Fintech will keep changing banking
The financial services industry has been completely disrupted the last few years. What made this possible and what implications does it have on people’s personal wealth and society at-large?
The fintech landscape has changed dramatically over the course of the previous decade. Born out of the global financial crisis of the late aughts, a general distrust of traditional banks paved the way for a new wave of competitors, who utilized their technical superiority to reshape the financial services sector. Suddenly, your bank didn’t require a physical location, just an app. This caught the old guard by surprise, as they not only lacked the technological know-how to respond but were also limited by archaic legacy systems. Challenger banks arrived on the scene promising a user experience on par with the world’s leading tech companies – frictionless, modern, and on-demand.
Today the smartphone is at the forefront of banking, capable of making payments, receiving funds, and managing our financial portfolios. The words ”mobile-first” are not an aspiration but rather necessary for survival. Fintech has brought a new global standard of banking, from lifting emerging markets and helping to accelerate the adoption of e-commerce, to simplifying money transfers and expediting the end of physical currency. But where do we go from here? What does the future have in store for the next generation of fintech actors?
It’s difficult to assess how fintechs will evolve without knowing the full extent of Covid-19’s impact on the global economy. But let’s look at what the trends portend.
Going forward, expect big data to play a more prominent role in conjunction with developing AI technology. Risk assessment will take on a new shape as digital banks look to open up access to credit for new pools of customers. Whereas traditional banks relied largely on precedence when weighing credit risk, digital banks will have access to a much more nuanced, holistic, and accurate snapshot of an applicant’s creditworthiness.
AI will make banks more effecient
Real-time analysis of customer data (both financial and personal) will allow banks to cross- and up-sell products and solutions designed with the individual in mind. Advances in risk assessment will allow banks to reach the underbanked and consumer groups without a credit history. That’s why it’s important to pay close attention to artificial intelligence and its continued integration into financial technology. AI has the potential to make banks more efficient, allowing for cost-reducing automation while eliminating errors.
Look no further than insurtech companies, which have embraced AI and advanced analytics to help make more accurate risk assessments on random events like catastrophes, based on historical data.
At the consumer level, automation has the potential to oversee our financial portfolio and help guide us through complex decisions such as investments, retirement planning, and home loans, while also carrying out routine tasks such as bill payments.
According to Deloitte’s Bank of 2030 report, the ideal automated tool would operate behind the scenes, monitoring the market for deals and products without human intervention. Whether banks can deploy AI technologies at scale, however, remains to be seen.
Corona pushing new solutions
The pandemic in particular has been a boon for payment providers. Let’s start here in Sweden, where Klarna has skillfully navigated the crisis to become Europe’s most valuable fintech ($10.65bn). When the Coronavirus forced us out of stores and towards e-commerce, Klarna was there, with a well-designed product, simple USP, and custom payment options that quickly caught on with Millennials and Gen Z. Retailers rejoiced. After all, the easier a payment provider can take the customer from shopping cart to checkout, the higher the conversion rate for retailers.
But Klarna’s ambitions don’t end with payments. As Germany’s Handelsblatt notes, Klarna has grown to where it’s not just competing against other payment service providers such as Paypal, but has set its sights on banks themselves.
A host of other payment providers have thrived in a marketplace still marked by fragmentation. Dutch startup Mollie secured unicorn status (privately held with a valuation of more than $1bn) thanks to its application programming interface (API) that conceals the complexity for merchants of accepting localized payment options. One of Mollie’s lead investors in its most recent funding round referred to the company as aiming to be the ”Apple of the payments world.”
Globally, we’re at crossroads with regards to fintech. As McKinsey points out, many European fintechs are still not profitable and thus reliant on a scarce resource – investor funds. Yet fintechs have several inherent advantages – such as agility – and the changes they’ve brought about to the financial world are here to stay. Customers want more digital with their banking services, not less.
