In many industries – such as airlines, retail, and media – disruption has been linked to new low-cost, almost commodity-type services. Southwest Airlines and Ryanair paved the way for low-cost flights, online news has become a commodity, and retail chains like Walmart, Aldi and Lidl have created a new cheap-prices-always category. The common theme is: cheap basic things, with a better experience available for a premium. FinTech disruption is changing finance in the same way, and when basic finance services become a commodity, they will be integrated to other services.
Some finance services have, of course, been in this category for a long time already. For example, payments are a crucial part of all e-commerce services and brick-and-mortar check out processes. It has become natural that services use third-party payment solutions rather than develop their own. We will see the same development for many other traditional finance and banking services.
Online lending, p2p lending and quick loans have been a fast-growing market. Those new lending services offer many benefits – sometimes a better price, but typically a much better customer experience. Sometimes they offer loans for people who cannot get a bank loan, and they might have more flexibility in terms and conditions. For many loan categories, bank loans are not a very attractive option anymore, especially when you factor in the customer experience, paperwork and time needed to get a loan.
Ford Motor Company just announced that they are going to adjust their car finance process (read more on WSJ). They decided that the traditional credit-scoring model is not very effective or optimal nowadays, and that they could get more customers and sell more with new finance models. Basically, they plan to use more data from new sources to get a more accurate profile of customers and optimize their financing better. It’s worth noting they were forced to do this because alternative lending services are already doing it, and competitive finance is an important component in car sales.
Car sales finance is just one example illustrating that companies outside the traditional finance sector need to develop better new finance solutions. FinTech makes it easier. The real estate sector has adopted a lot of new finance and investment models during the last five years, especially in the UK and the US – but now new real estate finance services are emerging globally. This means there are many new models available to invest in real estate – e.g. in development projects, rented apartments and commercial buildings, and new models to lend and borrow in real estate. Typically, this includes new finance instruments that are then offered through online finance services. These services are offered by some finance companies, real estate development companies and several startups.
At the same time, more inexpensive technology – or even technology-as-a-service – is available to build finance services. You don’t need a $100-million-plus IT back office to set up an investment or lending service – you can get it as a service from cloud, and they can offer access to relevant data sources (including credit ratings and richer data). It is quite easy to develop the actual application and your own investing and lending models.
We will see more:
- Services that offer finance with their products as car and real estate companies do already; it can come from their own finance models (including p2p components) or third-party finance providers
- Companies that offer finance solutions integrated with third-party marketplaces; for example, finance services with an API enabling integration with an e-commerce platform
- Online services that can integrate several financing services into their check-out process; for example, when you purchase something online, one payment choice could be a finance (loan) option, which you could get immediately and finalize your purchase.
All this is a part of the overall development towards an API and platform economy. Finance is becoming an integrated component for many other services. It means more competition for banks. But it also means significant new competition for credit card companies that have had an important role in smaller online purchases, and their money has typically been expensive.
When we think about FinTech and its impact, it is easy to focus only on the traditional finance sector. Certainly there will be significant impact on the whole finance value chain, as I have written earlier. At the same time, however, finance is shifting to a platform economy, and it is fundamental to adapt to the requirements of that business model by building the business network, offering APIs and utilizing data. After a few years, we will think about the old-fashioned bank loan process, with all these paper forms, and laugh as we do now at the thought of sending a fax or buying printed flight tickets.