As we continue to use our mobile devices, embrace IoT and teach cars how to drive without human assistance, the financial sector has also been influenced by innovation. The merger of technology and financial services, dubbed fintech, has in fact become so popular that Merriam-Webster added it in 2018 to stand for “products and companies that employ newly developed digital and online technologies in the banking and financial services industries.”
This makes fintech a very broad field, because technology has penetrated so deeply into our daily lives that it is simply impossible to clearly determine where conventional banking ends and fintech begins. These issues were the focus of discussion at the FINOPOLIS 2019 forum of innovative financial technologies in Sochi on October 9–11.
Since the advent of the first bank cards, users of financial services have been taking for granted things like online and voice banking, customer service chats, new security and fraud-protection features, financial documents sent through an app, and cost analytics. Moreover, in 2018, only 18% of customers visited bank offices for operations; the others were served online. It is becoming increasingly clear that fintech involves more than just online banking. With all the innovative technology, there are some really interesting fintech trends worth considering in the coming year.
Fintech in high-tech companies
Amazon provides loans to small businesses to improve its customer experience and help them expand their sales on its platform. Apple issues its own credit cards to address customer security concerns, providing its customers with best-in-class financial product experience. Facebook and Telegram are planning to launch their own currencies. This suggests giants such as Apple, Facebook and Amazon (with deep pockets, strong customer relationships and a wealth of accumulated client data) can pose a real threat to conventional banks. To be able to compete, banks will have to abandon their traditional product-oriented policies in favor of customer-oriented ones.
Fintech for protecting vulnerable customers
New services emerge that help to protect older people from financial fraud. The idea is to let our parents and grandparents be financially independent while protecting their assets. These services are also in demand among teenagers and young people of student age who are still supported by their parents, in order to help the parents to control expenses and make sure their children are spending money responsibly. One of the most popular services is Visa debit cards equipped with True Link Financial that allows blocking or only allowing certain sellers.
Using AI in banking
It is not a secret that banks use AI to expedite customer service and partly automate simple financial products while freeing up rare banking professionals for other duties. Assessing risks using AI also allows for regulating business lending faster and more flexibly, as well as minimizing human factor.
AI is no longer a monopoly of large banks. AI services are now provided by Google, Amazon and other companies; therefore, even developers with no experience with data can embed AI into their products. AI has a huge potential in terms of computerizing simple processes thus helping fintech companies to offer a better, easier and faster customer service than conventional banks.
Stakes on youth
People aged between 23 and 38, often called “millennials,” are the largest able-bodied age group. But compared to the previous generations, their financial behavior is significantly different. They are not desperate to buy real estate and prefer higher mobility; they are much eager to invest in their own education and unhappy with the high cost of living. This age group is also less inclined to become entrepreneurs than the older generation, even despite the polls that indicate that they would like to start their own business. Millennials show more tendency to accumulate wealth and minimize expenses than to engage in risky spending. Therefore, the services popular with millennials must meet very simple requirements. They must have a minimalist and user-friendly interface, and help with saving money, planning finances and optimizing expenses.
Peer-to-peer lending (P2P) in fintech is becoming an increasingly important source of financing both for individuals and businesses. P2P lending is a rapidly developing industry where online platforms match lenders with borrowers directly. This is especially beneficial for small companies. P2P lending is currently a real alternative to the conventional financial instruments because it allows companies and individuals to borrow and lend money without intermediaries.
The P2P lending model is quite simple: an individual or a legal entity registers in the P2P lending service as a lender or borrower. The borrower submits an application with a detailed description of the required loan. The service reviews the application and offers the borrower a credit score, a sum it suggests borrowing and the relevant interest rate. The entire process takes several minutes. Using the recommendations, investors then can provide funding for the loan.
The adoption of truly innovative business models in the banking sphere takes time, while startups need significant long-term investments in the infrastructure before they can generate stable revenue. For instance, blockchain startups attract a sizable amount of venture capital due to a radically new payment infrastructure. But investors, who sustained losses during the cryptocurrency boom, have become more cautious. Therefore blockchain technologies, despite their promising future applications, remain an interesting innovation that does not bring much money.
Licensing and state-business relations
Despite its interest in developing business as a whole, the state looks at new financial technologies with apprehension, fearing it could lose control over the financial market. Having these fears and being pressured by the traditional banking lobby, the government can adopt measures to protect the existing players, thus making it more difficult for the new ones to enter the market.
For instance, U.S. Securities and Exchange Commission (SEC) has filed for a restraining order to prevent Pavel Durov‘s Telegram from selling Gram tokens in the country, despite $1.7 bln invested in the project. According to SEC, initial coin offerings (ICO) are securities offerings and therefore are subject to SEC offering rules.
Investment banks have started to focus more on digital consulting services. Introduction of new technologies has allowed for considerable reduction of a minimum investment threshold for using services, which attracted a significant number of small and medium-sized investors. In 2017, US financial services corporation Morgan Stanley launched Access Investing, a digital asset management platform with a minimum investment threshold of $5,000. In the same year, similar projects were launched by Merrill Lynch (Merrill Edge Guided Investing) and Deutsche Bank (Robin). In 2018, digitally managed assets reached $120 bln.
Fintech in banking infrastructure
Similar to a giant Jenga tower, a typical bank’s inherited IT stack includes a large number of particular products, some of which are purchased off-the-shelf and others are developed by banks’ efforts. As with Jenga, removing or replacing the blocks of an IT stack can be risky and complicated. Digital innovations are often hindered by outdated information technologies, in particular, the core banking system (CBS), and the cost of change is high. Many financial institutions plan to replace their core IT systems within the next five or ten years. Several CBS financial technologies have emerged that will use IT issues inherited by banks as an excellent opportunity to make money.
Since 2010, fintech has grown into one of the fastest advancing areas, and the trend will continue into the next decade. Although not every fintech startup may pose a threat to small and medium-sized banks, the banking community is already taking efforts to constantly keep finger on the pulse of the latest trends to prevent some new technology from drastically shaking the core foundations of their business.
By Christina Firsova