The end of the (banking) world?You can check out the original article here.
There is substantial interest in the financial technology (FinTech) sector, at a time when the financial services sector is generally experiencing considerable churn. A raft of start-ups are using digital platforms to support innovative business models and deliver products and services more efficiently – with potentially significant consequences for the market incumbents.
No-one remembers cash, or currencies for that matter. No-one quite remembers what the distinction was between credit and debit cards – or why you would use a card in the first place for that matter. Everyone knows the function of banks. They are the utility at the heart of the financial system, heavily regulated, and often-state run – a bit like water and electricity …
It’s a matter of conjecture whether that describes the world 10 or 50 years from now. But it is the future. Historians will not suggest that FinTech caused these changes, any more than people explain the success of Uber, Airbnb, Google, Amazon or Spotify by reference to the world wide web.
What is more interesting at these moments of epic disruption is to wonder why the incumbents sit back and let it happen. The answer is always a combination of two things – disbelief and inertia.
Music and photography are the poster children of industries that saw the challengers in their rear view mirrors and did not look again until had been overtaken. Inertia is the more forgivable of the deadly sins. The companies with market leading positions are so invested in looking after today’s market that is often impossible to adapt.
So let’s take a look at the banks though this lens.
They used to be the only entities trusted to look after our money – and are regulated to the hilt as a result. They once had to be in close proximity with their clients, and this necessity meant vast quantities of people and property. Fast forward to today and few banking customers depend on branch banking, or care about their relationship with the bank manager – gone are the days when that relationship defined borrowing options, or was the source or all investment wisdom.
Crucially, this more distant relationship opens the floodgates to not only the challenger banks, but also to those who can harness the ubiquity of data and analytics to know all that needs to be known faster and more accurately that a single human.
That said, if you take a closer look you will see that FinTech, just like the world wide web, changes everything and nothing at the same time. We still pay someone to drive us, to listen to music and for a bed for the night. What changes is who we pay. In banking too, our needs are largely constant. We want a place, more resilient than a mattress, to deposit our money; a way of making payments, borrowing and saving. How these needs are met will change beyond all recognition, and it is inevitable that some of the related value will flow from the incumbents to the innovators.
In the world of FinTech, this leads to the all-important question: ‘Who are the innovators?’.
In considering an answer, we should not forget the apocryphal truths from the Gold Rush; namely that the inventors of jeans and the manufacturers of shovels made substantial and risk free returns.
The FinTech equivalent consists of a range of encryption, authentication and security technologies. The point is that the evolution of financial services is every bit as dramatic as the devastation of high street retail or the transformation of the automotive sector. If you combine this reality with the fact that consumers will expect better and faster for less, the conclusion that FinTech will reshape the market, and the market participants’ economic return, is a statement of the blindingly obvious.
There is, however, one factor that is largely overlooked when assessing the impact of FinTech, namely the value of money. We can all live with the consequences of a driver who loses his way, a dirty room or a song that corrupts half way through. None of us are even remotely that cavalier when it comes to money. The consequence of this is that there will always be a regulated banking sector at the heart of the financial system. Technology will flourish where the traditional providers offer nothing more than bureaucracy, negativity and delay.
It goes without saying that FinTech is trendy, and we have heard that warning before. It was called dotcom. As hundreds of companies pile into the sector it is worth remembering that there will be winners and losers, and more of the latter than the former. We all like choice, just not too much. We all like new, but not pioneering.
For investors in FinTech this is a difficult time. Stand back and miss out on the next Unicorns. Rush in and you may buy yourself a donkey.
On the difference between unicorns and donkeys click here
Bank artwork from clipart.co