Sunrise on the FinTech Horizon

Let’s talk about the future of banking and financial services, and importantly — what it could mean for you.

The machines have arrived in banking. Stale old fat-cat bankers are up against a new era of nimble tech companies with smooth designs and artificial intelligence. FinTech disruption has got legs and it’s sprinting. The rapidly scaling companies are grabbing market share from their traditionalist rivals, but the old school banks still have some fight left. Some are trying to reinvent themselves by deploying mission statements like “to be the best in digital banking experience” or by buying stakes in the upstarts. Will these strategies help them survive or win back customers? It’s reached a point where we need to talk about what’s happening in finance. Some of the things we need to talk about are what the future of the banking experience will be, what products will be available, where your spending data goes, what’ll happen to your credit history and what it all means for jobs and the industry as a whole. FinTechs aren’t just changing the customer experience, they’re shifting the entire game.

Screens from Frollo, Stockspot and Afterpay

Mass Personalisation

A lot of buzz in the FinTech world is around personalised banking. Creating a better and smoother customer experience while enabling more choice for consumers. This means using powerful tools like machine learning and AI to analyse spending data (data created by all your transactions) or user input information (completing a quiz or form) to create a digital user profile. This profile is used to tailor the product, promotions and services to you. Saving for a new car, a house deposit or a holiday? Well these new apps can help you identify where you can cut back on spending and increase your saving. Looking to get into the stock market or build an investment portfolio? There’s ‘robo-advisors’ who will help determine your risk profile and build a portfolio for you. The FinTechs are all about ease of experience and making your life more simple.

The arrival of ‘open banking’ platforms and data sharing tools like APIs has powered the FinTechs forward. These companies can now source data directly from traditional banks and setup your new account on their fancy new platform. The openness and availability of data is great for everday people as it means there’s so many more service providers for us to choose from. The choice and competition in the space should lower fees and improve the overall experience. That boring old cheque book or debit card is now being reinvented to try and give you something you want or need.

Reducing friction within financial service has steadily become more important as the industry has become more incomprehensible, and more complacent and reckless towards the treatment of clients. A simple home loan feels like it has a million options and it seems impossible to find someone to give you a straight answer about which of these options is best for you. Reducing friction means it’s easier to get access to financial products, swap banks, or use new tools budgeting, saving, shopping, insurance and debt.

There is a dark side to all this ease and openness though. Easy debt — easy problem. There’s huge rewards for being an excellent customer who saves a lot, gets rewarded for their limited spending and builds good credit history. Unfortunately life can get in the way. You lose your job, delay payments on a loan or credit card, or take on more debt, well now — thanks to sharing — the whole industry has that information. You can’t get away from the hurdles of life or missed payments. There are no clean slates in this new world of open banking and shared data. A short term crisis or debt spiral has the potential to haunt you for years to come.

As you build financial data you’ll be able to build your way out of past issues and also into benefits and rewards. For example some FinTechs now offer digital insurance for products based on your transaction history, or the ability to send a smart receipt, or even flag the expense as a tax receipt or work expense. It’s all about making life easier.

The platforms producing an ‘easier life’ and your ‘personal experience’ are generally built on machine learning or AI. Computers that get fed data, analyse it and spit out a result — your personal experience. However, that personalisation is still built on the rules of the machine and the programmer. They may not take into consideration what’s actually happening in your life. There are intangibles that only a human can listen to, understand and assist with. I believe that these digital tools will help a huge amount of people save more, be smarter with their money and make better decisions but they are probably best used with a human advisor.

A lot of the products are digital reinventions of old products. Rewards for spending on your transaction account isn’t that different to credit card rewards. What these digital reinventions do provide though, is choice. Banking has historically been held by incumbents that provided little differentiation and customers simply had to accept what they were given. It was too hard to swap banks, and what you got elsewhere wasn’t that different. Thanks to the FinTechs that’s changing.

Amazon + Goldman Sachs have partnered for data and a BaaS product

Banking as a Service (BaaS)

The arrival of so many competitors is fragmenting the financial industry into specialised and modular banking products and services. Companies are transaction specialists, credit card providers or savings accounts. They aren’t necessarily trying to be everything.

This specialisation was highlighted by the recent partnership announcement of Goldman Sachs and Amazon. Goldman Sachs will now be providing sellers on the e-commerce platform a ‘digital credit line’. This is a revolving credit facility that sellers can access and Goldman Sachs will not only get the credit business but they will also get all of the Amazon merchant data. A very powerful data set to go with a banking product. This partnership announces the arrival of Goldman Sachs, Banking as a Service. Where tech and finance are intertwined.

If we stick with Amazon for the moment we can see that Amazon is partnering with finance specialists across their business — Zip Money, Goldman Sachs, American Express, Synchrony. Rather than going with a full service provider that can do the lot (eftpos terminals, online transactions, bank accounts, trade finance etc.), they are opting for a specialised and modular approach.

Financial services providers like the growing FinTech Stripe, are starting by specialising and mastering one product market first and then expanding. The expanision process is by building modular components clients can add on or use separately. For example a business can get their online transactions platform and/or build on their billing platform from Stripe.

Vertical integration was both a success and failure in traditional banks, and it comes as no surprise that FinTechs are offering a range of products in a new way. Bankings new horizon appears to have vertical integration and full service providers as modules that can be plugged in, added on and swapped out for products from other providers.

