FinTech offers many new ways to bank and manage money. With Open Banking gaining pace, what does this mean for the security and the future development of payment systems for enterprises?
In this concluding part of this series on the development of FinTech, we are asking what the future looks like? What trends are apparent and, how can businesses take advantage of this expanding sector?
The demand for more mobile, on-demand services from consumers is a clear trend and critical driver behind the development of FinTech as a whole. Indeed, Dilip Krishna, chief technology officer and a managing director with the Regulatory and Operational Risk practice at Deloitte and Touche LLP says: “A large number of our clients are taking aggressive action to determine how they can use these technologies within their ecosystems. They’re acting as venture capitalists and investing in their internal projects to see what specific problems these technologies can solve.”
As financial services increasingly move away from traditional resources, FinTech will also become disruptive and, change how the B2B and B2C spaces approach payments in particular. Challenger banks which began with Metro Bank have been joined by a slew of others and additional service providers.
Speaking to Silicon UK, Todd McDonald, co-founder at R3 said: “The big trend we see is FinTech being embedded in more and more business processes. This goes hand in hand with the increased pace of digital transformation across all businesses. The advent of blockchain fits perfectly within these trends. As businesses digitally-enable their relationships, they need a way to stay in sync with more counterparties yet, do so in a way where those connections are private and secure. The right blockchain solution can solve for that, while also unlocking the potential to complete even complex transactions with little to no reconciliation or human intervention.”
Coupling the blockchain with FinTech services is a clear trend as together, these technologies continue to move financial services and transactions away from their traditional centralized base. The distributed ledger can also offer strong security which will be needed as payments, in particular, also move to new novel suppliers.
Trends to watch
FinTech has the potential to bring massive disruptive change to markets and processes that have changed little over decades. As Jacqueline Morcombe, area vice-president of international sales enablement at nCino, explains, more automation also needs to be added to the mix of services and processes FinTech will bring to businesses:
“Businesses and financial institutions will increasingly be looking for digital engagements and automated services wherever possible,” she explained. “We already see increased connectivity between businesses and financial institutions with a reduction in routine requests that can now be operationalized. For example, balance queries, statements and payments. The focus has been shifting towards value-add engagements that FinTech can facilitate for businesses, and portfolio and decision-making insights for financial institutions.”
Adam Bialy, chief product officer, OpenPayd also explained to Silicon UK: “COVID-19 will inevitably force rapid acceleration of digital transformation across the financial services industry. Right now, the spotlight is on the banks’ ability to adapt and survive without people visiting branches and without reliance upon manual processes. Those that didn’t truly commit to a digital transformation strategy yesterday are set to pay the price today.
“Before the pandemic, Open Banking was seen as the catalyst that would finally trigger real transformation among the traditional financial services sector. However, back in August 2019, research revealed that while 15% of traditional banks have built an API, not one is fully meeting PSD2 requirements. Open Banking has been less of a catalyst and more of a “gentle nudge”, with consumer-facing applications being limited to account aggregation services.
Bialy concluded: “While Open Banking has been less than success from a B2C perspective, there is an enormous opportunity in B2B around SME and corporate banking. By allowing third-party FinTechs access to business accounts, payment providers, lenders and equity managers, they will be able to better serve businesses desperate – especially under COVID-19 – to improve operational efficiencies, cut costs and better serve their customers.”
The new normal
In a post-COVID-19 environment, banking and payment services platforms will continue to develop and evolve. Consumers and then businesses will increasingly demand change to reflect the new world everyone will then be working within.
Says Accenture in their report: “Innovative payment methods introduced by non-banking players such as Google, Apple, Facebook, Amazon (GAFA) and Alibaba have further raised the bar by changing the way consumers “experience” payments. These players also have an inherent advantage—they’re closer to the customer by way of the other services they offer. This has enabled them to keep an ear to the ground and develop the much-needed agility to stay on top of the game. Now, they are increasingly being seen as natural partners for FinTechs, quickly gaining a financial niche as well.”
With Deloitte advising: “Executives should be looking at FinTech trends and thinking in terms of experiments and pilot programs, giving incentives to customers to try out new offerings with the understanding that it’s for a specified time or with limited features. Blockchain is a good example of how financial services organizations can create targeted applications and products to test out new approaches in a controlled environment.”
Businesses looking past the current crisis to a time when trade returns to whatever the new normal looks like, will need to consider how the continuing development and expansion of FinTech will impact their enterprises.
FinTech is revolutionizing how financial services are delivered. And with more change on the near horizon thanks to advantages the distributed ledger will bring, paying close attention – and being ready to act – must be on every business’s strategic roadmap.
Silicon in Focus
Alex Reddish, chief commercial officer, Tribe Payments.
What are the key trends across FinTech all businesses should pay attention to?
Right now, the most significant trend in FinTech is also the most prominent concern: COVID-19. With the current crisis, there are constraints around the amount of available capital. Investors are going to be cautious when looking at opportunities.
Challenger banks and FinTechs must prove their value in more than just customer acquisition. This will be challenging as FinTech companies have fewer funds to develop new products and more pressure to succeed. And many FinTechs that have used VC funds to drive customer acquisition can no longer do so.
