The Definitive Guide to Understanding Fintech Ecosystems
Fintech ecosystems have rapidly evolved to become one of the most critical and complex aspects of the financial services industry. But what are they, and why do they matter?
This guide will explore the critical concepts of fintech ecosystems and explain why they are so crucial to businesses and consumers alike.
What are fintech ecosystems?
Fintech ecosystems are collections of organisations working together to reach a common goal. In financial services, this usually refers to the development and adoption of new technologies to improve or disrupt the traditional banking sector. It can also mean improving economic growth and social inclusion for more people worldwide.
“Fintech ecosystems provide playgrounds for testing entirely new ways of operating. The impact of one ecosystem - formed by Provincial or Federal regulators, fintech and financial services companies - can serve as a model for other jurisdictions to monitor and emulate if successful,” said Raphael Bouskila, President & CEO, Mako Financial Technologies. “This is typical in Canada, where regulators and institutions are often looking at what’s happening on a global stage before innovating at home.”
There is also a second type of fintech ecosystem in the form of machine to machine (MtM) ecosystems. MtM ecosystems consist of computer networks that can connect through APIs or other digital interfaces, which allows them to share data and services. “We are in a unique time where the fintech ecosystem is blossoming,” added Andrew Hoag, CEO of Teampay.
In terms of the MtM ecosystem, Vijay Ramnathan, President at MineralTree, thinks that “there has been a lot of innovation, but each solution on its own offers very limited value and creates additional friction. The ability for these technologies across the ecosystem to speak to one another, connect the business process flow, and update the financial system of record where the real value is.”
The hybrid of the two types of fintech ecosystems mentioned above is the most common and refers to a system where both human and machine interaction occurs. The hybrid ecosystem will be used as the primary example in this guide.
Using ecosystems to help the fintech sector thrive
Fintech ecosystems improve the industrial development of the industry by providing an environment where fintech companies, financial institutions and regulators can collaborate. This helps improve the quality of products and services offered and allows for the sharing of knowledge and best practices.
“Fintech ecosystems are changing the way people think about banking and investing across the board. Specifically, they are challenging the way we have historically thought about financial systems and offering new ways for people to engage with money,” said Sachin Jhangiani, Co-Founder and CMO of Elevate Money. “Take real estate, for example. Getting started in real estate was historically reserved for those who were already wealthy, but the rise of digital investing platforms has completely changed that. Thankfully, with new systems and savvy investors, there are more opportunities to transform the market completely. I’m optimistic that we will see more wealth democratisation in the years to come.”
Fintech ecosystems democratise the financial services sector by allowing more people a voice in its development. In turn, this democratisation can help drive innovation and inclusion in the sector, which can positively impact economic growth.
According to Joel Radtke, Co-Founder of CollateralEdge, “Fintech is forcing the financial industry to evolve and re-envision the way it once operated. A key to further fintech technology adoption is for large legacy finance institutions to see ‘front-end’ sales and business growth benefits and not just ‘back-end’ operations efficiencies from their fintech partnerships. It’s an exciting time to be building products and services as part of the fintech ecosystem and shaping the way financial services will bring more value to customers in the future.”
Taking a look at the UK’s fintech ecosystem as a world-leading example
In the UK, the fintech ecosystem is thriving. This development is thanks to a supportive regulatory environment and a culture that embraces innovation. Venture capitalists have also invested a lot in the UK’s financial technology sector, which has helped attract foreign talent and fuel development.
“The fintech ecosystem here in the UK is thriving – investors are doubling down on fintech in the wake of the Covid-19 pandemic,” said Olivia Minnock, Editor at FinTech Alliance. “The past year has shown not only how important the sector is for helping consumers and creating jobs, but also how it can underpin many other industries like retail and hospitality, supporting them in times of need. That might look like enabling online ordering and payments, supplying alternative lending options, or enabling a small business to manage its cash flow better.”
