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Citi is one of the worlds largest financial institutions, operating in all major established and emerging markets. Across these world markets, our employees conduct an ongoing multi-disciplinary global conversation accessing information, analynulling data, developing insights, and formulating advice for our clients. As our premier thought-leadership product, Citi nullnullnullis designed to help our clients navigate the global economys most demanding challenges, identify future themes and trends, and help our clients profit in a fast-changing and interconnected world. Citi nullnullnullaccesses the best elements of our global conversation and harvests the thought leadership of a wide range of senior professionals across our firm. nullhis is not a research report and does not constitute advice on investments or a solicitation to buy or sell any financial instrument. nullor more information on Citi nullnullnull, please visit our website at citinullcitigps.Citi GPS: Global Perspectives (2) assess where we are in the Disruption Cycle by segment and geography; (3) take a deeper look at innovation in each of the key product segments - payments, lending and savings; and (4) assess what banks can do to improve the efficiency of their businesses, both in terms of current headcount and distribution as well as long-dated options such as Blockchain. Follow the Money From California to China, the banking industry is increasingly being challenged by digital disruption. As Jamie Dimon, CEO of JPMorgan has noted: “Silicon Valley is coming. There are hundreds of startups with a lot of brains and money working on various alternatives to traditional banking.” FinTech investments have grown exponentially in recent years: $19 billion of investment in 2015 was up two-thirds from $12 billion in 2014 and from low single-digit billions of dollars per year earlier in the decade. Given the recent shakeout in public equity markets, especially for marketplace lenders but also financial and technology companies in general, we may have a spill-over chill in private markets in 2016. This is not least from incumbent banking-funded Ventures units (see for example the February 2016 announcement by BBVA that it will increase its original $100 million FinTech fund to $250 million, now invested via Propel Venture Partners). Figure 1. Private Investment in Global FinTech Companies ($bn) Source: Citi and CB Insights; Includes first around and subsequent private investments All About the Consumer FinTech new entrants are targeting some of the most attractive and valuable profit pools in banking today. Citi Research analysts estimate that Personal and small and medium enterprise (SME) banking account for about half of the banking industrys profit pool and a higher proportion of the sectors equity value. Sifting through over a hundred FinTech private investments, we calculate that over 70% of the FinTech investments to date have been in the Personal/SME business segments. Why does 051015202010 2011 2012 2013 2014 2015FinTech investment has grown exponentially in recent years New entrants are targeting Personal and SME banking which account for about half of banking industrys profit pool 2016 Citigroup 7 Citi GPS: Global Perspectives Based on c120 private companies from CBInsights FinTech Periodic table Dec 2014; KPMGs top 50 most prominent FinTech innovators Dec 2015; Valuation based on Crunch Base Total Equity Funding for private companies and exit value for acquired companies At the Tipping Point in the West In the US and Europe, only a very small fraction of the current consumer banking wallet has been disrupted by FinTech so far. However, this is likely to rise. Greg Baxter, Citis Global Head of Digital Strategy, notes that we are not even at “the end of the beginning“ of the consumer disruption cycle in Western Europe and the US. Gregs team estimates that currently only about 1% of North American consumer banking revenue has migrated to new digital business models (either at new entrants or incumbents) but that this will increase to about 10% by 2020 and 17% by 2023. We are in the early stages of the US and European consumer banking disruption cycle, therefore we note that this estimate is subject to considerable forecast risk. However, an open question remains as to whether incumbent banks in the US and Europe can embrace innovation, not just talk about Blockchain and hack-a-thons, before FinTech competitors gain scale and distribution. Personal Based on Gross Merchandise Value (GMV) Source: Company Reports, Citi Research. Alipay TPV 2015 is estimated based on disclosure in 2014 adjusted for growth in Alibabas gross merchandise volume Total DigitalDisruptionTotal MarketValue98.9%1.1%Current$850 bnTotal DigitalDisruptionTotal MarketValue90%$1,050 bn202010%Total DigitalDisruptionTotal MarketValue83%17%2023$1,200 bnGlobal $1.7trChina $0.67tr (40%)US $0.34tr (20%)Alibaba $0.45tr (26%)Alipay $931bnPayPal $282bn01002003004005006007008009001000Alipay3.3xPayPalbut China is well past the tipping pointwith FinTech companies having as many clients as top banks and financial players 2016 Citigroup 9 Citi GPS: Global Perspectives & Solutions March 2016 Emerging Market Financial Inclusion Revolution Emerging markets often have a high percentage of unbanked population, relatively weak consumer banks, and a high penetration of mobile phones. Hence, they are ripe for FinTech disruptions. Kenya has led the way for almost a decade now with M-PESA launching in Kenya in 2007 with currently 23 million active customers in 11 countries. In next door Somalia associated in the past few decades with political instability instead of financial innovation mobile money is having an arguably even more profound impact with about 40% of adults using mobile money. Similarly, in the giant Asian countries such as India, Indonesia and the Philippines with an almost 400 million unbanked population, mobile money can also help solve a societal problem. Not surprisingly, policymakers look favorably at FinTech as part of the solution to financial inclusion. Figure 7. Percentage of Population (15+) with a Bank Account (2014) Figure 8. Distribution of Unbanked Population By Region (2014) Source: World Bank Financial Development Index, Citi Research Source: World Bank Financial Development Index, Citi Research After Kenya and China, Is India the Next Frontier in Digital Finance? Emerging markets do not follow a single path to digital finance growth. The success of mobile money in Kenya was driven by a significant investment in mobile money, the growth of a viable non-bank agent network, as well as proportional regulation. By contrast, China has seen growth driven by a few Internet giants, such as the Alibaba ecosystem. In India, the adoption of the AADHAR national biometric identity program and the opening of over 200 million new bank accounts, have dramatically increased the customer base. India, by its sheer population size (1.2 billion and counting), low level of banking penetration, policy initiatives (such as the AADHAR program), and the ubiquity of mobile phones (80% penetration), is one of the big opportunity spaces for FinTech. The latest data shows Indias mobile banking transaction value increased 4x year-over-year in December 2015. 020406080100Euro area United States East Asia &Pacific(developingonly)World Europe &Central Asia(developingonly)Latin America& Caribbean(developingonly)South Asia Sub-SaharanAfrica(developingonly)Middle East(Developingonly)South Asia32%East Asia & Pacific25%Sub-Saharan Africa17%Latin America & Caribbean10%Europe & Central Asia5%Other economies4%Middle East4%High-income OECD economies3%High unbanked population, weak consumer banks and high mobile phone penetration make emerging markets ripe for FinTech disruptions India is likely to be a big opportunity for FinTech 2016 Citigroup 10
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