A new breed of Financial Technology start-ups or “Fintech” are on the rise and presenting such aggressive competition to traditional High Street banks and financial institutions. Fintech companies are now providing financial products that is once the exclusive of banks, faster, sleeker, cheaper and more customer-centric way. This trend has not only drastically changed the face of lending and managing financial resources, but also potentially altered how, where and when payments are made.
Though several definitions exist for the term “Fintech”, for the purpose of this essay, it suffices to align with Caitlin Devine’s view that a Fintech is a start-up or company offering a financial services based product mainly through digital channel with an intent to challenge and disrupt the industry by offering an alternative. The most common types of fintech offerings include digital wallets e.g. Apple Pay, peer-to-peer money transfers, mobile payment systems, and peer-to-peer lending.
What is driving the Fintech revolution?
Whilst the overarching proposition of these start-ups is to offer capabilities for customers to get the job done using everyday devices, eliminate the “middle-man” and digitalizing experience throughout the journey and not just at the beginning, the drivers for the surge largely remains the following;
- Customers’ expectations – millennials
- Social media boom
- Lowering cost of technology
- Technological advancement in Data Science and AI
- Market Size and Venture Capital Investment
The following are highlights some of the offerings from these fintech start-ups:
- Mobile banking
Fintech start-ups have aggressively latched on the mass-market opportunities presented by smartphones to offer alternative payments methods. Customers are now able to transfer money, pay for goods and services, set up regular payments, manage their accounts etc., from the convenience of their smartphones.
- Digital Wallet
From Google wallet to well known Apple Pay, digital wallet allows users to store, send and receive money from their digital wallet accounts to other beneficiaries. The digital wallet would have already been linked to their credit/debit card or bank account.
- Peer-to-Peer Currency Exchange:
This aims to cut out the banks and brokers by providing an anonymous online meeting place for those who are looking to buy each other’s currencies by matching buyers and sellers.
- Peer-to-Peer Lending (Crowdfunding)
Zopa and Funding Circle offer platforms that bring borrowers and savers together to do business without the banking trusted ‘Middle-man.
- Digital currencies and Cryptography
There are currently numerous digital currency schemes based on distributed ledgers that allows remote peer-to-peer exchanges of electronic value without the need for intermediaries.
- Internet of Things
When fully realized, every object including cars, building and so on, will not only have data capturing and processing capabilities, but also internet connectivity.
In spite of the gains and promises of fintech start-ups, the journey ahead is still riddled with challenges and pitfalls. I highlight below some of the challenges this industry may have to contend with in the coming years:
- Cross-border transfer
Differences in legislative frameworks around by countries still present a big barrier. Systems also still largely exists in silos thereby necessitating the need for the costly intermediary banks which distributed ledger attempts to eliminate. Though Blockchain technology, a network of distributed ledger, has been recently hailed as the panacea to cross-border payments, but much is yet to be addressed from regulatory point of view.
- Anti Money Laundering
The rise in global terrorism has meant AML requirements is further tightened by financial regulators. The process which is largely manual is tedious and laborious. Ripple Labs, a digital currency operator, for instance only recently got fined $700, 000 for its failure fully fulfil and implement AML requirements. It’s a heavy price to pay for a start-up but this hasn’t put off others as there are much opportunities for innovation in this arena.
- Know Your Customer
With an average spend of £40m per year on KYC Compliance, Fintech can latch on this opportunity by providing superior solution at the fraction of the cost to eliminate the manual process.
- Data Protection, Privacy & Security
Blockchain seem able to fulfil these requirements but there are still changes around integration with existing services and infrastructure as we are still a long way away from replacing the dated infrastructure. MIT Lab currently pioneers an encryption solution but the decrypting algorithms.
- Digitalized credentials
There are opportunities around digitizing customers’ details and integrating that into mobile wallet which can be used to transact business as opposed to putting up with the clunky process of having to supply ALL persona details every time at PoS. This also implies that such digitalized data would have to be ‘compatible’ with most if not ALL Point of Sale and could potentially be linked with other customer details as Samsung Pay is soon to launch a product to fill the gap above.
Innovation in Payments BNY Mellon
Payments disrupted: The emerging challenge for European retail banks
Do fintech startups pose a significant challenge to the big banks
Fintech: What 60 Minutes Left out
Global Payments 2020: Transformation & Convergence
Complying with AML Laws: Challenges for Fintech
Fintech companies in fraud prevention, KYC and security
3 factors driving fintech startups (and what banks need to do to compete)
Bloomberg Market – Funding for Venture Capita-Backed Fintech Startups to hit a record in 2016
Global IT Spending – Gartner