What is Fintech and how did it become a global trend?

A late bloomer

More than two billion people in the world still do not have access to a bank account. Although governments and private companies have reduced this number over the past decade, a huge gap remains. However, the World Bank suggests that digitalizing payments could be the key to financial inclusion. This 2015 working paper addresses the growing trend that is replacing traditional banks to serve the unbanked: fintech.

Fintech, short for financial technology, has been around since the 1950s, when ATMs and credit cards made it possible for people to access their finances without visiting a bank branch. Today, the industry encompasses mobile technology, online lending and even cryptocurrencies. Anyone with a smartphone can now access a range of apps that allow them to transfer, manage and share money. This trend allows even those without a bank account to save and invest, activities previously reserved only for the rich, especially in emerging economies.

However, the current growth of customer-facing fintech did not start in countries with low financial inclusion. While Kenya's M-Pesa pioneered the industry, giants like TransferWise, Stripe and SoFi emerged from traditional centers like London and Silicon Valley.

So how did fintech become a global trend? And why are international fintechs increasingly looking for offshore development companies to increase their capacity?

A brief look at the history of fintech in the US and globally will shed light on how this industry has flourished across the globe.

The evolution of fintech: from the 1950s to today

Technology was an essential part of finance long before we could use an app to send money across borders instantly. Forbes posits that financial technology has evolved over five decades, from credit cards to ATMs to computers and the Internet. Each of these developments represents a huge innovation for the industry that has brought thousands of people into the financial market. Most importantly, banks quickly adopted this technology and increased their user base during this period.

The current boom reveals a new pattern. Increasingly, fintech startups are leaving banks behind, serving customers more effectively than traditional financial institutions. Banks are starting to innovate, but in many areas they are playing catch-up. The mobile fintech revolution goes straight to the consumer, bypassing the bank as an intermediary.

These B2C fintechs have their origins in the 2008 financial crisis. The subsequent credit crisis and increased regulations stifled innovation in banks. As banks began to focus more on compliance and risk management, customer-facing talent pools moved toward technology and innovation. New startups began meeting customer needs with more fluidity and attention than any bank could.

As fintech developed in the world's financial capitals, it became clear that this technology had applications in emerging markets around the world. In Southeast Asia alone, more than 266 million people are unable to access the financial market. In Brazil, the largest economy in Latin America, 40% of the population faces exclusion from traditional banks. While the current fintech boom began in the US and Europe, the trend has far-reaching repercussions across the world.

Fintech startups are solving global problems

Investment in fintech startups grew steadily between 2013 and 2017, falling slightly this year. Globally, there are more than 25 fintech unicorns, collectively worth $75.9 billion. Most of these companies are based in the US, Europe and China.

Financial inclusion increases equality and drives economic growth, especially in emerging markets. Fintech startups recognize the potential to combine greater inclusivity with powerful business models to drive rapid growth.

Why global fintechs rely on software development outsourcing

As technology and innovation grow across the world, startups are increasingly relying on offshore development companies for talent. With their complex mobile technology, fintech startups need outsourced support even more than other companies. Hiring developers, product managers, and financial experts in financial centers is an expense that few startups can afford. Offshore and nearshore development services have grown alongside startups, providing talent and support that is not available locally.

Even banks have started to turn to outsourcing to access technology talent that can help them compete with young, disruptive fintechs. See why fintech startups are well positioned to use outsourced services to increase their capacity and improve their products.

Fintech startups are well funded.

Globally, 1,128 fintech startups raised more than $16.6 billion in 2017. About half of that amount ($7.76 billion) came from 35 rounds that surpassed $100 million. Most startups raising massive rounds come from the United States and Asia, especially China and India. Both regions are close to the main nearshoring hubs in Latin America and Southeast Asia, respectively. These startups have the capital to invest in quality software development services that can expand their capabilities.

