What Is 'FinTech'? How Is It Disrupting Finance?
It's one of those buzzwords that's used by self-styled "experts" without explanation, as if we're all financial professionals and part-time computer programmers. In a general sense, FinTech refers to the technology that is becoming increasingly important in the world of financial services. This can include everything from mobile banking to crowdfunding. Prior to the 2008 global economic crisis, the financial industry was generally accepted as being one of the least open to innovation and disruption. In some cases, simple tasks like inquiring about your bank balance and withdrawing money were still being performed in a traditional, offline setting. The rise of FinTech in the last decade or so means this is all changing.
To put the sheer scale of FinTech's growth into context, Accenture declared in one of its recent reports that investment in FinTech rose to over $3 billion dollars last year from $930 million in 2008. This ever-expanding sector promises to disrupt the way all types of business entities operate, from multinational corporations to small-scale businesses, and even the way we manage our personal finances. We're talking about major changes to payments, business and personal loans, fundraising, money transfers, investing, asset management and even currencies. In fact, the financial services industry is more focused on technological innovation than at any other point in its history. Driven by new digital technologies, stricter banking regulations, changing consumer behaviour and the need to reduce costs, Accenture expect investments in FinTech companies to have doubled to $8 billion in 2018.
So who is behind this digital revolution? Interestingly, it's not the well-established financial institutions, but a new generation of disruptive players. There's been a huge proliferation of FinTech start-ups in recent years, thanks mainly to open-source software and cloud technology lowering the barriers to entry. Meanwhile, due to the legacy of the 2008 financial crisis, larger financial institutions are under increasing pressure to cut costs in order to stay within tougher capital requirements. This has made it more difficult for the major banks to develop FinTech innovations internally, and so many are seeking to benefit from this digital revolution in other ways. Recent data shows that 80% of major banks are incubating, investing in or partnering with FinTech start-ups. Similar to the pharmaceutical industry, innovation and new product development are increasingly being done by smaller, independent companies.
What does FinTech mean for us?
OK, so we've established that the FinTech sector - a dynamic market led by new entrants - is booming. But what does that mean for the average consumer or business owner? Well, here are the three main ways FinTech is changing your experience of the financial services industry.
FinTech is levelling the financial playing field by making high-level, top-of-market services more accessible to all kinds of customers, not just institutional clients and high-net-worth individuals. For example, take investment advice. Previously this was available only to the financial elite, and came with a heavy price tag. Now, however, innovative FinTech companies like Betterment are offering sophisticated but user-friendly online investment advice to a much broader audience.
Similarly, online funding platforms like Crowdcube (U.K.) and Symbid (the Netherlands) are enabling non-accredited investors (read: anyone) to purchase shares in high-growth start-ups and small businesses. These platforms are opening up potentially lucrative investment opportunities to the general public that previously would've gone to banks, investment funds or private clubs. We at Symbid have gone one step further, releasing a monitoring product that allows users to track the performance of their investments through a simple-to-use KPI dashboard. In this sense, FinTech is helping to raise the financial literacy of amateurs while lowering the barriers of entry to the worlds of venture capital, angel investing and stock trading.
2) Disintermediation of traditional business models
: This sounds complicated, but you've probably already noticed it happening. Basically, people are becoming less reliant on the providers of traditional financial services, such as banks. There was a time when we'd visit our local bank branch for any issue affecting our personal finances. Today we transfer our money using TransferWise, apply for a student loan through SoFi, file our taxes with Simple Tax, and manage outstanding payments on Satago. The list goes on. FinTech is cutting out the middle man when it comes to making a financial transaction of any kind.
This trend has the potential to shake finance to its very core. Peer-to-peer lending, for example, removes the traditional financial institution from the process altogether, instead establishing direct lending and borrowing channels between people. In simple terms, people with money and people in need of money are being connected more efficiently than ever before. The "marketplace lenders" providing this service typically offer lower rate loans for borrowers and provide investors with a differentiated, high-yield source of income. Their interest rates are often algorithm-driven. It's all making queuing for a loan in a bank seem so outdated.
Perhaps the greatest threat to the established financial sector lies in payment systems and virtual currencies, gradually removing the need for cash transactions and, eventually, electronic bank transfers. BitCoin is a well-known example of a "cryptocurrency", yet to fully mature, which promises lower transaction costs upfront and a seemingly endless list of revolutionary possibilities for our financial futures.
3) Customer experience
: Increasingly we expect banking to be as user-friendly as shopping or socialising have become. Next-generation banking is being built around interactive, mobile-friendly interfaces which emphasise the customer experience. Both Apple Pay, the contactless payment technology, and Simple, a beautiful all-in-one banking app, have made huge strides in this area in recent months.
2015 could be the year lifestyle and payments merge. Imagine "Buy" buttons embedded across our social networks, instead of being referred to an external site to purchase something. In fact, the major social networks - Facebook, Instagram, Pinterest and Twitter - have been experimenting with this for quite some time. Expect data to play a bigger role in shaping our experience of financial services, leading to personalised spending recommendations and credit ratings based on non-traditional factors such as education and social network.
The rise of the marketplace model
In a more general context, all these trends are tied to the growth of the service-led marketplace model. Companies like Uber (personal transportation) and Airbnb (hospitality) are disrupting other industries and setting new standards for trust and transparency, efficiency and connectivity between buyers and sellers. These peer-to-peer marketplaces have shown that younger generations are more open to doing business with and being influenced by peers, friends and like-minded people than institutions. We at Symbid are witnessing a growing trend towards this mindset when it comes to our finances, too.
Ultimately, in a practical sense, the changes outlined above should have the effect of lowering banking fees and speeding up processing times for all of us. It’s clear that the established players in financial services are finding themselves in a more dynamic and competitive market than ever before. FinTech companies are on the march, determined to simplify finance for everyone. Watch this space.
Symbid recently won the Dutch FinTech Award for SME Finance. Get the full story here.