It’s become fashionable post-GFC to label any company disrupting the financial services sector as a ‘fintech’. Small, fast-moving and innovative, these firms are primarily start-ups and offer a new approach to service, product development and ease of doing business in the digital age.
But fintech (an amalgam of financial technology) is just the latest phase of an electronic revolution that began with the advent of NASDAQ, the National Association of Securities Dealers Automated Quotation system, in the US in 1971, and was adopted by global financial markets and their operators from the mid-1980s onwards.
In that regard, fintech has been around for over 40 years and we can see the impact these technological changes have had on the financial services industry and consumers over that period.
The democratisation of financial services
While it has been a constant driver of change, it’s the combination of technology, creative thinking and new business models with the aim of solving customer problems which create the opportunities for true disruption and revolutionary change. What we are witnessing today is the democratisation, or what you might call the ‘retail-isation’, of financial services.
Access to financial markets has never been easier, accompanied by tools that allow people with little or no financial sophistication to trade for lower fees, at faster speeds, and with greater efficiency.
Technology is dramatically changing the way that business is done. But what hasn’t changed and which is absolutely key to how this business is undertaken is the intermediation process: matching providers of financial capital with users of capital.
That process provides for a use, transfer and recycling of capital in exchange for a reasonable return (to the providers) at a cost (to the users) and all undertaken for an acceptable level of risk.
Over the past 300 to 400 years we have had different names for this process; banking, exchanges, pensions and funds management, capital markets, superannuation and financial advisory. The latest form of this is peer-to-peer lending or what is now called marketplace lending.
The crucial role of trust
At the heart of this process lies the business of trust and particularly of financial trust between strangers. The history of disruption has shown us that for any new entrant to succeed they need to acquire this trust. But consequently, by causing disruption, trust is often difficult for new players to attain, primarily because consumers are inherently cautious when it comes to trusting their money with others.
It is little wonder then that people will hand that trust and their money to long-established incumbents, especially in uncertain times, the so-called ‘flight to quality’ that we saw during the GFC.
However, there are signs that this nexus is gradually breaking down. The digital revolution has altered the power dynamic and has placed consumers increasingly in control. As a result, their expectations regarding ease of use, speed, convenience, transparency, personalisation, access, security and design have all changed. To this, we can now add trust.
This hasn’t happened because of the banks and financial services companies but rather as a result of technology-driven companies such as Apple, Google, Uber, AirBNB, Facebook and Alibaba. You can see a pattern here when it comes to the transfer and exchange of money: they have in effect taken over the process of intermediation.
Their rise, together with digital disruptors in the financial services market, is due to four primary drivers of change, according to Rachel Botsman, a global thought leader on the collaborative economy who recently looked at 750 disruptors across more than 32 countries.
These drivers are:
- complex experiences (time-consuming and frustrating processes)
- redundant intermediaries (layers of people and processes that don’t add value)
- limited access (to goods and services)
- broken trust (where trust in an institution has fractured).
Each of these factors is present in the Australian financial sector, which is why banks, insurance companies and wealth management groups with their sizeable profits and high ROEs are being targeted in ever-increasing numbers by new, more customer-centric and innovative players backed by serious capital.
Not all of these operators will survive. But there are signs that companies such as SocietyOne with $100 million of personal loans and 5,000 customers, Click Loans in mortgages and Prospa, OnDeck and ThinCats in small business lending are making headway against their respective incumbents.
These Australian pioneers are part of a global trend which investment bank UBS said pose a ‘real and growing risk’ to banks and their traditional services. UBS interviewed executives at 61 banks and nearly 28,000 customers of 210 banks in 24 countries and predicted that the take-up of new applications such as transfers, payments and peer-to-peer lending could surge by between 47% and 150% over the next 12 months alone.
That suggests consumers – borrowers and wholesale investors - are increasingly prepared to place their trust in the new financial intermediaries and lending market places precisely because they are creating a direct bond and connection between the providers of financial capital and the users of that capital.
Danny John is Director of Communications at SocietyOne and a former Business Editor of The Sydney Morning Herald.