The Fintech sector has been radically expanding over the last years and the pandemic has acted as a booster. In 2019, the pre-pandemic year, only 80 fintech startups were created while in 2020, when the pandemic started, 8,714 were created and in 2021 there were 5.421 more.
On the funding side the path has been quite different: investment to the sector peaked in 2019 reaching 215bn, it plummeted to 127bn in 2020 but it recovered and reach a new high with 226bn in 2021.The most popular category of Fintech among consumers is money transfer and payment service as it is calculated that 75% of consumers globally have adopted some of these solutions. This was also followed by VC funding as more than 1 for every 2 dollars invested went to some form of payment or banking solutions. Digital lending, insurance, wealth management and capital markets are increasing but they are still running from behind.
The future of Fintech is clearly of great relevance for the upcoming years but the question is whether the emerging blockchain technology could be the catalyst of a further revolution within the financial services. Can Blockchain escape from the “crypto-only” perception and be the technology for other sectors, in this case, for financial services? For this purpose I’ve decided to interview Joan Torras who was my teacher in “Blockchain technologies in finance” during the past trimester who I thought could shed some light on this.
Professor Torras holds an undergraduate degree in Business Administration (Universitat Autónoma de Barcelona, Spain) as well as master’s degree in Finance (EADA Business School, Spain), Fiscal Law (Colegio de Economistas de Catalunya), PDG (IESE Business School, Spain) and Transformational Leadership (EADA Business School, Spain). He has 12 years of experience investing in real estate, biotech companies, startups, venture capital and financial markets, managing a portfolio of 300 million euros. He is also co-founder of Criptoconsult, a website with information about the world of cryptocurrencies, including exchanges, mining, participation in ICOS and Tokens. The content of Criptoconsult is designed to be accessible to a diverse public, avoiding the technical jargon that gets in the way of understanding how to invest in cryptocurrencies or Tokens. Professor Torras is the author of two books: Cryptocurrencies: Bitcoin and Blockchain and The New Digital Revolution.
Which fintech sector do you think has the most promising outlook in the coming years?
Joan: I’d say Paytech, challenger banks and financial infrastructure.
Will financing concentrate towards the big established players?
Joan: It’s difficult to foresee, but again, 60% of all funds come from players that are barely affected by the interest rates; 5% private equity, business angels 12-13%, venture capital 28-30%, incubators 10%.
Funding for fintech has decreased 90BN (30%) worldwide since the FED increased the interest rates. Considering the high dependency of fintech companies on funding do you think there is a risk within the sector?
Joan: Probably, but still funding maintains 2018-2020 levels. 2022 funding has dropped but on average still maintains the average flows of the past 5 years. The number of unicorns keep on growing, and although the US is the biggest funding area, with almost half of all deals, Asia is where the biggest rounds are being held. It will mainly affect projects developing in early stages, but I think there are still good opportunities. At the end, incubators and business angels represent 20% of financing and venture capital an additional 28%, which means that the rate of increase will have a limited impact on almost 50% of the fintech funding.
Talking about unicorns, it is true that there are many but many are such due to fundraising and not necessarily due to a strong financial performance, do you think all of them will survive?
Joan: Probably not, there are more risky projects like 21.co, and there are others like One Card, Dana and Stori that are revolutionary. I think that the ones that will survive are the most promising ones, not necessarily techwise speaking. It will depend on how many unbanked people they bring to the system. And under these premises, financial performance will be acquired naturally.
Last year one of the largest crypto exchanges in the world, FTX, filed for bankruptcy. The story of FTX is a real thriller: in 2021 it was the third largest fintech company in the U.S. valued at 32bn (just below Stripe (95bn) and Klarna (46 bn) ), it received investments by the most prestigious investment funds and its’ CEO, Sam Bankman-Fried, was considered a reference in the sector. However, one day, a combination of events led to a liquidity crunch that pushed the company into bankruptcy. What followed was the uncovering of irresponsible management of user’s funds and a complete lack of minimum levels of corporate governance and auditing (Much of FTX investments were directed towards its sister organisation Alameda Research which provided billions in loans to FTX executives). At least one million users that had their crypto in the platform had lost their funds.
Considering the increasing amount of fintech that are taking deposits from users, is there any chance of having a FTX in the fintech sector?
