At the start of this century, financial technology start-ups had started disrupting the FI primarily in the payments, loyalty, lending, wealth management, financial planning and insurance domains.
The credit card industry had come a long way from the Diners Club card to ATM machines and using credit cards over the Internet for e-commerce transactions. The point of sale (POS) machines or card readers also had evolved over time. Even though the payment experience was changing, the traditional payment process-ing companies and card companies were not paying much attention to customer experience and innovation. A large part of their investments and efforts were being spent on compliance requirements, consequent to the 2008 financial crisis. In the meantime, start-ups like PayPal were already revolutionizing the payment space by providing a seamless payment experience through their wallet services. Using wallets, users would have to specify the credential for the wallet only while mak-ing an online purchase. The wallets in turn would manage details like personal information, card details and shipping details. Soon multiple companies started introducing wallet services, including retailers and telecom companies. FinTechs disrupted the payments domain further by enabling peer-to -peer (P2P) payments using social media.Wallets had an impact on loyalty as well. Since each superstore had its own loyalty program, wallets were a much better interface for the customer. Through wallets, customers could now tie up loyalty cards of different stores to a single wallet interface.
The financial crisis of 2008 resulted in low capital availability with most of the large banks. Additionally, new regulations regarding risk and compliance made it difficult for most of the lenders to develop any innovative lending products. FinTechs were smaller in size and agile; therefore, they were able to develop innovative lending business models like P2P lending, Payday lending and Crowdfunding. P2P lending has been the most popular form of lending in recent years. FinTechs have enabled P2P lending in multiple different models. In some cases, FinTechs merely act as aggrega-tors or market places to get lenders and borrowers together. In some of the other mod-els, FinTechs have provided additional security like protection from default. Lending Club, On Deck and Zopa are some of the FinTechs that are enabling P2P lending.
Payday lending and micro lending was clearly out of bounds for large lenders because it comprised of – large number of low-value transactions and borrowing by people with low credit scores. This type of lending also necessitated that the overall cost overheads are low and the underlying IT systems are cost-effective and agile. FinTechs built upon the vacuum left by the large lenders and very soon created robust organizations that would provide payday lending. Zest Finance and Wonga are some of the FinTechs that are offering payday lending.
Funding projects and experiments through patrons and crowdfunding was again something that was not possible for big investment banks. FinTechs like Kickstarter were able to build upon the model successfully. SME loans and micro-finance were other lending offerings that FinTechs were able to offer. All of these offerings would have been difficult, if not impossible, for big established lenders to offer, owing to the complexity and the regulatory compliance issues involved.
FinTechs have also been able to tap into a large part of the middle-class pop-ulation by providing affordable wealth management and advisory services. The middle-class population was largely ignored by large investment banks, as their cost structures would not justify investing below a certain minimum threshold value.
FinTechs have brought the next level of investing to middle-class investors by offer-ing them robo- advising services. Since most of the middle-class population does not get enough time to spend on tracking investing trends, robo-advising has been a welcome offering and made some of these firms hugely popular. FinTechs have also been instrumental in enabling investing using state-of-the-art technologies like robo-investing for social causes. There are FinTechs that employ robo -investing techniques to invest in firms engaged in social causes matching the investor’s preference. Additionally, some of the FinTechss have been able to aggregate bank accounts for a customer and provide personal financial management along with wealth advisory services.
Financial technology start-ups in insurance, also known as Insuretech, have also been instrumental in transforming the way insurance is done. Similar to the bank-ing and wealth management industry, established players in the insurance industry have also been less agile and innovative owing to regulatory compliance and high-cost structures because of their size. FinTechs have been instrumental in offering on-demand insurance coverage using a mobile app by providing the user to toggle insurance coverage on a weekly, daily and hourly on a click of a button. These FinTechs, besides offering a good overall customer experience, are also helping save money for the user by charging the customer on a pay-per-use basis. The usage of sensors and devices like drones have helped insuretechs to collect information from inaccessible places, thus, providing a more accurate version of the accident condi-tions and suggesting preventive and corrective measure. Some of the FinTechs are helping insurance companies to decide insurance premium and claim settlements based on individual’s behavior. FinTechs like lemonade are enabling P2P insur-ance, and there are other FinTechs that are transforming P2P insurance by pooling money from like-minded people.
In contrast to large monolithic core systems in large FIs, FinTechs have much simpler core systems to manage. Technology disruptions like high network speed, faster computing, mobile devices, Web 2.0, cloud computing and IOT have also been helping FinTechs to drive the transformation. Owing to these technology disruptions, it was possible for FinTechs to bring in innovative products and engage customers with intuitive business processes. The new- age technologies were also instrumental in lowering the cost of doing business for FinTechs, albeit providing a much better customer experience. The customer was now getting a better and per-sonalized experience at lower cost. Soon a large number of FinTechs were popular with high customer adoption through word-of-mouth and social media publicity. A larger FinTech adoption brought in investors and ultimately started the chain of disruption in the industry.
