On any given day, one can find news articles referring to new developments in financial services, whether it’s about Bitcoin, block chain, P2P lending or other emerging trends. What do they all mean? Why are they attracting so much attention and what impact will it have for our daily lives? The following post is a summary of the key trends that have been addressed in Deloitte’s white paper – Fintech – Disrupting the way we bank.
Financial technology or fintech is the application of technology across financial services. Fintechs are using more agile, non-traditional methods that pose a disruptive threat to the financial services industry. Let’s explore some common fintech disruptors, including:
- Payday lenders and other short-term borrowing solutions e.g. Nimble, and Wallet Wizard
- Peer-to-peer (P2P) lenders e.g. Capify
- Credit decisioning platforms e.g. Yodlee and Daric
- Bitcoin and block chain infrastructure and services e.g. Chain and Ripple
This is compounded by another layer of disruption that is driven by non-traditional competitors such as payment platforms and online retailers becoming lenders and digital banks e.g. WeBank and Alibaba
Fintechs have enabled simple and efficient short-term borrowing. This is a significant change in customer experience when compared to the existing personal loan or credit card process from traditional financial institutions. We are seeing growth in this market driven by lower socio-economic individuals who do not appreciate the cost of borrowing as well as affluent, white-collar, young males who are using payday loans as a “Friday-night-top-up”; this has interesting implications for the credit card market.
P2P lending leverages data and digital platforms to match credit-worthy borrowers with lenders. It bypasses the use of a bank or traditional financial institution as an intermediary; given this, P2P lending reduces the cost of origination and funding loans and therefore can provide more competitive lending rates to borrowers in certain circumstances. The downside of this completely online model is the increased risk of fraud, and the de-personalisation of the customer experience. However, these are managed by managing risk at a portfolio level and disaggregating the risk to a wider set of buyers (not too different from the one of the original reasons that banks exist!)
Credit-decisioning platforms aggregate a borrower’s financial information and analyses their transactional data to assist credit decision making. Some platforms go further and consider other data points such as university grades. In future, if other unstructured data points such as social media posts are used to assist credit decision making, there could be implications for how individuals choose to conduct their online lives.
Since the global financial crisis, banks have become stricter about the rules they use to decide to whom they lend to. This has implications on small-medium businesses who typically have less “formal” financial accounting information or lower levels of security. To fill the void, online payment platforms such as PayPal have become lenders, offering capital to their merchant customers in the form of cash advances for business transacted on their platforms. The move of payment platforms into the lending space presents a significant disruptive threat to the traditional domain of the banks as it bypasses the banks payment networks and puts a layer between them and their customers at both the business and consumer end of the value chain.
Bitcoin and block chain are perhaps two of the terms receiving the most media attention in recent times. Bitcoin is a digital currency and is also a P2P system for online payments which does not require a central authority. Block chain is the distributed public ledger of all Bitcoin transactions, which allows transactions to be securely effected without the need for a trusted third party intermediary. As another form of currency, bitcoin has gained notoriety as a form of payment not only for legitimate goods and services but also for questionable activity. The real potential for bitcoin is its role as a global currency that is not connected to a particular country or central bank. Additionally, block chain technology has shown promise in significantly reducing the cost and time associated with transactions on stock exchanges, title transfers, and identity registry applications. Although still in its infancy, bitcoin and block chain has outpaced many legal and regulatory frameworks.
Adding to these fintech threats, internet giants becoming banks also poses a significant threat to traditional banks. China’s Alibaba, Tencent and Baidu have all received banking licences, drawing on big data generated from information exchanges across their networks to build a detailed understanding of their customer base.
The ability of fintechs to be more agile than their traditional counterparts poses a serious disruptive threat to traditional financial institutions. Consumers now have a growing number of financing alternatives to traditional channels; this presents a growing threat to the ability of traditional financial institutions to generate generous profits from their large and captive customer base.
While financial institutions as we know them will likely remain relevant for the foreseeable future, it is clear that sub-segments such as lending and exchanges are facing a tidal wave of disruption that could alter the financial landscape of the future.