16 Feb Fintech: Influence And Innovation
What is fintech’s role in changing the financial industry as a whole? As we’re already seeing, fintech could make an indelible mark on the way businesses and individuals receive and make payments. Learn some specific examples of technologies that fintech is using to disrupt the financial industry and consider what impact this might have on the future prospects of both fintech and finance as a whole. Also interesting: how a dataroom can support a company within business transactions.
AI, Blockchain, And Disruption
So what is fintech? We’ve covered this in another post, but, essentially, the fintech industry represents a balance between finance and technology—financial technology. The goal of most fintech enterprises is to “disrupt” an industry through innovation and improvement using new and old tech tools ranging from artificial intelligence to mobile app programs.
As with most tech startups, fintech tends to excel at by staking a claim in the margins and bringing consumers to their new settlement. This has blown out the boundaries of what the financial industry once thought was possible and is causing a genuine disruption in the way entrenched finance businesses and banks see technology.
For example, artificial intelligence (AI) is a major focus of several different kinds of fintech start-ups. From financial analysis bots to automated customer service, there are several fintech examples of AI getting integrated into a basic business model with a goal of providing better and more efficient service and results. The traditional financial industry isn’t as eager to jump onboard the boat train.According to a study by PricewaterhouseCoopers, 46% of fintech companies are investing in AI, while only 30% of traditional financial institutions are doing so. The same study shows that more than 80% of those traditional financial institutions are worried that industry innovators put their established businesses at risk.
It’s hard to square the high percentage of established but concerned business leaders with the low percentage of firms investing in AI, but that’s not the only area of innovation that “incumbents,” as PwC calls them, are focusing on. Blockchain technology is a major area of focus for the financial industry, with more than 77% of the traditional financial companies covered in the study indicating plans to incorporate blockchain protocol somewhere in their business “by 2020.”
While blockchain technology is becoming increasingly important not only as a financial ledger but also as an identity management and contract execution tool, that timeline seems awfully slow for the pace at which fintech is managing to innovate and disrupt. It’s another sign that fintech is having a major influence on the industry, often at a pace that traditional institutions like banking and other financial services aren’t ready to cope with at this point in time.
Fintech And The Future
Unlike tech startups that provide a service most people expect to receive for free, startups in the fintech market are in the unique position of having fairly bright financial futures—so long as their product is actually worthwhile. The most successful fintech startups will likely be the ones that provide something a bit different from what their competitors do.For example, the payment processing field is becoming crowded with fintech startups looking to challenge PayPal; even PayPal is subsidizing Venmo, an app-based service that could supersede its parent company in popularity. But there’s one fintech start-up, Flutterwave, that’s entering the payment processing game with a different angle.
Unlike most of its competitors, which focus on North America, Europe, and Asia, Flutterwave is focusing specifically on African markets, with a goal of helping business owners on that continent reach a global audience with the ability to process more than $150 currencies.
This points to one area in which fintech tends to lead current financial industry leaders: Embracing the idea that the Internet is a global marketplace. These traditional finance companies need to get on board with the idea that commerce has become globalized and democratized if they want to stay afloat. They may also need to reconsider their traditional means of generating revenue.
That’s because several fintech start-ups are focused on providing financial instruments that are less burdensome to the consumer, which often means that the provider itself isn’t profiting in the same ways they used to. For example, Lending Club allows users to obtain loans, which sounds straightforward enough.
However, Lending Club sets itself apart by connecting borrowers to lenders through a peer-to-peer platform that allows individuals to loan to other individuals. Other fintech start-ups like SoFi are also disrupting the loan process by reaching out specifically to individuals suffering from student loan debt and offering refinancing at low rates.In both cases, these fintech start-ups are offering consumers a potentially more attractive option than going through the judgment wringer at a traditional lender. Both Lending Club and SoFi use criteria other than credit score to make their lending decisions, which can be immensely appealing to consumers who are mired in debt but have a good job and a bright future.
The fact that these businesses have succeeded and are posing a potential threat to the establishment points to just how broken consumers tend to think the current lending process is and how frightening it is to get locked into a loan with a big bank if you aren’t certain what the future holds. SoFi even offers unemployment assistance and the option to pause payments in the event of job loss.
It’s hard to imagine a big bank offering personalized service and sympathetic assistance like this, but that’s a weak spot that many fintech businesses are exploiting to gain a competitive advantage. Big banks can try rebranding, but if they really want to stay competitive and keep themselves comfortably afloat amid the rising tide of consumer-focused fintech, they’re going to have to change their fundamental approach.
Whether it’s genuine or not, fintech businesses tend to frame themselves as putting the customer first. The old finance branding model of projecting authority and steadfastness may not work for younger generations. If older financial institutions think they can stay in the game by simply rebranding, making a good mobile app and otherwise doing business as usual, they may be unpleasantly surprised by the degree to which fintech start-ups can attract more business.However, while fintech as a whole may be somewhat unstoppable, the companies that find early success within the industry aren’t guaranteed to stay on top. Just as the dot com bubble took out several major e-commerce players in the early days of that industry while others, including Amazon, stuck around, the fintech expansion boom could well be followed by bust for those companies that aren’t smart with how they plan for their futures, protect their assets and obey laws.
One of the most important things a fintech company can do to secure their future is to focus on a specific use case that can easily be monetized and, if that’s not such as easy prospect, to find a way to market the service to an existing big bank or financial institution looking to innovate.
The PwC study indicates that 82% of financial industry incumbents are interested in increasing fintech partnerships in the next 3 – 5 years, which could be a golden opportunity for those fintech start-ups that have a useful product but aren’t quite finding their feet with a direct-to-consumer model.