Many of the world's largest companies and startups have outsourced at least some of their software development. Slack, Basecamp and Alibaba are among the tech giants that rely on expanded teams and offshore software developers to build innovative products. Even an extremely talented technical team can benefit from outsourced software development as a method to increase capacity without drastically increasing costs.

For example, a disruptive technology startup in Silicon Valley may spend 90% of its time building a viable, high-quality product. Its product managers and engineers focus on meeting customer needs, creating an integrated backend, and complying with regulations. Its business managers seek new markets and negotiate partnerships. But who is developing, testing and improving your mobile app or website? A software outsourcing company can provide developers that focus specifically on mobile devices, software support, or UI/UX design so that the fintech company can focus on growing the business.

Fintechs need high-tech talent.

The underlying technology behind some of today's most innovative fintech startups requires talented minds to build and maintain the software. New developments like blockchain, cryptocurrency, artificial intelligence, virtual reality and big data have swept the fintech industry. However, cutting-edge technology has its drawbacks. Mainly, it can be very challenging to find enough talented developers who understand the complexity of modern technology stacks, especially in a big city like London or New York.

Currently, 40% of technology companies struggle to hire and retain top engineering talent. The software development skills market is one of the hottest and most competitive in the world. In big cities, the best developers will logically gravitate towards the startup or company with the highest salary offer. To compete, startups may need to look abroad.

Banks are ready to fight in the fintech market.

Until recently, banks looking for innovation chose to partner with fintech startups to grow. These acquisitions and partnerships have brought young technology talent into banks, enabling them to compete in the modern financial market. CB Insights finds this trend is changing. Banks are starting to forego partnerships to develop their fintech internally to compete with their startup counterparts.

However, banks face the same talent crisis as startups. Perhaps banks perceive this pain even more. Many highly skilled developers and innovators feel stifled and disinterested in the more traditional work environment of a bank. Avoiding salary considerations, talented young people can choose to work for startups for the flexibility and benefits. A bank may struggle to fill a position for a digital product manager or software developer who can drive its new fintech programs.

Like fintech startups, banks have also started looking abroad to fill these talent gaps. After all, there are talented developers all over the world, so there's no need to limit your search to the world's financial capitals. Banks can easily access highly qualified programmers, outsourcing their technological development abroad. As institutions like Santander, Morgan Stanley and JP Morgan look to develop fintech in-house, they will likely look abroad. A strong offshore development company can provide anything from quality assurance to application development to big data management, so banks would be wise to take advantage of qualified talent if they want to compete.

Global talent can help fintechs compete internationally.

While many fintech startups have flourished in major financial markets, the need for financial inclusion lies elsewhere. Emerging markets in Asia, Latin America and Africa require high-tech solutions to integrate unbanked populations into the economy. There is a disconnect between the startups currently developing these innovative technologies and the markets that most need fintech. However, offshore software development can be a solution.

As? Many outsourcing companies have offices in emerging countries, which means their developers have first-hand experience of the issues these nations face. In addition to their talent, these developers can offer feedback and advice to startups working in the local economy. They may even have their own innovations that can help a startup better serve its market. When it comes to fintech, third-party developers can be much more than a help. They can become an essential extension of your team.

The future of global Fintech

Fintech is one of the fastest accelerating markets in the world. While venture capital investment in fintech declines in the US and Europe, fintechs in Asia and Latin America are expanding. However, the US still leads the global fintech industry, creating some of the sector's largest and most influential startups. Companies like Stripe, PayPal and Square have inspired copycats around the world through their innovative, customer-centric business models. Given its outsized role in the global financial industry, the US will likely continue to be a model for the fintech market for the foreseeable future.

As technology continues to improve, fintechs around the world will evolve to provide more customer-focused solutions to financial problems. Banks can try to compete or partner with fintechs that can drive internal innovation and keep banks relevant. However, the need for talented software developers will not diminish. In fact, as fintechs become more technical, we predict that these startups will increasingly look to outsource new talent that can provide excellent solutions to the financial market's most pressing problems.