According to the OECD ‘Business and Finance Outlook 2021: AI in Business and Finance’, “[t]he deployment of AI applications across the full spectrum of finance and business sectors has progressed rapidly in recent years”. Whereas fintech companies struggled to compete and win clients a little more than a decade ago, today their competition has officially (re)started. As some argue, the Global Financial Crisis (GFC) catapulted the growth of the fintech (also FinTech) market with equity crowdfunding having been a helping hand for many start-ups, who were in their early stages back then. Thereby, AI applications have offered benefits for a variety of actors such as businesses and clients, bankers and investors, and insurance firms and banks. With the UK-Singapore Digital Economy Agreement (UKSDEA) having been passed on 9th December 2021 as the 4th of Singapore’s Digital Economy Agreements (DEAs), fintech has also reached the spheres of policy-making and international cooperation. This article serves to provide an initial overview of the finance-fintech-AI dimension, which our team will keep you updated on this month!
The Global Fintech Market: Skyrocketing Amid The COVID-19-Pandemic
Trends and Background
According to yahoo!finance, the global fintech market was valued at US$7301,78 billion in 2020. In 2021, as data published by Statista highlights, the largest segment of the fintech market were digital payments, which were valued at US$6,752,388 million. Whereas the highest transaction values were located in digital payment, neobanking (‘internet only’) is becoming more popular and mainstream as well. However, the transaction value growth across different sectors of the fintech market (i.e. alternative financing and lending, digital investments and payments, neobanking) is projected to decline until 2025, which does not mean that users will make smaller transactions. Indeed, transactions via neobanking are expected to rise in value with the latter counting even more for the domain of alternative financing. Arguably, the latter forecast might be influenced by the COVID-19 pandemic, wherein alternative financing held alive many SMEs…As Finance Monthly writes, “[t]he Covid-19 pandemic brought alternative finance into the mainstream”.
Especially, when early-stage businesses needed financial support, opting for alternative lending increased their chances for approval, their more immediate liquidity and influence on choosing the right conditions of a loan. On the downside, alternative finance comes along with higher annual percentage rates (APRs) and the risk of trusting less established financial services providers. Whereas fintech has become somewhat mainstream, the domain of alternative lending is yet growing. Whether or not this is an obstacle, is something every business needs to decide for itself. In fact, every trend is accompanied by real risks and real chances with personal decisions fastly turning into social decisions. As Aileen Ott writes on greenbox Capital, alternative lending can particularly benefit businesses, which typically do not qualify for receiving a traditional loan. For instance, businesses in high-risk industries, businesses with a low/high credit, women-/minority-/veteran-owned businesses and businesses seeking for smaller loans. While the branch of alternative lending could thus lead to further supporting less privileged groups, high interest rates and risks in terms of credibility should not be ignored.
Pairing and Investing in Fintech and AI
Similar to traditional banking and fintech, the application of AI in fintech and other industries comes with its own benefits and risks. In an age, where data privacy, citizen control and the fight for equality and rights have arisen as somewhat similar and yet contradictory themes – or as two sides of the same coin- applying AI tools to finance could both be a way to restore security, prevent theft and corruption, and to enable the latter making citizen control possible as data on individual choices and behaviour is collected. As emphasized in the above-mentioned OECD Business Outlook 2021, AI technologies have: “[the] potential to improve productivity and innovation…[, the ability to] improve customer experiences, rapidly identify investment opportunities and possibly grant more credit at better conditions”. However, their “risks include entrenching bias; lack of explainability of financial decisions affecting an individual’s well-being; introducing new forms of cyber-attacks; and automating jobs ahead of society adjusting to the changes”. In a nutshell, AI might need to be managed through policies, which effectively support its deployment.
As the OECD Business Outlook 2021 reveals, the United States, the European Union (EU) and China, followed by Australia, Indonesia and India, are home to the most experts who actively contribute to finance- and insurance-related AI research. Especially because India hosts very few of such experts in comparison to the US, the EU and China, it might be somewhat surprising that India is the country with the highest relative AI skills diffusion in the financial sector followed by the US, Canada, Germany, the UK, South Africa and The Netherlands. With both AI and fintech skills being much needed for digital security jobs and VC investments in AI skyrocketing, especially in Japan and India, it makes much sense – even from an investment viewpoint, to invest into AI solutions as a fintech start-up. However, there are some limitations.
With investments into the financial and insurance services sector (including into AI businesses) having declined from 2019-2020, as the OECD Business Outlook 2021 shows, it might be relevant to find ways to regain the interest of investors, among which Israel stood out for its passion for investing into finance. Considering that Israel’s First Digital Bank (FDB) raised US$120 in a Series A funding round only in December 2021 – with the help of the Japanese company SBI Holdings, the Chinese internet-based platform company Tencent and the Swiss company Julius Bär, it might indeed be the time now to think about new markets and new partnerships. Since North America already constitutes the largest fintech market in the world with the US making up for 73% of the global fintech investment market, it could certainly be beneficial to expand fintech solutions to other regions while learning from the US’ success.
In 2020, Asia Pacific (APAC) had the largest growing fintech market worldwide. In addition, the APAC region is estimated to display a CAGR of 22,1% until 2030 – the highest CAGR projected until now, when the global average might see a CAGR of 20,3%. Especially, because the APAC region is also investing more in AI with Singapore (65,7), Japan (60,0) and Australia (57,8) having scored highly in terms of AI readiness, it might be worth exploring how effective business partnerships could be established with these countries. In addition, it might be worth observing how policy-frameworks could aid cooperation to accelerate the success of digital economies. As mentioned earlier, Singapore has done the latter by signing DEAs with other countries in the region, but also with Chile and the UK. This came just at the same time as Chile was discussing its new fintech law. Policy-frameworks indeed matter, when it comes to creating a mutual and safe benefit for start-ups, SMEs, investors, citizens and regional economies. Find out more in our next article!
If this article got you excited, let us assume that you probably are seeking to start up a business or invest in fintech? Even if not, you’re welcome – but if you have such intentions, reach out to us and obtain competent legal advice! We employ legal experts with knowledge across various African jurisdictions and have experience with giving advice on topics such as labour and immigration, tax and customs, contracts and negotiations, corporate governance and compliance as well as data protection. Next to our African offices, we also have one office in Germany! We have an international mind…You too? Then contact us today to collaborate.