FinTechs, therefore, not only started offering alternative business models, but they were disrupting the financial industry in a big way. Increasing network speeds from telecom operators and reduced data costs have been a critical factor in the success and rise of FinTechs. Right from the introduction of 1G networks to the existing 4G networks there has been a steady increase in the network speeds and a decrease in the cost of transmitting the data. 4G networks brought in a speed of 100 mbps to 1 gbps at very low cost, thereby driving the data revolution. Additionally, the telecom networks have enabled the transmission of voice, Internet access, video and multimedia messages through mobile devices. FinTechs have used the prowess of telecom networks coupled with the capability of mobile devices in the last decade to provide an unmatched customer experience anytime, anywhere, with high speed and at an affordable price.
The mobile phones themselves have been a major technology disruption fueling the rise of FinTechs. Mobile phones started off by being a device to talk remotely and wirelessly with another individual. The introduction of smartphones in late 1990s and early 2000s transformed the digital economy drastically. Prior to the iPhone, smartphones were primarily used by business professionals or by the afflu-ent. Apple disrupted the mobile phone industry by bringing in the iPhone. The iPhone provided a customer interface that was extremely intuitive and soon was adopted by a large population. Around the same time, other phone companies launched their smartphones as well. The entire phone industry transformed from a simple telecalling industry to a smartphone industry with the emphasis on apps and data formats. Also at the same time, the concept of the cloud and software as a service started becoming prominent in the technology space. The FinTech industry harnessed this concept to its full potential and way ahead of time.
Smartphones have multiple sensors built inside them including the ability to capture biometrics information. The embedded camera in mobile devices is capable of capturing high-resolution images and videos. This capability when coupled with high-speed networks enabled these devices to transmit photos and videos between devices instantly. All these features in addition to the enormous computing capability of mobile devices enabled FinTechs to launch apps like instant onboard-ing. These apps were capable of capturing biometrics information, photos of the
customer and onboarding details. Once collected, the information was sent to a centralized location in no time via high-speed 4G connections. The agile systems at the centralized location, coupled with AI was able to process and confirm the onboarding back to the mobile device in minutes. This process of onboarding a customer in the traditional set-up would take weeks, which FinTechs were able to complete in minutes. FinTechs, therefore, were able to disrupt the business by har-nessing the technical abilities of mobile devices. Soon mobile phones reached all the
places including the areas where the formal economy was not able to make inroads. It is forecasted that there would be around 5 + billion mobile phones worldwide in 2018. Essentially, there are now more mobile phones in the world than the number of people.
The smartphone industry also introduced App Stores wherein any developer (individual/corporate) could develop his/her app and upload it to the App Store wherefrom it could be consumed by any smartphone user. Therefore, developing and publishing apps became hugely popular, taking the count from about 500+ apps in 2008 to millions of apps now with billions of downloads. Initially there were utility- and media-related apps in the App Stores, but over time, the App Stores started getting first versions of mobile commerce applications. Soon e-commerce firms started conducting a large part of their business using the application in the App Store. This was the first sign of FinTechs becoming a major force in the financial services industry.
As the hardware and software capabilities on phones started becoming better, the first set of financial start-ups like Square and Groupon emerged. Some of these companies were using the geolocation capability on the device to provide best offers near the user. Subsequently, a host of financial start-ups emerged with innovative applications in the App Stores. Some of the innovative apps launched in the App Stores included, applications for banking, wealth management, lending, loyalty, insurance and payments. Some of the apps, that started as a personal financial man-agement (PFM) tool, soon evolved into a full-fledged financial app with features like account aggregation, financial planning and setting financial goals.
The smartphones were also instrumental in transforming the payment industry by the introduction of near-field communication (NFC) chips and the capability to host wallets. Wallets, as explained earlier, are applications that try to emulate the capability of a physical wallet virtually. Therefore, a user can manage identity, card and cash information using wallets. Additionally, the wallets provide a single interface for all payments. Wallets dedicated to carrying out payment transactions are called payment wallets. The payment wallets are capable of conducting payment transactions using a wide variety of currencies. In Africa, the wallets have enabled financial transactions to a large unbanked population by using mobile money as an intermediate currency. Mobile money could be bought/exchanged from telecom operators similar to any other currency exchange and a mobile connection becomes the basis for identifying an individual. There are also wallets available that help buying, selling and exchanging cryptocurrencies.
