The Next FinTech Frontier: Deeper Purpose
In recent years, FinTech has created a massive wave, disrupting many business verticals, especially the finance industry. It has improved many facets of finance like payments, money lending, wealth management, and more. This disruption has resulted in creating seamless and unique customer experiences, helping customers understand and adopt FinTech without much hesitation. The industry is awash in consumer plays that are universally recognizable like the innovations at Affirm or Apple and the Apple Card. Typically, we categorize FinTech in just four verticals: lending, payments, insurance and investing. This is what the press covers, and this is where venture capital flows. Nevertheless, the above approach overlooks some of the most undervalued corners of the industry. In this overview, you may recognize the unsexy, unusual and unfamiliar side of FinTech. The average consumer doesn't typically see or interact directly with the underbelly of the financial system, leaving it relatively misunderstood and exceptionally undervalued. The challenges there are systematic and offer major pathways for innovation to take root.
Data is the lifeblood of finance and banking. It’s required to help move money, secure banks and generate alpha for investments. It's often an afterthought as it lies beneath the surface and within the pipes until we're suddenly drowning in it. Web scraping, machine learning, drone technologies, and satellite imagery contribute to the accelerating race for more data. Companies like Thinknum are scouring the web to deliver unique insights to investors which helps improve processes in the following areas: customer segmentation, fraud detection, risk management, personalized services, compliance capabilities.
Fintech companies are well-known for being customer-focused, and customer segmentation is one of their interest areas. The financial industry is focused on dividing their customers depending on:
In this regard, FinTech companies can easily analyze spending habits depending on age, gender, and social class. They can also easily tailor their services and alternate banking products to meet the demand and needs of each customer segment. The most valuable customers, namely those spending the most money, can also be identified. This will generate higher levels of customer satisfaction, as people generally seek highly personalized offers and financial products.
Another advantage of using Big Data in the financial industry is the fraud detection prospects that it opens. Obviously, with the rise of online banking and internet transactions, companies in the sector and their clients are more susceptible to fall victim to fraud. Big Data helps banks and other financial institutions to better understand the spending habits of each customer, but also their usual online patterns. In this case, when unusual activity is detected by the enterprise, the holder of the account can be easily contacted and ask or informed about a transaction that seems suspicious.
Obviously, risk management is an area of high interest in all industries. Once again, in the finance industry, Big Data comes with the immense advantage of identifying potential risks in terms of bad investments or bad payers. While Big Data cannot completely prevent such risks, it can identify those at early stages and prevent further development into risky paths. Big data can help companies in the financial industry tailor programs and strategies that will assess the potential risks and minimize those.
In the banking and FinTech industry, like in many others, offering personalized services is one of the greatest marketing tools available. Fintech companies like Contis Group claim that more and more customers have searched for personalized and flexible FinTech services and packages. The pressure to create personalized services in the industry is also driven by the increasing number of companies that adopt such strategies, thus where a keen competition is present. Alternative banking institutions began to use the services of FinTech companies to improve their services and offer more personalized packages, but also a better, more comprehensive, faster infrastructure, which contributes to creating a more personalized and facile experience for the final consumer. Not only can FinTech companies identify spending patterns to make banking recommendations, but they can also use those to help the final user save more money if this is one of their goals. Unlike traditional banking institutions, FinTech companies focus more on creating personalized financial services that meet the very specific demands of the final consumer, and this is where Bid Data comes in the discussion.
Companies that offer financial services are always required to follow specific rules. This calls for frequent audits and compliance controls to follow the very specific demands of the industry in terms of security, privacy, data, and finance. Big Data contributes to catering to these companies with valuable information in terms of consumer needs and expectations regarding those. Using cloud-based data, these companies can now use analytics packages and integrate those into their systems, allowing them to have a more actionable insight in this regard. Moreover, those companies in the FinTech industry that offer personalized financing options can now analyze and detect where a financial crisis is more likely to occur and adapt their strategies to follow some strict preventive measures.
