Jamie Dimon of JP Morgan famously remarked to his wall street colleagues “Silicon Valley is coming to eat our lunch”. The anxiousness of disruption (by startups) at the corridor of large global banks is palpable. Different banks are reacting to this is in different ways — some are launching an incubator program, some are taking stakes in emerging fintech companies and others are just ignoring the trend, assuming it as “another fad” which will pass away soon. What is the reality? What will financial services (and more specifically banks) look like 10 years from now? In this article, I will cover the major players in fintech space and what they are trying to solve:
1. Peer -to- Peer (P2P) Lending: One of the major functions of banks is an act of intermediation. A customer has some extra savings. She places it at the bank for safekeeping and some return. Another customer needs to borrow money to buy a house. The bank acts as an intermediary between the two and manages the risk of the transaction. P2P lending platforms are trying to eliminate this function by connecting both sides directly. The platforms are not only funding simple personal loans but more complex mortgage and commercial loans. They aim to reduce the cost of intermediation and giving a price advantage to both the individual lenders and borrowers. It has become so lucrative that there are now institutional funds that are putting in money on P2P platforms. Broadly three types of lending are covered on these platforms:
Unsecured P2P lending: Companies like Lending Club (recently IPO’d at over 2b), SoFi (student loan)etc. are facilitating P2P unsecured loans.
Commercial P2P lending: Companies like RealCrowd, Realty Mogul are facilitating loans for large commercial real estates. Able Lending focuses on loans to SMEs.
2. Crowdfunding: Another group of fintechs are connecting companies directly with individual/institutional investors to raise funds. The companies raising funds are mostly startups and SMEs where the crowd is investing in exchange of equity. But then again, in some cases companies valued beyond billion plus are also raising on these platforms. The growth rate of these platforms are staggering and has caught public interest. Equity stakes at (private) companies which used to be only limited to a very few super wealthy individuals or institutional money are now available to the masses. A few are projecting to invest over a billion dollar annually by next 2/3 years. AngelList is the most popular among them but there are few other platforms like Funders Club, We Funder, CircleUp etc..
3. Credit Rating: At this stage, the obvious question is, how are these startups managing risks and approaching credit scoring? Two approaches:
Social gaph based model: Companies like Vouch are using social graphs to decide the credit worthiness of individuals. They are building a credit rating model using the network of individuals, interaction patterns and the number of people in the social network who will vouch for the borrower to decide credit scores.
Big data based model: Companies like Inventure are building credit model based on data analysis generated by the behaviors of borrowers. They will allow a borrower to download an app which will track the behavior of the user and build a credit model
around that. Let me unpack that more….for example, a person who talks frequently with her family over phone are supposed to have a stronger tie in the community and less credit risk. Inventure is using this and other social data to estimate the risk of lending to that individual.
4. Wealth Management: These fintechs are developing sophisticated asset management model and eliminating the need of asset managers and analysts. They are using a combination of artificial intelligence (AI) and behavioral data. Historical portfolio performance data, an individual’s risk appetite and all other relevant economic and market data are fed into the system and the AI reallocates the fund based on those information. It is very likely that these AIs will soon show a better portfolio management skill than a “human” asset manager as the machines continue to learn and improve.
These fintechs are also playing a big role in democratizing the wealth management services for the masses by lowering the fees and entry barrier (minimum balance requirement). Most of their customer base are millennial but they are also slowly penetrating the more matured customer group. WealthFront is at the forefront in this space with companies like Nutmeg and RiskSave following behind.
5. Digital (mono-product) Banks: A few fintechs have taken up banking licenses and rolling out monoproduct offers like current accounts connected with an all purpose card. Some are focusing on savings accounts with higher interest rate than traditional banks. Their main appeal is low fees, friendly User Experience (UX) and cutting down
bureaucracy of traditional banks. There are a few in this space like Atom Bank, Mondo, Earny etc.. These banks have rewritten the processes and structure ground-up as a digital bank and therefore easily outmaneuver the traditional banks offering digital services in this space.
6. Payments: One of the important functions of banks is to transfer funds between parties. An estimate indicated that banks earn around USD 4B every year as fees just by transferring funds. Couple of fintechs are actively working in this area. Notables are TransferWise, working in the space of international payments and mpesa/bkash working mostly at domestic payments. Companies like Stripe are servicing merchant payments and Shopwave replacing merchant terminals with iPad based hardwares integrating the complete accounting/inventory management of small shops. Payment is a critical intersection point for a long standing customer relationship and with fintechs aggressively moving in this space, banks need to watch out.
7. Bitcoin (Alternate currency): This is where fintechs are operating at the edge and pushing the boundaries in a fundamental way. Bitcoin is the most popular digital currency out there. This was developed by Satoshi Nakamoto (no one knows the actual name) on a platform called Blockchain. Blockchain is a distributed ledger system with no one specific owner. The bitcoins need to be “mined” using heavy processing power and the number of bitcoins that can be mined (generated) is limited. That means, there is no government that can control bitcoin price by issuing additional bitcoins. This provides a
sort of protection against inflation. Companies like Abra are using Bitcoin to completely upend the fund transfer services across boarders. For example, in case of Abra, a Bangladeshi working in Dubai will go to an agent and give UAE Derham to the agent to transfer to Dhaka. The agent with a click will transfer equivalent Bitcoin to a counter agent in Dhaka. This happens in a few seconds. The agent in Dhaka will convert the Bitcoin to Bangladesh taka and give the money to the relative of the sender, bypassing banking channel and fees. A few other digital currencies have been floated in line with bitcoin — ethereum is the second most popular among them. Bitcoin is quickly getting adaption and platforms like OpenBazaar (like Amazon) using Bitcoin for transaction. Given its position as a safe harbor, Bitcoin is considered, in some quarters, as the next gold.
8. Blockchain: Blockchain is the underlying technology for Bitcoin. While there have been controversy around the viability of Bitcoin, Blockchain is quickly establishing itself in the main stream. There are many uses of Blockchain — from copyright protection, to use for land registration to acting as a clearinghouse for banks. Recently, some of the global major banks (like Standard Chartered) have joined a consortium to partner with Ripple for implementing blockchain technology. Some technologists consider the impact of Blockchain similar to internet and believe, like internet, Blockchain will fundamentally change our life in the coming years.
9. Comparison Site: These sites aim to bring transparency to customers by comparing the fees, terms and conditions of products of different banks. Fees and charges by banks have been a notorious source of complaints by many customers and these sites aim to act as a bridge between the two and generating referrals in the process. CompareAsia is a big player in this space as well as domestic player like Smart Kompare.
10. Insurance: A discussion of finance and technology will not be complete without covering how insurance industry is getting disrupted. We do not have enough space to cover insurance here but, in short, there are many innovative models out there from Lemonade (mortgage insurance), Metromile (auto insurance), Oscar (health insurance) — all targeting different insurance verticals using better user data, analytics innovation and customer experience.
It has been famously said that the impact of technology is over estimated in the short term and under estimated in the long term. There is a high risk in banking and finance community that the significant long term impact of the technological changes are not properly grasped. There will be many failures among fintech companies. But the few, that are good and can navigate the regulatory challenges, will eat away a significant portion of revenue of banks and will make many banks obsolete.
Author: Sajid Rahman
Sajid Rahman – CEO@Telenor Health, Director@Founder Institute, Non Executive Board members to Technology companies in Asia and Europe and active Angel Investor