What are fintechs and why are they booming?

Because of the massive use of smartphones for bank transactions and the acceleration of this trend due to COVID-19, big banks around the world have understood the need for the industry to evolve. As a result, they have begun to incorporate financial technology (fintech) into thir product range.

Smartphones have played a pivotal role in the spread of financial technology by dramatically changing the way users interact with technology. This, coupled with the digital acceleration caused by COVID-19, has led to steady growth in the possibilities of integrating new financial technologies (fintech) into financial services. And that's just the beginning.

The fintech sector is comprised of companies that offer digital services for financial advice and wealth management, personal finance, alternative funding approaches and new electronic payment methods, among many others. Fintechs are not just payment platforms: the sector involves a multitude of financial products and services focused on automating business processes in numerous geographies and markets. The result is a "hyperpersonalisation" of the customer experience.

According to a survey entitled ‘Retos y amenazas del sector fintech en España. La visión del actual y potencial profesional’, [Challenges and threats facing the fintech sector in Spain. The perspective of the current and future professional], produced by EADA Business School and ISDI, 70% of professionals see the expansion of the fintech business as inexorable and consider it offers major opportunities. In fact, 65% of respondents in the industry are already using fintech services in their daily lives.

With Asia leading the adoption of this innovative technology, according to EY's latest Global Fintech Adoption Index, this trend is being driven by continuous technological development in a quest to improve the customer experience. This is focused on three main areas: electronic payments, blockchain and robo-advisors.

1. Electronic payments

Electronic payments, i.e. systems that transfer money electronically between buyers and sellers using a mobile device or contactless payment methods, are a fundamental part of the transaction process in e-commerce.

Innovation in electronic payments benefits both consumers and businesses, providing more versatility and greater control over processes. Multichannel payments, mobile payments, contactless payments, and mobile wallets are just a few examples. According to Visa, every transaction that moves to e-commerce is paid digitally. Wellington Asset Management forecasts that e-commerce will grow by 15-20% per year over the next few years, which represents a strong tailwind for companies in the digital payments sub-sector.

2. Blockchain

Blockchain is a type of transactional technology that ensures high levels of security and functionality. A blockchain is an immutable distributed ledger used to register changes of ownership and transactions, track assets, and ensure transparency, security, trust, and exchanges of value in transactions involving digital assets, without the need for a central server or database.

Bitcoin was the first application of the blockchain, but there now hundreds of blockchains, with Ethereum being the one most widely used for decentralised applications. The technology is evolving rapidly. There are now platforms, such as Algorand and Solana, that are faster and allow for scalability.

3. Robo-advisors

Robo-advisors are digital platforms that provide automated financial advice and/or management services. Using algorithms based on risk optimisation, they create portfolios for clients according to their needs. They also automatically rebalance portfolios to maintain target asset allocations and offer tax-efficient solutions by managing the user's tax base. Robo-advisors enable all investors, regardless of their wealth, to access services usually reserved for high-net worth individuals. All these developments are made possible by new technologies such as the cloud, artificial intelligence and machine learning, which are enabling companies to leverage data to improve decision making.

At Santander Private Banking, we believe that innovation in financial technology will be increasingly powerful, adapting to users' growing digital needs. Consequently, through the Future Wealth advisory framework, we analyse the companies that are positioning themselves most competitively in this technology and advise our clients through efficient investment vehicles.