In recent years, the finance technology (fintech) industry has become of the fastest growing high-tech sectors. Hundreds of Israeli and foreign companies and startups are developing technologies that affect one of the most important interfaces of modern life: our money. Fintech encompasses a range of economic business-to-business (B2B) and business-to-customer (B2C) activity, including payments, money transfers, credit card charges, check scanning, ecommerce and digital consulting, customer relations management, and app trading services.
A study by Accenture found that global investment in fintech tripled within just one year, from $4 billion in 2013 to $12 billion in 2014.
According to a study by IVC Online, Israel is not lagging, and it has a thriving fintech industry, with 430 companies and 14 multinational R&D centers. Fintech has been growing steadily since 2002, where Israel had just 90 companies, and the pace has picked up since 2011.
Investor interest in fintech has skyrocketed; 15% of fintech companies in business in 2014 raised capital, and 43 companies raised capital in January-September 2015. IVC predicts that the number will grow by the end of 2015, possibly nearing the 2014 record of 61 companies that raised $369 million in capital.
Israeli experts advising the “Globes”-Bank Hapoalim (TASE: POLI) Smartup3 competition mapped the world of Israeli fintech. “Israeli companies are engaged in a wide range of fintech activity,” says Nielsen Innovate VP Business Development Dov Yarkoni, “ranging from security to technology marketing. Companies are developing electronic signature technologies for customer relations management (CRM), customization, and big data. Lately, we’ve seen more companies engaged in security in the wake of the global buzz about cyber attacks.”
Explore.Dream.Discover CEO Duby Lachovitz differentiates between B2B and B2C companies. “On one hand, we see companies engaged in payment transfers between individuals, electronic loans and crowdfunding, online securitization like in the US, collections, social payments, and so on. On the other hand, other companies are developing systems for financial institutions, such as facilitating money transfers, electronic wallets, facilitating payments to small businesses, etc.”
Lachovitz adds, “We see more B2B companies in Israel, because Israeli financial institutions are desperately seeking technological differentiation and strongly support local companies.”
Yarkoni also notes the involvement of financial institutions in fintech, saying, “Financial institutions and banks are working hard to embrace fintech start-ups, both to obtain ideas first hand and try them out, and to obtain innovative ideas.”
He adds that changing regulations in Israel and other countries is benefiting fintech development, noting, “Financial institutions are the only companies allowed to grant loans. We see extensive access to crowdfunding money, and online banks exist all over the world.”
Changing financial behavior
30 years ago, Prof. Muhammad Yunus founded Grameen Bank for microloans, which has helped millions of villagers in his homeland of Bangladesh. He won the Nobel Prize for Economics in 2006 for his global success story, and microlending is now drawing the attention of fintech.
“For years, young people have had more trust in Google than the banks,” says Yarkoni. “That is why many new companies are creating products aimed at changing young people’s financial behavior. For example, we have invested in a company called Change, which is engaged in financial behavior. It uses various strategies, such as apps that organize expenses and send alerts on them and compares expenses to expenses in the immediate environs, to prompt people to change their financial behavior to save more. There is also the objective strategy; an app that shows how much time you have to save in order to buy a product that you want.”
Four companies won the Smartup3 competition: Finupp Ltd., TapReason Ltd., The Grid Ltd., and Paybox Ltd. As in other industries, fintech start-ups face difficult challenges as they strive to expand from Israel and reach larger clienteles.
“Fintech is very crowded,” says Lachovitz. “It is necessary to know how to differentiate yourself from the rest of the market. I advise new startups to carefully examine the market, see that you’re not stepping on anyone’s toes, and then carefully define your area of development.”
“The Israeli developer is exposed to Israeli problems which are not necessarily global problems, and is exposed to Israeli opportunities, not American ones,” says Finupp CEO Assaf Regev. To overcome the challenge, he advises, “Study the target market, including consumer tastes and the business and regulatory environment. At Finupp, we invested heavily in learning the English and American laws and tax procedures. The beneficiary is naturally the person who can afford a ticket to study the market first hand.”
The Grid CEO Gur Harel agrees on the need to focus, saying, “It is critical for entrepreneurs like us to be very focused, to concentrate all efforts on solving a very specific problem, which is usually relevant for a very defined segment of users. This is mainly because resources are limited and time is short. You can’t scatter and you must create substantial value and a strong edge fast, which is very hard to do without being very sharp. Conversely, if the market is small, like in Israel, that focus is liable to make it very difficult to achieve the numbers en route to massive usage, simply because the target clientele is small are there are too few use cases.”
“Israeli companies, because the market is small, target foreign users from day one. On this point, the startup’s culture and DNA from the outset develop globally and toward wide dispersal,” says TapReason CEO Nimrod Elias. He says that the way to tackle the challenge is to “build a strong brand that can differentiate itself from the competition in the value it creates, making it easier to find relevant target populations. Massive distribution will be critical if it based on a mechanism in which the users recommend or share their use experience with others. For this purpose, the product should encourage users to do this.”
PayBox CEO Tal Grinberg says, “A good product or service should meet a strong enough need or pain. The moment the pain is big enough and the proposed solution offers better value than the alternatives, the audience will seek, adopt, and share.” He adds, “Familiarity with the pain and the needs is a difficult process, and if you get it wrong, the solution and the value it creates could end up being far less relevant. The big problem is to keep the product up to date and creating value when the environmental conditions the need, the competition, market tastes, and culture change, in order to keep customers happy. Ultimately, satisfied customers bring more satisfied customer.”
Yarkoni adds one more piece of advice to the suggestions of the startup CEOs: he calls on new professionals in the field not to fear cooperating with big financial institutions. “You have to get over your fear that the big institutions will steal your idea, because you have to cooperate to reach more users. If your idea is sufficiently innovative and unique, you better confront this fear in order to succeed.”
Published by Globes [online], Israel business news - www.globes-online.com - on November 22, 2015
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