In 2004, we witnessed the shift towards Web 2.0. Mentality and assumptions of web developers have shifted from “everyone has very limited internet connectivity and limited browsers” to “lots of people have broadband and modern browsers now”. This meant techniques could be applied to start creating stuff we never had before. This led to the web app era. 2016 was arguably the start of the Mobile 2.0 era. Our mindset is shifting from “people don’t have good mobile internet and limited smartphone penetration” to “there are a billion people with high-end smartphones now constantly connected to the internet”.
The banking system is one of the underlying core systems of our society and it has always followed the evolution of our lifestyle, even though it lags behind. Web 2.0 brought limited banking capabilities online. The mobile era brought it to our smartphones, often leaving much to be desired, yet the capability was there. A perfect storm of increased smartphone penetration, big data, blockchain and fintech have put it on the doorstep of Finance 2.0, but do we dare to enter?
The year 2017 is the year where our financial system will start to change noticeably for a mainstream user, not just the early adopters that played with P2P loans, blockchain or digital banking. A new set of startups are maturing and reaching the critical mass, where they will start reaching everyday users. Here are the assumptions that the dawn of Finance 2.0 brings:
- Past financial performance (credit check) isn’t the best metric to reflect likelihood of future repayment; new models are developed.
- Banks are open to collaboration and have changed from walled gardens to bustling bazaars.
- Technology can do a lot of the jobs better, quicker and more reliably than humans can.
- Regulator is not a stop break, but an enabler who truly wants to encourage innovation, transparency and competition.
- Customers are willing to share their personal data, and it’s easy to do and there are vast amounts of data to create personalised models.
- Settlement times and transactions become so negligent that we can power a network of instant micro-transactions.
The finance system is one of the underlying foundations of our civilisation. Without finance, trade wouldn’t be possible, and without trade we couldn’t specialise in any of our activities – we would still have to produce all our food, clothes, shelter, and even our iPhones, ourselves.
Risk assessment will change
We are starting to look beyond traditional historic credit history to guide the future. Traditional credit scoring looks to the past and present as a guide to the future, but what would it be like if many data points, from psychometric testing to posts on Facebook or LinkedIn, could be used to build up a more accurate portrait of creditworthiness? What if instead of analysing past behaviour we could create an accurate persona of the customer that has predictable patterns? Hamburg-based startup, Kreditech does just that.
Settlement and transaction time decline
Carrying out a payment is inefficient – it takes time and costs money. A typical international payment with “mainstream” currencies takes anywhere between two and five days. It also costs a lot. Local payments are cheaper and quicker. Some countries, such as the UK, already have instant payment systems in place. However, this is more of an exception than the norm.
Blockchain technology enables us to minimise transaction costs to a bare minimum and makes settlement times near instantaneous, locally or internationally, creating a sound infrastructure for a layer of micro-transactions that weren’t viable before. This would change the way we pay for things, or even who pays for things. In Finance 2.0, people will only set up the logic for when the payment should occur (we run out of milk > order new bottle) for the vast IoT network. Objects will do the micro payments (the fridge, in this case).
Another immediate area that will change is the way we remunerate creators for their content. A network of micro-transactions will enable us for pay for content as we consume it – pay for every page of the book you read or for every minute of the movie that you watch rather than the whole book or movie. A lot of business models will turn upside down as a result.
Data sharing and customer stickiness
Banks currently enjoy very high customer stickiness, well above a decade. Until very recently, it was a pain to move a bank, but this is no more. In the UK, banks will transfer all your scheduled payments for you and reroute all the payments from your old bank account to the new bank account. However, this is only half the job. What we lose is the data we’ve generated with the banks over the years.
With upcoming PSD2 regulation, this will also change. Customers will be in charge of this data, and will be the gatekeepers, providing keys to whomever and whenever they consider fit. This will change the balance of power significantly. Rather than using one provider (the bank) for most of your needs, customers will be able to have many providers and use them as specialists for their one best function. Data generated by all of these providers will complement each other. The layer of aggregation will likely appear, that will simply plug all the APIs into one and provide great user interfaces.
Banks will turn into platforms
A bank won’t be a closed garden but rather a bustling bazaar. A place for creators and innovators to meet their clients – a platform. Airbnb is the biggest hotel chain, but it doesn’t own a single hotel. Uber is the biggest taxi company that doesn’t own a single taxi. Can the bank be the biggest financial institution without any financial products? Can banks simply become the gatekeepers of the bazaar, ensuring product quality, security and taking money for opening the gates to new vendors?
Pascal Bouvier and David Brear have discussed the pros and cons of such platforms, and Chris Skinner has laid out the steps these banks need to take. I won’t summarise this better than they already have, so do read their articles.
Change in regulatory mindset and approach
Regulators are perceived slow, inefficient and reactive. This would be best visualised by thousands of pages of regulatory frameworks such as the Dodd-Frank Act. However, the role of the regulator has changed significantly. The regulator is under a constant spotlight to make sure that the financial crisis of 2007-8 doesn’t repeat itself. Equally, it’s pressured to foster innovation, which in turn fosters competition. Many small players competing with each other reduces system risk and is beneficial to the customer in terms of price and quality. The regulator is encouraged to become much more proactive to prevent the misconduct from happening in the first place. For this, the regulator needs to have a hand on the pulse of the market, lots of data and access to the innovators of tomorrow. Sandbox by the Financial Conduct Authority (FCA) is a great example of embracing forward-looking innovation.
Robots will transform finance business model
The corporate structure and head counts will change drastically in finance over the coming years. Robots can already do many jobs better than humans can. Robo-advisors are better and cheaper at allocating assets. They can’t, and likely never will, provide behavioural coaching like a private banker can, but this is only relevant for the ultra-wealthy.
Other parts such as compliance, accounting, modelling will be slowly transformed, or even replaced, by machines. Machines don’t do mistakes. In the next 10 years, banks will change from large employment hubs to lean operations. Many functions will be automated and many parts of the business will be lost to the marketplace. Banks will maintain their core functions and employees associated with that.
The dawn of new finance is upon us. As a crucial element of our society, these changes will have a ripple effect across many functions and industries. A more efficient financial system will make our overall lives more efficient, more transparent and fairer.
– This article is reproduced with kind permission. Some minor changes have been made to reflect BankNXT style considerations. Read more here. Image by Who is Danny, Shutterstock.com