FinTech: At the Confluence of Customer Demand and the March of Technology
Every year, companies like Deloitte, Gartner and IDC, and publications like Forbes, net magazine, Wired, Fast Company and others track and analyze technology trends. Throughout the last several years, cloud computing, data analytics, AR, VR, blockchain, the Internet of Things, AI, ML, digitization, data privacy, cybersecurity and more have impacted industries, enterprises, and society as a whole. For more background, here’s my 2019 tech column, “A Year in Review.”
Despite the fact that FinTech as a defined concept has been around for more than 50-years, many still don’t know that each of us uses FinTech every day. If you use a prepaid card to pay for your Starbucks coffee, that’s a use case. Peer-to-peer (P2P) or digital lending is a huge market with PayPal, Venmo and Zelle where you can send money to businesses and consumers with just your phone. Crowdfunding platforms such as GoFundMe, Patreon and iFundWomen have enabled businesses and individuals to pool funds from multiple sources via the web.
In the banking sector alone, FinTech use cases include, payments and settlements, data analytics, wealth management, capital markets, accounting and tax, lending, and other industry segments.
Demand Drivers
The dramatic increase in FinTech applications and reach derives primarily from end-user demand, with an assist from the rapid advances in technology that are increasingly able to support that demand.
According to PWC’s Global Fintech Report 2019, a survey of over 500 financial services and telecommunications companies, 48% of financial services and 47% of telecom respondents “have embedded fintech fully into their strategic operating model.”
Blockchain adoption is increasingly steadily, with institutional adoption gradually catching up to the individual fervor. Smart contracts are more secure and immutable because they’re signed using cryptography and many digital-only banks and traditional banks are collaborating with FinTech companies in cryptocurrency.
Another visible trend is hyper-automation which encompasses advanced technologies, like artificial intelligence (AI) and machine learning (ML), to automate processes and augment humans.
A Wide Range of FinTech Applications
Other FinTech applications include robo-advisors that provide automated, algorithm-driven investment services without much little to no human interaction, which reduces costs for greater access.
The e-commerce marketplace is expanding with Apple and Goldman Sachs each offering a new consumer credit card. The Apple credit card works with the iPhone’s digital wallet app. Facebook’s Messenger enables payments for Android and IOS users. However, you need a Facebook account and a debit card or PayPal account for money transfers.
Meeting Consumers Where They Are
Did you know that if you book flights on Expedia, you can pay in bitcoin through Coinbase? While there are terms and restrictions of course, Coinbase is a regulatory-compliant cryptocurrency exchange that offers services to institutions and individuals while maintaining user privacy. According to Investopedia, Coinbase has more users than Charles Schwab.
Overstock partnered with Coinbase to enable payments in bitcoin. BlockVerify and Everledger reduce fraud by establishing provenance on the blockchain instead of relying on a paper trail that can be lost, stolen or falsified.
Insurance is another industry that’s being transformed by FinTech. It even has its own catchy category name—insuretech. Take Oscar Health Insurance. Its mobile app enables members to consult with doctors, book appointment and get prescriptions. Insurtech is also being used for auto and home insurance and data protection.
Open Banking Laws; Secure Customer Authentication
E-commerce is being impacted in the European Union, however, by the Strong Customer Authentication (SCA) requirement under the second Payments Services Directive (PSD2). For open banking, The European Commission said it will “facilitate innovation, competition and efficiency,” give consumers more and better choices in the EU retail payment market and introduce higher security standards for online payments. The deadline to be compliant with the SCA requirements as part of PSD2 is March 2021.
In the U.S., open banking laws now require banks to make it easier to export your data to change banks which provides consumers with more financial products and services.
Alan McIntyre, head of Accenture’s global banking practice, says the days of the bilateral deals are numbered and the large banks will start adopting a more standard interface for sharing account data. Competition will force a move to more openness, he said, pointing to PayPal’s example.
“PayPal made it easy to put a ‘Pay with PayPal’ button on websites and mobile apps, and suddenly PayPal became ubiquitous,” McIntyre said. Visa and Mastercard quickly responded with their own express checkout tools.
McIntyre said that there’s also more going on under the surface than the public can see. Large U.S. banks are starting to invest in the technology to provide open banking, though they’re not publicly talking about it yet. “Ultimately, they will have to have that capability.”
1.7 billion people globally don’t have access to banking services, according to the World Bank. Mobile apps are providing these critical services to the unbanked or the underbanked which is another benefit of FinTech.
