Fintech: The transformation of the financial industry
Fintech is the innovative use of technology in the design and provision of financial services. It has the power and potential to change the banking dynamics as we know it. This is can be achieved with the introduction of artificial intelligence, loans between private individuals (peer-to-peer), big data, blockchain, robo-advisors, and digital payments (by participants such as @Kushki), among others.
In fact, by 2016, Henri Arslanian, in his TED Talk at Wan Chai, explained that we are going through one of the biggest transformations in the history of finance, and the greatest impact will be suffered by bankers because, in the future, their positions will need abilities, knowledge, and personal skills that are very different to those required now.
Now that we are near 2020, it is a good time to retrieve the message of his talk.
Henri Arslanian is the Asia leader of PwC FinTech & Crypto, Chairman of the Hong Kong FinTech Association, and Deputy Professor at the University of Hong Kong.
Technology Sets Higher Expectations
According to Arslanian, historically, banks were quite good integrating these new technologies to provide a better service to their users, but after the financial crisis of 2008, they were too busy dealing with new regulations and requirements, so technology was not a priority anymore.
At the same time, some of the most impressive innovations became part of our day to day: iPhones, Airbnb, Uber, WhatsApp or WeChat are some examples. Their use created a gap between what the banks could provide, the user experience and the level of convenience that consumers wanted to have.
Such a gap started to widen so much that even entities that were never associated with traditional banks wanted to enter the business and seize this opportunity (especially technological firms). For example, by 2016, Facebook already held about 50 regulatory licenses only in the USA, which now allows its users to transfer money through their messenger app. Amazon also started an experiment offering student loans, and Alibaba's financial division has become one of the biggest funds in the world.
Likewise, WeChat has become one of the most common tools to transfer money, and additionally, it supports functionalities such as purchasing insurance policies, investing in funds, booking medical appointments, getting a taxi, donating money to charity and even finding a date mate, all without exiting the application.
With many stakeholders offering such possibilities, the future of financial platforms will not be led by traditional banks but by technological firms; so, today's children will more likely open their first account through Facebook or Apple, and not in a bank.
Now, fintech startups can offer products that could only provided by traditional banks before. People can obtain loans through peer-to-peer lending platforms, and they have access to robo-advisors providing asset management services that are more transparent and considerably cheaper than other alternatives, among other things.
A New Banking Model Led by the “Newcomers”
Additionally, these “newcomers” (startups) may choose only the parts of the banking industry that they want to cover, usually selecting the most profitable ones. Thus, startups usually prefer to deal with front end activities or customer support areas and leave to traditional banks those boring back end activities.
This could create a new model in which traditional banks would become providers of basic services for these technological firms, while fintech startups would be the ones that control users' experience.
A Solution for Debanking
This revolution brings many positive aspects; financial inclusion is one of the most important. Currently, more than 2 billion people in the world have never used bank services. These people do not have access to savings accounts, and they cannot obtain loans for their studies. They save their money literally putting it under the mattress, thus perpetuating a vicious poverty cycle. This is not a problem only for developing countries; for example, in the USA, at cities such as Miami and Detroit, more than 20% of households are not banked.
The good news are that, for the first time in history, this part of the population could have access to financial services. According to the World Bank, between 2011 and 2016 more than 700 million people went from being unbanked to be banked. This is only the beginning of an industry that is continually seeking to transform the way financial services are provided to consumers, improving users' experience. Additionally, they offer more accessible options from the costs point of view.
Former call centers are already starting to be replaced by artificial intelligence: powerful chatbots that emulate human conversations and messaging apps. Likewise, the use of passwords is being replaced by biometric information and voice recognition. All of this, to provide financial services to millennials in a more enjoyable way.
A Mindset Change will be Necessary
Arslanian mentioned a study that revealed that more than 70% of millennials preferred going to the dentist to hearing what their banks have to say. This is a concern for banks, because they are now starting to understand that the scenario is changing, and that they will have to evolve to survive.
Citibank estimates that in the next 10 years, 30% of bank jobs will disappear. Some experts even say that it might be a 50%. This would bring serious consequences because it would not only affect the financial industry, but other sectors related to it, from legal and accounting firms to hotels and restaurants.
Of course, fintech companies will generate jobs, but they will require different abilities, as they will seek creative designers and programmers, instead of businessmen and compliance officers. So, instead of sitting back and waiting for the government to formulate new policies and regulations to adapt to the new reality, the fintech community will also have to work to shape this new ecosystem, to ensure that the change process happens in the best way.
But that's not all, this implies a mindset change, especially for parents, who should feel more comfortable with the idea of their children joining startups and starting their own business, instead of searching for stable jobs in banks.
Arslanian also says that he teaches the first university fintech course in Asia because he believes that it is unacceptable for students to graduate in finance without having any knowledge in technology. Likewise, he considers that the curriculum of finance and business careers should include design thinking, coding and product development, as creative programmers and thinkers are the ones who will shape the future of this industry.
