The subject of FinTech has been attracting plenty of attention. Although much has been written about it, the concept itself is somewhat ambiguous. The origin of the term can be traced back to the US-based consortium of bankers, researchers and government officials formed in the 90’s as an attempt to show the public that banks are willing to follow the path of technology-driven innovation. Subsequent to that, FinTech was used to refer to the computer systems implemented by financial institutions internally for the purpose of digitisation and process automation. These projects were the petri dishes of the early FinTech evolution.
The global crisis of the mid-2000’s fundamentally eroded customers’ trust in financial service providers. Institutions were seen as the very antithesis of progress. In addition, armies of unemployed financiers flooded the job markets in search for something to do.
These factors seeded the emergence of a multitude of start-ups, eager to disrupt the financial industry. The new marketplace adopted the old name and with time, FinTech came to represent the democratisation of finance, creativity, customer centricity and even social-economic change.
This new breed of services has been the focus of much research. Investment bankers, financial analysts and government regulators alike are trying to understand the trend and predict its impact on the global industry. Opinions differ, but one sentiment is shared by all: it is an exciting competitive marketplace that has the potential to bring in a new reality for consumers.
With that said, one part of the FinTech image remains blurry. Very little is understood about the way in which the evolution of computing technology has enabled it. Yet, having this understanding could help explain not just the secret behind the success of new ventures, but also the mystery behind the apparent inability of established financial institutions to compete in this market despite their existing market share and the access to substantially larger resources.
For the last 30 years the financial services industry has been the single largest purchaser of computer technology and as a result, has played a critical role in its evolution. Long before then, the financial industry itself was able to leapfrog – its evolution being propelled by advances in computing. The advent of credit cards in the 50’s, ATMs in the 60’s and electronic stock trading in the 70’s enabled financial institutions to obtain unimaginable market reach.
In the 90’s, when mainframes, despite their rumored demise, made the second coming, the financial industry was ready to embrace these powerful machines and apply them to a multitude of new purposes. The arrival of the first data recording systems made it possible to automate data analysis, which ushered in the age of the first FinTech ventures1.
Sometimes however, evolution takes unpredictable turns. In the case of commercial line-of-business software, evolution was mostly driven by the search for the biggest payout. And as far as payouts go, large financial organisations with their bottomless pockets and insatiable hunger for the “magic bullet” made for the perfect target. Software vendors formed long lines in the lobbies of banks and insurance companies, offering their own unique brand of “best IT solution for the ambiguously defined problem.” The world was flooded with CRMs, ERPs, ESB, ECMs, MDMs and any other possible three letter acronym. The financial services industry swallowed them all, building unimaginable technical complexity in a process. New problems were invented to feed the beast, bigger budgets were approved for systems that would serve no purpose. Before anyone noticed, solutions became the biggest problem. Organisations found themselves being crushed by the crumbling mountains of legacy technology
A decade came and went, the age of the internet and smart phones brought in new laws of physics for commerce. It was just a matter of time before the privileged world of financial services industry was invaded by a new breed of players. They might have lacked financial experience, and did not necessarily have original ideas, but they had one critical advantage: access to the latest technology without the baggage of a decades-long pursuit of technological nirvana
So, the old guard was caught with an impossible challenge: being able to compete with nimble, hungry young businesses that could pivot on a dime in an attempt to stumble across the next great idea. Institutions responded the way institutions do – by institutionalising innovation. Relevant departments were formed, people were adorned with important new job titles and budgets were re-allocated. There was only one problem: no amount of well-funded institutional “innovation” can wish away decades of entropy that turned technology into an ugly monument to the bureaucracy-driven evolution.
The New Breed
Ironically, many of the ideas that underpin the new FinTech market were born within the walls of old-style financial institutions. After all, these are the people that have been doing it for decades and understand the market better than anyone. The problem is, these innovations cannot be brought to life in that setting. And even though some of the financials are attempting to innovate by bypassing their internal IT structures, generally smaller businesses get there first.
The ‘zoo’ of FinTech start-ups could be categorised in at least nine ways2 . I like to think of them in terms of the big ideas that underscore their business models:
- Reachers These are the businesses that bet on the ever-increasing reach of the internet. The most conventional of the bunch are utilising the reach to bring well-understood services such as banking, insurance and wealth management to mass markets3 . Another kind is making use of the proliferating network of mobile devices to spread the idea of mobile wallets4 . The most contemporary use of the reach is to adopt the model of social networking and utilise it for variety of crowdsourced financial services5 .
- Minimisers The premise of these businesses is based on the public sentiment that services provided by conventional financial institutions are too expensive, follow a very complicated process and generally take too long. So, they utilise the latest innovations in Digital User Experience in order to simplify customer interaction6 with the service provider, make the service itself cheaper7 , remove the middle-man8 and automate most of the processes
- Digitisers These businesses utilise opportunities made possible by the advent of bitcoin – they use the technology to offer digital currency10.
4) Shifters At the core of this exciting group is the drive to truly reinvent the way consumers perceive financial services. These businesses offer novel ways for customers to interact with financial institutions by changing familiar, well-established commercial models11.
5) Gamifiers The latest advances in the theoretical domain of Game Theory, and the latest developments in the supporting technology have enabled this breed of FinTech start-ups to approach the way consumers manage personal finance from the perspective of funpromoted high engagement12.
6) Assurists In the true spirit of the democratisation of finance these businesses focus on providing their customers with commodities that are difficult to quantify – the feeling of trust and fairness13.
7) Segmenters Following the good-old business practice of covering a larger share of smaller markets, these start-ups constrain their consumer base by focusing their products on a particular, well-defined market niche. Some have chosen to target students, others cater for children14.
8) Artificialists The latest developments in the field of Artificial Intelligence and algorithmic reasoning have allowed businesses to apply advanced computing techniques in order to automate financial reasoning and remove human participation from the consumer’s interaction with the service provider. These businesses utilise algorithms to provide financial advice and facilitate transaction processing15.
9) Trail Blazers These businesses base their model on the same premise as the “Reachers” – the expanding network of mobile devices. The crucial difference is that “Blazers” are driven by the ambition to serve the vast underbanked communities in Africa and Asia. Besides being able to establish lucrative operations in a largely-unexplored markets, the model has a happy side-effect of promoting socio-economic development in impoverished areas16.
So, what is next for FinTech? This is where I let my imagination run wild.
There is always a chance that conventional financial institutions will figure out a way to crawl from underneath the rubble of legacy technology and join the FinTech revolution in a renaissance of institutional digital innovation. But my bet is on some sort of convergence, where old guard and new players will be able to form some sort of hybrid for the purpose of providing consumers with the best of both worlds: new-age customer-centric service supported by the safety of regulated money vaults.
FinTech will for sure become a technology product, the new breed of software vendors will be selling the new flavour of “snake oil.” While the ever more strict constraints of regulation will be imposed on FinTech businesses, they will evolve and grow to become the new incarnation of “Elephants” to walk the financial Earth.
The blazingly fast pace of the technology evolution will seed new opportunities on the fertile ground of FinTech. We will see the dawn of FinWear, where a multitude of wearable devices will endow us with the ability to transact at will. Next step, BioFin – with the advent of computer-augmented bio-wear we will convert our bodies into a walking transaction enabler. And, finally, when technology has evolved to read and interpret our emotions, EmoFin will enable us to transact implicitly. The world where you could purchase an item by merely liking it. What a truly dangerous world that would be.
Ulvi Guliyev- Head of Care Platform Engineering, Zoona