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When was the last time you spoke to your bank manager? Better yet, do you even know your bank manager’s name?
You don’t know because you never go into your local branch. Almost 40% of the US population use mobile banking according to the Federal Reserve – a trend growing year-on-year. Banks are simply not keeping up with this tremendous social change, and treating customers as though they access services the way their parents and grandparents did. If you want to obtain a loan or financial advice, get a mortgage, why do you need to go to a branch? After all, every other aspect of life has moved online.
What happens to finance when you take humans out?
The financial industry still uses human beings and paper to manage services, with technology used to actualize human judgments. A human agrees to an investment, approves a loan or increases your overdraft limit: A human is involved in every step.
Fintech, (the unlovely portmanteau of finance and technology) uses software and algorithms to replace inefficiencies in financial functions. Data is leveraged to replace human evaluation, eliminating fallibility and bias in the financial sector.
Fintech works differently depending on where you are in the world. In a developed market, where people are well-banked, fintech is breaking apart the retail services offered by banks.
This is unbundling – as banks typically offer one package of services in a ‘bundle’: your current account includes some sort of pension, insurance and advisory service, even if you rarely use them.
Fintech’s logic is simple: When it comes to finances, pay for what you use. A faster international transfer service should not have to include the chance to speak to a mortgage lender. The financial industry offers inefficient services, and delivers them in a highly inefficient way – putting decision-making at the mercy of opening times and training quality.
Wealthfront is a good example: it enables clients to invest in products without the aid of a financial manager, as it provides advice driven by the market. This eliminates exorbitant management fees, and enables clients to invest immediately.
Fintech in developing markets
The World Bank estimates more than 2-billion are unbanked globally. Most of these people are in developing markets. In developed markets, fintech can fill the gaps between financial institution and clients. But in developing markets, with a smaller formal financial sector, there is enough space for fintechs to become the primary way for people to manage their finances. Ultimately, this will mean they use cash less, and therefore increase their personal safety, and bolster the security of their transactions.
Fintech can work with the technology people already use. In the Philippines, where there is high mobile and smartphone penetration, but few banking services, people can already use services like Lenddo – an online application that lets customers use their connections to access financial services. In Thailand, Omise is helping sellers accept payments from a variety of platforms, thereby increasing their opportunities for entrepreneurship, and allowing people to access goods and services more securely than simple cash payments. Vietnam has Payoo – an e-wallet service that helps make bill payments much more straightforward.
Fintech’s social impacts
Former Barclay’s boss Antony Jenkins last year predicted it will take fintechs 10 years to take traditional financial jobs. McKinsey also estimates that at least 60% of banking retail profits will be taken by fintechs. This means there will be a dramatic shift to the way the traditional high street bank looks like, and what it offers – but more on that later.
The social impacts of fintech will be profound. With services giving people more control over their finances, customers will be empowered to place their money where it is most efficient and best for them: perhaps you would like to invest your money in stock, or in a house? You now can, using eToro, which tracks the moves made by top traders and allows you to copy them. Or you can combine a financial advisory service like DueDil with an investment service like LendInvest that matches investors with borrowers to make mortgages quick and easy, while providing excellent returns for investors.
The point is, you will not be excluded from a process you previously were, since the price to enter such an activity is relatively low, and you will not have to worry about negative social stigma such as affiliating with stock brokers.
This means we will be less clients of financial institutions, and more curators of our own wealth. Ordinary citizens will be empowered to take financial actions as they will have the tools and the knowledge necessary to execute them. Future Advisor is one such tool – it’s a startup that enables clients to get substantial investment advice tailored to them. Thus, fintech’s social impacts will be two-fold: it will help demystify financial management and empower people to manage their finances, without the need for intermediary third-parties.
Fintech will not make experts of us all – we have widespread smartphone use, but only a small percentage of people know how to make an app – but since there will be an interest for people to manage their own finances, people will be spurred on to take control where they can.
On a grander scale, fintech currencies such as bitcoin and dogecoin are going to change what banks actually manage. TABB research recently reported that Capital markets and banks could adopt the technology behind bitcoin as early as this year. They are highly attracted to the ways cryptocurrencies enable more secure transactions and create new streams of revenue. The blockchain acts as huge depersonalized ledger, recording every bitcoin transaction and storing this information on a global network.
In developed markets therefore, not only will banks likely cooperate with fintechs to reduce inefficiencies in their retail services, behind the scenes, they will probably use fintech themselves to make more secure transactions and limit corruption.
Over in Africa, not only are services like Transferwise increasing financial inclusion by reducing transaction fees when making international payments, but startups like ReadyCash are helping unbanked Nigerians transfer money by SMS technology. That means fintech can be retrofitted to technologies we in developed markets have grown out of.
This is fintech’s greatest advantage over traditional financial institutions: it can fit itself to the lives of consumers, and it does not expect consumers to come to it. By recognising that people manage their finances in a variety of ways, fintech can extend to extant technologies to make such management easier and safer. This will bolster financial inclusion, as more and more people in developing markets turn to safer and more sophisticated solutions for handling money. What’s more, fintech will compete with current services like Money Transfer. A reduction in fees will mean money will actually reach communities across the world, rather than being sucked up in fees.
So, where I would never say ‘don’t bother learning your bank manager’s name’ – there’s no need to be rude now – I’d recommend learning their name, and also about which fintech services suit you best.