The landscape for financial services is changing, and while some trends stand out as inevitable, the endgame is still unclear. Not long ago, fintech was an obscure topic that only a few of us actually cared about. By now, fintech has exploded as a mainstream topic with an increasing level of interest from the general public. This post may not propose any revolutionary new insight, but in order to better navigate in uncharted waters it is often useful to conduct an overall assessment of the status of fintech and digital banking.
Fintech is not one single discipline, but a collective term describing different ways of improving and/or disrupting traditional financial services through use of technology, hence the term FinTech.
Payments is still the biggest and most mature field within fintech. Changing consumer behavior, eCommerce, smartphone adoption, digital currencies and PSD2 are just some of the trends that is making payments ripe for disruption. This used to be a field of opportunities for promising startups, and has given us successes such as Klarna, iZettle, Square and Venmo. Now this field is gearing up for a clash of the titans, where fintech challengers like Klarna and Transferwise face off with tech behemoths like Facebook, Apple, Google, converging industry players from the telco and retail industry, incumbents from the payment industry such as Paypal, Visa and Mastercard, the banks and Alipay as the dark horse in this battle royale for the future of payments.
What are they trying to solve?
The digital payment infrastructure varies across countries, and where the Nordics are nearly cashless, cash is still used extensively in countries like Austria and Germany. Regardless of digital maturity, there are still some fundamental issues to be solved. Even with card payments, there are still several areas where there is unnecessary friction in the payment and checkout process. New solutions aiming to reduce friction will enable digital retailers and merchant to increase conversion rates, thus creating opportunities for payment service providers that focus on convenience and simplicity. Cross-border payments and remittances are slow and costly, and innovators are attempting to reduce transaction cost and deliver near real-time clearing and settlements. Payments is the first step towards financial inclusion, and mobile solutions like mPesa and Easypaisa is providing basic transaction banking services to the unbanked in countries like Kenya and Pakistan.
Who are being disrupted?
Basically anyone operating in the payment industry is at risk. According to Accenture, banks alone are set to lose 43 percent of retail payment revenues as a result of PSD2. Payment infrastructure players such as SWIFT are challenged by the promise of blockchain, and traditional payment service providers have even more to lose as increased competition in the payment space may render payment processing a commodity.
However, the main reason why payments is the main battlefield in fintech is the fact that payments is the entry point for further disruption. According to McKinsey, 80 percent of customer interaction with their banks is through paying for goods and services. Controlling the payment interface will give an unprecedented leverage for intermediation of transaction banking. Facebook is one such player, who is in a unique position to disintermediate retail banks as a digital ecosystem built on the digital identity of every user in its user base, with the ability to evolve alongside changing user behavior.
iZettle has expanded into lending, and Klarna is already utilizing their strong position within digital payments to become a full-fledged retail bank. Payments are key to acquire crucial customer data, which will be used for both risk and credit assessment, as well as data-driven product development and new business models. EU’s payment directive, PSD 2 will further strengthen this trend by requiring banks to allow users to initiate payments and access their own transaction data through third-party solutions.
For more insight on payments, check ou these posts. Make sure to subscribe and stay tuned for my next update on where we stand on savings and investment trends.