Fintech 101

by Su Aziz

Financial technology, fondly known as fintech, is certainly a divine disruptive change to the traditional finance industry and a welcomed technology for other industries. One that’s especially appreciated by startups and small businesses when it comes to how they handle their payment as well as global reach.

According to the definition on Forbes’ article, The Complete Beginner’s Guide to Fintech in 2017, fintech or financial technology is loosely defined as ‘technologies used and applied in the financial services sector’ that are mainly used by financial institutions ‘on the back end of their businesses’. Academicians Arner, Barberis and Buckley describe fintech as the new marriage of financial services and information technology in their 2015 paper on the topic The Evolution of Fintech: A New Post-crisis Paradigm.

The Complete Beginner’s article affirms what we are currently witnessing in terms of how we conduct our banking and finances: that fintech is representing more and more technologies that disrupts traditional financial services such as mobile payments, money transfers, loans, fundraising and asset management.

Before you think fintech’s nothing more than a techie trend, The Complete Beginner’s also features a report Accenture recently released which finds that ‘investment in fintech around the world has increased dramatically from USD930 million in 2008 to more than USD12 billion by early 2015’. That’s a whopping growth rate and an undeniably impressive one. On CNBC’s website, KPMG reports that in 2015, ‘financing for fintech startups hit over USD20 billion which is a 66 per cent increase on the USD12 billion recorded in 2014’.

Those figures prove fintech’s popularity in several sectors including crowdfunding and traditional financial institutions, even the large ones, such as banks and insurance companies. They mostly incorporate the technology into products and services that are already existing and, it also reports, some financial institutions tend to set up in-house fintech incubators.

Delving further into fintech

Thomas Dapp in his 2014 paper, Fintech – The Digital (R)evolution in the Financial Sector, predicts that the financial sector is increasingly under threat from ‘technology-driven firms that are using digital means to very dynamically force their way into the market for easily standardisable financial products and services in order to win customers and gain market share’ and how ‘this movement is referred to as “fintech” in the online and offline media discourse’.

Dapp’s paper discusses how ‘the increasing spread of efficient web-based technologies and the adaptation rates at which people integrate these technologies into different parts of their lives have eroded some of the efficiency gains accruing to traditional banks’. Dapp uses digital wallets as an example to show that new players make selected services as well as products available to customers speedily and more efficiently.

This is, according to Dapp, ‘due to, not only modern technologies, but also lower transaction costs, in particular, on both the supply side and the demand side’. However, in Thomas Philippon’s 2016 paper The Fintech Opportunity, he states that cost hasn’t gone down for asset management services even though ‘finance has benefited more than other industries from improvements in information technologies. But, unlike in retail trade for instance, these improvements haven’t been passed on as lower costs to the end users of financial services’.

Inevitably, most firms see no other way but to adapt their business practices to digital structural change because, according to Dapp, ‘analogue strategy’s just as inadequate as offering an additional digital distribution and communication channel alongside the conventional channels…Many internet firms as well as startups have taken this onboard and are operating successfully in the market’.

However, Dapp observes ‘potential consequences of digital structural change and an inadequate adaptation in individual sectors could be seen clearly over the last 20 years in the music industry. In publishing and the media, too, business processes are being revolutionised by digitisation’. Basically, reverting to technology such as fintech to introduce products and services from a range of industries to customers is inevitable in this century.

Philippon observes how ‘fintech startups propose disruptive innovations for the provision of specific services. The key advantage of incumbents is their customer base, their ability to forecast the evolution of the industry and their knowledge of existing regulations’. Philippon opines that startups’ key advantage is that ‘they’re not held back by existing systems and are willing to make risky choices’ and, fintech startups especially, get the opportunity to build the right systems from the beginning.

How fintech changes the way you do business

In The Complete Beginner’s Guide article mentioned above, it reports how fintech is revolutionising the way small businesses such as startups, accept payments and go global. It’s making it easier than ever to start and run a business. Which translates to, convenience for micro and startup businesses because, as the article states, ‘even farm stands in the middle of nowhere can accept credit and debit cards with tools like Square and PayPal. And while there are fees, the entrepreneur doesn’t have to do a particular volume of business to qualify for an account. Anyone anywhere can safely and easily accept credit card payments, making it easier to do business.’ Furthermore, it’s worth to repeat, fintech offers financial services at lower costs.

The question of going global which involves international money transfers does arise. Even though, according to The Complete Beginner’s Guide, it’s getting easier – PayPal, for example, will automatically convert currencies for small transactions. This isn’t only convenient but makes it possible for people in, let’s say Asia, to buy products from any country. What’s more, the article mentions a service called TransferWise and how it’s ‘streamlining international money transfers, disrupting that sector by offering a 90 per cent discount on traditional bank transfer fees’.

Dapp in his 2014 paper explains how the market for mobile payment systems ‘remains in a state of flux and holds promise of lucrative market entry and growth opportunities for many players outside the banking sector’. Furthermore, Dapp reaffirms what most people already think of companies such as Amazon, PayPal, Apple and Google and how they are ‘associated with user-friendly, convenient and reliable service. In a few cases, they enjoy a similarly high level of trust as traditional financial service providers’.

Basically, Dapp thinks that ‘the more automated and convenient the concept of the individual process steps on a platform, the less consumers will accept the idea of having to switch over to a bank [such as online banking] for the last step, that’s the payment transaction. Convenience, security and above all the principle of “everything from a convenient single source” is increasingly becoming established online especially’.

Final words

Dapp predicts that banking will change faster over the next decade compared to the recent past decades – bespoke services, products via speech recognition and modern data analysis. Additionally, Dapp states in the same paper, ‘biometric recognition procedures will become established in the mass market and, especially in digital distribution channels, complement existing identification methods based solely on knowledge and possession – and might even replace them’.

Although, Philippon in his 2016 paper highlights the need for good regulations and how difficult it is to design them. ‘Tightening regulations is not only difficult, it can also be counter-productive,’ he writes. ‘The most obvious risk is that of shifting activities outside the regulated banking system. Another risk is to make compliance costs prohibitive for would-be entrants. Finally, and most importantly, no one knows how a safe and efficient financial system should look like. All we know is that the current one is expensive, risky, and dominated by too-big-to-fail companies.’

Philippon thinks fintech movement does share a few features with all other disruptive innovations’ movements except that it has some features that are specific to the finance industry. ‘Like in other industries, fintech startups propose disruptive innovations for the provision of specific services. The key advantage of incumbents is their customer base, their ability to forecast the evolution of the industry, and their knowledge of existing regulations,’ he states.

Whereas, the key advantage of startups, Philippon continues, is that they aren’t held back by existing systems and are willing to make risky choices. What’s more, fintech startups have the chance to build the right systems from the very beginning and ‘share a culture of efficient operational design that many incumbents don’t have’.