Smartphones and mobile devices are also transforming the health insurance industry by enabling applications that help you get home delivery of medicines, applications that can schedule an appointment with doctor, applications that notify a patient with a medication schedule and multiple other applications. The camera and video streaming capability on phones is helping doctors diagnose and prescribe drugs to the patients remotely. Cloud technology has helped start-ups by limiting their start-up costs on infra-structure, as they now have access to state-of-the-art infrastructure in a pay-per-use model. All the mobile and online applications need to interface remotely with a server at the back end. A start-up in the initial days after their formation are not sure of the usage capacity of their infrastructure, therefore a dedicated infrastruc-ture would mean either building too much or too less. Cloud technology has come in as a savior, since it would charge on a pay-per-use model. Thus, start-ups would end up paying what is proportionate to their usage (success) instead of loading the infrastructure cost up front. This has lowered the initial investment for venture funds, consequently increasing the number of VCs and investors willing to invest in early-stage start-ups. Consequently, financial start-ups would not need to latch onto large IT infrastructure for managing the load of their subscribers, but instead they could partner with firms, and directly interface with their back end infrastruc-ture through a public/private cloud. Summarily, the mobile/online apps and cloud revolution together has made software-as-a-service a reality. Infrastructure provid-ers like Amazon is an example of such a cloud service provider. Challenger banks, a name given to an all online banks with less capital requirements, are using cloud technology to keep their costs down.
In the initial days, most of the websites were rendered from a centralized server onto the user’s browser – there was very little content that was exchanged locally with a user’s machine. Additionally, since these websites were only suitable to be accessed on desktops/laptops, therefore interaction using these websites was very limited. The Web 2.0 guidelines enabled the end user to own, change or append the existing website content. The responsive design ensured that the new websites could be rendered seamlessly on mobile devices. The responsive design could be achieved only if the websites were developed using client- side scripting technologies. Start-ups were building the system from scratch, and it was fast and easy for them to adopt to this new-age technology compared to the large FIs. Large FIs had to take a two-step approach to make their websites responsive. The first step was to fragment their applications to expose core functionalities as services, collectively known as microservices. Second step was to develop websites using client-side scripting. These websites would then use the services created in first step for rendering content and information. Consequently, adopting the new technologies, start-ups were able to launch their offerings faster in market, thus encashing the first mover advantage.
Technology disruptions mentioned above along with regulatory pressure, pushed businesses toward exposing their functionality and data using API-fication. API-fication has helped businesses in unbundling different components of the application like the customer experience, the core processing engine and interme-diate workflows. An example would be a robo-advising FinTech who can offer only the core engine capability using APIs, instead of mandating the customer to buy the entire platform including the user interface. A large number of FinTechs have been able to use this as an additional revenue stream, besides running their own platform. An example could be payment FinTechs offering their APIs to businesses for integrating the same in their commercial apps and applications. Another shot in the arm for FinTechs have been the second payment services directive (PSD2) regu-lation in Europe and the UK. It mandates that all FIs should provide authorized access to their data and functionality. Consequently, FinTechs can now integrate data and core functionality from large FIs. The information from FIs coupled with unique customer journeys will enable FinTechs to disrupt the way business is done. Access to data and information from large FIs will also help FinTechs to cut down customer acquisition time and ultimately reduce their go-to-market time.
FinTechs have been very innovative in their approach toward using technol-ogy to find a business solution. Some of the most innovative FinTechs are using IOT and gamification to imbibe saving habits into customers while doing finan-cial planning for them. These FinTechs use health habits like the number of steps taken to transfer a predefined amount to a savings account. Direct payments from connected cars at tollbooths at the time of crossing the booth is already being prototyped by FinTechs. FinTechs are also providing a very personalized customer experience using technologies like business intelligence (BI), analytics and AI. A group of FinTechs are using BI, analytics and AI to provide high-impact market news for companies that exists in the portfolio of an investor. Some other FinTechs are providing intelligent search engines using Big Data and AI. Therefore, using IOT, AI, gamification, BI and analytics, FinTechs have been able to leverage the technology innovatively to bring about new ways of doing business. These tech-nologies have helped start-ups redefine individual financial functions like lending, onboarding, etc. as separate personalized user-journeys.
FinTechs as mentioned earlier are building their platforms from scratch. Consequently, some of them have opted to build their platforms using block-chain. Blockchain at a very high level can be described to have the following
components – (a) a distributed ledger that can store unique transactions, (b) a consensus mechanism that ensures there is authorization for a transaction from authorized entities, and (c) the transaction is secured through cryptography and chaining the transaction blocks. The financial world is also characterized by all of the above requirements in regard to financial transactions. Therefore, there is a clear overlap from a technology fitment perspective. There is a distributed ledger built by FinTech company that has more than 80 banks participating in its creation and usage. Blockchain is also used in the generation and exchange of cryptocur-rencies like Bitcoin, Etherium, etc. There are FinTechs based out of Africa that are using Bitcoin as an intermediate currency in a cross-border currency exchange and instant payment. Blockchain is being touted as the biggest technology disruption after the Internet.
All of the abovementioned technologies have therefore given an edge to start-ups since they are providing one of the best customer experiences at affordable costs. It is no surprise that more than $50 billion has been invested across 2,500+ companies globally since 2010. The subsequent chapters detail disruptive busi-ness models adopted by FinTechs using new-age technology. There are also exam-ples of how FinTechs are trying to help social causes and how innovations have been used to reach out to unbanked and informal economies. FinTechs are not only disrupting in developed nations but are coming up with innovative solu-tions in emerging and developing countries including Africa.