Mar 29, 2022

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4 Examples of Financial Innovations

When discussing the future of financial technology (fintech), the conversation has moved over the years from EFT to PayPal, and most recently, to Bitcoin. Many financial innovations have transformed our lives, and some have failed drastically. There are lessons to be learned from both.

1) PayPal

PayPal is one of the world’s biggest financial innovation examples, with 361 million active users currently.1 In 1998, PayPal, known as Cofinity Inc. at the time, was founded by Ken Howery, Luke Nosek, Max Levchin, Peter Thiel, and Elon Musk. Almost immediately, the company saw great success, growing at approximately 10% every day. By mid-year of 2000, the organization hit five million users, and just two years later, PayPal was acquired by eBay for $1.5 billion.2 PayPal eventually split from eBay in 2014 – a move most were expecting since investors had been urging them for quite some time.

Today, the organization has a market cap of $112.50 billion (March 2022)3 and is still growing. It’s acquired companies such as Braintree, Venmo, VeriSign, iZettle, Honey Science Corp., Xoom Corp., and Hyperwallet Systems Inc.4

Success or failure?

The success behind PayPal becoming the biggest online payment processor has a lot to do with its founders meeting a gap in the market. This was especially evident during the COVID-19 pandemic.5 

In 2021, statistics showed that consumers were 54% more comfortable making cross-country purchases if PayPal was an accepted payment method of the merchant. 6

PayPal went through six iterations before becoming the online payment giant it is known as today. Max Levchin describes how they had to regularly pivot in a matter of days, and be agile enough to take the next step towards success: “But between the founding and the actual PayPal, it was just this tug-of-war where it was like, ‘We’re trying this, this week.’ 

Every week you go to investors and say, ‘We’re doing this, exactly this. We’re really focused. We’re going to be huge.’ The next week you’re like, ‘That was a lie.’”7

PayPal offers dedicated customers special discounts at selected retailers and has a reputation of being exceptionally safe, ensuring all information is encrypted.8 According to Dean Turner, PayPal’s previous Director of Security Intelligence, “If you care about the product [and] you care about your customers, you care about your customers’ security – this is what you have to do.”9 This level of excellent customer service puts this financial innovation in high demand.

2) Funding Circle

Funding Circle is a platform connecting organizations that have available money to lend with creditworthy businesses seeking finance. Its founders, Alex Tonelli and Sam Hodges, started the platform after experiencing how difficult it was to gain funding for their small business. After opening a number of fitness centers together, the two failed to grow the business any further because they couldn’t get a loan.10 This experience sparked the idea to create Funding Circle.

Based on peer-to-peer lending, also known as social lending, Funding Circle is now one of many lending platforms offering this service. However, it found great success by being the first of its kind. Following two years of cost contraction, the company reported an $83 million profit for 2021.11

Success or failure?

With banks becoming increasingly regulated and start-up capital becoming difficult to secure, peer-to-peer lending has stepped in to meet the demand of new lenders and borrowers. In an environment where there is easy money, however, rapid credit source expansion will often lead to financial disasters like the 2006 mortgage bubble.12 This is because individual lenders don’t necessarily have the know-how when assessing credit risk. Peer-to-peer lending might have its faults, but as a business, Funding Circle is now on its way to becoming London’s biggest fintech IPO, with net assets valued at $331.1 million.13

One of the major reasons behind its success is that value is created through a return on investment, which Funding Circle is able to typically offer at a higher rate than traditional financial products.

Those who choose to invest in Funding Circle gain value through its credit scoring. This speaks to the credit integrity of its potential borrowers, mitigating the risk to lenders.14

3) M-Pesa

Starting out as a convenient way to send money back home, M-Pesa has since become the largest payments platform in Africa.15 Today, this platform allows many unbanked Kenyans, who mostly live in rural areas, to deposit, transfer, and withdraw money and pay for items using their mobile phone. M-Pesa is one of the examples of how financial innovation has led to financial inclusion by creating a service geared towards the unbanked and underbanked.16 This branchless banking service works by allowing users to store money in an account accessed via their mobile phone using PIN-secured text messages.17

Success or failure?

M-Pesa was acquired by Safaricom in 2007.

Brian Wamatu, who heads up the product development, said, “We stumbled upon M-Pesa 10 years ago, for people working elsewhere in Kenya that could [now] send money to their families. We were looking for a platform that enabled payments and that was sustainable.” 18

It was reported that in 2022, more than half of Kenya’s entire GDP is transacted on M-Pesa.19 And in terms of revenue, M-Pesa’s transactional value grew by over 50 percent year on year, resulting in a total revenue of 146.4 billion shillings in 2021.20

However, while many acknowledge M-Pesa is a huge success in Kenya, there are contradictory opinions regarding the success of M-Pesa everywhere else, particularly in South Africa. M-Pesa was brought to South Africa in 2010; six years later, the platform only had 76,000 active users, leading to its closure the same year. A large contributor to this failure was South Africa’s excessive regulation when it came to mobile money. 21

4) WeChat

WeChat has become one of the world’s most popular, independent mobile apps through monthly active users. It has over one billion active users, making it one of just five apps in the world that have surpassed that user milestone.22 First launched by Tencent in 2011, WeChat was just a simple messaging app that eventually evolved to become an ecosystem of its own.23

Today, users can access a multitude of functions on the app including:24

  • Banking
  • Travel
  • Booking a doctor
  • Networking
  • Filing for divorce
  • Job searches
  • Making reservations
  • Online shopping
  • Entertainment
  • Applying for a visa
  • Research

With the introduction of WeChat Pay, the company officially entered the fintech realm, which allows users to access multiple payment methods, settlement across major foreign currencies, and in-app purchases on their shopping page.25 Tencent’s financial innovation has led to a number of industry awards, with them recently receiving the Singapore Business Review’s Technology Excellence Awards 2021 for the cloud services category.26

Success or failure?

WeChat has been a major success. However, some speculate as to whether WeChat’s success – specifically in China – is largely due to the popular messaging application, WhatsApp, being banned in the country.27 WeChat has been accused of sharing personal user’s data with authorities in China, while WhatsApp offers end-to-end encryption.28 Yet, WeChat continues to offer many more features compared to WhatsApp and is said to have been ahead of the curve even before WhatsApp was banned. Already in 2013, WeChat users could send monetary gifts, pay bills, and transfer money.29

As of January 2022, daily active users on WeChat sub-applications reached 450 million, with the number of active mini-programs growing by 41% year-on-year, and the average daily use times increasing by 32% year-on-year.30

A large reason behind the company’s success was capitalizing on the opportunity to add new major functions, transforming the app from merely being one focused on messaging.

Ultimately, the success behind financial innovation is based on meeting the needs of people through the disruption of the status quo. In the words of PayPal’s Max Levchin, “You can’t get married to any one particular plan.” This means accepting that you need to adapt as your customers’ needs evolve. Often, the end product bears little resemblance to your original idea – with good reason.

Take your cue from these innovators and choose your fintech course today 

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