Technology is revolutionizing the way that the financial industry operates. Rapidly accelerating technological advances are creating entirely new business propositions, such as crowd-funding, peer-to-peer lending, digital currencies, mobile banking, online investment, and new payment systems.
The impact of technology is upending workflow and processes in the financial services industry. Tasks once handled with paper money, bulky computers, and human interaction are now being completed entirely on digital interfaces. Given how pervasive financial services are across the globe, the disruption opportunity for fintech startups is massive.
For decades, banks and insurers have employed the same relatively static, highly profitable business models. But today they find themselves confronted on all sides by innovators seeking to disrupt their businesses. Crowdfunding, peer-to-peer lenders, mobile payments, bitcoin, robo-advisers — there seems to be no end to the diversity, or to the sky-high valuations, of these “fintech” innovators.
Technology has created a massive increase in the availability and use of data and social media, shaping customer expectations and the ability of financial institutions to use consumer data to price, target and market their products and services.
Almost every type of financial activity — from banking to payments to wealth management and more — is being re-imagined by startups, some of which have garnered blockbuster investments.
We use technological shortcuts for things from simple tasks like booking vacations and buying books to more consequential matters like searching for a new home or trying to diagnose our ailments. But is the technology good enough to replace guidance from financial advisers? Or is technology actually good for advisers because they can use it to do their jobs better?
Since the introduction of credit cards in the 1950s, debit cards in the 1980s and the rise of e-commerce through the 1990s, electronic payments have grown in popularity, displacing cash and cheques. In 2012 they accounted for 68 percent of U.S. transactions in value.
Electronic transactions rely on a number of intermediaries, which provide acceptance, convenience and security of transactions, and are generally coordinated by large scale-based payment networks.
A number of innovations have emerged in the past five years leveraging mobile devices and connectivity to make payments simpler and more valuable. Examples range from digital wallets to automated machine-to-machine payments.
The majority of these innovations will modify front-end processes to improve the customer and merchant experience while leaving the underlying payments infrastructure undisrupted.
The current value transfer system, built on automated clearinghouses and intermediary banks, has made it easier for customers to send money across geographies, but many pain points remain to enable rapid and inexpensive value transfer between countries.
Decentralized currencies and mobile money solutions provide compelling alternatives to traditional value transferring systems by streamlining the intermediating processes.
•Convenience: Reduces the need for customers and merchants to carry cash, reducing associated costs, including trips to banks, price inflexibility and opportunity costs (i.e., interest earned).
•Efficiency: Reduces the cash management costs for businesses and financial institutions as fewer bills are exchanged by hand and money movements are settled electronically.
•Traceability: Enables a greater degree of visibility into the flow of money for financial institutions and regulators, facilitating taxation, transparency, and information gathering.
•Protection: Protects customers and merchants from fraud and theft by documenting transaction records and reducing the need to hold cash.
•Merchant Adoption: Electronic payments are not accepted by every merchant due to the infrastructure costs, high fees and settlement delays.
•Accessibility: Under-banked population does not have access to primary accounts and therefore only uses cash in transactions.
•Convenience: Small denomination payments are often still conducted reducing the number of processing steps and time to complete a transaction.
•Fraud: Despite the safety measures increasingly adopted, electronic transactions create opportunities for fraudulent activities.
A number of payments innovations have emerged in the past five years, leveraging mobile and connectivity to make payments simpler and add value.
•Mobile Payments
- Mobile wallets
- Mobile-based merchant payment solutions
•Integrated Billing
- Mobile ordering & payment apps
- Integrated mobile shopping apps
•Streamlined Payments
- Location-based payments (geotagging)
- Machine-to-machine payments
•Next-Generation Security
- Biometrics / location-based identification
- Tokenization standards
Simplicity: Payments innovations allow customers to make payments in a single tap or automatically by leveraging connectivity (e.g., wireless network, near-field communications).
Interoperability: Most innovative payment solutions are not restricted to a single payment method, allowing customers to manage and use a variety of credit cards, debit cards or bank accounts for payment.
Value-Add Services: Many innovative solutions offer value-add functionalities in addition to payments, enabling merchants and financial institutions to interact more closely with customers and deliver additional value (e.g., loyalty, offers).
The innovations will reduce the use of cash and make payments less visible to payers. They will also enable financial institutions and merchants to use data-driven customer engagement platforms.
As more payment solutions allow customers to link their bank accounts for direct payment and seamless point-of-sale vendor financing, the use of credit cards could be displaced by these platforms.
Customers may lose visibility into their payment choices, increasing their default cards’ share of wallet and reducing the importance of some traditional differentiators like brand and design.