In general, consumers want personalized seamless experiences and real-time interactions with chatbots or conversational interfaces, messaging, voice search, mobile apps, social media and more. Interacting with real people, however, is still key, and consumers expect a higher level of service. Nowadays, the differences between B2C and B2B communications are blurred. The new term is human-to-human (H2H).
How FinTech is Impacting Business-to-Business (B2B)
For B2B companies, in particular, C-Suite executives need to lead transformation by focusing on the customer and their employees rather than the technology itself. A major pain point is that people don’t understand the complexities of the FinTech ecosystem. Education is key to adoption.
Even industry sectors outside financial services are integrating FinTech to better serve their customers and generate additional revenue streams. FinTech startups can launch new products and services more quickly, cost-effectively and have apps to connect with customers in real-time with reduced IT costs.
Banks have particular hurdles because their huge customer bases demand that the firms focus on maintaining loyalty and trust. To this end, banks have enormous regulatory and compliance teams to protect them from cybercrime (though some banks still need to do a better job of internal policing—I’m looking at you, Wells Fargo and Credit Suisse). But many are mired in legacy systems, siloed data and disparate systems which produce organizational and administrative challenges. According to Boston Consulting Group, “for every $100 billion in assets a bank has, it can achieve as much as $300 million in revenue growth by personalizing its customer interactions.”
FinTech Partnerships: As-a-Service
For businesses, the question is whether to invest, partner, create their own accelerators, incubators, investment funds or use available FinTech services. Software-as-a-Service (SaaS) providers enable companies to subcontract IT or purchase software in-house.
A former client of mine, for example, offers mutual fund oversight and distribution back-office software that the industry uses to process billions of dollars of transactions and stay on-top of their data.
Another option is Infrastructure-as-a-service (IaaS), a form of cloud computing services that customers can access through a third party such as Amazon Web Services (AWS) and Google Cloud’s Platform (GCP). Customers can also adopt a private cloud using their own infrastructure. Cloud-based platforms and customer-relationship management (CRM) services like Salesforce provide B2B services for companies to connect with financial and client data.
Many banks are planning to adopt cloud computing and application programming interfaces this year. Banking-as-a-Service (BaaS) involves digital banking with application programming interfaces (APIs) that enable third-party developers to efficiently build applications and services, core components of open banking. When companies use APIs, they democratize their expertise to provide specific services and data rather than needing to overhaul an entire organization which is time-consuming, costly and often prohibitively so.
I worked with a FinTech AI startup that offered APIs such as personalized insights and expert conversation to asset managers, wealth management firms and insurance companies.
Consider a firm like Morgan Stanley, where a wealth manager may have some 300-500 portfolios to manage. Financial advisors (FAs) need to review investment and firm data, global news, sentiment and more. With the virtually infinite amount of data, it’s impossible for an FA alone to synthesize and analyze the data to make informed decisions.
That’s where APIs come in. Partnering with companies like Thomson Reuters Wealth Management, Morningstar and others, brokerages are able to provide actionable insights to its customers and their clients in a fraction of the time using FinTech and AI.
Pierre Habis, Head of Consumer Banking at Union Bank said, “I see 2020 as the year of the consumer experience for digital banking. Our industry is ripe for change. Over the years, we’ve seen some incredible new technology being built – both within and outside of our industry.
For those who are in the traditional banking industry, I believe the focus will remain on integrating new technologies and enhancing digital offerings, but the emphasis will be more around providing a more valuable, more personalized experiences for our clients.”
How Can Banks and FinTechs Work Together?
Goldman Sachs, Citigroup, J.P. Morgan Chase & Co., Wells Fargo and Bank of America have been focused on the FinTech space for more than five years.
Goldman Sachs introduced Marcus for digital consumers in data analytics and real estate. Marcus is separate from the global banking brand for institutions. Tanya Baker, Global Head of Goldman Sachs’ tech accelerator, GS Accelerate, told attendees at an MIT Sloan Fintech conference in 2019, “We have scale, we have a trillion-dollar balance sheet and we have brand.”
Citigroup has invested in blockchain startups while J.P. Morgan formed The Financial Solutions Lab, a five-year, $30 million initiative managed by the Center for Financial Services Innovation (CFSI) to identify, test and expand the availability of innovations to help Americans increase savings, improve credit, and build assets.
JP Morgan and American Express have entered the installment loan market and are looking to incorporate similar point of sale (POS) technology into their core lending offerings.