This will lead FinTechs to focus inwardly on base economics to increase margins as volumes fall. By exploring ways to improve operational efficiencies, at a time of diminishing returns, FinTechs will be able to weather the storm, and critically come out of the crisis leaner, stronger and more resilient to headwinds.
And while funds will be limited for product development, there will be a lot to learn from customers who are using services in new and unexpected ways. Even more so than ever, FinTechs should pay attention to their customers to fuel the next wave of innovation.
How transformative will FinTech be across the financial services sector in particular?
FinTech is already transformative. For years, traditional financial services providers under invested in technology because they were unchallenged. Off the back of the 2008 financial crisis, the rise of FinTech has both created competition but also accelerated and supported digital transformation among incumbents. I’d argue that the sector is stronger and healthier as a result of the FinTech “challenge”.
FinTechs such as eToro and Kroo are transforming their respective markets. These companies have solved many issues consumers had with trading or retail banking.
More long term, FinTech was the catalyst for far-reaching industry changes like Open Banking, which was designed to drive competition and improve innovation, putting FinTechs on a level playing field with big players that have big pockets.
Starling Bank is a prime example of how this is transforming the sector. Starling has pioneered the idea of “marketplaces” where a range of best breed services from retail loyalty to pensions are available to customers to browse at their leisure. This innovation fuels competition and has made longstanding banks adapt to new ideas. For example, we’ve seen Natwest mirror Starling Bank in launching a companion card which vulnerable customers can give to trusted people to pay for their groceries and essential items.
Moving forwards, as we transition from Open Banking to Open Finance, which addresses the broader universe of financial services – not just banking – FinTech will continue to be transformative. And my view is that sub-sectors like mortgages and pensions, which still rely heavily on paper-based processes, are set for the even greater disruption that we’ve seen to date.
How will CIOs and CTOs have to change to ensure their businesses and organizations make the most of FinTech in the future?
Many CIOs and CTOs of financial institutions and companies, in general, will need to ‘bite the bullet’ when it comes to utilizing FinTech for their organizations. Older, archaic systems currently in place are not fit for purpose and are failing the businesses and customers they serve. This was a particularly acute problem last year, with The House of Commons Treasury Select Committee publishing a report slamming banks and cloud providers for their failures and calling for increased oversight and regulation.
Financial institutions need to re-think and re-orient their system architecture to allow them to partner with FinTechs to deliver new and exciting services more efficiently. But this isn’t just about product innovation and new customer-facing products; it’s also about the back and middle office. By deploying FinTech into the core, institutions under price pressure can improve operational efficiencies and improve the return on equity they so desperately crave.
How will compliance and regulation impact on the development of FinTech in general?
The FinTech industry largely exists because of regulations. The proactive stance from the UK government and its regulatory sandbox is one of the many reasons that it leads the world. PSD2 is the most important regulation for the FinTech industry to-date. It has been implemented to encourage data-sharing between banks and FinTechs – banks share the data, and FinTechs used it to craft new services.
Unfortunately, right now, it isn’t working quite as planned. The reason is that most bank APIs aren’t up to spec and the costs of integrating with APIs for most third parties is too high, creating a barrier to entry especially for the start-ups the regulation was designed to help.
Open Banking has a sound rationale behind it; it is just a little broken. To fix it, there needs to be better cooperation between banks and FinTechs to reduce barriers to entry and to make sure banks are also able to make use of the innovations that appear as a result of it.
With new money laundering regulations and Open Finance around the corner, the impact on the FinTech sector moving forwards will largely depend on lawmakers. They need to strike a balance between security and innovation, between pragmatism and vision, and between the new players and the old.
Is FinTech a disruptive technology or one that will evolve over time to make its full impact felt?
FinTech is a disruptive technology that is already driving change in the financial services industry.
Just take digital wallet technology as an example. This is a significant innovation that allows any company from retailers to utility providers and even gaming companies to build an integrated digital wallet complete with account number and sort-code that give customers a way of storing and using their money. This would allow an energy company to provide a digital wallet and companion contactless card to a customer who can use their account balance to pay for goods and services.
As a result, the energy company gets the customer data which they can use to craft new services, and the customer will get incentives from the company to keep their money within the system. This helps with customer engagement and allows the company to communicate with customers in a more informed and targeted way.
While FinTech is changing the market, genuine disruption might be an overstatement. The fundamental market economics and systems remain the same. But with the rise of big tech, the evolution of Open Banking to Open Finance, and the growth of decentralized networks like Libra – all placed in the pressure cooker that is Covid-19, substantial disruption is just around the corner.
How do you expect businesses to use FinTech services in the future?
To date FinTech services have been deployed at the front-end to provide a better user experience. In the future, I expect FinTech services to drive operational innovation and systemic, long term change in how businesses manage their finances.
One challenge in using FinTech services is fragmentation—the majority of FinTechs focus on solving a particular problem. Rather than going to a single provider to supply technology across the business, firms need to speak with a myriad different FinTechs and stitch together a holistic solution. This will give rise to companies that bring together best of breed FinTechs and provide a single point of integration to ease the procurement and implementation headache.
And finally, I expect businesses to use FinTech as the benchmark for innovation. $137.5 billion was pumped into FinTech in 2019, more than any other technology vertical. FinTech is leading the world when it comes to applications of AI, quantum computing and decentralized networks.
FinTech is setting the innovation barometer that all other businesses will measure their success against.