Fintech has been the buzzword and the bogeyman in the banking industry for the past few years.
Small, agile start-ups have started to give established banking giants sleepless nights and a run for their money as they eat into market share and start to chip away at profits in traditional stronghold areas.
So what are the biggest digital trends that we will see in banking? What is going to become the mainstream? More importantly, should the traditional big players in finance be genuinely worried about the newcomers onto the scene?
This article takes you through some of the developments to expect and the names to watch out for.
Digital Wallets and P2P payments
One of the longest standing disruptions happened in the money transfer space. The rise of digital wallets – with it the ability for people to both move money around and pay without the need to use their bank accounts – has been causing a stir in markets all over the world.
In developed markets, the hype arises from digital wallets’ disruptive potential to take transactional business away from banks.
It also steals potential customers away from banks in developing nations which have always had low take-up rates for traditional banks. For example, in India there are dozens of digital wallet players catering for the estimated 900m unbanked.
The space has become even more crowded as the lines between banks, start-ups and even Payment Service Providers have become blurred. Now, the traditional payment platforms are partnering with digital wallet players to create pre-paid virtual debit cards (For example – Visa’s partnership with India’s Oxigen wallet). No longer do they need the services of a bank to allow consumers to use their service.
This, however, has led to an oversupply in a space in which it is hard to actually make money. Fierce competition and low margins, coupled with the existing notion that people will not pay money to transfer value will likely mean that the digital wallet space will go through a period of consolidation, with a lot of the early start-ups going to the wall before 2020.
Those who survive will most likely be the ones who can find the magic mix of profits and brand loyalty.
The global remittance market is responsible for a significant part of international capital flows, with more than $580b being sent across the globe in 2015.
This market has been traditionally dominated by large specialist players like Western Union, Moneygram and Ria who have relied on creating and maintaining huge networks of cash in and out of venues to entice foreign workers sending money home.
Due to the manual and analogue nature of the business, it has been ripe for disruption by non-traditional players for some time, and now they are here.
While mobile remittance is popular in developed nations (15% of all remittance transactions in the USA were through mobile devices in 2011), the challenge has always been how to reach those without bank accounts and provide the cash out service when there is no branch network.
That space has been occupied by the more agile remittance players and by other more surprising sources. Telco operators have spotted remittance as a potential opportunity and realised they can make capital by using their own network to provide the channel to remit electronically.
Singapore’s Singtel has the mRemit product, which allows workers in the little red dot to send money to the Philippines, Indonesia and India through their mobile phones.
The market leader, however, is Vodafone’s M-PESA, a mobile remittance and micro-financing platform which began operating in Kenya. In 2012, it had 17 million M-Pesa accounts in Kenya alone. Since then, it has expanded to India, Afghanistan and eastern Europe.
The last remaining territory would seem to be social, where players like Xpress Money have come in with the XOPO app. Launched in January 2016, the app allows people to remit money from the UK using their social media accounts.
Peer-to-Peer Currency Exchange:
P2P foreign exchange (peer-to-peer foreign exchange) is one of the fastest growing sectors within the industry.
This micro-industry has been driven by start-ups like Transfer Wise and Midpoint who work by cutting out the middleman – banks and brokers – and the costs associated, by connecting the two parties to an exchange directly.
The concept works like this. Party A is living in Hong Kong but wants to convert to Singapore dollars; while Party B wants to convert Singapore dollars to Hong Kong dollars. Technology pairs these two people together and finds the mid-point between the two rates (which both sides would agree on).
This method generally creates a favourable rate when compared to brokers and banks, which usually apply a spread of numbers, rather than fixing on the midpoint between two transactions.
Cutting out the middle man also allows the fee to be fixed or pegged to a far lower rate than was traditionally possible. Banks typically charge a margin of 1-5 per cent on mid-market rates, plus a transaction fee. Most P2P exchange apps charge a flat fee of less than 1%.
The industry has been so successful that the likes of TransferWise (who raised $58m in capital in 2014) have now become bona fide big businesses.
CurrencyFair, the online P2P currency exchange market place also claims the industry will transact £250bn of currency transfers by 2017.
Robo advisory Services:
Robo-advisor is the new buzzword that has been growing steadily within the investment industry for the past five years.
Algorithm-based online wealth management services, which give portfolio advice based on automation have started to replace human advisors simply because younger people would rather seek cheaper and more automated ways of tracking and creating their investments.
The millennials driven market has been dubbed the HENRY within the finance industry, High Earner Not Rich Yet. Those who are probably going to be wealthy but are still at the stage where they feel brokers fees are not worth the money.
This large and willing audience was ripe for disruption simply because the existing industry didn’t cater for their needs. Leading Robo-advisory business Wealthfront said 90% of its 30,000 clients are under the age of 50 and 60% are under 35.
A study by AT Kearny in 2015 found that billions of dollars in funds have already moved across to algorithmic investing services like Betterment or Wealthfront and, and that number is predicted to grow.
The report goes on to say that as much as six per cent of all U.S. investments – about $2 trillion worth – will be managed by robo-advisors by 2020.
Traditional thinking has remained, that of the hardest banking models to disrupt are insurance and mortgages, namely because of the technical nature of the models and the large amounts of capital needed.
Disruption has generally been around the edges of the space – with price comparison websites and the rise of online insurance selling in the West – but now fintech companies have slowly but surely started to encroach on the financial side of the business.
Fast growing start-ups Guevara, Friendsurane and Lemonade (which raised $13m in late 2015) are using the crowdsourcing model to reduce insurance costs and to make claims cheaper. Their model works by pooling a monthly fee with a group of other people (in the case of Friendsurance it would be you friends and family)
In this model, you pool part of your monthly fee with a group to insure against claims. The fee you pay is split between a collective pot of money that pays out claims and an individual insurance.
The crowdsourcing element reduces costs, but the real benefit – in theory – comes with the sense of responsibility that comes from being aligned with a group. If you know your insurance claim comes from of pot of money that you might know or have an affinity with, you are less likely to make fraudulent claims or over-claim.
Mortgages – on the other hand – have been a far more challenging space to disrupt, but P2P lending on a large scale has been starting to make inroads into a difficult market.
The UK based Landbay has found a niche in creating a P2P mortgage model only for those who are buying as an investment. It attracts investors in with an attractive interest rate and the promise it is lending to the buy-to-let market, statistically one of the safest asset classes in UK lending.
In 2015 it was lending around S$4m a month and was named one of the most disruptive start-ups in the UK by the Everline Future 50 report.
Fintech’s inexorable march forward will bring about change in the industry. Whether big banking institutions or small start-ups win, consumers will enjoy greater efficiency in financial services.