Financial infrastructure is often ignored (which means it's working) just as we tend to enjoy a hot shower until the pipe bursts. However, the proliferation of FinTech apps attached to institutional platforms eventually devolves into an atomistic pile of matchsticks. It opens up a complex but massive opportunity for those brave enough to reinvent the foundation of the industry. For example, OpenFin has developed a new operating system for institutions, and other teams are tackling cloud migration, APIs and core banking functionality.
“Open Finance “ — open-source financial services infrastructure built on public blockchains — may be the next major digitization narrative after FinTech. Driven by the transformation of analog liquidity (deposits in a bank account) to digital liquidity (tokens in digital wallets), the playing field can be leveled for offering financial services. As a result, new profit motives are introduced encouraging innovations not previously feasible. For the first time, there is the possibility to move liquidity from an analog world into a digital world, with minimal reliance on existing FS infrastructure (e.g. banks). Liquidity can pool and aggregate in different ways not constrained by physical commercial bank footprints and distribution networks (e.g. branches/ATMs). This erodes a long-term advantage that commercial banks have long held: a monopoly on cheap funding vis-a-vis deposits. By attempting to redefine financial services from the core, the longstanding conventional wisdom about “how banking works” will change. The result is the possibility of something fundamentally new to emerge. This is why Open Finance may turn out to be a more disruptive digitization narrative than we’ve seen in the past.
The ultimate beneficiaries in the world of Open Finance will likely be consumers, and by extension, the financial services providers who choose to adapt to this new paradigm. However, the sustainability and degree of success for new business models will be predicated on the continued maturity of two nascent Open Finance-enabled paradigms:
- Leveled playing field and lowered barriers to entry for financial services. In a world with Open Finance, anybody with an internet connection can theoretically plug into an ecosystem of open financial services protocols (e.g. DeFi), built on public global settlement infrastructure. As long as this remains true, anyone can extend their business offerings to include financial services without much-fixed cost investment — just OpEx to use the protocols.
- Increased competition for liquidity creating a profit motive for innovation. Most people don’t realize that when they deposit cash at a bank, they are essentially investing their money with them. The fact that most banks pay a similar interest rate to its customers, suggests that the counterparty risk should be the same across all banks. This could not be farther from the truth. As we saw in the crisis, bank risk differs greatly (depending on geographic footprint, product focus, underwriting competency). Most rational investors demand higher returns if they are exposed to higher risks. The only place where this does not hold true is in commercial bank deposits. If access to liquidity continues to be democratized, new blockchain-native offerings can compete on a more level playing field, passing along efficiencies to customers (example below). A world with increasingly digital liquidity creates a profit motive for innovation.
In practice, trying to guess exactly which new players and business models emerge, and win, will be difficult. It is very possible for innovative business models to come from both incumbents (banks, wealth & asset managers), through to new startups and non-banks. The underlying drivers of change are the same. As both incumbents and startups become increasingly comfortable with the new paradigm, along with regulators and policymakers who begin to grasp the economic game theory associated with public blockchains, the conditions for Open Finance inspired innovation will flourish. It will be exciting to see the new innovations — many of which we can’t even imagine — built on this new world of Open Finance.
Matt Harris, Partner at Bain Capital Ventures believes that eventually, we won't talk about "FinTech companies" in the same way we don't talk about "internet companies" today. FinTech will be part of every industry, and many have already linked up.
Wresting with a past full of Madoffs and mortgage-backed securities, large financial institutions are beginning to flaunt deeper purpose. In early August, the Business Roundtable issued a new purpose for corporations — but instead of profit and shareholders, it included words like:
FinTechs are capitalizing on this shift by connecting banks to activities that support this new philosophy. For example, the rise of ESG investing has led companies like TruValue Labs to build applications that bring that insight straight to the fingertips of investors.
