How Fintech Will Change Traditional Private Equity

New financial technology has changed the way many companies and individuals do business.

As of 2019, 75% of people had used some kind of fintech or money transfer product, so it’s no surprise that when most people think of fintech they probably think of payments. But even though it’s not top of mind when you think about some of the biggest trends in fintech, private equity is about to become the next big industry to have its barriers knocked down by fintech.

In some ways, it’s difficult to imagine the world of private equity ever being susceptible to disruption. The industry works in substantially the same way that it did a century ago, and has been remarkably resilient in the face of cyclic market crises, regulation, and technological advances. That might be about to change, however. The new ways of working that fintech affords means that private equity might also (finally) discover some new ways of working. This is true in at least three ways:

New Products

Traditionally, financial services could only be provided by large incumbent financial institutions. They were the only game in town and presented a limited menu of commercial offerings. Fintech companies have upended traditional financial services by reinventing business models and offer role-models for similar product innovation in private equity. Robinhood, for example, demonstrates that the freemium model may yet work for trading platforms.

The COVID-19 pandemic has also shown just how critical it is for companies to have remote working capabilities accessible, including in industries where remote work was not previously commonplace. With more businesses realizing the advantages of working from home, they’re going to need new tools to adapt to this new way of life. Subsequently, this massive shift in how we work has led to the adoption of many new technology platforms, including fintech.

However, thanks to advancements in fintech, many of those same transactions can now go through in as little as 24 hours. As you can imagine, fintech adoption has grown rapidly and has seen a 72% increase since the pandemic began.

Automated Decision Making

Artificial intelligence platforms like Grammarly and Senseon have revolutionized the way people conduct work independently. It seems as though automation will also play a significant role within private equity.

Some companies are already letting automation lead the way. Social Capital, for instance, has begun using algorithms to predict the rate of growth of specific companies, and therefore the level of return on investment. If things look good, the algorithm can write a check right then and there.

Yet other companies have invested heavily in automated solutions that use algorithms to handle repetitive tasks for their marketing campaigns, including ads, email, and social media. This ultimately helps to make things more streamlined and efficient.

Of course, algorithms will not replace humans entirely anytime soon. You still need some human ingenuity to understand why a particular action should be taken.
In fintech, the new wave of products have been focused on customer experience and helping them make decisions faster based on better (and more) data. Private equity needs to start leveraging data in similar ways.

Creating New Private Equity Investors

One of the largest segments of fintech has been the underbanked, and so one of the largest categories of fintech growth has come from addressing this challenge. There is a similar gap in private equity funding. Equity dollars often flow to the coasts of the U.S. and not as much to middle or emerging markets. Because of this, funds are specifically being launched to target global startup ecosystems that are not the typical hubs of innovation. There are initiatives to target specific high-impact verticals like financial inclusion, education and cleantech.

Whether these opportunities will make an impact on the sometimes conservative world of private equity remains to be seen. But with many investors now aware of the benefits, agility, and sheer power that fintech products provide, it’s likely that they will start demanding the same from the private equity partners they do business with.

Fintech stands to undergo some serious advancements within the next decade. Those who work with PE firms would do well to adopt it now while it is still relatively new, or they risk falling behind the competition.

Disruption can be frightening at first. But in the case of fintech, there’s no going back.

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