Fintech — The Digital Finance World
Abstract
The evolution of internet has disrupted or even shattered some of the conventional industries throughout the 90’s and the 21st century. Just think about the record industry which has been completely wiped out by online streaming, or about street fashion shops which have been taken over by online retails shops. However, it is believed that the only industry which will be resistant to the change is the finance industry but it has also been proven wrong. It is changing faster than any other industry now. In recent days, you often come across the word ‘fintech’. What does it mean? Fintech = Finance + Technology. It is an innovative technology which competes with the traditional financial methods. The Finance industry is considered to be a complex sector, however, in the 21st century it has changed and is still changing. Fintech can evolve as a powerful tool by harnessing the spending habits, consumer lifestyle and addressing the pain points of the customer using BIG Data Analytics. For example Fintech has the power to change the underwriting procedure in the banking industry by considering the daily activities of the customer for approving their loan proposal which will not be seen in their banking transactions. We have seen how Amazon Credit card has helped to increase the Credit tack record for the bad crdit history people. This paper is framed in such a way to tell how fintech can act as enable of better access to financing and the disruption it is bringing and will bring.
Introduction
‘Money’ is a prime factor in any industry and in our daily lives, it is but natural to consider fintech as seemingly endless. It has become important today, starting from providing digital services for transfer of money, facilitating the banking process and to store money in our digital wallets. The competition in this sector is increasing day by day. Many companies are coming up with new innovative solutions by incorporating advance technologies like AI, Big data, Blockchain and much more to move ahead of their competitors and to provide their clients with the best advancing solutions to their problem.It helps people to make informed decisions as compared to earlier times. It has also increased credibility driven by transparency.
For many years, banks have enjoyed governmental regulations for the financial sector which prevented newcomers to enter and establish their business easily, but everything went upside down after the 2008 market crash. Banks created a deep hole in consumer trust and support. The mix of distrust created by banks and tech advancements like encryption, cloud computing, AI, blockchain etc. has created a perfect storm for Fintech companies to rise to the occasion.
Demonetization was also one of the major reasons for fintech to grow in India in the recent times. Before demonetization was announced, Paytm and the digital payment industry didn’t have much growth but after demonetization, they had a 3–4 fold increase in growth. The p2p lending business, which is a growing industry, was also accelerated by fintech. Because of the high interest rates and difficulty in getting bank loans, many people started approaching p2p business.
These changes not only attracted startup companies but also the world’s most innovative companies like Apple, Google, Amazon etc. which created their own mobile payment systems such Apple Pay, Tez, Amazon Pay. Many companies have started investing more in fintech companies. Global investment in fintech has increased ten folds between the year 2010–2017.
The reasons for fintech’s rapid growth are rising customer expectations, plentiful VC funding, lesser barriers to entry and accelerating technological revolution. These forces are creating a scenario where customers are becoming more and more comfortable with fintech. Globally, more than 50% of the people use at least one non-traditional fintech form.
The success of Fintech does not lie in the money i.e it is not about focusing on the money but on the deciding who is their target customers and how making a clear definition on how they consider them as target customer. Say for example Millennials (those who born between 1981-1996, currently who will in their 20’s and 30’s)will care about the different things than the Gen X (those who born between 1965-1980, who will be in their 40’s and 50’s). Millennial and Gen Z are not showing interest in high end luxury cars like Ferrari or Rolls Royce. They don’t even given importance to brands but they give importance and look into the purpose and values provided by these service providers for them. Millennials and Gen z behave in different way than Baby boomers or Gen X in digesting and retaining the information about the products or services. We have to remember that those who are in their late 20’s who grew up by playing video games are still continuing that habit. It gives us the perspective of how the companies should cater them. For Example Most of grandfathers and great grandfathers concentrated on wealth creation which resulted in large amount of generation wealth. But at this point people less concentrate on generation of wealth. They just inherit the wealth. We can see the behavioural change. Fintech can provide service to these kind of people by acting as intermediary. There are lots of opportunities available to monetize it just depends on how we approach the issue and address them and most importantly how we describe our target customer.
Financial industry has seen changeover in such a way that now certain banks exist in app only. Like Flipkart and other ecommerce space where everything happens in virtual world even banks started operating in that mode. Though the attraction among customer is very less but in future this model might dominate the market by reducing number physical banks.
