Fintech: a new era
Fintech: a new era
The future is already happening, it just isn’t equally distributed yet. Fintech is not just a combination of Finance and Technology. It describes an entire whole new industry that includes companies using technology to enhance the financial, banking and customers service more efficiently. Fintech is not only changing the way people perform their daily transaction, it’s changing the utility and impact of money.
A report done by KPMG shows that there has been five times increase in the number of fintech start-up company in Australia over the past 5 years. Investments in the Australian fintech sector jumped from AUD 73 million in 2012 to AUD 1 billion in 2017. It is expected that the fintech sector will take AUD 10 billion aggregated revenue away from the Australian banks while contributing AUD 3 billion revenue to the financial sector, by 2020. Fintech is growing fast into a powerful disruptor to current conventional financial practices.
To Innovate or Perish: The Incumbents
The challenge for incumbent financial institutions is how to not be left behind as this tide rises. A fish and chip shop at the QUT Kelvin Grove village you can purchase using your phone based financial accounts linked to international currencies and social media accounts. Already happening is Alipay, Apple Pay, and Android pay systems.
The big four Australian Banks have not been sitting on their hands either, but they are well aware of their vulnerabilities as conventional banks become less essential to everyday transactions. The pipes of international finance are being widened and liberated as non-bank players enter the financial transactions industry.
The banks could adopt an in house approach where they create a new agency for the integration of fintech internally. Growing organically from within can be slow and subject to big organisation inertia. An alternate strategy is to acquire the smaller successful fintech companies and integrate them into the bank. For Westpac (ASX.WBC) they did a bit of both. Westpac plan to invest $100 million into fintech companies by 2020. The Commonwealth Bank (ASX.CBA), went internal and established an agency to innovate and come up with the famous CBA-owned EFTPOS “Albert” terminal. The CBA continue to have the best phone banking app with “Commbank” and the “Commsec” app is also very user friendly albeit with the CBA’s uncompetitive share trading brokerage fees. If this is the benchmark then considering the competition the big four’s smartphone apps has performed sufficiently well to fend off new entrants for the time being. ING’s marketing campaign with Isla Fisher aside, their fee structure is attractive however their accessibility isn’t yet on the level of CBA. Still , we have not seen equivalent products from non-bank players though we expect this is a matter of time. As the fintech industry matures we will see which strategies are more adaptive.
Fintech’s First Wave
The first wave of innovation in fintech consist around the personal and business finance services offered through apps and web portal, giving consumers and businesses access to investment and credit opportunities through peer-to-peer models or algorithm-based models. One fine example is the use of smartphones. It allows the possibility of “complete digital” for money operation. In a recent study by Frost & Sullivan, mobile apps have been developed to be the sole platform for mobile banking and investment tools: out of the top 100 most downloaded and highly-rated apps on both the Australian Google Play Store and Apple App Store, 60 per cent of them come from small fintech, not from the giant banks and investment firms. Such innovation enables customers to perform any transaction around the world within seconds. We have seen that fintech start-ups can provide apps that benefits consumers, and consumers don’t care that it is not from a renowned bank.
In recent years infrastructure was established to make some of these innovations possible, but the rollout is far from equally distributed. Only last year did the 1970’s system of magnetic tapes stop being the primary mode of record keeping and transactions speed up. We first used pay wave in 2010, but it did not become common until five years later. Mobile phones have had this capability for at least the past three years but still do not have wide adoption.
At the rate the industry is evolving, financial products and services – and the technological infrastructure behind them will look remarkably different within a decade. Financial institutions have to define their fintech strategy and align it to their future vision and adapt to what technological change brings.
The Road Ahead
Fintech is all about managing data better for a streamlined process of payments and a well efficient systems. Only in 2017, fintech innovation started moving towards financial infrastructure, data analysis and business-to-business market opportunity.
Data driven systems have vulnerabilities to cyber security threats. These can include theft and disruption. The banks have a guarantee against loss from cyber threats such as if your credit card is hacked or stolen, but this is not so for smaller fin tech players who could go under. Cyrpto currencies have similar vulnerabilities to theft and loss not that you can use them for much. Besides we think the current range of cryptos are worthless anyway.
This evolution will display through the proliferation of payments technology throughout other aspects of our lives and the ability of payment system to be friction-less and convenient as technology can make it. The Internet of Things revolutions promises to have fridges that restock themselves for example. This could be done using fintech with sufficient user permissions, with data flowing around the system.
The digital revolution began by digitising what already happened in analogue, or putting online what we did in real life anyway and making it simpler. After the low hanging fruit is picked, who know what new innovations will emerge.
Peering further ahead, we expect there will be more changes in our purchasing behaviour. Potentially there could be a further splintering of existing industries. Perhaps there could be closer targeted services such as when we drive our car out of our garage, the on road insurance starts, and ends when you enter the garage again and a different insurance policy covers the over night. Perhaps the Amazon innovation of a supermarket that tracks your every move and has no checkouts will catch on. Perhaps we will see more science fiction come to the real word like a Minority Report style of identity linked purchasing and Google style consumer tracking where ever you go.
Many of these things were a concept. But now, it’s either already happening or well within the bounds of being achievable soon.
By Marcus Ong and Adam Atkins
This is not advice. See our Disclaimer.