The Future of Finance. #56 #cong16

By John Wright.

The first banks sprang up around 2000 BC and since then, finance has become a fundamental part of human society in every culture and corner of the globe.

We have undoubtedly come a long way since the first grain loans were made to farmers but the purpose has changed very little. At its heart, the purpose of finance has always been to connect two end users -  savers and borrowers. Whether you’re a first time homebuyer, a small café in need of a business loan or a large multinational company expanding into a new market, access to money is critical. In any significant financial decision, you are likely to avail of the financial services.

Over the years, many methods creative arrangements have been designed to connect these two end users – from a simple small business loan to complex bonds. Regardless of the method used, a healthy financial sector should do this efficiently.

But in modern economies, this purpose has been obscured along the way. Banks, advisers and other intermediaries accumulate large profits, creating an industry that’s oversized and often inefficient. With businesses and balance sheets to maintain, these intermediaries often exist for their own purpose and don’t necessarily prioritize the needs of the end user. The end result can be higher fees and lower quality service for the consumer. And, as we have seen with post-2008 bailouts around the globe, the cost to governments and the public of maintaining this infrastructure can be very high indeed.

In the past, most of us never questioned this system, meaning banks had little incentive to change. But with a poisoned legacy behind them, the financial services have had difficulty building consumer trust. A lot of financial decisions, such as which mortgage, which loan, which banks accounts – don’t require expensive advisers. Consumers are waking up and a growing number are asking: isn’t there a better way of doing business?

And new technologies are stepping in to provide the answer.

Over the last five years, tech start-ups have exploded and are rapidly innovating in the finance sector. These new “Fintech” players are slicing off services normally run by a bank and doing it much better - from SME lending to card payments, from wealth management to international payments. Startups can offer, or soon will be able to offer, almost every financial service that was traditionally offered by a bank. Everything is up for grabs. For the first time ever, there is a real alternative to banks.

Some of the areas affected by new technologies are:

  • Payments are becoming faster, mobile, cheaper and more convenient
  • Insurance is becoming more personalised and tailored to each consumers needs
  • Deposits & lending are more simpler and more direct. For example, online lending platforms can directly connect a borrower with a saver

More and more consumers are choosing these alternatives over traditional providers.

Ernst & Young predicted that use of Fintech providers by consumers will double in 2016 alone, chiefly on the grounds of convenience.

Clearly finance is being disrupted in a fundamental way and it would be wrong to treat it as a one-time event. Disruption is the new reality. Stratups thrive on uncertainty and will continue to chip away at a banks business.

In 2015, Cisco – a world leader in IT – interviewed over 900 companies in 12 different industries to discover how exposed they were to digital disruption. The interviews revealed that the average time it would take for these companies to suffer major impacts from disruptive competitors was only three years.

Like any large company, many companies in the financial services are traditionally reluctant to change. But they can no longer afford to be complacent - consumers will move forward, with or without them. Banks must adopt innovative strategies and practices to adapt and thrive in this new world.

Innovation is no longer optional. To survive in finance today, it’s compulsory.


© Eoin Kennedy 2017 eoin at congregation dot ie