Over two billion people in the world still do not have access to a bank account. While governments and private companies have pushed that number down over the past decade, a massive gap remains. However, the World Bank suggests that digitizing payments could be the key to financial inclusion. This 2015 working paper touches on the growing trend that is ousting 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 spans mobile technology, online loans, and even cryptocurrency. Anyone with a smartphone can now access a gamut of apps that allow them to transfer, manage, and share money. This trend enables even the unbanked to save and invest, activities previously reserved only for the wealthy, especially in emerging economies.
However, the current growth of customer-facing fintech did not begin in countries with low financial inclusion. While Kenya’s M-Pesa was a first-mover in the industry, giants like TransferWise, Stripe, and SoFi came out of traditional hubs like London and Silicon Valley.
So how did fintech become a global trend? And why are international fintechs increasingly looking to offshore development companies to boost their capacity?
A brief look at the history of fintech in the US and the world will clarify how this industry has blossomed worldwide.
The evolution of fintech: 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 evolved over five decades, from credit cards to ATMs, to computers, and the Internet. Each of these developments represents a massive innovation for the industry that brought thousands into the financial market. Most importantly, banks quickly adopted this technology and grew their user base during this time.
The current boom reveals a new pattern. Increasingly, fintech startups leave banks behind, serving customers more effectively than traditional financial institutions. Banks are starting to innovate, but in many areas they are running to catch up. The mobile fintech revolution goes straight to the consumer, jumping over the bank as the intermediary.
These B2C fintechs find their origin in the 2008 financial crisis. The subsequent credit crunch and increased regulations stifled innovation in banks. As banks began to focus more on their compliance and risk management, client-facing talent pools shifted to tech and innovation. New startups started to serve customer needs more fluidly and attentively than any bank could.
As fintechs developed in the world’s financial capitals, it became clear that this technology had applications in emerging markets worldwide. In Southeast Asia alone, over 266 million people cannot access the financial market. In Brazil, Latin America’s largest economy, 40% of the population faces exclusion from traditional banks. While the current fintech boom started in the US and Europe, the trend has far-reaching repercussions worldwide.
Fintech startups are solving global problems
Investment in fintech startups grew steadily from 2013 to 2017, dropping off slightly this year. Globally, there are more than 25 fintech unicorns, which are collectively worth US$75.9B. Most of these companies have headquarters in the US, Europe, and China.
Financial inclusion increases equality and drives economic growth, especially in emerging markets. Fintech startups recognize the potential to pair increased inclusion with powerful business models to spur rapid growth.
Why global fintechs rely on software development outsourcing
As tech and innovation grow worldwide, startups have come to depend increasingly 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 finance experts in financial centers is an expense few startups can afford. Offshore and nearshore development services have grown in tandem with startups, providing talent and support that is not available locally.
Even banks have started to look to outsourcing to access tech talent that can help them compete with young, disruptive fintechs. Here’s why fintech startups are well-placed to use outsourced services to increase their capacity and improve their product.
Fintech startups are well-funded.
Globally, 1128 fintech startups raised over US$16.6B in 2017. About half of that sum (US$7.76B) came from 35 rounds that topped US$100M. The majority of startups raising massive rounds come from the United States and Asia, particularly China and India. Both of these regions are close to top nearshoring centers in Latin America and Southeast Asia, respectively. These startups have the capital to invest in quality software development services that can expand their capacities.
Many of the world’s largest companies and startups have outsourced at least a portion of their software development. Slack, Basecamp, and Alibaba are among tech giants who rely on extended teams and offshore software developers to build innovative products. Even an extremely talented, technical team can benefit from outsourced software development as a method for increasing capacity without drastically raising costs.
For example, a disruptive tech startup in Silicon Valley might spend 90% of their time building a viable, high-quality product. Their product managers and engineers focus on answering customer needs, creating a seamless back-end, and complying with regulations. Their business managers look to new markets and negotiate partnerships. But who is developing, testing, and finessing their mobile app or website? A software outsourcing company can provide developers that focus specifically on mobile, software support, or UI/UX design so the fintech company can concentrate 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 such as blockchain, cryptocurrency, artificial intelligence, virtual reality, and big data have swept across 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 tech stacks, especially in a big city like London or New York.
Currently, 40% of tech companies struggle to hire and retain top engineering talent. The market for software development skills is one of the hottest and most competitive worldwide. In big cities, the best developers will logically gravitate toward the startup or company with the highest salary offering. To compete, startups may need to look abroad.
For example, a founder might realize his/her fintech should be processing and analyzing data to drive decision-making. No one on the team has experience in big data, so they look to an outsourcing company to provide them with an experienced data scientist. While many companies use outsourcing to lower costs, a top offshore development company can also augment a team’s capacity. BairesDev only hires the top 1% of talent, so startups and fintechs can receive high-quality development work, without the challenge of recruiting and retaining a developer.
Banks are ready to battle in the fintech market.
Until recently, banks who sought innovation chose to partner with fintech startups to grow. These acquisitions and partnerships brought young tech talent into banks to allow them to compete in the modern financial market. CB Insights finds that this trend is shifting. Banks are beginning to forgo partnerships to develop their fintech in-house that competes with their startup counterparts.
However, banks face the same talent crunch as startups do. Perhaps banks notice this pain even more. Many highly-skilled developers and innovators feel stifled and uninterested in a bank’s more traditional work environment. Eschewing salary considerations, talented young people may choose to work for startups for the flexibility and perks. A bank might struggle to fill a position for a digital product manager or software developer who can drive their new fintech programs.
Much like fintech startups, banks have also started to look abroad to fill these talent gaps. After all, talented developers exist all over the world, so there is no need to limit a search to the world’s financial capitals. Banks can easily access highly-skilled developers by outsourcing their tech development abroad. As institutions like Santander, Morgan Stanley, and JP Morgan look to develop in-house fintech, they will likely look offshore. A strong offshore development company can provide anything from quality assurance to app development, to big data management, so banks would be wise to take advantage of skilled talent if they want to compete.
Global talent can help fintechs compete internationally.
While many fintech startups blossomed in top 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 need fintech most desperately. However, offshore software development could be a solution.
How? Many outsourcing companies have their offices in emerging countries, meaning their developers have first-hand experience in the problems those nations face. Beyond their talent, these developers can offer feedback and advice for startups working in that local economy. They might even have innovations of their own that can help a startup better serve their market. When it comes to fintech, outsourced developers can be much more than a helping hand. They might become an essential extension of your team.
The Future of Global Fintech
Fintech is one of the most rapidly accelerating markets in the world. While VC investment in fintech drops off in the US and Europe, fintechs in Asia and Latin America are booming. However, the US is still leading the global fintech industry, creating some of the largest and most influential startups in the sector. Companies like Stripe, PayPal, and Square have inspired copycats around the world through their innovative and customer-centric business models. Given its outsize role in the global financial industry, the US will likely continue to be a role model for the fintech market for the foreseeable future.
As technology continues to improve, fintech worldwide will evolve to provide more customer-focused solutions to financial problems. Banks may try to compete, or partner with fintechs that can boost 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 outsourcing for new talent who can provide excellent solutions to the financial market’s most pressing problems.