Over the past century, businesses of all stripes have either increased efficiency, become more competitive, or reduced their cost of service in order to either survive or thrive. If these businesses hadn’t done this, they probably wouldn’t be around today. The finance industry is unique in that its pricing hasn’t changed much over the past one hundred years. The French economist Thomas Philippon estimates that the cost of financial intermediation in the US has changed little in the past 130 years. Today, costs are around 2%, a rate that, surprisingly, hasn’t changed much in a century.
It’s not for a lack of cutting-edge technology. Fintech is built on technology that is revolutionizing the world – blockchain, contactless payments, distributed ledgers, smart contracts, cryptocurrencies, and even the buzzword of all buzzwords, AI – but its main goal has always been to lower the cost of financial services and create cheaper ways to overcome financial contracting frictions. A secondary goal has been to improve consumer welfare.
Fintech 3.0. era is marked by competition unlike the banks have ever seen. Over 20,000 specialized FinTech companies operate throughout the world and, although they present a direct existential threat to traditional banks and financial institutions, fintech is an extraordinarily complex and competitive field. Smartphones have become banking instruments as millions of new banking customers starting accessing the internet more than a decade ago, allowing them to join the fintech revolution.
2011 saw the introduction of the Google Wallet, followed a few years later by Apple pay. Venmo, Square Payments, Amazon Pay, Stripe Payments, and WePay all let people pay for services as well as send money to friends and family. The release of Bitcoin in 2009 kicked off the cryptocurrency boom that is another powerful fintech driver. AI, blockchain, distributed ledgers, smart contracts, and crypto will continue to be the technology upon which fintech and paytech will grow.
A.I. is another technology fintech is wholeheartedly embracing. NLP-based chatbots can provide instant customer services, while machine learning and deep learning models can spot potential fraud before it becomes a costly loss for the company. AIOps solution can empower and streamline the IT operations via AI-driven services. Artificial Intelligence for IT Operations provides the robust functionality built for the modern IT Operation.
The many types of AI will power 95% of all customer interactions within a decade, with consumers soon preferring interaction with machines over humans. Resource productivity will also increase at a rate of 40% year-over-year for the next fifteen years, as well as increase industry-wide profits by an average of 39% during that same time, according to Forbes.
Computerworld calls Blockchain “a public electronic ledger built around a P2P system that can be openly shared among disparate users to create an unchangeable record of transactions, each time-stamped and linked to the previous one. Every time a set of transactions is added, that data becomes another block in the chain (hence, the name).”
Blockchain transactions don’t need to be backed by a bank or government entity, which removes the third party from any financial transaction. Blockchain is particularly useful in Fintech because it simplifies regulatory compliance and allows easy cross-border payments and custody and asset tracking, says IDC.
Blockchain is a real-time technology, which also the potential to reduce standard clearance and settlement times, which could save banks billions over the next decade. By 2024, blockchain tech is set to hit US$20 billion and that’s probably a conservative figure.
Although the world has been hard hit by COVID, PayTechs are in good shape to not just survive but thrive. This global outbreak could hyper-drive a move to contactless payments which was already gathering steam before the worldwide pandemic. According to a recent report by Grand View Research, the overall contactless payment market is expected to hit $4.68 trillion by 2027, so the market potential is huge.
Traveling has ground to a halt, but consumers are still buying necessities and other essentials. This, of course, requires payments to be processed and contactless payments allow a level of safety consumers like. While U.S. interest in contactless payments rose by a modest 8% in 2020, this pales in comparison to growth elsewhere. For example, in the Philippines, Globe Telecom saw its e-wallet GCash app record a 700-percent surge in transactions in May 2020.
One of the most important aspects of FinTech is the mobile payments feature. The future of payments is playing out in places like China and SE Asia right now. With its 700 million active monthly customers, Alibaba’s Alipay leads Tencent’s WeChat, but the latter is quickly gaining ground because it has developed an ecosystem used by 50 million merchants in all kinds of industries. Through the app, users can order and pay for food, book hotels, taxis, and flights, buy movie tickets, make dental or medical appointments, as well as send money to others. In China, QR codes are used to make payments, but these might soon be replaced with facial recognition payments.
Asia has also seen the rise of what’s become known as the ‘Super App’. China’s WeChat and Alipay, Singapore’s Grab, and Indonesia’s Go-Jek all provide a variety of services, including messaging, shopping, booking, ridesharing, as well as payment services via a one sign-in and single user experience. And these companies aren’t sitting still, they recognize their customers are always on the lookout for something new and innovative.
Today, FinTech is one of the most robust industries around. Because it is built on revolutionary technology, it should easily survive these troubling pandemic times. By 2022, mobile transactions are projected to grow by 121%, up to a point where they will comprise 88% of all banking transactions. Fintech is in the midst of a paradigm shift. Emerging technologies like AI, blockchain, contactless payments, distributed ledgers, smart contracts, cryptocurrencies combined with ever-changing customer expectations and preferences are redefining how financial institutions deliver services to their increasingly demanding customers.
In the long-run, Fintech leaders need to keep innovating and embracing these technologies as well as accelerating the move from cash to digital payments. Otto von Bismarck, once said, “He who has the money, has the power.” But today that’s not completely true. Today the power of money is shifting towards those who have both the money and the technology.