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Disruption Series: FinTech & The Future of Money

Fintech

When you think of the word ‘disruption’, several well-known names usually jump straight to mind. Uber, Airbnb, Tesla and Netflix are some of the most recognisable, but there are plenty of others dispersed throughout a variety of industries. These well-established brands have developed their reputations as start-ups that have turned the business model in their particular niche on its head and are giving the incumbents a good run for their money. In some cases, (Netflix vs Blockbuster for example), they’ve even put them out of business, although this is an exception.

One less publicised industry that is also experiencing significant disruption is Financial Services, which, up to now, has been dominated by large banking groups. What is driving transformation in these industries is the wealth and power shift from Baby Boomers to Generations X and Y and the different attitude that the younger cohort has towards customer service in the financial domain.

Introducing FinTech

The catalyst for change within financial services is badged as ‘FinTech’ and it lies at the intersection of financial services and technology. With this unique DNA, FinTech is able to deliver a state-of-the-art customer experience, with a speed and convenience that is leaving the ‘old school’ banking and financial services industry in its dust. It’s bringing a much higher degree of customer centricity to the entire financial system – which is what ‘disruption’ is all about.

In the same way that companies like Uber and Airbnb have transformed their industries, FinTech start-ups are riding the waves of disruption with solutions that better address customer needs by offering enhanced accessibility, convenience and tailored products. And the younger generation – in particular, Millennials – are responding by following with their digital footprints.

disruption This insistence on near-instant gratification in customer service delivery and functionality leads Boomers to label the younger generation as ‘impatient’, but in reality, it’s simply a reflection of what this demographic has grown up with, and what they are accustomed to. This expectation could be summarised as: “I know what I want, I’m used to getting it the way I want it and I want it now.”

Consultancy PWC describes in a recent FinTech global report how clients, like those in Gen X and Y, are becoming accustomed to the digital experience offered by companies such as Google, Amazon, Facebook and Apple, and they expect the same level of customer experience from their financial services providers. These mobile-first consumers take immediacy, convenience and security as a given, and archaic payment solutions that take days rather than seconds for settlement are considered unacceptable.

Changing Landscapes Push Innovation

And it’s not just in transactional banking that FinTech is scoring points, it’s happening right across the financial services spectrum, including portfolio management, mortgages, car loans, insurances and peer-to-peer lending. FinTech start-ups are using technology and networked platforms to reduce costs, offer differentiated products, provide a better user experience and offer shareholders additional revenue opportunities.

Peer-to-peer lending is a prime example of how FinTech has cut right across the traditional banking value proposition. In this lending model, the intermediaries (banks) have been removed from the equation – leaving only three actors: Lender + Borrower + Platform (provisioned by FinTech). Their imperative is to scale fast and keep investors happy – a job P2P lending is doing very successfully.Fintech disruption

Big U.S. P2P lenders include Lending Club and Prosper to Peer, while in Australia successful companies include Harmoney and Squirrel Money.

However, it’s worth noting that the traditional Financial Services giants are not sitting back and allowing FinTech startups to ‘eat their lunch’. Many have embarked on significant investment in digital technologies to lift their game in the fields of customer service and transactional banking. Their goal is to secure their existing ‘old (Baby Boomer) money’ as well as provide FS smarts that will attract new Gen X and Y customers.

To accomplish this, some are going so far as to set up internal or external ‘innovation units’, which are tasked with developing their own FinTech financial services solutions. The success, or otherwise, of these units depends largely on the freedom they are given to emulate the agile methodology and out of the box thinking that start-ups seem to employ instinctively. However, these FS institutions have deep, profitable pockets and already established culture, resources and capabilities that start-ups lack, which gives them a huge advantage.

Developing Economies are Untapped Markets

Encouraged by the dramatic increase in the number of people in the developing world getting access to the Internet and smartphones, FinTech start-ups are attempting to disrupt the existing financial order in these markets. Up to now, traditional money lenders and informal remittance services have often been the only option for much of the population. However, new mobile-hosted platforms are allowing the previously financially disenfranchised to participate in first-world banking practices. 

Blockchain FinTech providers are attracting third world customers and younger generations alike, by offering access to services through multiple service channels. Central to this is mobile smartphone adoption, which is already driving major changes in the payments arena. And this acceleration to mobile financial services provision will only increase. According to Bill Gates, in the year 2030, two billion new customers will use their mobile phones to save, lend and make payments.

Here at SMSGlobal, we believe a mobile-first approach is absolutely vital. What we’re seeing in the Financial Services sector is just one example of an industry transformation – of which there are many. We work closely with several major banks to provide transactional and bulk SMS messaging services, as they (and we) see how critical mobile success is to customer retention.

Blockchain to Alter the Fundamentals

One major FinTech development we’ve been keeping our eye on, and will almost certainly rewrite the Financial Services rulebook, is blockchain. And although it sounds like a defensive move in a sports game, blockchain is, in fact, a distributed database of computers that maintains records and manages transactions.

Blockchain disruption Rather than having a central authority (such as a bank), blockchain uses the network to approve ‘blocks’, or transactions, which are then added to the ‘chain’ of computer code. Cryptography is used to keep transactions secure, and the distributed nature of transaction approval makes the system harder to tamper with.

According to PWC, blockchain technology may result in a radically different competitive future in the FS industry, where current profits are disrupted and redistributed toward the owners of new, highly efficient blockchain platforms. Not only could there be huge cost savings through the use of blockchain in back-office operations, but also large gains in transparency that could be very positive from an audit and regulatory point of view.

PWC predicts that blockchain “represents the next evolutionary jump in business process optimisation technology.”

Forget Disruption - It's Just a By-Product

While blockchain and other FinTech developments are groundbreaking, it’s interesting to note that the start-ups authoring these innovations aren’t necessarily setting out with disruption as an end-goal. Rather, they’re focused on finding a better way through a market, system, or product category. Their goal is not to eat an incumbent’s lunch. Instead, they’re trying to rethink how a market should work. The best startups aren’t disrupting, they’re reimagining. If disruption occurs, it’s a by-product, not a goal.The future of money

Another common misconception about disruption is that in a digital world, the winner takes all. This logic sometimes holds, but more often it doesn’t because the networks the players operate in are rarely exclusive and they can easily sustain a variety of providers.

Yet another misconception is that new technology will inevitably substitute old technology, rendering it obsolete. And while we have witnessed e-mail replace the fax machine, flash memory supersede diskettes, and Wikipedia supplant the Encyclopedia Britannica, industries with perfect substitutes are an exception to the rule. More often than not, digital will offer a new complement, rather than be a substitute.

What is clear is that digital is changing the nature of competitive advantage in many businesses – just like major technological developments have done before. Mobile is a good, but not the only, example of this. So forget disruption as an end goal – it’s just a buzzword. Re-imagine and transform your business, products, services and industry by focusing on solving the problems of your customers better. If what you’ve done is worthy, disruption will follow naturally.

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