Fintech has made quite a lot of headlines, at least in startup publications this decade. But we can still say that actual changes in the finance industry have been quite insignificant and even the new technology, or fintech, has only played a small role – so far. Most changes have happened on the outer peripheries rather than the core. When and how should we expect the big changes to happen?
A new research report Fintech 50 lists the top 50 fintech companies and fintech growth during the last five years. We can see there are some success stories, but if we look at those numbers and companies, we can conclude, fintech hasn’t yet been a threat to traditional finance institutions. Square and Stripe are the top companies on the list, they exist mainly to handle payments. They represent new technology and make payment solutions more cost effective. They are also services for processing transactions rather than actual finance services.
Other companies on the list include also new credit scoring, trading and money transfer services. They are also very transaction-oriented. We still have quite limited changes, e.g. in saving accounts, wealth management, real estate finance, lending and investing services. Robo-advisors is a category that has seen much more talk than real business.
We have heard many reasons why it is so hard to change the finance sector, from regulation to a need for a strong balance sheet, risks and conservative customers who guard their money. But as we know, in many industries big disruption often takes more time than visionary early-adopters expect, but it then comes and maybe in a bigger way than expected. We have seen, how long it has taken the big disruption in retail to really happen.
If we try to think what has been successful in fintech and new finance services, it has been services that are very simple and straightforward to ordinary people. Services to make payments easy, services to transfer money or get small loans when you need them. We can never underestimate, how important convenience is to consumers. It is more important than price, which is also very important.
We have also seen that some new exciting things get traction, but it can be for a short time only. If the value, usability and comprehensibility are not in place, people abandon the services quickly. We have seen equity crowdfunding, ICOs, robo-advisors and P2P lending getting a lot of attention, but the services haven’t been able to offer enough value or they have been too complex to understand or use. There are many reasons for this such as being too complex to understand the real value; difficult to evaluate the services themselves; even bad services and complex finance products or asset classes.
One very significant problem with new finance services is when too many compromises are made, when the services haven’t been disruptive enough. Some finance professionals can challenge this argument, and say you can make new finance services, only if you know the old services well enough and build new products based on that knowledge and experience. But if you do in that way, you just add new stickers on old services, or maybe add some web and mobile functions, but you don’t go to change the fundamentals of the services. The successful online retailers or media services haven’t only added a web services to order items or watch content, but they have build the whole company and operation on moderns digital operations, logistics and models.
If we simplify this real disruption point, we should not expect real new disruptive finance services from London, New York or Singapore, but from San Francisco, Berlin and Shenzhen. They are not built by former bankers, but by software-oriented risk-taking entrepreneurs that are ready to challenge old models, take risks and convince risk taking venture capitalists.
Many technology solutions in fintech have been based on traditional fundamentals, like centralized solutions that also utilize many old finance world concepts and systems. Although blockchain has suffered from the ICO bubble, it is a model and technology that can offer tools to really change the finance world. Blockchain and distributed ledger solutions generally are also developing behind the scene rapidly. It will be to find the balance between totally wild distributed models and how fast the regulation can develop.
What can we expect in fintech during the next few years? Here are some predictions:
- Most real disruptive services that produce game changers will come from outside the finance services and former finance industry people;
- Successful new finance services will not only offer a web or mobile cover to old types of services, but they will also be services and instruments that are fully designed to digital elements and operations;
- The successful services will be easy to understand and easy to use;
- Software for new services will be built on the latest models and principles, including open source components, GitHub libraries and open APIs;
- The services will be very scalable, and should not be compromises of old traditional manual processes, new technology or limited to geographical areas.
We will see much more change in the finance sector, but the timing is always hard to predict and in the finance sector it is even more complex with regulatory constraints. But when we get services that offer significant value to people and attract enough investor money, no regulator or politician will be able to stop them for long. It might sound like a cliché, but we need finance services that really disrupt the industry and not simply cutting corners.