What is green finance, and how will innovations in FinTech impact the environment? The United Nations Environmental Program is banking on new financial technologies to address several issues where environmental stewardship and sustainable development align. Sustainable development through new and innovative FinTech will, hopefully, address several issues that are keeping large groups of the world population living in extreme poverty and excluded from formal financial systems. The World Bank and other global development groups estimate that about half the world’s population, between 2 billion and 2.5 billion people, do not have bank accounts or access to formal financial services, such as credit, savings, or insurance. The goal is universal financial inclusion by 2020. Financial inclusion is challenged by issues of:
The lack of infrastructure and financial inclusion for half the world’s population is seen as one of the primary roadblocks to sustainable global development. FinTech vision - many parts of the world with large unbanked populations, leap-frogged from a cash economy over credit and debit cards, to mobile money for both point of sale and bill payments. With strong internet use and smartphone technology, for instance, China is spearheading efforts at moving into a cashless economy. Estimates are that 60% of the population has internet access; the current population is 710 million. The developments have addressed issues of rural access, identity, and credit scoring using alternative variables. The majority of access to the mobile money system in China is through WeChat and AliPay. Mobile money systems such as digital wallets are significantly less costly to run on average compared to traditional financial systems such as brick and mortar banks. There is a carbon footprint saving as well when moving from a paper-based to a digital system. For those in rural areas, transportation savings when accessing financial services can be significant. The significance of these individual small savings, though, needs to be multiplied by the global population who are currently unbanked. The increased access to formal financial services by half the world’s population will fuel both human development and a sustainable future.
The wider objective of FinTech is to serve the unmet financial needs of those segments of the population which are not the core target segments of traditional financial services models. Thus, FinTech mainly focuses on a core objective to contribute to the larger goal of financial inclusion for one and all. The financial environment has changed significantly. This is due to the increasing popularity of decentralized currencies, tech payment options, digital wallets offered by companies like Apple, Samsung, Google, and online reviews. The traditional financial institutions like banks are now struggling to prove their ongoing value to the consumers and strive to provide high-quality services at a low price. On the other hand, the healthcare industry has been reluctant to embrace such technology at a similar magnitude. However, FinTech has the ability to bring significant change in this sector and make healthcare more accessible and affordable for the masses. FinTech goes where the money flows, and in 2018 $3.5 trillion dollars flowed through the U.S. health care system. With that much capital at play inside of a complex and politically charged industry, extraordinary problems arise. Health care's intersection with payments, insurance and data opens a collaborative gateway for financial technology. Companies like Simplee are streamlining medical billing and collection, while others tackle insurance rates and data management. Another important aspect, the worldwide wearables market is increasing by 16.9 percent every year. Around 310.4 million wearable devices are sold in a year, generating a revenue of $30.5 billion. This success is owed to the monitoring of personal health and wellness. The relationship between tracking fitness and the larger health issues is undeniable and the success of such products has direct implications on the healthcare sector. Providing 24 hours of access to important information has been exclusive for financial institutions — until now. But its importance cannot be denied in other sectors too, thus, FinTech should be utilized to introduce this in healthcare as well. Through blockchain applications, one can store data, improve functioning with the help of AI, and help individuals in accessing the data. The payments and billing systems in the healthcare industry are full of trouble, so a change is not just desirable but necessary here. FinTech startups should help in finding ways to facilitate payments by offering online billing and bill payments. The interest of the masses is to create a retail kind of experience in healthcare and introduce blockchain for easier and facilitated transactions. As individuals have become more open about sharing their personal details and lifestyle choices, it’s possible to formulate personalized programs. Depending on your age and health condition, these programs can actually lead you to a healthier lifestyle and help in keeping the problem areas under control. Healthcare should be innovating itself with time and must be working for the betterment of the individuals. Serving the health-related needs of individuals should be prioritized by different industries and they must work together to ease up the healthcare processes.
There are still countless problems to be solved and opportunities to get involved in across traditional and trendy FinTech verticals. But as we tackle those problems, the technical transformation of this industry will evolve. The next FinTech frontier lies under the surface and in shrouded corners that take a bit of digging and won't win the beauty pageant. Look under your feet at the foundation, the walls, and infrastructure, the data flowing through the pipes and the customers on the periphery. They will undoubtedly be the key to opening the floodgates to the next chapter for this burgeoning industry, which has already begun.