This is the detailed PESTLE analysis of Fintech industry examines the macro environment factors that can affect the dynamics and degree of favorableness of Fintech sector.
Background and Introduction
The term “Fintech” is a combination of the words “finance” and “technology”. It refers to the use of modern technology to provide innovative financial services and products. The Fintech industry has experienced tremendous growth in recent years, transforming the way people access and manage their money.
The roots of Fintech can be traced back to the early 2000s when online banking and payments systems began to emerge. However, the industry really took off after the global financial crisis in 2008, which led to a decrease in trust in traditional financial institutions and a growing demand for alternative financial services.
Fintech startups have disrupted traditional financial services, offering customers access to financial services through their smartphones, bypassing the need for brick-and-mortar bank branches. These companies use advanced technology, such as artificial intelligence and blockchain, to improve customer experiences and streamline financial processes.
The Fintech industry has been rapidly evolving, encompassing various sectors such as payments, lending, insurance, investment management, and cryptocurrency. As of 2021, Fintech has become a major global industry, with billions of dollars invested in startups and established companies alike.
Overall, the Fintech industry is reshaping the way people interact with money and financial services. Its continued growth and evolution promise to bring new innovations and benefits to consumers, businesses, and society as a whole.
FinTech Industry Information
| Information | Description |
|---|---|
| Definition | The use of technology to provide innovative financial services and products |
| Root Causes | Increase in demand for alternative financial services after the 2008 global financial crisis |
| Technology Used | Artificial intelligence, blockchain, mobile apps, big data analytics |
| Sectors Covered | Payments, lending, insurance, investment management, cryptocurrency |
| Major Players | Startups (such as Stripe, Robinhood, and Square) and established companies (such as PayPal, JPMorgan Chase, and Goldman Sachs) |
| Global Market Size (2021) | Estimated at $550 billion, with a projected compound annual growth rate of 23.3% from 2021 to 2028 |
| Major Regions | North America, Europe, Asia-Pacific, Latin America, Middle East and Africa |
| Benefits | Improved accessibility, convenience, and efficiency in financial services for consumers and businesses |
| Challenges | Regulations and compliance, cybersecurity risks, competition with traditional financial institutions |
| Future Outlook | Continued growth and innovation, expansion into emerging markets, increased adoption of cryptocurrency and blockchain technology |
Political Factors
The political climate is at the core of the operations of any industry and Fintech sector is also influenced by volatile political environment. The Russian and Ukraine political turmoil has created an increase in the cyber-attacks on these companies in the region. In addition, the unstable political situation disrupts the amount of transactions made by the users.
The political stance of the companies in the industry is another factor that has the potential to affect their future prospects. For instance, the leader of a Fintech company holding biased views or discriminatory attitude is likely to face a negative attitude from the consumers (Mavadiya, 2017).
Government strategy for technology based financial services also constitute an important part of the political domain. The policies devised by government officials can help the Fintech sector to grow by providing favorable incentives to the new ventures to enter into the market. In addition, it can also create a strategy for supporting the integration of these services by people.
Economic Factors
The poor economic outlook of a country indicates that Fintech industry is likely to experience slow growth. Inflation, low disposable income and unemployment drive down the consumer demand of such services, and puts the users in a financially vulnerable position. The revenues generated by the companies and their operational efficiency is negatively affected.
Recession is also likely to create a significant challenge for financial technology firms that don’t have adequate financial backup to running their operations during crisis. The case of Robinhood shows that declining cryptocurrency market leads to cost cutting measures and layoffs. On the other hand, the larger companies are less vulnerable to the effects of economic slowdown.
Organizations taking financial technology services also focus on reducing the cost of managing company operations. During economic slowdown, Fintech can provide low cost solutions to the firms operating in the financial services domain. The range of lending services also appeal to the young consumers that are seeking cheaper technology based financial solutions (Egkolfopoulou, 2022).
Social Factors
The attitude of people towards financial technology plays a crucial role in the number of users of such services. When people consider technology based financial services bringing ease into their lives, they respond positively to such innovations. The digital transformation of the society also facilitates the growth of the Fintech sector making the banking platform the largest user segment.