The elimination of a need to carry physical cards and the emergence of payment decision support systems could support the proliferation of niche and merchant issued cards, splintering wallet share among many cards.
The current value transfer system, built on automated clearinghouses and intermediary banks, has made it easier for customers to send money across geographies, but many pain points remain to enable rapid and inexpensive value transfer between countries.
Decentralised currencies and mobile money solutions provide compelling alternatives to traditional value transferring systems by streamlining the intermediating processes.
Driven by competitive pressure from these innovations, the future of value transfer will be more global, faster, more transparent, and cheaper.
These non-traditional schemes may compete directly with the existing financial ecosystem as alternative payment networks emerge along with a variety of financial products denominated in the network’s native currency.
Financial institutions may choose to facilitate the growth of alternative payment networks as a complement to existing networks. They might act as a gateway for value into these networks and launch financial products that are connected to non-traditional payment schemes.
Alternatively, the non-traditional schemes may act as a catalyst for traditional institutions to develop solutions that fix key pain points in the current value transfer system; potentially by leveraging elements of the non-traditional schemes
While the rails built on automated clearing houses have enabled value transfer across geographies, many pain points are emerging as customer expectations rise, as while the current “rails” for value transfer between financial institutions are complex and involve many institutions a similar process is used for all transactions; from large institutional transfers to the settlement of retail payments.
•Sender Request: Sender asks their financial institution to transfer an amount to a specific address (using BIC or IBAN codes)
•Secure Messaging: Sending bank sends a secure message to the recipient bank requesting a transfer of the specified amount
•Flow of Funds: The recipient bank responds to the sender bank’s request for funds via a clearinghouse or correspondent bank
The basic elements of the current value transfer process have been in place for over 150 years. The concept of “wire transfers” was originated by telegraph companies (e.g., Western Union) who would receive funds for transfer from a sending party and send a telegraph to correspondent branch instructing them to deliver the money to the intended recipient.
The digitization of this process throughout the latter half of the 20th century improved the security of messaging services and improved the settlement time of clearinghouse activities.
•The actual transfer is not instantaneous: funds may take several hours or even days to move from the sender’s account to the receiver’s account.
•If the sending and recipient banks do not hold reciprocal accounts the payment must be sent to a clearing house or correspondent bank for the assurance of payment for the recipient, adding costs and delays.
The complex structure of requesting the recipient bank to demand payment makes the process more vulnerable to fraud using exposed sender credentials
Innovations will make payments more cashless and invisible in the future, while enabling data-driven engagement platforms for customers.
•Cashless: More cash will be displaced by electronic transactions as payments innovations make it beneficial for customers to use payment cards even in small denomination transactions.
•Back of Mind: As more transactions become virtual and automated, more payments processes will become invisible to end customers, changing their needs and behaviours.
•Engagement: As payments and mobility becomes more integrated, the importance of payment transactions as a potential customer interaction point will increase for merchants and financial institutions.
•Data-Driven: With greater adoption of electronic payments, more data will be accumulated from payment transactions, allowing financial institutions, services providers and merchants to gain greater understanding of customers and businesses.
•Reduced Costs: Because innovative solutions build on the existing infrastructure, which has very low variable costs, the cost of making electronic transactions will fall as electronic payments gain more volume.
These emerging non-traditional payment schemes will create competitive pressure for the value transfer rails to become faster, cheaper and more borderless.
•Global: Geographical distance as a factor in transferring value will continue to narrow and even under-banked regions will be connected.
•Fast: The time it takes to transfer value between two accounts will be significantly reduced.
•Transparent: The flow of funds will become increasingly visible and traceable.
•Secure: The opportunities for fraudulent activities will be largely reduced.
•Reduced Costs: The cost to execute transfers will be minimised with the streamlined and automated rails.
How will changing customer needs and behaviours in an increasingly cashless world change the payments landscape?
•Consolidation of the Payment Market: Customers lose visibility into their payment choices as innovations like Amazon’s 1-click and Uber’s seamless payments push more and more transactions to a single default card
The default cards’ share of wallet will increase and the importance of differentiators like card brand and design will be reduced
•Fragmentation of the Payment Market: The successful deployment of digital wallets eliminates the need to own/carry physical cards and enable decision support systems to help customers optimise card usage
This drives a proliferation of niche and merchant issued cards, splintering share of wallet across many providers
•Displacement of Credit Cards: Customers with revolving balances elect to use innovative point of sale vendor financing schemes offering preferable terms
Credit card usage is eroded as transactional card users migrate to payment solutions that seamlessly link to their bank accounts
•Compete with an alternative network of financial providers: A network of innovative financial services providers (e.g., authentication, remittance, savings / lending, insurance, merchant payments) emerge around alternative payment schemes.
