The application of technology to the legacy industry of real estate is transforming the way we do business. Traditional, archaic processes have made our industry ripe for innovation and disruption, birthing the advent of fintech as a groundbreaking way to transform a long-established industry and improve processes and experiences for both businesses and consumers.
But fintech is far more than a buzzword. A portmanteau of “financial” and “technology,” fintech broadly describes the use of technology to improve activities in finance, in both consumer-facing industries as well as within financial services institutions.
Fintech has birthed several subcategories. Along with emerging technologies such as blockchain, regtech, and wealthtech, proptech and insuretech are burgeoning areas of financial services innovation and are garnering interest from the historically change-averse mortgage, real estate, and settlement services industries. The goals and purpose of some companies – including States Title – may align with several of these subcategories.
Here’s a summary of fintech and the two subsets we align with most closely, namely proptech and insuretech.
Although the term fintech is relatively new, analysts place the birth of fintech around the late 1800s and early 1900s due to the evolution of communication devices like the telegraph, transatlantic cables, and Morse Code. Every decade following these early inventions was marked by fintech innovation:
At fintech’s core are data analysis and machine learning, which are used to provide insight on customer behavior and develop algorithms to automate some manual, repetitive tasks. Fintech has been used to automate banking services, insurance, investments, trading, and other financial services segments that have been slow to adopt sophisticated technology, largely due to regulatory concerns.
Regulators have been skeptical of fintech since its inception, largely due to data security concerns and hacking threats. American firms are particularly vulnerable, as even a small data breach can run afoul of the Gramm-Leach-Bliley Act or a patchwork of state laws, and damage a fintech company’s reputation.
Market analysts have also noted that many fintech firms have high startup costs, but low marginal costs as they scale up and add new customers. At the same time, fintech startups have been hailed for their unique, innovative, creative, and progressive work environments, giving them an edge over banks and traditional finance companies.
While some established financial institutions and technology companies are deploying fintech to give their organizations a much-needed infusion of modernization, startup activity has been explosive. Forbes has noted that the 2008 global financial crisis and the focus on financial services regulation that ensued created “the perfect vacuum” for fintech innovation.
At the end of last year, global accounting firm KPMG proclaimed 2019 a “massive” year for global fintech investment, attracting a significant amount of capital from the venture capital market. In particular, investors focused on later-stage companies and partnership models.
The COVID-19 pandemic undeniably impacted fintech deal activity in the first half of 2020, with new M&A deals grinding to a halt. However, the rapid demand for and use of digital platforms, banking, payments, and other fintech-related services drove many financial services companies to double-down on their fintech investments, KPMG observed. As financial institutions continue to leverage alternative sources of data to enrich their understanding of customer needs and wants, as well as their risk exposure, data analytics becomes even more critical.
“We continue to see strategic deal activity,” said Ian Pollari, KPMG’s Global Fintech Co-Leader. “Building internally generally takes a longer time, and hence, strategic M&A and investments can play an important role to respond more quickly.”
Proptech became a buzzword in the real estate industry in the last few years as companies began to leverage emerging technologies to optimize the way people research, rent, buy, sell, and manage a property. At the heart of proptech is the desire to make a technological – and psychological – change in the real estate sector to address changing consumer needs and expectations. It seeks to achieve this change by addressing common pain points in existing real estate products and systems, including affordability, manual and tedious processes, consumer education, and time spent on real estate transactions.
According to KMPG, proptech also experienced a banner year in 2019, with $2.6 billion of global investment, and more real estate firms globally incorporating digital solutions and data management into their primary business processes. The firm observed that as more real estate and property management companies embrace proptech, they will deploy it in the collection and management of their data. This is expected to lead to cultural changes within organizations, and a more savvy workforce that will continue to garner investment.
“We’re going to see incumbents around the world seriously reconsider their technology stacks and how future-proof they are,” said Ian. “This is going to include looking at their core banking and origination system in the context of their overall strategy so that they can readily compete with digital banks and emerging partnerships involving big techs and other scale providers.”
Insurance is one of the world’s oldest financial businesses, and its major players have decades of experience in the market. Although insurance firms have offered customers peace of mind for well over a century, this focus on legacy businesses and its intense regulation have made the sector reluctant to embrace technology or change. Consumer demand for convenience, speed, and transparency birthed insuretech, which aims to make the issuance of insurance simpler, faster, and less confusing for customers and businesses.
KPMG observed that the insuretech sector saw pullback from investors even before the pandemic due to high company valuations and few large acquisitions. The United States continues to dominate insuretech globally, accounting for seven of the top 10 insuretech deals in the first half of 2020 – including the $123-million funding round States Title announced in May.
(For more on States Title’s instant title solutions, see What Is Instant Title Insurance Underwriting?)
Noting that States Title significantly increased its transaction volume following its acquisition of North American Title Insurance Company in early 2019, KPMG said some companies are taking growth “into their own hands in order to attract additional investment and make a future IPO more appealing.”
“We’ve always thought of insuretechs as the acquisition targets. Now, we’re starting to see the trend where insuretechs are becoming the acquirers. I think this is a very important distinction, and is why some are able to raise so much money,” said Gary Plotkin, KMPG’s Global Insuretech Leader.
KPMG also noted investor interest in artificial intelligence and automation of monitoring and optimizing assets. Insuretech investors are also increasingly focusing on profitability, investing in companies with scalable business models, the firm said.