Investment in fitnech
Indian fitnech has seen high level of capital infusion in the industry than before. Several macro-economic factors such India’s is fastest growing economy, large population and increasing digital penetration etc., has fuelled the growth in investment in this sector, According the NASSCOM Indian fintech market will reach $2.4 billion in 2020. There are many new generation fintech with cutting edge technology which are valued more than the traditional banks. There are several global hubs for fintech is being created around the world like London is considered as hub for open banking solutions whereas China is mastering in facial recognition space and Israel is well known for the cyber security.
No of deals happened in India is rising when compared to China. Number of VC investments in china has decreased to 29 from 49 in the last quarter of 2018. Number of fintech deals has increased by 61% in start of 2019. According to CB insights data Venture Capitalist has invested around $890 million in around 130 fintech deals in Asian market.
More non-traditional firms are succeeding in capturing the market faster than traditional financial institutions. And now both have understood the synergies they can create by collaborating. At the same time tech giants also started offering financial services for example apple pay, google pay, amazon pay etc., and creating solution in techfin space.
What is fintech and techfin? Does both convey the same meaning? Is there any big difference between them? Not much difference. Based on their underlying organisation it is classified as fintech or techfin. Companies which offer financial services efficiently by using digital technologies is known as fintech. For example mobile banking app by respective banks is great example of fintech in traditional firm and in non traditional firms we can say venom,billdesk, paypal etc., on the other hand techfin are those firms whose core business is technology but they also provide financial product as part of the service business. Best example is Google Pay, Alipay, PhonePe etc.
Collaboration will fetch more advantages for both sides of the court. The logic behind this most of the fintech startup will have innovation mindset, they will be more customer oriented etc., but what they lack is scaling, strong brand recognition which is available with traditional firms. So it will be win-win situation for both the players of they collaborate. According to World Fintech report 2018, Most fintech are focused on narrow segments or which are not served by tge traditional firms but the problem for them is scaling. With the kind of legacy the traditional firms has and tech support from fintech startups will be create value for the both.
The major challenge is to establish an ecosystem where both of them can benefit from other. Jack Ma, founder of Alibaba said, “In future financial industry will have two big opportunities. First, traditional firms will go digital like online banking. Second internet bank will emerge and it will be completely operated by outsider. In either case success depends on how well the company utilise the customer data and learn from that insights and offer according to customer needs.
One significant point to be noted here is big tech firm already they have enough customer base or even we could larger than traditional banks but what they lack is the TRUST which has been created by these banks. It is reserved only for them. Without gaining trust it becomes difficult for them. That too in the tension about the privacy issued about their data it becomes extremely difficult for them to gain trust from the people. So to fill that gap they definitely need the help of traditional bank help where traditional bank in need of high end technology requirement. So as we said before it will be win-win situation for both if they collaborate.
Companies which makes bet more and more on the experience and makes things easy will succeed in the competitive environment. This is the secret mantra for disruption. Most fintech has understood this very well. Banks have the knowledge and legacy but fintech are challenging them on technology front. It is time to relook the bank valuechain.
There are few things which is important to sustain in this fast emerging fintech sector.
Collaboration is everything or in other words sharing economy will be integrated in every part of it. In near future people will need service of bank but it will not be in the present form. Slowly sharing will start in financial sector as well like Ola, Uber etc., sharing here means decentralised asset and using those information efficiently to find the service providers rather than people automatically turning to bank. Most of us think financial service company are those which take care of end to end process of transactions. But they just act as intermediary or take care of one part of the process. Similar way there are some peer to peer transaction based fintech companies lend money to people by partnering with the traditional banks. These kind of business model is existing in UK, China and US. As mentioned earlier there are many fintech compaies which focus on particular specific problem in the value chain. According to the survey conducted by PwC, the result shows than 44% of the people who are earning less than 75000$ in a year would trust technology company more than traditional financial company for p2p lending and this percentage is increased to 68% for the category of people who are earning more than $100000.
There are n number of companies which act as enablers. It enables people to raise funds or in other words it helps people to borrow money for various purposes. Bankers are the one who connect between the people who have money and who needs them. But in future as we are emphasising from it will not like that. Apple has filed a patent for p2p money transfer using mobile devices. If it comes then it will disrupt the retail lending format. The thing people use it more than the traditional one because of high cost involved in commission and other fees etc., It is costing huge for traditional banks also maintain branches in less densely populated areas. In those banks are trying to partner with the domestic fintech companies to create an alternative distribution channel. M-pesa in Kenya would be best example for this where it accepts deposits and payments using mobile phones and agents.