These services provide customers a meaningful alternative to financial institutions by keeping money entirely within the alternative schemes.
•Facilitate alternative payment schemes as complements: Traditional institutions launch financial products that are connected to alternative payment scheme ecosystems (e.g., Bitcoin savings accounts, mobile money insurance).
Financial institutions may also act as a gateway to alternative payment schemes (e.g., authentication).
•Provide leaner, faster payment options within the existing network: Alternative payment schemes act as a catalyst for traditional institutions to develop new solutions.
Leveraging elements of alternative schemes, traditional institutions build more streamlined rails for the movement of money.
These solutions reduce the advantages of alternative payment schemes and retain the flow of money within the traditional financial network.
•The success of any innovative payment solution will require a strong customer rationale to switch, as most customers do not consider the existing payment regime to be broken.
•In an increasingly cashless future, payment providers who can embrace emerging payment innovations to offer differentiated, value-adding digital experiences will be able to deepen their relationships with customers and take a dominant place in the changing market landscape.
•Reduced control over customer experience: Financial institutions may lose some or most control over their customers’ transaction experience as digital wallets consolidate digital payment platforms.
•Customer targeting: Leveraging data on specific customer segments will become an essential component of strategies to gain a dominant share of wallet among those segments that encourage or drive more frequent usage in a diversified market.
•Merchant relationships: Financial institutions’ ability to partner with merchants will become a critical component of strategies to drive merchant-specific usage, enable merchant-issued credits, or become a preferred card on merchant platforms.
•Competitiveness of bank-issuers: Large stand-alone issuers or network issuers may gain a competitive edge over bank-issuers using their scale to consolidate the market.
•360° view of customers: Issuers that consolidate their customers’ share of wallet will gain visibility into most of their payment activities, leading to valuable data on their lifestyles and preferences.
•Customer retention: As consumers spread purchases over a larger and larger number of cards, the credit card will lose its significance as a key anchor of customer retention for financial institutions.
•Distributed credit: It will become more difficult for individual financial institutions to assess customers’ creditworthiness as their credits become distributed over multiple cards.
•The shift in credit business models: As new credit vehicles displace credit card based borrowing the overall profit models of retail financial institutions will be forced to change.
•Loyalty programs: Financial institutions will need to create new ways to promote customer loyalty as lower fees on bank account transactions disrupt the current credit card, loyalty models.
•Competitiveness of bank-issuers: Large stand-alone issuers or network issuers may gain a competitive edge over bank-issuers using their scale to consolidate the market.
•360° view of customers: Issuers that consolidate their customers’ share of wallet will gain visibility into most of their payment activities, leading to valuable data on their lifestyles and preferences.
•Customer retention: As consumers spread purchases over a larger and larger number of cards, the credit card will lose its significance as a key anchor of customer retention for financial institutions.
•Distributed credit: It will become more difficult for individual financial institutions to assess customers’ creditworthiness as their credits become distributed over multiple cards.
•A shift in credit business models: As new credit vehicles displace credit card based borrowing the overall profit models of retail financial institutions will be forced to change.
•Loyalty programs: Financial institutions will need to create new ways to promote customer loyalty as lower fees on bank account transactions disrupt the current credit card, loyalty models.
•To bring innovations to the traditional value transfer rails, financial institutions must collaborate to identify top priority areas for transformation solve for regulatory complexity.
•Revised margin structure: Margins on the current payment and settlement transactions will need to be restructured as competitive pressure grows from alternative rails.
•Global implementation: Global settlement infrastructure and emerging markets may present the largest immediate opportunities for the development of alternative rails of payment and settlement, given regulatory complexity of developed local markets.
•Changing role of trusted intermediaries: As highly accurate and efficient alternative rail designs are implemented, the role of traditional intermediaries (e.g., payment networks) as a trusted party may diminish.
•Loss of visibility into customer transactions: As more financial transactions are conducted via alternative rails, financial institutions will lose visibility into payment history to asset/loan portfolio aspects of some or most of customers’ finances.
•New sets of risks: As financial institutions participate in the further development and usage of alternative rails, they will face a new set of risks around reputation, security, and compliance that are not under their direct control.
https://www.weforum.org/agenda/2015/06/5-ways-technology-transforming-finance/
http://www.kemplittle.com/site/news/impact-of-technology-on-the-financial-sector
http://www3.weforum.org/docs/WEF_The_future__of_financial_services.pdf
Source: Crypto New Media
