It’s an adage: dinosaurs don’t move fast enough, which gives agile creatures (or companies) an ability to survive and even thrive. Banks’ dominance over money is eroding. That may surprise traditionalists, given that financial services are the largest sector in the world and that big banks have potent allies in politicians. However, technology and evolving paradigms are giving FinTech ventures an edge when it comes to offering new financial products, services, and practices that improve the customer experience. There’s also the issue of trust. Just 41% of Americans trust banks, while 27% are angry about the economy, according to a 2018 joint survey by the University of Chicago and Northwestern University. That’s creating a culture in Main Street that’s suspicious of Wall Street. Aside from mistrust, technological trends are giving consumers more ways to store wealth, send payments, and protect data, included decentralized finance (DeFi), tokenization of assets, artificial intelligence, regulation technology (RegTech) and cryptocurrencies and etc. Here are ways that depositors, borrowers, and creditors can do business that was traditionally reserved for financial institutions.
In the not-too-distant future, nearly every company will derive a significant portion of its revenue from financial services. One of the key elements enabling this transformation is evolved paradigm and, more importantly, how that’s going to change banking as we know it fundamentally. Every company, even those that have nothing to do with financial services, will have the opportunity to benefit from FinTech for the first time. Startups will be able to launch companies faster and more cheaply. Existing financial services institutions will be able to introduce new products quickly—and spend less on IT maintenance. And most importantly, this means more choices, better products, and lower prices for consumers. In terms of momentum, a survey by the World Economic Forum found that just 28% of the millennial and Gen Z generations trust their banks to be fair and honest. That is a far cry from providing delightful products. Meanwhile, more than 50% of Americans who live paycheck to paycheck often experience an entirely different financial services system. Though they’re likely to need financial services more, they have fewer options, and those offerings are much more expensive. Collectively, the majority of us don’t love our banks.
This same monumental change—infrastructure “as a service”—is coming to financial services. And it’s not just one company; it’s multiple companies because financial services infrastructure is so complicated. This transformation will reduce the cost and complexity to become a financial services company, and importantly, it will unleash thousands of experiments that will pave the way for the future of banking. We would expect this innovation to come from startups and existing financial services institutions. But a large percentage of it will come from existing companies that are adding financial services for the very first time. It’s already happening: Apple just launched a credit card. Now, this may have been a highly anticipated move in FinTech circles, but not that long ago, Apple was just your computer company. Now it’s hoping you’re going to like its credit card as much as you love your iPhone. It could be easy to dismiss Apple because it’s a company that’s both flushes with cash and known for launching new products. But this trend is happening more broadly. Take Uber and Lyft. These are ride-sharing companies. If you’re a driver, they might also be your bank. For Uber and Lyft, adding financial services has two benefits. The companies both spend hundreds of dollars acquiring drivers. Then they have to make up that cost through margin on rides. It’s much faster to make up that cost if they also have a margin on banking services. Furthermore, if I’m a driver, I’m more likely to stay with a company that is also providing my financial assistance. Ultimately, if successful, Uber and Lyft might need to acquire fewer drivers, due to better retention.
Bank customers are frustrated with practices like unethical behavior, overdraft fees, and excessive ATM charges. These sentiments give startups an advantage, particularly if they can offer better and cheaper services. Hence, fintech ventures are creating features designed to attract consumers and outperform banks. For example, Algorand is building a high-throughput blockchain that can process as many transactions as large-payment processors. However, blockchain allows senders and recipients to transact 24/7, unlike banks, which are closed after business hours and weekends. Secondly, blockchain-powered payment systems are typically frictionless and less expensive because they remove the need for intermediaries. These systems are also viewed as more secure since multiple nodes validate a transaction. While a depositor needs to go to a bank to fill out a wire transfer form, PayPal, Venmo, and other online payment systems allow users to simply swipe their phone. A 2018 McKinsey study observes that “Fintechs ... are investing significantly in technology to improve performance, respond to competitive threats and capture investment and partnership opportunities.” Personalization, along with better products and services, is key themes in the financial sector. The winning game plan leverages agility, not too-big-to-fail size.
Close to 2,000 fintech companies were launched last year alone. Existing financial institutions might finally be able to replace some of their legacy systems and spend less on maintenance. Besides, they may be ready to launch new products more quickly by partnering with some of these startups. Every company, as we saw with Uber, Lyft, Shopify, Mindbody, should be thinking about how to leverage financial services to serve their customers better, better retain their customers, and drive more margin. Finally, the fascinating part comes to us as consumers. With new financial services companies spinning up—and some of our favorite brands launching financial services—our existing facilities are getting better. I believe that in the not-too-distant future, everyone, no matter their socioeconomic demographics, no matter where they live in the world, will have access to affordable financial services, and we might even love them.