What we may end up seeing is a consolidation of power in the 2020s, with the largest banks and payment providers expanding their product offerings and portfolios with strategic acquisitions.
Or we could see the continued buildout of fintech ecosystems by global tech titans, in the search to create an all-in-one super banking app. In China, both Tencent and Alibaba have a duopoly on mobile payment platforms (Wechat Pay and Alipay), which when combined, according to CB Insights, serve nearly 94 percent of the Chinese population and act as a launch pad for other financial services, such as interest-free installment lending.
Amazon is creating a suite of services
One of the biggest hurdles for challenger banks is customer acquisition costs, an area where multinational conglomerates will hold a sizable advantage with their flywheel economic systems. This is the route Google and Amazon want to follow as they strategically move towards offering digital banking services. Amazon’s case study is particularly interesting, given the wealth of data it has on customers, from purchase history to entertainment consumption habits. Amazon is reportedly exploring forays into home insurance and medical insurance, to go along with a suite of financial services like banking, business loans, and payments. The question remains whether regulation will serve as a blocker, or merely an obstacle.
Let’s peek into the future. There are indications that the new decade should bring about a level of refinement when compared to the disruption of the previous ten years. Clearer hierarchies will establish themselves as the focus shifts more towards products and services, and less on direct competition with incumbent banks. That means, ideally, consumers should stand to benefit from a broader and more comprehensive world of financial opportunities.
Disruption is out with digital banks
While traditional banks and startup-challengers have begun to cooperate, the next market to be disrupted is insurance. And payment is on its way into a new phase with biometric security solutions. These are three major trends within fintech.
Disruption is out with digital banks
The first wave of challenger banks declared war on their traditional counterparts. But the newcomers on the market see the old guard less as adversaries and more as partners. Why? Because classic banks have leveled the playing field with the help of banking APIs – allowing for P2P payments. They’ve also introduced suites of digital services, and UX-friendly apps – and invested in in-house accelerators (see BBVA) to help develop future fintech partners. And while challenger banks are here for the long haul, especially given their impressive funding rounds in recent years, they still need to diversify their services to sustain revenue models beyond card transactions.
Insurtech
More than a few fintech analysts have identified insurance as the next multi-billion dollar industry ripe for disruption. The consulting firm McKinsey assessed that the combination of tech-savvy players on the market would ”alter the terrain on which incumbents compete.” This is particularly true among younger, forward-thinking consumers, who can compare different offerings (such as homeowner, risk, and even pet insurance) and discover transparent, custom-tailored products packaged via AI. Europe is an especially promising market for insurtech (thanks to a robust insurance culture), helping power Germany’s Wefox to unicorn status and attracting global players like Lemonade.
Payments
In recent years, payments have experienced more volatility and change than any other area of fintech. As the pandemic ushered in a new era of e-commerce, payment companies including Stripe and Klarna have seized the moment with their ability to manage what retailers have struggled with for over a decade: building a frictionless online payment system. This has also helped facilitate the growth of e-commerce in previously untapped markets.
The ”new normal” of the global economy means uncertainty, with unemployment and fluctuating wages, which is why we’re witnessing a rapid adoption of ”buy now, pay later” services, especially among younger consumers who might lack access to credit cards.
The need for more hygienic, contactless means of payment has also increased Western demand for virtual wallets and mobile point-of-sale terminals, the latter of which has big implications for Apple Pay and Alipay. Amazon took this one step further in September with its announcement of palm-recognition for payments. The use of biometric information is especially important to monitor, given how much security it offers.
Indicative of the rise of payments is how quickly the world’s two biggest payment providers (Visa and Mastercard) moved to acquire market space, particularly through strategic M&As and partnerships. However, the global payment infrastructure must address the issue of access, as a cashless economy will have significant impact on society’s unbanked.
Jeremy Cothran
Industry Editor, UpNext
Years in Schibsted
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What I’ve missed the most during the Corona crisis
Hiking in South Tyrol, Italy