Payment related inter-business transactions can be cumbersome for small and large businesses due to extensive paper works, documentation requirements along with cost of transferring funds. But that is where FinTech stands, providing key solutions to these hassles. FinTech is currently on the rise, and according to PwC, funding of FinTech startups has increased at a CAGR of 41% over the last four years, with over USD 40 billion in cumulative investments.
The industry achieved USD 27.4 billion worth of investment last year alone, and as a result, FinTech companies are deemed a major threat to traditional financial markets. In fact, PWC states that 88% of major global finance companies expressed concerns about losing revenue to FinTech innovators. And this level of uncertainty is no different in B2B market. In May 2018 alone, B2B FinTech received around USD 275 million worth of funding from around the world.
So, the question is how can FinTech transform B2B payment and transaction capabilities?
Broadly, there are a lot of active areas of FinTech innovation, such as, blockchain, smart contract, insurtech, regtech, digital cash, etc. With these, the objectives of FinTech companies is to simplify B2B payments, invoice financing, business loans, online e-commerce and e-procurements. B2B FinTech has remained a top priority among investors with USD 8.7 billion global B2B FinTech investment in Q4 2017, according to KPMG report.
Blockchain is the backbone of FinTech innovation, achieving investments worth USD 512 million in 2017. Blockchain helps financial institutions to save time and expense without any third party involvement. In October 2017, MasterCard had established its blockchain as an alternative of swiping cards. In February 2018, blockchain consortium R3, along with TradeIX, launched ‘Marco Polo’, a solution to help pre and post-shipment financial trades. In Singapore, Monetary Authority of Singapore and three Asian banks, worked together to develop blockchain proof-of-concept (PoC) in order to streamline know-your-customer (KYC) processes. In addition, these integrations may not slow down any time soon, as even governments have been supportive to blockchain efforts.
Also, FinTech companies are consolidating blockchain with smart contract and other similar innovations to smoothen cross-border payments and fund transfers. As a matter of fact, SWIFT, a cross-border messaging network, launched Global Payments Innovation, an enhanced solution to track and ensure same-day settlement for network of banks.
But the main focus area for B2B FinTech investors and corporates is Regulatory Technology (RegTech) solutions. Cyber security represents one of the most intense issues facing financial services industry. 2018 is the year of PSD2, GDPR, and MiFID II, which shows that regulatory compliance is a hot topic and cannot be ignored by any means. Deploying RegTech helps firms to meet financial compliance rules, with main priorities of digitalizing Anti-Money Laundering (AML) and Know Your Customer (KYC).
Similarly, FinTech can simplify B2B financial transactions through invoice financing, B2B payments, and SME lending. E-invoicing provides access to some specific transactions whenever needed, with capability of future analysis. According to Billentis, Swiss consultancy, e-invoicing market will be worth 16.1 billion Euro by 2024. Furthermore, both USA and EU have made e-invoicing mandatory from 2018, which implies that FinTech could be a leader in facilitating global B2B sector. In addition, B2B FinTech offers online B2B procurement facilities by using AI to match buyer and seller. FinTech shortens SME lending, as it is possible for institution to receive digital applications and to analyze its creditworthiness. Likewise, traditional insurance firms face immense competition from the emergence of InsurTech, because of its capability to deliver data models and analytics, to identify and qualify risks, to settle claims and integrate data.
Moreover, large financial institutions are increasingly investing in or acquiring B2B payment start-ups, to also compete in FinTech sector and to build their own service offering. According to KPMG, in Q4 2017, mergers and acquisitions between such US financial institutions and other established FinTech startups accounted for USD 1 billion.
There are far more areas and implications of FinTech that can have significant impact on daily B2B financial transactions. Remember when smart phones came out and people said, “Won’t make much of a difference”, and now it has displaced a lot of technologies. Hence, with continuous innovation of FinTech offerings and increased B2B FinTech start-ups, B2B FinTech can be considered as a catalyst of major upcoming financial disruption.
Grishma Prasad Adhikari, Research Analyst at A2Z Insights