JP Morgan’s own marquee Quorum blockchain division is reportedly in discussions to merge with ConsenSys. The Quorum platform, based on Ethereum, is used to run the Interbank Information Network, a payments network that involves more than 300 banks. ConsenSys is a blockchain startup that was founded by Joe Rubin, one of the co-founders of Ethereum.
Wells Fargo will be digging itself out of a hole of its own creation for awhile—it’s hard to believe that the fake account scandals first exploded in 2016—but there are signs that new CEO Charles Scharf has an actual plan. On the January 2020 conference call to discuss the fourth quarter of 2019, the company disclosed that it had spent $166 million on “the strategic reassessment of technology projects in wealth and investment management.”
On a smaller scale, but perhaps no less significant, Wells Fargo’s venture unit, Wells Fargo Strategic Capital, invested $5 million in a startup, Elliptic, as part of that firm’s $28 million Series B round. Elliptic uses blockchain analytics to help banks and cryptocurrency companies manage risk and meet regulatory compliance.
Bank of America introduced a digital cash management tool for small businesses, Business Advantage 360, an online tool available through desktop and mobile that provides business clients with real-time cash flow and credit, debit and sales projections. Business Advantage 360 is integrated with third-party platforms including QuickBooks, Run Powered by ADP, G Suite by Google Cloud and Google Analytics.
The bank said in a statement that more than 1 million business clients have used Business Advantage 360 since it launched in February 2019.
Bank of America’s AI “Erica virtual assistant” alerts customers when they may have been charged more than once for a purchase so they can take immediate action. Erica will then guide them through the process of filing a dispute when necessary, similar to Amazon’s Alexa.
Chime, a digital bank, raised $500 million in December at a $5.8 billion valuation. Chime helps users get ahead by eliminating banking fees, providing a debit card, Spending and Savings Accounts and an app for iPhone and Android users. Chime is considered one of the best Money Management apps by many.
Big Tech Enters FinTech
Companies like Google, Amazon, Apple, Facebook and Netflix are partnering with licensed banks to add services to their existing offerings and to avoid numerous regulatory constraints. The tech companies create the credit cards, mobile apps, digital wallets, websites and more to improve the customer experience, while the banks provide the funding. According to CNBC, more than 42 percent of banks are partnering with FinTech companies.
Facebook wants to introduce a digital currency that makes global payments cheaper and faster called Libra, a virtual token would be tied to a basket of currencies and government debt. President Trump has urged the company to seek a bank charter which is difficult for FinTech startups to obtain.
Yet, the announcement last year brought a global debate of ideas about whether or not Libra should be approved or whether or not it was a cryptocurrency. (It’s not, but it may one day be a viable digital currency for those who don’t mind giving Facebook even more information about themselves.) Facebook is continuing its move into the payments space, with or without Libra, with Facebook Pay to send money using Facebook apps beyond just Messenger. The company plans to add Instagram and WhatsApp as payment highways.
“People already use payments across our apps to shop, donate to causes and send money to each other,” the company said. “Facebook Pay will make these transactions easier while continuing to ensure your payment information is secure and protected.”
Any discussion of Facebook is remiss without including data privacy and cyber risks, but you’ve heard me talk about it before.
Improving Cybersecurity
The FBI just released the Internet Crime Complaint Center (IC3) “2019 Internet Crime Report” last week. The IC3 was established in 2000 to provide victims and third parties with a reliable and convenient reporting mechanism to submit complaints to the FBI.
Throughout the last five years, cybercrime has cost individuals and businesses in the U.S. more than $10 billion. In 2019, the FBI received 467,361 complaints of suspected internet crime, with reported losses in excess of $3.5 billion.
The ten most common cybercrimes are identity theft, social engineering, botnets, flood attacks, cyberstalking, phishing attacks, PUP (Potentially Unwanted Program), online scams, exploit kits and fake content.
It’s our responsibility to stay vigilant. In 2019, I wrote several columns about data privacy that, if I may, I’d recommend to anyone who wishes to get a flavor of the issues from multiple perspectives.
To sum it up, watch Brittany Kaiser’s Netflix’s documentary, “The Great Hack” or read her book, “Targeted.” After resigning from Cambridge Analytica, Brittany shares her story and reminds us to stay vigilant. For more read my article, “In a Digital World You Are Being Followed.”
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Wendy Glavin is the founder and CEO of Wendy Glavin Agency, a strategic marketing, public relations and social media consultancy. Find out more at www.wendyglavin.com.
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Equities Contributor: Wendy Glavin
Source: Equities News
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