simplify, speed up, make more secure and reduce the cost of financial transactions, or to increase underserved populations' access to financial services. The technologies involved are not necessarily new, but the trends of growing online commerce, increasing mobile usage and rising concern over Internet security are key drivers of future adoption.

Early-stage investor interest in fintech has surged in recent years. First-round institutional investment in fintech companies grew from $4.1 billion in 2013 to $12.2 billion in 2014, roughly three times faster than venture funding overall, according to consulting firm Accenture. We think fintech categories such as mobile payments, online lending, peer-to-peer transfers, cross-border transfers and financial inclusion should grow in the coming years.

Growth in mobile payments
Mobile payments in the U.S. alone are projected to grow 22% annually over the next five years, according to technology research firm Forrester Research.


Startups are using the existing payments infrastructure to improve service levels for consumers—primarily by reducing the number of steps involved in individual transactions and increasing security. For online transactions, payment service providers store and handle consumer credit or debit card details and communicate with the payment networks on behalf of both the merchant and the customer in authorization and settlement.

For consumers, the main benefits include not having to enter payment details in multiple websites and not having to share personal information with unfamiliar online vendors. The total value of online mobile payments in the U.S. is expected to have reached $53.1 billion in 2015. However, an increasing share of the growth in mobile payments is expected to come from offline, in-person sales that are forecasted to reach $34.2 billion in 2019, up from an estimated $6.8 billion in 2015.

Online lending gains traction
Online lending has been gaining attention following two large initial public offerings last year. Consumer loans still account for the majority of products sold, but student loans, small business loans and mortgages are increasingly available.

Primarily, online lenders are better able to serve smaller customers (whether individuals or small businesses) that have limited or no access to traditional funding sources. They also can offer smaller loans and, without the need to maintain physical branches or conduct in-person applicant assessments, have significantly lower origination costs. The online lending market is extremely small relative to the $3.5 trillion in total outstanding consumer credit. But the size of this market hints at the scope of future growth.

Some 38% of the world's adults lack an account at a bank or nonbank financial institution, and 73% do not have a bank savings account.

The market for peer-to-peer transfers largely consists of transfers of money—as gifts, family allowances, the settlement of group restaurant bills and the like—between individuals. It consists of online services that allow customers to transfer funds through mobile applications, email or text messaging (SMS) using linked bank accounts, credit cards or debit cards. Forrester Research estimates that the market for electronic mobile transfers reached $5.3 billion in 2014 and will grow 26% annually through 2019.

Though not as fast growing as other fintech categories, the international cross-border transfer market is large, at nearly $600 billion, and has grown steadily, at an average of just under 6% annually, since 2007.

Several startups offer a range of international services, such as sending money for cash pickup (enabling recipients without a bank account to receive money) and making direct bank deposits in U.S. dollars or another currency. They offer lower prices and faster deliveries without requiring minimum transfer values.

Fintech also has a growing presence in the emerging world, generally as a means of financial inclusion for populations lacking access to financial services. The World Bank estimates that some 38% of the world's adults lack an account at a bank or nonbank financial institution, and 73% do not have a bank savings account. However, high rates of cell phone penetration are a continuing source of growth potential for providers of nontraditional financial services. In many countries in sub-Saharan Africa, for example, access to mobile connectivity far exceeds access to financial services, which has given rise to local branchless banking provided by telecom companies in countries like Kenya and Tanzania.

Adapted from U.S. Trust, Weekly Capital Market Outlook, Sept. 28, 2015.

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