- by Humayon Dar
- June 20, 2021
By Akash Anand
The widespread applicability of Financial Technology or better known as FinTech has revolutionised the financial services industry and challenged established mainstream players. FinTech has not only disrupted the way people manage and use money, but in many markets these fintech companies are standing up to traditional institutions to become a force to be reckoned with. According to a recent study by Accenture, over one-third of mainstream financial services’ revenue is at risk due to disruption in the industry from FinTech firms.
FinTech firms fall under two distinctive categories: a) Information technology and software firms that support and facilitate financial services institutions as bank technology providers, and b) Tech-startups and small innovative firms substituting the regular financial intermediary, the ease of accessibility to which can cause ‘disruptions’ for mainstream banks and banking systems. CB Insights estimated that global investments in FinTech has grown from US$4 billion in 2013 to approximately US$12 billion at the end of 2014, pioneered by online hubs like Kickstarter and IndieGoGo. Some estimations point to around US$34 billion globally by 2015.
McKinsey reported that the number of FinTech start-ups globally has grown more than twofold to exceed 2,000 in just over a year. As nearly all aspects of financial services can be substituted by FinTech companies – extending from deposits and lending to capital raising and investment management, from market provisioning payments to insurance services; FinTech as disruptors are poised to change the world of banking as we know it. Alternative online financial platforms such as peer-to-peer lending (P2P) and crowdfunding sites have gained considerable momentum in the past few years in developed markets to become the norm these markets. Its growing popularity is fast moving to emerging markets where the need for low cost financing is on the rise.
Growth in FinTech, which is largely driven by digital transformation, is changing the financial services landscape and is now a key business enabler. As such, FinTech innovations are fundamentally altering consumers’ digital banking experience and banks delivery of financial products and services. Quoting Chris Skinner, CEO of the Financial Services Club, “The reason FinTech is “so hot” is down to the fact that it is moving financial operations from the boardroom to the internet.
Banks have time to adapt but that time is running low. Customers don’t want to go to 100 different companies to get their lending, investments and payments controlled. They want to come to a name and an institution they know and recognise. Banks have to act to utilise that brand recognition.” Clearly, the time is now or never for formal channels of lending and financial intermediaries to realign their business models and strategy in order for them to stay competitive and profitable.
COMPETITOR OR FACILITATOR?
Without a doubt FinTech is poised to continue to disrupt conventional ways of the finance industry. The Islamic finance industry is no exception. FinTech, if embraced, could potential transform how the Islamic finance industry is viewed in a positive way. It was reported in the Gulf Times magazine that Fintech has brought about new business ventures that combine both IT-based alternative financing and Shar’ia-compliant financing principles.
FinTech has also become a game change for financial inclusion. Asian Development Bank estimates that the number of financially excluded adults across the Asia Pacific region has declined to about 1 billion as the direct result of innovations in financial technology. “Muslims comprise approximately a quarter of the global population, and yet Islamic-based financial assets are less than one percent of total global financial assets,” a finance expert observes. Digital investing could be an additional means for Muslim investors around the world to invest in a Shari’a-compliant way.
It is worth noting that crowdfunding firms in the Muslim countries the likes of Dubai-based Beehive, Jakarta-based Blossom Finance and Singapore-based Club Ethis and Kapital Boost are offering Shari’a-compliant services aimed primarily at providing low cost alternative financing to small and medium enterprises (SMEs). Their business model is simple – connecting creditworthy businesses looking for funding with smart investors to build mutually beneficial partnerships. Through technology via crowdfunding, these firms are able to eliminate costs and the complexity of traditional finance.
In the United Arab Emirates for example, where the SME market is underserved by Islamic banks, the potential for Shari’a-compliant tech start-ups to act as a lending platform for SMEs remains high. There has also been a growing trend for banks to collaborate with crowdfunding and FinTech firms so as to enhance their service and offer alternative channels of funding to their customers. This indeed is expected to increase further while expanding to other industries such as takaful and Islamic wealth management. The aforementioned examples also show that FinTech companies can act as a competitor as well as facilitator to Islamic financial intermediaries.
One good example of a well-known Islamic venture is Beehive, as mentioned earlier, being the first P2P lending with an independent Shari’a certified platform by the Shariyah Review Bureau (SRB). This illustrates the continuing innovation in Islamic finance products across new sectors and highlights the increasing role of Islamic finance in bringing together different parts of the world with surplus funds in search of investment opportunities. Islamic crowdfunding platforms the likes of Kapital Boost and Club Ethis are also spearheading growth in this sector.
Digital investing or online investing has taken new prominence in many developed and emerging markets as the third wave of disruption of social and mobile is unleashed. However, it is still considered as a niche market in the few Muslim countries where it has been established; whilst in many other Muslim countries it is almost non-existent. In Malaysia, for example, after regulation on equity crowdfunding was introduced, positive development can be seen with the launching of a number of platforms operating in a Shari’a-compliant way. Nonetheless, it is still a long way before Islamic crowdfunding becomes mainstream.
As the market is growing, the trends are changing and for the businesses to remain competitive they would need to adjust their products and services to reach various locations, with new technology and a new approach to younger consumers while complying with the regulatory regime and offering comprehensive reporting. This is a trend that was anticipated by the Profile Software team that has early enough developed platforms for alternative finance and Islamic finance.
Profile Software is successfully addressing the ever-evolving market requirements not only through its investment in developing innovative platforms but also through its people, a team of subject matter experts who understands the Islamic and conventional alternative finance marketplace. The Alternative Finance platform developed competitively incorporates both banking and investment management functionality while offering unique flexibility to meet the needs of startup firms as well as established ones that want to diversify in this industry meeting the competition challenges. In addition, Profile Software invests in new technologies such as mobile and cloud to offer a suite of uniquely positioned banking and investment management solutions.