The UK’s long history as a financial centre can also be attributed to the success of its fintech ecosystem, with many financial institutions having offices in London, providing a wealth of possibilities for fintechs.
“London is a leading global fintech hub – but we mustn’t let fintech in the UK stay London-centric,” added Olivia. “This is being positively challenged by strong regional clusters led by FinTech North, FinTech West, FinTech Scotland, FinTech Wales and FinTech Northern Ireland – with organisations like FinTech Alliance and Innovate Finance helping to bring these together virtually and physically.”
Other fintech ecosystems
The South American fintech ecosystem is still in its early stages, but a few notable players are worth mentioning. Brazil, for example, is the leading fintech sector in South America and has attracted a lot of investment from foreign investors. It’s home to many startups working on innovative solutions for the region, such as Pagar.me, a payments company, and Nubank, a digital-only bank.
“The South American business and civil populations are enthusiasts and understand the benefits of Fintech,” added Michael Clouser, Co-Founder of The Startup Race. “For example, in Colombia, many use a mobile-based payment platform that is much like WeChat (WePay) in China. Also, cryptocurrency is used frequently for transactions amongst people and businesses. Some of this is because of the historical inflation cycles.”
There are also many different fintech ecosystems in Africa, each with unique characteristics. Nigeria, for example, is home to a large population of unbanked and underbanked citizens, making it an attractive market for fintechs. Kenya is known for its mobile money ecosystem, which has successfully driven financial inclusion. In addition, fintech is first when it comes to which sectors receive the most investment across the continent.
The B2B side of fintech ecosystems
When it comes to B2B collaboration in fintech ecosystems, a few key players stand out. Mastercard and Visa, as well as large banks, place a lot of emphasis on fintech collaborations. In addition, several startups have built their businesses around partnering with banks and other companies.
“PayPal and Venmo forced the hand of the banks to create Zelle. Square innovated on small business payments, which led to an entire industry built around point of sale companies tailoring their systems towards different industries across retail and hospitality, taking market share away from legacy solutions like NCR and forcing them to innovate,” stated Nelson Chu, Founder and CEO of Percent. “Crypto and blockchain were dismissed until the volume of transactions and number of users began to threaten the banks’ existing businesses. With time, all these ecosystems within fintech are what push innovation forward for the broader financial technology industry.”
There are also non-fintech companies that are getting involved in fintech ecosystems. “Uber pioneered the embedding of payments inside the ride experience, creating an entirely new form of car service. In the world of B2B payments, we are beginning to see the embedding of alternative financing within the payment experience. This is made possible by the blending of different payment and financing capabilities into a singular service experience for the end-user,” added Rob Rosenblatt, CEO of Behalf, Inc.
The bottom line
Fintech ecosystems are complex and ever-changing, but that’s what makes them so interesting. There are a lot of different players involved, each with their own unique perspective and set of skills. By understanding the various dynamics at play, one can better understand how fintech is evolving.
“We cannot have a one-size-fits-all financial services sector,” said Sarah Biller, Co-Founder of FinTech Sandbox, and Executive Director of Vantage Ventures. “This approach too often failed the unique needs of citizens across the US, especially in rural states like West Virginia. We must meet people where they are if we are going to understand and then build a truly inclusive and sustainable economy and financial services sector. Fortunately, the declining cost of technology, expanding point-of-sale capabilities, increasingly ubiquitous reach of smartphones, and other innovations are making this possible.”
The diversity of fintech ecosystems drives innovation forward in the broader financial technology industry. “As fintechs innovate, they continue to change the way those relationships work, how money moves, and who can participate. The ecosystem is always evolving and improving,” added Jed Rice, CEO of Aliaswire. “The financial services industry you knew ten years ago doesn’t exist today – and what you know today won’t exist ten years from now.”
In conclusion, it will be interesting to see how these ecosystems continue to evolve and connect with each other. It remains to be seen whether these factors will lead to more innovation in the broader financial technology sector.