Fintech is the newest portmanteau buzzword in the financial services industry. Short for financial technology, it refers to the use of digital technologies in delivering financial services, and has seen aggressive growth in venture investment – from $6 billion in 2013 to $17 billion in 2016. This blogpost examines how Fintech is disrupting five core segments of the financial services industry – retail banking, lending, payments, insurance, and wealth management.
More than 60% of costs for a retail bank come from branches and associated staff, and these establishments have been focused on transaction automation through online account checking, online account transfers, automated alerts, and mobile check deposit. What’s new, however, is the emergence of online only banks. These banks do not have brick and mortar branches, and pass some of the savings from branch and staff costs to the customers in the form of higher savings rates – a typical online bank in the US today offers a 1% interest rate on a savings account – that’s about 20x less than what’s offered by a retail bank. They are also more efficient in targeting and signing up new customers. For example, WB21, a fast-growing global online bank serving over 2 million customers in 180 countries, uses a proprietary GlobalKYC technology to open a new account online in just 8 minutes!
If you apply for loan from a traditional lending institution, you might first need to provide documentation like historic tax returns, financial/salary statements, appraiser/inspector reports, etc., and, assuming the documents are error free, you then have to wait for the lender to secure credit score worthiness to gain approval. In the digital world, many of these steps can be automated, expedited, or even eliminated, and that’s exactly what Fintech firms are doing through a variety of digital tools like 24/7 online loan centers, uploading documents via cloud technology, automated income/asset verification, real time credit score check, electronic signature, chat bot based notifications, etc. These features enable firms to reduce the lending process to as little as 1-3 days, and provide more flexibility on loan amount and maturity. Check out this piece in TechCrunch that illustrates this how Kabbage uses big data analytics for loan underwriting by utilizing data sources like social media profiles and QuickBook accounts.
Digital disruption in financial services started first in payments, where firms like PayPal were the web 1.0 pioneers. Fintechs today are disrupting payments in three key ways – online payments for products and services purchased online (e.g. Alipay, Wepay), NFC enabled contactless payments at POS through mobile wallets (e.g. ApplePay, Samsung Pay), and peer-to-peer (P2P) money transfer over internet. The New York Times gives a good overview of the staggering growth of mobile payments in China in “In Urban China, Cash is Rapidly Becoming Obsolete,” stating:
“Almost everyone in major Chinese cities is using a smartphone to pay for just about everything … At restaurants, a waiter will ask if you want to use WeChat or Alipay — the two smartphone payment options — before bringing up cash as a third, remote possibility… In 2016, China’s mobile payments hit $5.5 trillion, roughly 50 times the size of America’s $112 billion market… Ant Financial [Alipay] and Tencent [Wepay] were set to surpass credit card companies like Visa and MasterCard in total global transactions per day in the coming year.”
Insurance firms have been quick to adopt digital initiatives for effective distribution (e.g. reaching mobile native customers), product flexibility (e.g. offering insurance for a day or even fewer hours) and digital-friendly categories (e.g. cyberinsurance). But the disruptive opportunity for Fintech in insurance, also called Insurtech, lies in quantifying the risk/exposure of the customer in making a decision on coverage and premium. This process, called underwriting, typically analyzes lots of historic data (e.g. patient health record for medical insurance and driver’s records for car insurance), and Insurtech firms are using data driven insights and predictive modeling to improve this process. Wired illustrates this concept for Oscar, a millennial-targeting medical Insurtech firm:
“Oscar’s core business [is built by] marshaling the data they had been collecting since 2014—insurance claims—into something that could tell a story about who a doctor is - one where they didn’t contract with just any pediatric endocrinologist but the right pediatric endocrinologist …. In 2016, with its broad, leased network, 2 percent of premium costs went out-of-network. This year, Oscar’s out-of-network costs are down to 0.6 percent.”
Wealth management is a massive $165 trillion market worldwide, and wealth managers serving high net worth clients typically charge fees equivalent to 1-3% AUM (asset under management). That’s changing fast with Roboadvisors – algorithms providing financial advice to customers with little or no human intervention. Roboadvisors can automate all aspects of wealth management, including risk adjusted asset allocation, investment selection, order execution, portfolio rebalancing, reporting, and tax management. And, they can do it all with 24/7 availability, high speed transactions, as little as $0 account minimum, and fees as low as 0.25% of AUM.
In spite of the frenetic startup activity in Fintech, established financial institutions have many things going strongly in their favor – heavy regulatory scrutiny, customer trust built over many decades, and relatively high cost of acquiring new customers. All of these factors provide Financial institutions a strong competitive moat for now, but they will need to build/partner with/buy Fintech capabilities, and (as is true with anyone competing with organically digital firms) do so fast!