Fintech: how to profit as technology transforms banking around the world
Finance has used technology “since the days of the abacus”, as Philipp Buschmann, the chief executive of smart-banking platform AAZZUR, puts it. However, until a few years ago most financial firms and institutions remained relatively insulated from the digital revolution that had disrupted many other sectors of the economy. Even the rise of online banking had failed to challenge the dominant retail banks in the UK, while basic financial tasks such as processing payments or making cross border transactions still relied on the infrastructure created decades ago.
That’s changing – and changing fast. Customers are now much more comfortable carrying out a wide range of tasks through new channels such as apps. They are increasingly looking for the kind of convenience in financial services that they are getting elsewhere in the modern economy. The result is a fast-spreading financial technology (fintech) revolution.
Payments technology is an example where the industry is changing very rapidly, says Nina Moffatt from the fintech and payments team at law firm Paul Hastings. Until recently, companies selling goods and services over the internet had a very limited choice of providers when it came to processing payments and moving the money to their bank. However, the wider use of application programming interfaces (APIs) is now giving them a lot more choice.
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An API is essentially a way for one piece of software to communicate directly with another. Among other things, APIs make it easier for websites to use different services from multiple providers and ensure that these providers share data with each other. This means that a company selling goods over the internet can use an app provided by one firm to receive and process payments, have the money deposited into an account provided by another business and even have a link to a third app that offers credit.
Taking paperwork online
Payments technology might be experiencing a “big wave” of innovation at the moment, but other parts of the financial service industry aren’t far behind, says Michael Kent, chief executive of payments company Azimo. For example, some aspects of compliance and “know your customer” requirements “are already being automated and moving online”. Meanwhile, digital technology is increasingly being applied to payroll management and some tasks traditionally associated with a company’s chief financial officer, “which makes it much easier for small firms to deal with these tasks in real time”.
A slightly longer-term project is the digitalisation of the insurance industry. For example, Kent notes that “many underwriters are using big data – large amounts of detailed data from multiple sources – to get a much more accurate estimation of risk”. It’s true that the behaviour of the first generation of short-term lenders, such as Wonga, which was criticised for its high interest rates, “dealt a blow” to the public perception of the online lending industry. However, he argues that the successful digitalisation of consumer credit shows what can be achieved in other areas.
Build your own bank
Perhaps the biggest change to the current model of financial services comes from the rise of “embedded banking”, says Buschmann. This involves companies cutting out the middleman and “effectively creating their own bank in order to offer financial services directly to their own customers”. Some companies, such as General Electric in the US or the supermarkets in the UK, have offered banking services to their customers in the past, but this has been limited by the technological and regulatory complexity of creating their own banks.
However, the rise of digital technology, as well as firms such as Railsbank, which specialise in creating the necessary digital infrastructure, means that “the time to set up your own bank has been cut from five years to six months”. As a result, many more companies are now in a position where they should think about providing their own financial services, says Buschmann. “Just as many forward-thinking firms realised in 1999 that having a website could be extremely useful, or even a necessity, many companies are now realising that providing their own financial services to their customers is a good idea.”
Finding a new advantage over peers
The development of buy now, pay later (BNPL) services is an example of ordinary companies using a “novel customer-centric product” from non-traditional providers to gain a competitive advantage over their peers, says John Pauley of law firm Harper James. In return for the retailer giving companies such as Klarna or Clearpay a cut of the sale price, the BNPL provider pays the retailer for the goods, while allowing the customer to defer payment without incurring interest or charges (so long as the subsequent payment is made within a certain time).