Insurance technology (insurtech) will be the next segment to watch on the global financial technology (fintech) landscape after attracting the largest share of venture capital (VC) funding in the US last year.
According to the Citi GPS: Global Perspectives & Solutions report published last month, insurtech made up 34% of the country’s total VC investments as at September last year. This was a significant leap from 2015, when the segment was not large enough to be categorised. The lending segment, which had the highest share of VC funding (58%) in 2015, had a 20% share of VC investments last year.
The use of technologies, such as big data, Internet of Things Analytics (IoTA) and wearable devices, allows insurance companies to be more creative and offer highly customised products to their consumers, says the Citi GPS report. It cites Cocoon’s home security system, which is able to pick up low level sound waves and notify the homeowner if anything unusual happens in the home, as an example of such technology.
In April last year, Zurich Insurance announced a partnership with Cocoon to encourage its consumers to take the extra step in home protection. UK consumers can buy the home security system at a discount and receive a 10% discount on their home insurance premiums when purchased via an approved broker.
Another insurtech company, Roost, offers WiFi-enabled smart batteries for smoke and water detectors so that users will be immediately aware of a fire or water leak. This would allow policyholders to have a lower overall cost of claims. According to Roost’s website, insurance companies that deploy its solutions can expect to cut their annual claims cost by 5% to 15%.
Other innovations include the use of electronic gadgets by auto insurers to better understand consumers’ driving behaviour and use risk-based pricing as part of their offerings. Wearable devices, meanwhile, allow insurers to improve the underwriting of health insurance.
According to the Citi GPS report, the two largest VC investments made in fintech last year were in health insurtech companies. Oscar Health Insurance, which allows consumers to select health plans and make doctor appointments using a mobile app, raised US$400 million last year. Clover Health, which uses data analysis and preventive care to improve health insurance for seniors and give customers who use private versions of Medicare a less expensive option, managed to raise US$160 million.
The report says innovations in the insurtech segment are not only for products but also distribution. “Insurance product distribution often involves manually filling in long forms. This process can be simplified in the mobile and digital world where health records, exercise habits and so on can be accessed through the customer’s public health records or mobile devices. Distribution is not just about selling an insurance product but also simplifying the end-to-end process of making claims against the policy.”
Despite the large amount of attention insurtech has received, the segment has been slow to take off compared with banking technologies. The Citi GPS report says fintech players have found it hard to enter the insurtech segment as insurance products are highly customised (unlike payments or banking). Mobile banking apps, for example, have been around for several years, but insurance products are still mainly offered through traditional distribution channels where agents have considerable commercial power.
Lending still relevant
In 2015, the lending segment was the largest destination of VC funding in fintech. Last year, however, well-publicised challenges in the US — liquidity limitations, capital requirements, increasing regulatory scrutiny and other macro headwinds — saw the segment capture only 28% of the VC investments in fintech.
Despite the headwinds, the report says marketplace or alternative lenders are here to stay. There are opportunities in the sector that can be engaged by fintech investors, especially in China and emerging markets.
One of the contributors to the Citi GPS report, Douglas Jiang, says he sees huge growth potential in China’s alternative lending space due to the lower consumer credit and small and medium enterprise (SME) lending penetration in the country. Jiang is director at IDG Capital, a China-focused private equity and venture capital fund.
“Alternative lenders in China have their own characteristics compared with their western counterparts. Often, they do not have institutional investors as a source of funding as the lenders in the West do,” he says.
“They often operate an offline-to-online (O2O) business model where the borrowers are sourced offline and lenders sourced online. More importantly, the lenders serve the underserved SME or consumer lending market.”
However, Christiaan Kaptein, principal at Singapore-based Dymon Asia Ventures, says the under-penetration in the consumer and SME credit space does not equal opportunity. “A lot of the peer-to-peer (P2P) lending platforms have not gone through the credit cycle. Lending money is easy, getting your money back is more difficult. A lot of the platforms could fail when the credit cycle turns. Those who can manage the credit risk will benefit disproportionately.”
In China, the growing number of failed P2P platforms and fraud cases has driven tighter regulations in the space which, in turn, has changed the P2P model. Today, lenders are no longer allowed to guarantee returns. This has led to a consolidation in the sector.
Jiang says he sees three winning business models for alternative lenders. The first model involves partnerships with incumbent banks. “This model is increasingly popular in the US, where you can see the likes of OnDeck collaborating with JPMorgan for SME loans. Similarly, Kabbage is partnering ING and Santander in Spain and the UK respectively.”