COVID has created a higher demand for the financial technology services as the digital transactions and financial processes were deemed as safer. The investment and lending platforms have significantly benefited from the pandemic as the number of people using online mediums for financial transactions have expanded (Krivkovich et al., 2020).
However, there remains concerns about the degree of security offered by these companies. People may be hesitant to use Fintech services because of the security risks. This negative perception can be a challenge in the growth of this industry. Individuals may have a preference for traditional banking system which is deemed as offering a greater degree of security.
Technological Factors
The Fintech industry is primarily driven by technology as it requires software that support the users in handling digital payments. The mobile banking is one such example where the availability of relevant and updated technology is crucial in the running of smooth operations.
Technological advancements are making it possible for the Fintech industry to flourish as a larger number of people are using digital medium for their financial service needs. For instance, Cryptocurrency is an area that has grown over the years offering investment and savings opportunities to the users.
The availability of a strong IT infrastructure is necessary to carry out the operations as the industry is dependent on the use of technology. Moreover, advanced technology tools are needed to handle the operations of Fintech services. Some of the tools used by the financial technology sector are Blockchain, Artificial Intelligence (AI) and Internet of Things (IoT).
Operating in the domain of technology, the Fintech companies have to focus on maintaining their cyber security effectively which requires the use of advanced technology. The management also has to invest in the development of security of the data base to lower the risk of data breach. Poor data privacy and security can compromise user trust and result in loss of market share (Phillips, 2022).
Legal Factors
The implementation of legal regulations in this sector is an area that needs improvement. England (2022) has observed that there is a lack of thorough application of regulations in this industry. The legal guidelines that are being implemented are related to licensing and getting approval for becoming a part of the Fintech sector.
The Fintech companies have to follow employment laws, along with focusing on the implementation of legal aspects related to intellectual property, class-action. Poor compliance of these legalities can lead to issues, as evident in the case of Plaid app, where the management had to pay $58 million to the users for violating their data privacy.
Environmental Factors
Fintech industry is considered to be an environment friendly alternative to the traditional banking systems as the financial processes are managed in the digital domain. The paperless financial management emphasizes green credit and investment options, which can help the users limit the harm being caused to the environment through traditional banking and financial service system.
However, a downside of Fintech is the consumer use of credit and debit cards, which add to the plastic waste and can contribute to environmental degradation (Cag, 2022). The high carbon footprint associated with these plastic cards makes it an area of concern for the environmental protection entities. Fintech firms needs to create solutions to mitigate their environment impact.
Conclusion
The Fintech industry is in the growing phase, gaining support from technological and social factors. The economic and political situation can result in slower growth rate of the industry though. Moreover, the legal aspect needs further improvement to bring greater degree of compliance through well implemented regulations for these firms.
References
- Cag, D. (2022). Top 5 Causes of Climate Change Related to the Fintech Sector. Fintech Magazine. Retrieved from: https://fintechmagazine.com/sustainability/top-5-causes-climate-change-related-fintech-sector
- Egkolfopoulou, M. (2022). Fintech’s Pitch: We’re Cheaper, More Mobile, More Focused. Bloomberg. Retrieved from: https://www.bloomberg.com/news/articles/2022-01-13/fintech-winning-young-consumers-by-being-cheaper-and-better-banking-alternative?leadSource=uverify%20wall
- England, J. (2022). IBM Security leader talks political impact on Fintech. Fintech Magazine. Retrieved from: https://fintechmagazine.com/banking/ibm-security-leader-talks-political-impact-on-fintech
- Krivkovich, A., White, O., Townsend, Z. & Euart, J. (2020). How US customers’ attitudes to fintech are shifting during the pandemic. McKinsey & Company. Retrieved from: https://www.mckinsey.com/industries/financial-services/our-insights/how-us-customers-attitudes-to-fintech-are-shifting-during-the-pandemic
- Mavadiya, M. (2017). Alt-Right Against Fintech: The Impact Of Politics On Technology. Forbes. Retrieved from: https://www.forbes.com/sites/madhvimavadiya/2017/08/17/alt-right-fintech-politics-technology/?sh=6853d87f6e1d
- Phillips, A. (2022). Top financial and professional risks for fintech companies. Marsh. Retrieved from: https://www.marsh.com/ie/services/financial-professional-liability/insights/top-risks-for-fintech-companies.html