The fintech industry is entering a period of rapid change, according to a new report from McKinsey & Company.
"Companies wondering how they will fit into this new era must first understand the forces that are pushing the changes," write Miklos Dietz, Vinayak HV and Gillian Lee in a McKinsey report published in November.
According to the McKinsey report, the fintech industry has matured rapidly in recent years and there's no sign this momentum will stop anytime soon.
"While the industry will undoubtedly continue to expand as its customer base grows and investor appetite remains unsated, changes are imminent," according to the report. "Indeed, the very concept of what comprises fintech will shift."
As the industry enters a new phase of development, McKinsey predicts that the fintech industry will broaden quickly to embrace even newer technologies and offerings. The report also predicts the boundaries now delineating financial services will likely start to blur.
"Some aspects of fintech are likely to reach into a broad swath of the global economy, much like how digital technologies have become a necessity, rather than an option, for every industry," the report states.
The report breaks down the seven critical aspects of this new environment that financial services companies must understand to thrive in this shifting fintech market.
1. Expanding product scope
According to the report, the fintech industry will play a role well beyond financial products and services. The scope of products and services offered by fintech companies is already expanding rapidly, according to McKinsey.
Where once companies focused on payment applications, lending and money transfers, the industry's reach has extended into more than 30 areas, according to McKinsey. Some of these new areas that McKinsey predicts will be new norms in banking include: robo-advisory, blockchain, artificial intelligence and machine learning, Internet of Things and connected devices, and digital cash management.
As fintech companies expand their scope, they are also moving beyond a customer's financial needs to offer a wider range of services, according to the report.
As an example, McKinsey points to Social Finance (SoFi). SoFi began by offering financial products to students and young professionals, according to McKinsey, and has since expanded to provide career coaching and networking services.
2. Increasing provider diversity
The report finds that the fintech industry is also becoming more diversified, with "a wide variety of business models seen across geographies, segments and technologies." An example of this would be a large technology company expanding into financial services.
The report points to China's Alibaba, as a prime example of this diversifying business model. Alibaba started as a major e-commerce site and has moved into financial products, with its Alipay subsidiary boasting more than 800 million registered users in 2016.
According to the report, PayPal is also adjusting its business models to encompass a wider range of services.
"PayPal, launched in the 1990s to provide a payment system for online purchases, then a new phenomena, has since expanded to provide instant lines of credit and mobile applications that locate nearby stores and restaurants that accept payment by PayPal," the report states.
3. Improving collaboration
Collaborative partnerships will become increasingly important as fintech companies seek scale and traditional financial institutions seek digital expertise, according to McKinsey.
The report finds that examples of such partnerships are already emerging.