The big change in product integration will be the value of the data rather than the ability to process transactions or provide credit. Who owns your data and who can provide the analysis and insights you need — that will be what makes customers stay or add on more modules. The stickiness of data will be the new barrier to swapping.

Stickiness is being created in all areas of FinTech. Slick designs and easy-to-use platforms are coupled with data insights to get you engaged to their service but the rewards programs, promotions, insights and notifications of special events building the stickiness. An easy example of building stickiness is Afterpay’s shopping pages. Notifications of special deals on their website exclusively comprised of companies that accept Afterpay for payments hook customers in. But where does all this spending data go? What happens to all the data some of these FinTechs are compiling on you?

If we look at an Afterpay transaction we have to ask does the transaction data go to your traditional bank, to Afterpay, to the merchant, to major stake holders in Afterpay like Tencent, and does it or will it end up in the hands of foreign governments? Scary thoughts.

Your Life, Your Data

Every single dollar you spend without using cash can be tracked, analysed and shared. In the digital age if you don’t use cash then you have no privacy. The banks and FinTechs can see where all your money goes. They use this data to build a digital profile that can assist with delivering a personalised experience to you, to analyse your credit worthiness, to analyse consumer spending and the economy, and a whole range of other things.

They’re able to do this through ‘open banking’ platforms and sharing agreements. This is where the banks use API’s (little digital keys to access information from someone else) to share data with each other. For example, a budgeting app that automatically categorises your spending data into transport, food, utilities etc. and then gives you ‘insights’ on your spending behaviour, probably uses an API to get the information from your bank.

There’s a few things about this information sharing world to be aware of. Banks may refuse to cover you for any fraudulent activity that occurs on your account as you have authorised third party access (given someone else permission to get your account data). The other and more potentially scary question is who has your data and are they on-selling your data to other companies? Is that budgeting app using your spending habits to sell to marketing companies?

I don’t know about you, but I find it a little terrifying that so many people can see when and I bought milk, how frequently I buy take out or where I went on holiday. Our entire lives are built through series’ of transactions. Paying the bills, getting the groceries, and all the rest. It’s a whole lot of data and it’s pretty easy for someone to build a profile of us from it, and once they have that profile, there’s no knowing what they’ll do with it.

New Banks and Old Banks

The Neo-Banks are here with impressive digital solutions. I personally use a branchless bank and absolutely love it. They’re a traditional bank that’s made the transition to all digital rather than being a digital native or neo-bank. There’s no doubt that the insights the digital banks can provide are immensely useful, but a lot of the traditional banks have been investing heavily in these capabilities as well. CommBank in Australia has one of the best digital offerings in the world and owns a significant stake in the global buy now pay later firm Klarna.

The lines between new banks and old banks are blurred. Especially when you consider that Goldman Sachs views themselves as a BaaS provider rather than a traditional bank. So what does all this mean?

Well capital requirements and regulation are pretty hectic for traditional banks. The extensive government oversight often requires hundreds of staff dedicated to compliance. The FinTechs that don’t take Authorised Deposits (government backed deposits) won’t have a lot of these challenges and requirements. Therefore they’re more agile and able to provide differentiated services, or pivot their customer offering. This regulatory gap actually creates opportunities for both the old school banks and the new school FinTechs.

Traditional banks can create or provide regulatory products and services to the FinTechs for a fee. This could even include provided white label deposit accounts or underwriting the FinTechs and being the capital/money behind the technology. Just because they aren’t at the customer facing front end doesn’t mean they can’t be in the game. Like an onion the industry can have layers.

A layered service is the ideal place for the future of the industry. A space where FinTechs can innovate and push the customer experience forward without taking on the cumbersome balance sheet and regulatory requirements of an old bank. The traditional banks can provide their risk, capital and regulatory expertise in the form of new products and services to the FinTechs while still growing and winning business. An industry built this way could minimise systemic risk while improving client outcomes.

There is a balance to be had between the traditional bank and the FinTech. Just like there’s a balance between the human advisor and the robo advisor. We simply can’t avoid nuances of life.

Conclusion

The FinTechs are changing everything about the banking game. Companies like Douugh are reinventing the banking experience and as if that wasn’t enough they’re changing the way companies are going to market for investors. Douugh is set to trade on the ASX via a reverse merger rather than your traditional company launch and IPO.

This new school of banking is definitely exciting and I can’t wait to see how they it continues to change the landscape. Everyday consumers are the winners from their arrival as they provide more choice, price competition and will ultimately improve banking experience the world over.

Within this technological revolution is an opportunity for a balance to be reached with traditional banks and FinTechs. The heavy regulation and balance sheet requirements of traditional banking slow down adaption of new technology but provide unique and essential skills the industry can’t afford to lose. At the same time the industry needs the disruption and customers deserve better banking.

To the FinTechs I say, keep up the good work!

A very short list of a few great FinTechs to check out are:

If you have any questions then please feel free to comment, and if there is anything you’d like to see analysis on or read about in the future then let me know.

Also, please note that this article does not represent financial advice or the views of any organization; it is only the opinion and analysis of the writer.

Thank you for reading.

Yours,
Chris Leeson

Bringing finance and economics to you with a focus on in-depth analysis and everyday life.

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