Fintech continues to disrupt the entire financial services system, using innovative technology to deliver financial services that consumers crave. As Bank of England celebrates its 325th anniversary, what is the future of finance?
The usual ‘cut’ taken by traditional banks when processing payments could be under threat by fintech companies that offer clients more effective banking services, mobile payments and cashless banking services. The last few years have seen major shifts in how consumers pay for goods and services – in 2007 cash accounted for 61% of transactions, set to decline to just 16% by 2027.
As the payments industry continues to develop, and with smartphones offering new ways to pay, businesses have had to adapt to the new landscape of e-payments. While consumers continue to demand new ways to pay, it’s the traditional financial services turn to transform in the face of fintech innovation and market-driven consumer needs.
Between 2015 and 2018, 2,868 bank branches closed in the UK, and in the same period high-growth businesses received over £4.5 billion in investment. Large investments such as these could spell the end for cash, checks and credit cards. In London the number of ATM withdrawals fell 8.7% compared to last year, with the growth in contactless payments probably the key driver in the move away from cash. Fintech start-ups are wooing consumers with a flurry of innovative personal finance and investing applications, allowing them to enjoy the benefits of mobile and online payments, as well as virtual wallets. The case for cashless includes security, convenience, cost and personal preference, while the drawbacks are mostly social. A cashless society discriminates against the low-paid, undocumented immigrants and older people, and unless the traditional banks transform, they are in danger of becoming obsolete.
Tech in the payments industry is nothing new. Innovations such as PayPal and Square – established 21 years and 10 years ago respectively – are no longer enterprising disruptors but established features of the financial services landscape. More recently, fintechs have proved increasingly able to replicate traditional key banking functions in addition to developing new ones. The numbers of people exclusively using their bank to facilitate payments are decreasing, with alternatives like SWIFT gpi and other cross-border payments services. gaining traction.
Payments are an important aspect of everyday life and hassle-free, fast and less-transitional fee payment services will lead the market. With regulations like PSD2 and growing customer expectations, there is pressure amongst banks to innovate and offer continuous customer service to ensure they retain the primary relationship with the customer. This widespread growth in digital payments will disintermediate the banks and credit card companies from consumers and take control of the user experience, and unless traditional services embrace new real-time payments channels, machine learning tools and Open Banking APIs, they risk losing the race. These increasing regulations and expectations should not be seen as threats – banks should use them to provide more informative and personalised services to their customers
Banks still have access to the customers, but are aware of the threat posed by new innovations if they do not rapidly digitalise. Working collaboratively with newcomers is the best way forward. BBVA was among the first to do so; as early as 2013 it had launched a $100 million in-house fintech fund and increased the figure to $250 million when it transferred investment to an independent fintech venture three years later. HSBC went on to announce an $880 million tech fund that will focus investment in China, Hong Kong and Macau start-ups.
To fully realise goals, banks and fintech companies should collaborate, offering innovative, real time and 24/7 payment services – reducing structural costs, facilitating greater regulatory compliance and better serving customers.