Financial infrastructure: the FinTech way

Financial infrastructure plays a critical role in a country’s economic development and stability. It determines how efficiently financial services can be provided. A high-quality infrastructure lends itself, among other benefits, to lower transactional costs and more accurate risk evaluations, improving lending and access to capital.

In short, a financial infrastructure enables money to move throughout an economy, functioning as a platform for transactions, whether these are payments, financing, or the transfer of bonds and stocks.

Over recent years, we have seen the emergence of various FinTechs as infrastructure providers. In this role, FinTechs are selling services to financial institutions not only to improve the end user experience or to add additional capabilities, but also to more fundamentally change the way these financial providers offer their services, i.e. through digitalisation, and better manage risk. This breed of FinTechs are also helping financial providers to better meet their consumers everchanging needs and deploy new offerings at a faster pace.

Today’s infrastructure landscape 

If you were to map the FinTech infrastructure landscape, you would see a myriad of FinTechs across a breadth of fields offering infrastructure capabilities. For example, some common buckets that these FinTechs would fall into include:  Banking-as-a-Service/Platform (BaaS/P), connectivity, FX, trading, security & authentication (including AML and KYC), compliance, scoring, data & analytics and business tools such as financial software, ERP, payroll and accounting.

These services and back-end functionalities are becoming increasingly vital for more traditional providers but their existence is also allowing other FinTechs to be set up and scale at speed. FinTech start-ups are able to outsource complex processes like KYC and implementing banking regulations, which is usually achieved through the integration of Applied Programming Interfaces (APIs). This approach is reducing long standing barriers to entry and accelerating time to market.

Some examples of infrastructure providers that come to mind are TransferWise, Starling Bank, Marqeta, and Tink.

Tomorrow’s infrastructure landscape 

As we have commented before, the global FinTech scene could evolve in two ways, where it:

1. Becomes saturated with specialised providers; or
2. Consolidates so only a few providers offer everything, akin to the “super” providers in China

These two possibilities could be extended into the FinTech infrastructure space. One could argue that currently, we have a relatively splintered sector with many specialised providers competing within their respective niches. However, several acquisitions made by larger financial institutions, e.g. the likes of Visa and Mastercard, is either by design or necessity contributing to the consolidation of infrastructure providers under larger umbrellas.

Should these acquisitions continue, it is fully possible that we will find ourselves with many FinTechs providing end-user experiences while relying on the same back-end infrastructure. Or perhaps a single mega-provider or handful of mega-providers that handle/s everything from the back- to front-end.

The future most likely lies somewhere in the middle of these two extremes, where new start-ups are still able to launch and thrive in spite of frequent acquisitions of successful providers, forming an equilibrium between the super-provider and micro-provider scenarios.

It is also important to highlight that, although these back-end scenarios may not represent the customer-facing parts of a FinTech, they are somewhat interdependent on each other. Consumer-facing providers can also rely on several partnerships for back-end functionality with distinct infrastructure providers used to handle cross-border payments, AML, open banking, and other elements. Alternatively, the inverse is also possible, with customer-facing FinTechs becoming more commonplace, targeting ever-narrower niches, but all connect to a single back-end infrastructure provider.

Either way, we are sure that the picture for this decade will look very different from the picture seen last decade!