July 16, 2015 12:00 am JST

Finance-oriented startups set to rattle old-fashioned banking

RYUSHIRO KODAIRA, Nikkei senior staff writer

TOKYO -- Startups providing financial services via the Internet have achieved strong growth in the U.S. and around the world in recent years. Many believe this emerging industry, recently referred to as fintech, will go on to become a major provider of financial services, taking a big bite out of large banks.

Future way

Former U.S. Treasury Secretary Lawrence Summers, former Morgan Stanley CEO John Mack and other well-known economic figures serve on the board of Lending Club, a U.S. fintech startup founded in 2007. The company utilizes information technology to analyze customer credit ratings, then match people and businesses seeking loans with those looking to invest. It charges commissions for the service.

     Lending Club's operating revenue in 2014 came to nearly 40 times the amount four years earlier. The company, which went public last December, is currently valued at $5 billion.

     Other rising U.S. fintech startups include Square, which provides smartphone-based and other online payment and settlement services, and Ripple Labs, which transfers funds internationally over the Internet.

     In a report released earlier this year, U.S. investment bank Goldman Sachs positioned alternative banking systems as the new frontier of financial services. More than $11 billion of yearly profits could shift from conventional financial institutions to newcomers over the next five years as competition intensifies, the report forecasts.

Overheated?

According to consultancy Accenture, investment in finance-oriented startups worldwide reached $12.2 billion in 2014, a sevenfold jump from five years earlier.

     Behind this dramatic increase lies tightened regulations governing the financial industry, following the global financial crisis. As this has led to poorer services from major banks, customers are increasingly dissatisfied. This has created opportunities for entrepreneurs in the areas of small loans and other financial services. Excess cash sloshing around the globe due to monetary easing programs by central banks has also fueled the dramatic expansion of fintech services.

     The heightened interest in such startups has some old hands in the venture capital business feeling nervous.

     "Today, startups can raise cash easily if they can associate their operations with fintech," an executive at a major Japanese venture capital fund said. "It reminds me of the atmosphere during the dot-com bubble," he added.

     Fintech startups could be hit by fallout from overheating. One possibility is that they may face hardships when the U.S. Federal Reserve raises interest rates. If this happens, and many believe it will, later this year, excess liquidity is likely to start draining from financial markets worldwide. In this situation, investors eager to put money into these startups could quickly disappear.

     In Asia, fintech fever was most notable in China. But the recent stock market plunge has significantly dented the boom, since it has become difficult for startups to carry out initial public offerings. Many were forced to delay plans for stock listings due to the crash. Not a small number of those are thought to be startups offering small loans and other financial services online.

Seeds of tomorrow

While many fintech startups may be crushed by events such as the end of quantitative easing and chaotic stock markets, the small number of survivors could become major providers of financial services.

     In Japan, the banking group at the Financial System Council has begun discussions about reviewing the business fields in which banks are allowed to operate. This move is aimed at making it easier for banking groups to invest in financial startups. Hopefully, these discussions will take into account the likelihood that fintech will most likely shape the future of financial services.

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