The world of banking and financial services is starting to hear a new term. Fintech, short for financial technology, is the crossing of tech startups into financial services territory. The term loosely equates to a collection of peer-to-peer lenders, online currency exchanges, crowdfunding sites, asset management firms and mobile payments services outside the mainstream financial sector.
There are 4,000 startups looking at different aspects of banking, each nibbling away at bank profit margins. “They have created a massive fragmentation of the value chain,” says Frank Rotman, founder of a Fintech focused venture firm. Each are trying to provide cheaper, faster and more intuitive services in one part or another of the financial services supply chain.
This was the subject of a keynote speech in the 4th Annual Conference on Electronic Banking and Payment Systems in Tehran on Monday by Brett King, the founder of Moven, mobile banking app, described by Wired, Forbes and the New York Times as a “bank of the future”. Moven’s app, debit card, and contactless payment sticker provide real time spending insights that motivate customers to make smarter decisions and save more.
Fintech is rapidly using intuitive services and data interpretation to beat the banks at their job. Currently there are apps creating credit scores via social media profiles. One of these called Lenddo is using this method very successfully. Now, US banks “are coming to Lenddo because its loans have lower default rates than best US banks,” said King. In the UK Zapp, a mobile payments service, has half the default rate of multinational lender HSBC.
“They don’t use credit scores. They use data, they use behavior, and that’s the change,” says King.
Some banks have picked up on the changing trend. Traditional banks are acquiring startups to get their skills or integrate them into their company. US software company Sieble was bought by Spanish lender BBVA, to help it adapt.
This is becoming a trend and some are experimenting. Fidobank in Germany allows you to open a bank account using your facebook ID, getting loans needs further proof. That makes more sense for the millennial generation. It’s the paperwork that baffles them.
“The world is changing and banks are not well placed to change their behavior, like the textile companies and the farming community,” said King. That’s why many banks, seeing fintech as a threat to their traditional ways, may try to put regulatory pressure on these startups.
“That has never worked in history, ever before,” said King, “no one has ever successfully stopped disruption.”
Yet, some of the big players have decided to join in, on the fintech front. Russian Sberbank, Spanish Santander, HSBC have set up fintech venture funds, each in excess of $100 million. Barclays launched a fintech accelerator, and UBS has started internal tech groups to work on specific technology projects.
London and New York are the capitals of fintech, with New York stealing that crown from Silicon Valley, the traditional startup capital. New York is leading in the amount of investment, but london’s investments are growing faster. Also, London employs more people in fintech.
How to Change
“The future of financial services is not fin, its tech,” said King.
So, the future of the financial service firms relies on providing a great experience for their clients. If they don’t manage to move towards this new trend their businesses will be compromised within five to seven years.
King provided two starting points towards better usage of technology in the financial industry. Firms should “hire data scientists, and get rid of paper forms”. King also proposed that CEOs and boards bring in millennials to help them get a new sense of technology.
Banking advisor John Kelly proposed implementing technology in banks’ back offices. “The big challenge is to make the back end service-oriented,” Kelly told the Financial Tribune on the sidelines of the two day conference. Once a bank changes its back end to “a service-oriented architecture, where services matter not products,” financial services can easily be offered via mobile apps.
Another surprising fact is in many of fintech’s branches, developing countries like Kenya are leading the way -- a sign of hope for Iran. Kenya is the world leader in mobile payments.
“Iran is ahead of many countries in e-banking” Kelly stated. Kenya’s major mobile operator has 18 million customers while in Iran there are over 40 million mobile users, creating a very large market for mobile services.
When questioned if financial sanctions could hinder e-banking in Iran, Kelly said, “Sanctions don’t change [Iranian firms’] ability to implement a service-based architecture,” and there are already banks which have implemented some e-banking foundation. Tehran-based Saman Bank boasts the best and fastest e-banking services and infrastructure among Iranian lenders.
“The ingenuity and the smart capabilities of [Iran’s] technical people haven’t been affected by sanctions,” said the senior banking advisor.
What about the regulator’s role? Currently some fintech firms are calling to be regulated, so they can expand their market by gaining consumer trust, via the regulator’s seal of approval. Others are pushing the other way, contending that regulators are to slow to change from a technology perspective.
King says regulators should “allow banks to do prototyping and experimentation, and work closely with the regulator to see if [an idea] works.” This way the regulators may get comfortable with these new initiatives.
Kelly took a slightly different stance, saying regulators must take an active stance in e-banking as “unregulated banking was a disaster, and that regulators should be more open to innovation and do their own research and development projects.”
So as tech has transformed various industries, now it is finance’s turn. As business magnate Bill Gates said: “Banking is necessary, banks are not.” Which banks will stay, which will go obsolete? That depends on their adaptability to change. But, this we know. New giant’s are on the horizon.