Financial technology or FinTech, is a business which mainly uses software to provide financial services to customers, thereby, disrupting the traditional financial landscape, which focuses more on what the banks will offer and less on what the customer wants. FinTechs are affecting the way people think about banking and how they do their banking. They are attracting millennials (born between 1982 and 2004), who are high earning customers prioritising fast, easy, flexible, and inexpensive banking solutions over personal services. Big data companies like Google, Apple, and Facebook are also accessing this market and add an additional dimension to mobile banking.
The global increased service regulation of the banking sector resulted in the downsizing of banks to reduce costs, negatively affecting their utilisation of technology within the system [1]. Many banks have complicated and outdated Information and Communications Technology (ICT) systems which are not able to compete with the technologically advanced systems of FinTechs, making them susceptible to more downtime, resulting in decreased customer satisfaction [2]. With more customers using smartphones, there is a need for streamlined banking services and reduced service costs. Traditional banks have neglected to understand and adjust to customer needs, allowing FinTechs to offer exactly the services these customers seek – products which are simpler with fewer features and easier to use at a fraction of the price [3].
Global trends
Globally, there are an estimated 12,000 FinTech start-ups and funding increased from $5.6bn in 2014 to $12.2bn in 2015. Although the popularity of FinTechs in the USA is limited, China and Europe have seen a boom in the last two years [14].
China, with 1.3 billion mobile phone users and increasing market value in mobile technology, has seen a significant increase in the use of FinTechs for banking and lending. Less regulated Chinese banks have helped FinTechs to grow from one platform in 2007 to over 2000 in 2015; most of these FinTechs are peer to peer lending companies due to the lack of access to credit for FinTechs in China [8].
The centre of the FinTech revolution is London with $646 million of venture capital funding going into the local start-ups in the first quarter of 2015, an increase of 66% from the previous year [3]. The Government has been instrumental in this growth through the development of a tech hub called Tech City in East London. England also has a micro, small, and medium enterprises (SMEs) friendly approach to tax, start-up capital, and market competition [9]. In reaction to this success, the Canary Wharf group has developed a FinTech cluster which has turned into one of Europe’s biggest technology accelerators for finance.
Sydney, Australia has taken London’s example and has started a similar concept called Stone & Chalk, which is supported by the New South Wales government as well as large Australian banks. They are hoping to surpass Singapore and Hong Kong and become the main FinTech hub in the Asia-Pacific [10].
There is no FinTech cluster or centre in USA, but several states are competing for the position. Silicon Valley and New York would like to be the hub but it seems more likely that there will be several hubs all over the country. USA is still lagging behind London but the risk-happy culture in the USA might make them more successful in the long run [9]. FinTechs in USA have many IT and technologically savvy people to pick from, and as the popularity of FinTech services increases this will begin to play a role in the success of the start-up as well as its competitive advantage.
Future for banks and FinTechs
In the past, banking was structured around face-to-face interaction; customers were reliant on the expertise of the advisers and had no other sources of information to draw from. Technologically-enabled customers can now access information about products, banks, and advisers from their phones or computers. This increase in awareness has moved the power from banks to customers, meaning that the bank’s communication with customers must take place in real time and on the customer’s terms [5].
FinTech’s technology allows customers to access and use their accounts 24/7 anywhere in the world and addresses their needs much better than the traditional 9 to 5 services. With more than 40% of customers using mobile phones to access their accounts and a predicted increase of 20% over the next 5 years, new technology must adapt with the customers [6].
Why are FinTechs successful
FinTech start-ups are successful due to the low margin, asset light, scalable, innovative, and compliance easy (LASIC) principle.
- Successful FinTechs have low profit margin as a main feature, riding on existing infrastructure without the burden of large fixed assets, making them flexible and innovative.
- FinTechs ensure that their businesses remain scalable and flexible. They can increase in size without enormous cost increases. Most importantly the technology remains scalable.
- FinTechs in their basic makeup are innovative; their reliance on constantly changing technology means that they must change with it and predict future trends.
- FinTechs are fortunate that the regulations which govern them are currently light, enabling them to reduce compliance costs [4]
Google, Apple and Co
Large data companies like Google and Apple in USA have taken advantage of a loophole in the federal law which does not regulate the financial transactions of nonbanks. Nonbanks are not clearly defined, and internet giants are using this to their advantage by forming nonbanks which do not accept deposits but customers can withdraw their money on demand, usually by transferring to another traditional account [7].
Apple’s newest iPhone contains a near-field communication (‘NFC’) chip which allows the compatible devices to communicate with each other when they are in close proximity without any additional steps. Considering that Apple holds the details of 800 million credit cards it can make an easy transition into a digital wallet [7].
Google’s peer-to-peer transaction service, Google Wallet, is linked to the Gmail accounts of its users as well as Google+. Together with Android Pay it allows customers to pay at point-of-sale by tapping their phone, send and receive money for free, and keep track of spending. Facebook followed Google’s example in 2015 and started its own payment system; its American users can link their cards to the messenger app which allows them to transfer money to each other as easily as sending a message [11].
Similar products are available in China; the social networks Sina Weibo and WeChat offer financial products like credit cards to their members. Internet retail giant Alibaba has expanded its services by introducing a company called Alipay. It was expected to become a large financial institution and is now valued at $60 billion and offers full financial services via the internet. Alibaba further owns an internet money market fund called Yu’E Bao which had no assets to begin with; after 10 months it was valued at $90 billion making it the fourth largest money market fund [12].
Data Mining
The data giants have an advantage which start-up FinTechs and banks do not have in the form of millions of members already signed into their database and records of customer-behaviour spanning years [7]. Data is also collected from online transactions, searches, and social networking activities [13].
PayPal has been running since 1998 and under its parent company, eBay, has been data mining for longer than the other data networks. It has a unique position in that it is not classified as a bank or a nonbank, due to its policy of keeping money in interest earning checking accounts, it is classified as a money transmitter and thereby avoids any regulation [7].
Conclusion
FinTechs are actively targeting and attracting high earning millennials and thereby threatening traditional banks at the most basic level. These high-income earners are more likely to use additional FinTech services which can translate into investments for FinTechs rather than the banks. The global reach and large data bases of Google, Apple, and Facebook have the potential to impact the market and relegate traditional banks to the sidelines.
References:
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Authors: Heike Menne-Spohr and Dr. Mohammad Saud Khan
