Once thought to be unfailingly secure due to their size, scope, influence and the high barriers to market entry, banks, insurance companies and investment houses have come under assault from a new technological wave that threatens their status quo, if not their existence. The technology is moving at such a rapid pace that, by 2020, as much as 25% of the financial industry’s revenue will be at risk. According to a PricewaterhouseCoopers (PwC) report titled “Financial Services Technology 2020 and Beyond,” the convergence of financial services and technology, which has come to be known as fintech, has become such a disruptive force in such a short time period that established financial institutions must quickly reconsider their business models or risk obsolescence in significant parts of the financial services value chain.
Technological advancements in other industries have ramped up the expectations of consumers, who now demand higher quality and more personalized services, seamless experiences and more value for their money in all interactions with businesses. Fintech promises to deliver the same for consumers in the financial services industry, but there is much more behind the push toward new business models than customer-friendly solutions.
The Sharing Economy
The popularity of mobile tech-driven companies such as Uber Technologies Inc. and Airbnb Inc. is evidence that a sharing economy is rapidly emerging. An increasing percentage of people are becoming comfortable with dealing directly with other people. The notion of peer-to-peer (P2P) engagement is taking hold in a broad swath of industries including financial services. P2P lending, led by companies such as Lending Club Corp. (NYSE: LC) and Prosper Inc., is steadily growing its share of the consumer and small business lending market. Through crowdfunding sites, smaller investors can invest in the kind of opportunities once only available to venture capitalists. New payments technology that eliminates the need for checks or credit cards is already disrupting the consumer-bank relationship. P2P payment technology is emerging, allowing individuals to instantly transfer funds to another individual.
In the new, shared economy ecosystem, banks may continue to act as an intermediary in some of these transactions, or they may become another part of the value chain. However, without a significant change in their business model, their role in consumer transactions will steadily decrease.
A vast amount of fintech investment has been concentrated in developing the digital wallet that exists in a consumer’s smartphone instead of his pocket or purse. Digital wallets, which provide consumers with a quick, secure and low-cost way to use, store and send money, can have the most disruptive effect on the banking industry, which relies on these offerings to draw customers to higher-end services. Although still in its early stages, the potential of the digital wallet has attracted technology behemoths such as Apple Inc. (NASDAQ: AAPL) and Alphabet Inc. (NASDAQ: GOOG).
Large financial institutions have entire information technology (IT) departments dedicated to improving efficiency and lowering costs in delivering their services. However, they are encumbered by massive legacy systems that create a cost floor beneath which they cannot go without subsidizing costs. The very nature of fintech startup companies is their low footprint and ability to sidestep costly networks, which is driving down costs while offering a better customer experience. Consumers are able to transfer payments, open money market accounts, borrow money and invest money at a fraction of the cost of traditional financial institutions.
The Rise of the Millennials
PwC expects the millennial generation to be the biggest users of fintech services. The challenge for traditional financial institutions is the millennials’ heavy reliance on social media for information and guidance, which has made them more demanding and less loyal. Their experience with other forms of e-commerce has shaped their expectations for personalized service delivered at digital speed. According to PwC’s research, one in three millennials would consider changing banks in the next 90 days, and they are more likely to compare traditional institutions with digital upstarts. Fintech companies hold the advantage over traditional institutions in their access to and utilization of data to inform them of the needs and preferences of their customers, allowing them to mass customize their offerings. Younger users have come to expect the sort of personalized service and tailored solutions once only available to high-net-worth clients that can now be delivered through automated processes and artificial intelligence.