8 Biggest Fintech trends for 2019
2017 was a record year for VC Fintech investment with more than $39bn raised by Fintech companies, but H1 2018 show already impressive $41.7bn. VCs and banks have excellent reasons to bet on Fintech. Let’s take a look!
Banking as a Service — BaaS
Fintech startups are way faster than traditional banks, but that doesn’t mean that they can or should work separately.
Traditional banks have legacy systems that don’t allow them to innovate and roll out the innovation to the entire customer base with the same speed Fintech startups are doing it. At the same time, Fintech startups need to face regulations and heavy capital requirements, an area where existing banks are already comfortable. This is where the middleware Bank-as-a-Service is born allowing API integration between the Fintech which provide the user with a better experience and the regulated bank providing an existing back office.
Fintech startups can negotiate with licenced banks a seamless integration of bank services with “bank on demand” business models which allow them to scale the business. This way “ FinTech banks are enabled to compete directly with banks by offering core-banking services without having to build all the products that would be needed”.
Mobile banks have shown huge growths in 2018. Mobile Banks such as Revolut, N26, Monzo and Moneze are growing more than any traditional bank. Revolut is an excellent example of this fast growth. Revolut has more than 2 million users, onboarding more than 9000 users per day.
Currently, people live online, and Millenials want convenience, low fees and very simple UX/UI. That’s what Mobile banks offer: any person can open a mobile bank account in less time than what would have to wait on the queue of a physical branch.
Millennials want to call the bank neither, and banks need to understand that phone banking is dying too. Everything is about apps now. The least use used the mobile function for people under 30 years old is the call function!
The growing number of companies providing mobile KYC and soften regulations also support this trend. The SFC in Hong Kong already recognises digital signatures for opening bank accounts and KYC.
BTW, the fact that I’m using the word “user” to describe a customer of the bank is also a sign that times are changing!
My next trend is another Mobile Banking big driver.
Silicon Valley is coming. Jamie Dimon, JP Morgan
Paypal, Google Pay, Apple Pay, Amazon Pay, WechatPay, Alipay are dominating the payment space, and banks need to understand how to sell financial services through these platforms.
First, we have to distinguish between Google Pay, Apple Pay, Amazon Pay or even Pacific Coffee app and the truly disruptive Chinese platforms. The first ones are using the same old and boring legacy system used for the last 20 years or more, which requires the same old actors: transaction acquirer, acquirer processor, network (same old Visa, Mastercard, Amex), the card processor and the card issuer. However, Alipay, Ant financial, and Wechatpay Tencent and JD Finance with JD.com. JD sells payment systems are doing things differently.
Chinese counterparties are using entirely new infrastructures, using only a bank acquirer between the customer and the merchant. This lean infrastructure allows speed and competitive fees.
Alipay also allows lower volume transactions to be merchant direct which removes the acquirer from the transaction flow.
These mobile payment apps are serving not only already banked people but also unbanked and underbanked, being the underbanked a big target for this market.
In China, more than half a billion people use mobile payment apps, and the Chinese market is entirely heading a cashless society. At the moment, in most of the Chinese cities, it’s already “strange” to pay with cash.
The battle between every startup and incumbent comes down to whether the startup gets distribution before the incumbent gets innovation. Alex Rampell
Big data, data science, new data sources and better data
The combination of big data with AI, and Machine Learning is powerful and it’s allowing tech companies to understand their customers better and target them products.
Amazon, Netflix, Google and many other companies use big data to provide recommendations for their customers. Why shouldn’t banks do the same?
Creating new data models, training that data model with a lot of data (big data) and use that model to come out with a prediction about someone’s future behaviour, fintechs can not only better target customers but also create more efficient credit scoring systems.
Forensic location data is also going to be used in different ways, especially for lending and insurance industry.
Data on the habits of the customer is going to be used to understand his risk and calculate premiums. An insurance company can for example use data from the customer Fitbit to understand his lifestyle and if he exercises, use his payments data to know if he buys vegetables or potato chips at the supermarket, and according to his habits adjust the price of the health insurance.
I guess that this is better data than looking questionnaires, old data and averages.
Other new sources of data such as IoT data allow insurance companies to understand risk better. Tesla cars already allow to record and send real-time data on the speed and driving behaviour. This data can be used to adjust, real-time, the car insurance price. The insurance premium will not be an average price but directly correlated with the behaviour of the driver.
In the book “Everybody Lies: Big Data, New Data, and What the Internet Can Tell Us About Who We Really Are”, Seth Stephens explains how people lie when they need to answer questionnaires (for example to apply for a loan or health insurance) but most of the people are more transparent regarding their online life and digital footprint.
Banks need to start using other forms of data instead of or quarterly financial, to evaluate a company ability to repay a loan, real-time data like sales data, inventory data, receivables data, CRM data. Banks need to plug into the enterprise software and get real-time data on all the financials. For real-time interest rates, real-time credit lines that are built in real-time financial data.
Soon, customers, data will be more important than fees.
I didn’t know if I should include this trend inside the Big Data one or not, but I believe this is going to be a significant trend too.
Peer-to-peer lending is being replaced by algorithmic lending. Using new data models to evaluate risk, algorithmic lending platforms (that for commercial reasons will continue to use the term P2P lending) will allocate the lending portfolio and price the loans according to new data models and machine learning.
The Regtech connection to Fintech
Government s and Central Banks will make sure that fintechs are doing business according to the rules and they are going to use Regtech for that.
One example is how People’s Bank of China is using the Wanglian system to basically have access to every transaction made through mobile payments such as Alipay and WeChat Pay. This system allows the regulator or central bank to track transactions.
In 2017 there was more money raised through ICOs (Initial Coin Offering) than VC funding but in H2 2018 that is changing. Fewer projects are doing ICO and selling tokens because of the SEC crackdown. Some countries are looking at ICOs as unregistered securities and to sell a security before it is registered is considered a felony. Other countries are starting to regulate the industry by creating new legal frameworks for projects.
Although ICOs are going to continue to exist (when I say ICOs I mean utility tokens), STOs or Security Token Sale will be the big 2019 buzzword.
STOs are basically “normal” securities that live on the blockchain instead of a centralised database. STOs will allow the tokenisation of traditional securities like shares, bonds, REITs, art, and much more. STO is opening doors to new investors, fractional ownership, scalability and transparency with much faster clearing and settlement.
Blockchain, blockchain and blockchain
Well, to talk about all the innovations that blockchain is bringing to fintech I would have to write a book! I will use instead least only a few ones:
Trade finance: new platforms are allowing to connect in a single transparent distributed database buyers, sellers, customs, shipping companies and banks. we.trade is a consortium of some major banks including Deutsche Bank, HSBC, KBC, Natixis, Rabobank, Société Générale, Santander, UniCredit and Nordea.
Cross-Border payments: the blockchain enables real-time visibility of the liquidity of nostro and vostro accounts, easing reconciliation and allowing liquidity savings while meeting key industry requirements such as governance, data privacy, standardisation, and identity.
KYC and Identity: identity on the blockchain and KYC on the blockchain allows banks and financial institutions to onboard new clients in a much faster way. The concept of reusable KYC is already a reality that will sale a lot of paper for sure. Some examples are Civic, IBM solutions or Helix.
Security tokens: the ones I spoke above.
Blockchains also promise to disrupt insurance, mortgage underwriting, P2P lending and collateral trades.
Check also KPMG’s “The Pulse of Fintech — 2018” report for more insights.
Hope you enjoy it! I will be writing more stuff like this!
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