Fintech Will Uberize Banking
There are three main things people need everyday banking services for (or rather have to rely on banks for) – Payments, Lending, and Investment. Individuals and businesses want to do one or more of the following:
1) Make payments to others for buying product or services from the (Transfer of money from one entity’s bank account to another entity’s bank account)
2) Borrow money for their day-to-day or specific needs (Bank acts as the lender lending money which many others have deposited in it)
3) Invest surplus/spare money to earn some returns (Fixed Deposits, Savings accounts or similar securities, where banks offer nominal interests on the investment)
Traditionally banks have been the only entities providing these services for which they act as intermediaries and consequently charge a fee. Without bank accounts, people probably pay each other in cash. But this then is the non-digital mode of payment and not a sustainable one. Moreover, the unbanked (mostly the poor section of the society) are completely left out of these services because they can’t afford a bank account for having to maintain a minimum balance. And even if the banks offered, zero-balance accounts, individuals would still need to go to the bank to make payments – a deterrent to open a bank account in first place. Shouldn’t entities be allowed to avail the above three services digitally, and without needing a bank?
FinTech is about to change all of this. In fact, it already is. VC Investments in FinTech firms (which as per Forbes – an American Business Magazine were more than $17 billion in 2016, with a significant chunk of it in ‘payments’ space) clearly indicate elevation in trust on FinTech in its ability to provide banking (to both –currently banked as well as unbanked) without actually needing the banks. To begin with, FinTech – which represents a term for the ability to provide financial services using new technological innovations – is mainly catering to the above three banking services.
Payments: Many peer-to-peer payment platforms are already popular: PayPal, PayTM (in India). Facebook and Apple, which consumers never dreamed of acting as payment platforms, have come out with peer-to-peer payment systems making the activity of payment seamless between individuals. The rapid spread of smartphone is an enabler in allowing people make payments at their fingertips at any time and from anywhere (Mobile Banking) with few clicks and without being at the bank or in front of a computer. None of these need a bank (except for few nodes where the source of money today is the bank). So these alternate payment platforms are already snatching business away from the banks.
Lending/Borrowing: With the advent of peer-to-peer lending, people and business are already lending and borrowing money – without needing a bank. When it comes to borrowing money, the borrower (ideally) hardly cares who loans him the money. He does not want to but has to. He will be happy if lenders flock to him competing offering the loan at the lowest possible interest rate and terms and conditions. The borrower could be a firm as well. Today, however, it’s wishful thinking; since banks are the primary entity in lending business, the borrower has to care about who lends him money even though he does not wish to. But this will no longer remain a wishful thinking. These are the second disruptors (although to a very minute extent) that are snatching the lending/borrowing business from banks. The indirect loss is even more, as the unbanked of today, who otherwise would have had to go to the banks, are in a position to borrow money without needing a bank, and all they will need is just a smartphone.
Investments: Crowdfunding is becoming a powerful alternative method of investment / raising capital allowing entrepreneurs to showcase their ideas to investors of all sizes and allowing people to act as investors (contributing a small amount) to fund those ideas. [KickStart, Ketto, Milap (India) are some of the service providers in this segment]. In 2015, an estimated USD $34 billion was raised from Crowdfunding (as per Wikipedia). As per a World Bank Report, global investment through Crowdfunding will reach $93 billion by 2025. This is the third area where FinTech will eat into Banks’ market share.
The Uberization of Banking:
Going ahead, the FinTech revolution (and some people already predict this) will result in the creation of a financial marketplace, offering a platform where people will no longer go to banks, but rather approach the market to invest or seek loans. Lenders will compete in real time to lend at the lowest possible rates. This revolution would be the Uberization of Banking. Like Uber, where the service providers (car drivers) and service consumers (riders) find each other dynamically, based on their custom needs; the Uberized marketplace will let borrowers and lenders find each other quickly for loan amounts big and small. Like Uber, which disrupted the traditional Cab/Taxi business, the banking marketplace will disrupt the conventional banks. Today it is estimated that FinTech companies serve only 0.05% of the needs of raising financial capital’s needs. But this is growing at a whopping pace every year.
But wait. What about the stringent regulatory and compliance norms that banks have to put up with (for investment, lending and payment services)? Yes, those will also take place – all of them – dynamically through this APIs which will connect providers and consumers to this marketplace. There will be real time bidding between the lenders to lend money to a borrower. Right from evaluating the borrower creditworthiness, authenticity of both sides, verification of collaterals, to running sophisticated models (algorithms) and engaging ML to assess future risks presented by both sides, to negotiations on the interest rates, terms of repayment, regulation and compliance – the marketplace will provide APIs for lenders, borrowers and facilitators. The borrower will not know upfront which lender’s money is going to land in his lap. But would he care? The marketplace will enforce every participating entity to maintain its credibility with a rating system.
Will the banks be sitting and watching? Some say they will vanish, and the others say they will flourish. But it is predicted that banks will adjust their businesses to mutually benefit by placing at the right spots in this ecosystem. But some of their functions are going to face disruptions for sure.
And now let’s look at the technical and implementation challenge if this marketplace were to exist: Big Data, high throughput stream processing, analytics, authentication (multi factor), API security, Identity and Access Management, cloud, network – everything will have a role to play. Blockchain would be the preferred implementation technology.
India would be at a particular juncture if this were to happen. With a significant percentage of the population still unbanked soon to be coming under financial inclusion initiatives of the Indian government, the Aadhaar push (authentication, credit history check, credibility check), linking of all financial transactions to Aadhaar, India surely stands to benefit from this FinTech revolution.