Even in India Postal department is aiming to apply for small finance bank license. It is because postman knows every nook and corner of his area. It will be easy for him to reach the customers. So in initial stage it looks like postal department has great market base. For example people who wishes to deposit can hand over their cash to post man who will collect at doorstep. It makes the process easier for the people. Even ING is testing turning mobile phone into a POS terminal as pilot project in some parts of the world. In this tech saavy world informal segment will not be great hinder for the fintech startups as more number of people move towards less fees and easier usage then enough market will be grown similar to Kenya.
Blockchain will make revolution. Two important thing that makes everyone in the industry starting from startup founders to well established business CXO’s to speak about it. First is there is wide chance of the making the infrastructure cost less expensive than the existing one. And second is blockchain gives n number of opportunities for financial sectors starting from smart contracts and so on. As we said at the start block chain makes the infrastructure less expensive, it is because it is decentralised ledger where authenticity of the transactions is performed by anyone in the block. This process helps to reduce the intermediary who are existing now. And blockchain process is more efficient and transparent one when compared to the present.
These plethora of opportunity available in the blockchain technology has attracted both budding business and well established business person to develop their product with concentrating on specific view as well wide view of addressing the problem. Accenture and Ponemon Institue conducted a study on cybercrimes in financial sector and the report says that cost of cyber crime has increased 40% over the years and money spent by firm to tackle these also increased from $12.97 million in 2014 to $18.28 million in 2017. It is difficult to hack blockchain network. It is like searching lost ring in the sea. The biggest challenge in this hyped technology is having a clear vision of where to apply it and knowing why to apply it.
The New Mainstream: Digital
India consumes 9.8 GB per month and it is anticipated to double to 18GB in 2024 according to the report published by Swedish equipment manufacture Ericsson. It is estimated to reach 1.1 billion smartphone user in India by 2024. It show s the level of digital penetration happened and happening in India. It is same with other emerging countries as well. India aims to slowly move towards less cash and more digital economy. Digital is applicable in all parts of financial sector. Think of growing number of digital wallet. Digital wallets are secure, fast and more over low cost method to save and send money instantly to the need person. Before it takes days to send money. Later it was reduced to hours and now it takes seconds to send or receive money. It all happened because of Digital disruption. Still now it takes 2-3 days for cross border transactions. It is expected that blockchain technology will make that also to happen in mins.
In recent years the main competitors for banks are not their peers but from non-traditional competitor. There are lot of segments within financial sector is emerging. Every one of us will maintain at least two bank accounts and atleast will have minimum of 2 debit/credit cards apart from these will have other special cards from different business channels. Many of us will find it difficult to maintain all these accounts. There are startups which aggregates all these one app where you can maintain all these in few taps from checking balance to transfer money. Even RBI has given permission to 3-4 companies to work on account aggregation. There are pilot projects going on in India. Similar to account aggregation there are startups like Curve which aggregates your card. Multiple cards from different banks will be replaced with single card and using the app you will select the card from which amount has to debited.
All these things will help bank to get data about the consumer spending from which they analyse and give insights on how to save money and inputs on investment from which they can earn. These data helps banks to improve their real time fraud detection. Over few years automation will start coming in financial sector as well especially in lending and clearing the cash settlement and in capital markets. To be competitive in the market financial companies should be ready adopt the change so quickly.
Conclusion
In forth coming years financial services will like a Layer below which everything will be built on the top of it. To some extent the layer will be owned by a big player and everybody will work with him. Competition will kick out all the bad companies and only good one will survive in the market and dominate them. It is no more single man show in the Financial Service Industry. To stay in the market and competitive they have to collaborate with Fintech Companies to grow. Many startups are looking towards the accelerate their growth through faster, cheaper and broader distribution of the services against the traditional which are costlier and risky as well.
In the future, it is expected that banks will outsource or share the task of managing technology with external companies so that they can concentrate on risk management and running their business. All physical banks will be closed as all of them are currently on the path to get their processes digitized.
Fintech has great social and economic transformative potential. The industry, its consumers and the big corporations are hungry for change and are ready to take the leap of faith. That’s why many people consider fintech to be the fourth industrial revolution. Let’s wait and see whether it can replace traditional banking industry or not?
In the future, it is expected that banks will outsource or share the task of managing technology with external companies so that they can concentrate on risk management and running their business. All physical banks will be closed as all of them are currently on the path to get their processes digitized.
