innovation in finance

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Just like print media publications, legacy banks are now feeling the heat of disruption from their target audience moving online, and being wooed by technologically agile startups. But unlike people who fondly remember reading the print newspaper on Sundays, or awaiting the paperboy to pass on his bike, the disappearance of banking as we know it is unlikely to evoke much nostalgia from consumers in times to come.

With the Great Recession still a recent memory, and the world’s leading banks like Wells Fargo publically being fined for tricking users out of millions of dollars in fees, consumers are welcoming the winds of change. With nearly 70% of Millennials now engaging with their finances entirely online, quickly adopting new Fintech apps and moving towards challenger banks, traditional banks are left with three options: Innovate, acquire or die.

But the nails aren’t in big banks’ coffins just yet. If banks learn from new players, Fintech innovation could help not only save traditional banking, but also revamp it and transform it into something more efficient and attractive to younger audiences. However, if they continue alone, they will be regulated to the history books.

Here are three Fintech predictions:

1. Financial Institutions will acquire more Fintech startups

Banks are large lumbering global organizations by nature, held back by legacy systems and rigid hierarchies. And they’re not especially known for their innovative spirit. Ron Shevlin, Director of Research at Cornerstone Advisors argues that to push widespread change in an industry that has barely changed in centuries, three elements are required: technology change, demographic change, and economic imperative.

Shevlin says that while the emergence of internet technologies and then the advancement of mobile technologies provided the technological shift needed to motivate widespread change, it has only been in the last few years that Millennials growing power in the economy has provided enough demographic change — and thus an economic incentive — to shake banks into action and force modernization at the risk being made redundant.

If banks — which are already notoriously slow at innovation — tried to compete with Fintech companies on each of their individual functions (transfers, loans, money management, stocks and shares etc) they would be dead in the water within a decade. But while banks may be slow off the mark technologically, they do have one thing up their sleeves – and that’s a lot of money.

A new study by IDC and SAP shows 34% of banks would collaborate with a startup, and 25% would prefer to acquire. Leading the charge is BBVA, which recently acquired banking startup Holvi, payments startup Openpay and bought US online bank Simple. But American banks are getting into the action too. Over the last year, Goldman Sachs bought Honest Dollar, an online retirement planning service, Ally Financial bought online brokerage TradeKing Group and BlackRock acquired online investment firm FutureAdvisor.

Banks are realizing it is much easier to buy ready-made technology to integrate into their systems, and startups — which are struggling to raise funding due to an A-round crush — are recognizing they can push their products to the next level, with bulging bank balances and access to world-class R&D and innovation labs.

2. The lending, payment and transfers industries are being transformed

It comes as no surprise that banks, as businesses, aim to make money and stay profitable. Traditionally, their main means of doing so was through lending money and collecting interest on loans and credit cards, through charges such as overdrafts and also on international and inter-bank transfers.

In the last few years, we have witnessed the growth of the ‘financial wellness’ movement championed by Fintech startups, who aim to break monopolies over loans and transfers, and protect users from hidden charges, high-interest loans and bad money management.

Innovative Fintech startups are “unbundling” banking by providing individual services such as money transfers, loans, savings, financial advice and investment options, all presented in slick mobile ready platforms with great UX designed perfectly for the needs of the ‘on-demand’ generation.

Whereas people who wanted a loan used to have to put their best outfit on and grovel with the local bank manager, nowadays there are a plethora of online personal loans available from micro-lenders such as OnDeck, Kabbage, FundBox, BlueVine and Prosper and peer-to-peer lending platforms like Ratesetter and Funding circle.

The same goes for money transfers and payment systems. While Paypal has long offered a more affordable means of sending money anywhere in the world than with traditional banks, the service required users to link to accounts at leading banks. Nowadays a new generation of transfer services from Fintech players and leading tech companies have joined the party too with services such as Google Wallet or Apple Pay.

Fintech companies, such as SecurionPay, identify customers’ needs better and facilitate payments in the easiest way possible and with simplified user flow. Their payment forms include just essential information and there’s no need to redirect users to external payment –or bank — services to pay. Innovative payment platforms offer customer-centric solutions which offer a user-friendly purchasing process, with seamless checkout not solutions with multiple steps in checkout and fields to fill out. Merchants look for solutions with fast onboarding, with dead-simple integration process, innovative technology and responsive customer support which fintech startups are increasingly offering better, faster and more securely than with traditional banks.

Banks are quickly losing their main sources of income, as consumers realize they can save time and money by investigating new payment, transfer and loans companies in the world of Fintech. As this starts to hurt banks’ bottom lines over the next decade, we are likely to see more banks adopting Fintech technology. In ‘Key trends for banking and securities in 2017’ by Deloitte, experts predict 2017 will see more focus on faster, more affordable transfers as banks partner with fintechs with ‘the blessing of the Federal Reserve”.

3. The entire financial sector is set to be disrupted by bitcoin

In the aforementioned report, experts at Deloitte argue banking is facing a “serious existential threat” from bitcoin technology. Former Wall Street Banker and Bitcoin specialist Evander Smart argues that when the digital currency matures and gains widespread consumer confidence, bitcoin technology could totally cut banks out by allowing people to do their own banking, on their smartphone with a decentralized, encrypted currency far more valuable than any fiat currency used by banks today.

Bitcoin could become “the next gold” – a decentralized crypto-currency backing currency which would have a profound effect on the value of other fiat currencies. Today, while the opportunities for bitcoin are immense, the digital-currency is not solving a problem, as it has still failed to gain widespread consumer trust.

While the 2016 theft of $72 million from exchange platform Bitfinex in Hong Kong might have spelled the death of less robust technology, market values recovered soon after. Current concerns revolve around the exchange and security of storing the currency, rather than bitcoin and blockchain it functions on.

Michael Jackson, former COO of Skype and board member at bitcoin wallet provider Blockchain argues the resilience and reliability of blockchain has been proven, but the challenge facing blockchain companies is to “successfully obfuscate the complexity of bitcoin and bring frictionless value transfer to the next 100 million daily users.”

One of the best ways to grow consumer trust, and boost users around the world would be by partnering with leading retail banks. While consumers may doubt banks’ ethics, they do trust them to look after the money they deposit in their vaults. A number of leading global banks including Santander and UBS are trialing blockchain technology for international cross-border payments, in partnership with U.S. start-up Ripple.

Chris Larsen, chief executive of Ripple, told CNBC that while international transfers using traditional methods take a few days and are expensive, the blockchain technology could give banks a 33 percent reduction in their operating costs during this process and make transfers “in seconds”.

Antonio Simoes, HSBC’s UK and Europe boss said last year he believed problems in banking would be fixed by 2020, but it would take much longer before customer trust was regained due to continuing scandals within the financial sector. However as consumers increasingly move towards reliable, affordable and ethical new fintech startups, banks that don’t begin to partner with and acquire fintech technology and innovation teams soon will die. Fintech innovations hold an appeal for Millennials, and with the global reach and bulging bank balances of retail banks, their adoption could lead to a more efficient, affordable and transparent financial sector overall.