If you were Internet savvy in the late nineties, you would have most probably encountered PayPal, a money transfer service developed by US-based company Confinity. It needed you to have a PayPal account to pay money electronically. It is also likely that you did not use it. However, as Bengaluru-based Deepthi Rajan, Head Technology Upskilling and Communication, Corporate and Investment Banking Technology at Societe Generale notes, “PayPal was the first alternative to traditional banking.”
Now fast forward to the present. On the afternoon of a business trip, a millennial lawyer in Mumbai was at the airport sans her credit card. An accompanying senior colleague paid for her air ticket. To return the money, she asked if he had Google Pay. He didn’t. Two weeks later, she had yet to return the money. “I have to do net banking, set up the third party account, and….” she said, by way of explanation. Google Pay meant she just had to log on to the app on her smart phone, enter a passcode (or fingerprint) to open the app, search for his name and transfer the amount. “It’s convenient because there is no need of a wallet, like Paytm wallet, and the money is directly transferred from my bank to his without the need for an intermediary.” A study by the American Banks Association had one standout of millennials’ banking habits. 71 per cent of those who participated in the study would rather go to the dentist than listen to what banks were saying.
But fintech or Financial Technology, in the hands of disruptive entrepreneurs, has changed banking entirely. It is an innovative use of technology in the design and delivery of financial services be it AI, peer to peer lending, digital payment; just to name a few of its services. In fact, fintech start-ups have attacked every part of banking, from wealth management, trading, retail banking and savings. As of now, they are the front end of banking while the boring part is still the traditional banking system. Rajan illustrates with an example of Bank ‘B’ and fintech company ‘F’. If Bank B has a cumbersome paper-based mortgage process and Fintech F has just the solution – a fully digitised product spanning the entire mortgage process from application to approval, complete with a super easy to use interface. F needs customers – a banking license would be good but customers are essential. B’s API gives F access to B’s customer data.
Soon, B’s customers have a hassle-free experience applying for mortgages and F has access to a well-established customer base. BaaS (Banking-as-a-Service) can often result in point solutions such as personal finance management tool, accounting software, interest calculators or ATM locators being developed by third parties. These solutions can be sold as standalone applications, be part of an app store, or integrated into a product suite, all of which may or may not be owned by the banks. This is apt for the millenials since the above mentioned studies show that at least 23 per cent of them feel that the main barrier to banking was the lack of mobile apps.
“Importantly, Fintech is removing the need for bank branches or any physical infrastructure, just like ATMs removed the need for human beings to act as bank tellers to give people money,” says Vikram Gulati, a MBA (Finance) student from Stern, NYU, “It is enabling a much larger customer base, as people can live and work far away from their actual “branch” and is allowing not only faster services like instant money transfers but also instant investments into mutual funds/fixed deposits. It is also allowing lots more people to have access to credit, as analytics on spending etc. can help drive credit scores (still experimental). Other innovations include buying of insurance online, filing tax returns easily and so on. Millennials would rather use such apps.”
Now, thanks to fintech, banking is perhaps just as easy as hailing an Uber taxi. In the US alone, Facebook has 50 different regulatory licenses that will allow its users to transfer money by the messenger app. In Britain, for some of the millennials, Monzo is close to being a cult. WeChat in China takes it further by allowing the user to not only buy insurance, make payments, invest in funds, but also book doctor’s appointments, donate to charity, and even set up dates.
While fintech companies deliver personalized experience through a deep and focused understanding of the pain points in customers’ banking journey, what does it actually mean for customers and banks? Rajan notes that for customers, it’s a great deal; access to better products, elegant user interfaces and enhanced services. But the downside is that customers must deal with a fragmented set of service providers for different services – loans from one company, investment advice from another, deposits from a third and so on. For the millennial lawyer, that is not much of a big deal. “I can choose,” she says.
But how do the traditional banks deal with fintech? Fintechs with their narrow offerings, minimal regulatory obligations and zero legacy technology infrastructure are an uncomfortable reality unless, as Rajan notes, the traditional banks acquire a fintech (BBVA’s acquisition of Simple) or partner with one (HSBC with Tradeshift). “But many such relationships are largely driven by a zero-sum mentality, where one party wins often at the expense of the other smaller player,” she points out.
Industry experts like Henri Arslanian, who teaches the first fintech university course in Asia, have stressed that as banks try to integrate fintech to bridge the gap between customer experience and what they traditionally offer, the role of the future banker will be very different from the present day.
“The skill sets will be different,” he said in his TedTalk. “There will be designers and programmers rather than traders or compliance officers.” Already, it is estimated that in the next ten years, about 30 per cent of the banking jobs will disappear. A grimmer outlook estimates it as 50 per cent. But, no matter what, fintechs are providing banking to millennials in a way they actually like.
We would, however, like to leave with this reminder by quoting Douglas Adams:
We are stuck with technology when what we really want is just stuff that works. Fintech companies should keep that in mind.