Joan: Fintech is not taking deposits from users, it is a sector strictly regulated, specially thanks to UE 2015/2366 PSD2, and either you have an electronic money licence or a banking licence, so they are secure companies. FTX is a different story as it is mainly focused on cryptos and NFTs, and here is the main difference: cryptos are not regulated and so there is no protection once you enter the crypto world. FTX is 90% focused on DeFi, cryptos and blockchain, so once you want to try this “kind” of fintech, then you need to send funds to any exchange to be able to operate with them. And yes, under cryptos there are risks and although we generally consider FTX a fintech, it is actually not, because the definition of a fintech is to unbundle a bank and specialise in one concrete area, making it efficient, lowering costs and using technology, but cryptos are not inside a bank. Companies related to cryptos are not “pure” fintech but more of something in between the two worlds, that offers financial services from non-regulated markets.
In fact, crypto exchanges are rare species within the fintech sector and many, like Joan, don’t consider them to be real fintech companies. However, it is still an unconventional financial service where people can invest, trade, and even borrow. One way or the other, the FTX collapse didn’t have any major impact on the fintech market and not even in crypto. Although it did impact the sector in the aftermath of the crash most exchanges including Binance and Coinbase have fully recovered and are now breaking new highs in valuation. A similar situation occurred with major crypto currencies like Bitcoin, Ethereum and other coins. It can be argued that FTX was more part of the exception than the rule in the market, although no one really knows with certainty…
What has failed with FTX?
Joan: In the crypto world every exchange acts like a stock market. They have their own inflows, outflows and quotes. When volatility strikes the sector, the exchanges suffer naturally. When Bitcoin, with a 40% dominance on the market, falls 25%, some cryptos block withdrawals because they do not have enough funds to withdraw everybody that asks for it, and when you start acting like that, you will have solvency problems. Ftx failed because it did not have enough liquidity. Failing to more than 1,1 million creditors.
The liquidity crunch of FTX unfolded right after Binance decided to sell its whole stake of FTT (FTX’s own token) valued at U$S 529 millions due to a “risk management decision”. This was followed by FTT’s price collapsing by 80% and customers seeking withdrawals for as much as U$S 6 billion which forced FTX to file for bankruptcy on November 11 of last year.
Some people think this is due to blockchain unreliability… but blockchain had nothing to do with FTX collapse…
Joan: No, nothing, we are talking about cryptos not blockchain, some cryptos use blockchain, but that does not mean that it is a matter of blockchain. It is a matter of lack of regulation, no supervisor and liquidity management. The problem is that when you find cases like FTX, some other exchanges are affected, like genesis, because there is panic in the market. You cannot blame the brand of your car if you do not have petrol to run it, It is the same, blockchain is the car, oil are the cryptos.
And you need a decent driver too…
Joan: Well… of course but you never know if the driver is decent or not when you don’t know if the driver has a licence (cryptos again are not regulated).
Do you think blockchain will be the predominant technology for financial services in the future?
Joan: Sure, there are many examples of banks developing blockchain solutions, such as HSBC or Deutsche Bank. Blockchain offers many advantages compared to traditional banking systems, offering security, no intermediaries and lowering costs in many areas of the bank. Although developing it can be costly, it is a technology that will be adopted.
Lastly, do you think the expansion of blockchain as a decentralised system can undermine regulators’ effort for avoiding money laundering or is there a way to use blockchain with KYC tools at the same time?
Joan: Not necessarily, blockchain and KYC are two different things. They are not related. Blockchain can be traceable if you wish. Depending on which type of blockchain you are implementing and to which service is applied, then you may need regulation in terms of identity protection. In fact, some of the KYC tools are based on blockchain. Regulation is needed in cryptos but you cannot regulate blockchain as you cannot regulate python for example.
More companies are accepting cryptos as a means of payment and the development of the sector has been impressive. However, it is still used by savvy users with some knowledge and interest on the subject and it’s not, as for yet, a true need for the general public that remain reluctant to its adoption. Moreover, the current use of blockchain shows that a lot of work remains ahead: people managing crypto, although increasing, is still only 4.2% of total population. On the contrary, financial services are used by most people worldwide.
Indeed, there is a huge opportunity for the widespread use of blockchain or DeFi (Decentralised Finance) as the technology for financial services, as Joan remarked, as soon as it is followed by real improvement in terms of security, traceability and cost-efficiency. Probably one of the biggest challenges resides in the environmental impact of blockchain as the amount of energy needed to implement these technologies casts doubts on the environmental sustainability of Blockchain.
There are still major improvements needed in terms of efficiency for the Blockchain in order to make it a widespread technology. However it remains as our greatest hope that one day it will help us expand financial services to the millions of people that are still, albeit the fintech revolution, inadequately served.
Participant of Master in Fintech & Business Analytics, class of 2023