The second is a wealth management business model. For example, CreditEase — one of the first P2P lending platforms in China — has rebranded itself more as a wealth management player. This allows the platform’s investors to choose from a wide range of products, such as private equity, real estate and fixed-income investments, as well as P2P loans.
“Service providers to institutional leaders — chartered and non-chartered alike — can also be winners. Companies, such as WeCash, partner consumer finance companies, P2P lenders, e-commerce platforms and so on to make loan decisions within minutes. We should increasingly see specialists in the wealth management side to attract investments while others will focus on originating quality loans in vertical markets,” says Jiang.
In the US and Europe, marketplace lenders are expected to have the same level of compliance and risk management as banks. The marketplace’s lending growth may also be capped by tight regulations and the existence of a deep financial system, including the range of near-prime and subprime lenders. According to the Citi GPS report, fintech companies in these regions are more likely to be successful in lending when it is linked to payments.
Adoption of advanced technologies in banking
In a March 2016 Citi GPS report, it was stated that bank branches would focus more on advisory and consultation services than transactions in the future. This is due to the fact that the returns from having a physical network are diminishing and the cost of bank branches and associated staff can be reduced with automation.
Today, rapid technological advancements and the improvement in artificial intelligence are leading a revolution in financial services. Advanced analytics and artificial intelligence (AA-AI) is applied to every aspect of banking, from real-time customer engagement and more efficient operational processing to better risk and fraud management.
AA-AI is also widely applied to corporate banking and markets for better processes and market insights. This includes predictive analytics, machine learning, robotic process automation and graph analytics.
There is a large adoption of virtual digital agents (VDA) within banking. These are automated software applications that enable human interactions through natural language processing. When integrated with AI-based knowledge bases such as expert systems, the VDAs can perform multiple autonomous roles such as customer service agents, transaction enablers, information providers and back-office workflow automations.
Some examples include “Hannah” by UK-based M&S Bank, “Nina” by Swedbank, and DigiBank by Singapore-based DBS Bank. According to an estimate by research and consulting firm Tractica, which was cited in the report, the VDA market will reach US$15.8 billion worldwide by 2021 while its unique active consumer users and enterprise VDA users are expected to grow to 1.8 billion and 843 million respectively.
Asia the No 1 fintech investment destination
Asia has overtaken North America as the leading financial technology (fintech) investment destination, driven by megadeals that have taken place in China, according to the Citi GPS: Global Perspectives & Solutions report released last month.
According to the report, as at end-September last year, China accounted for more than 50% of the US$18 billion of global fintech investments, compared with just 19% of the US$19 billion invested in the previous year. The country has benefited from deals such as Ant Financial’s (formerly known as Alipay) US$4.5 billion private fundraising exercise in the second quarter of last year and several large venture capital (VC) investments in Chinese fintech companies in the first quarter.
“China dominates in Asia. It accounts for nearly all of the large fintech investments in Asia, especially in the US$50 million and above range. Of the 27 fintech unicorns (billion-dollar private companies) in the world, eight were born in China,” says the report.
“The US still has the largest number, with more than half the fintech unicorns. But the biggest fintech private companies by total value, as well as cumulative funding raised, are now found in China.”
Ant Financial and Lu.com — two of China’s largest fintech unicorns — were valued at US$60 billion and US$18.5 billion respectively in their most recent private funding rounds. Meanwhile, Silicon Valley-based Stripe and Sofi — the largest fintech unicorns in the US — were only valued at US$5 billion and US$4 billion respectively.
The report says Chinese fintech companies are able to grow rapidly due to the way they innovate. Unlike those in the US or Europe, which focus on a specific part of finance — such as lending, payments or wealth management — the Chinese companies built one-stop financial shops around their original core offerings, such as social media and e-commerce.
“China’s huge e-commerce ecosystem is larger than that of any other country in terms of gross transaction volume. It has created a commerce and finance ecosystem outside the banking system, which has enabled and funded new payments and financial services companies, often linked to the new internet giants,” says the report.
In terms of global fintech VC investments, China’s share more than doubled last year to 46% of total investments as at September last year, exceeding that of the US (41%) and Europe (10%). The remaining 3% invested in Asia (excluding China), which suffered a heavy decline last year due to slower funding activity in India — a big driver for the region in 2015.
In total, VC-only funding for fintech slowed last year due to a more cautious stance taken by VC investors in the light of volatile stock markets in the first half of the year. With the inclusion of other types of funding, such as private equity, mutual funds, hedge funds and corporate funds, Citi estimates a small increase in total global investments for 2016.
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