We can all tell a story of the impact e-commerce has had in our lives. With fintech in the limelight, let us look at the bigger picture and explore how this will shape the future of finance.
Nowadays, we still seem to remember very well how the global financial crisis slowly took over markets around the world and spun us into recession. Unfortunate macroeconomic events like these demonstrate what forms the core hypothesis of my book – the moment trust leaves any (financial) system, substantial value is destroyed alongside with it.
The financial services sector counts on trust as its most fundamental operating requirement, and this is why trust is a critical factor in enabling the survival of established players and transformation of the field at large. Now, we find ourselves at the cusp of a major tectonic shift that is to change the face of financial services – and fintech is prominently driving this change.
2015 was rightly dubbed ‘the year of fintech’. Financial technology startups are charging ahead and collecting tremendous amounts of funding with their bold visions of how the industry should look like in the future.
Regardless of their functional focus, what these fintech startups really do is create a trusted intermediary for individuals to exchange some form of value – such as stocks, digital, fiat currency, etc. If you strip down today’s established financial services players, all you are essentially left with is their core function of serving as a trusted intermediary.
This means that fintech startups are not just innovating the way business is done in the finance world, but are creating a new financial system altogether – a system that is defined by a new order of trusted intermediaries that are smarter, better, more versatile and affordable than what exists in the status quo today.
The Blockchain is arguably one of the smartest inventions in this space -– a mathematical logic that paradoxically creates a trusted intermediary by doing away with trusted intermediaries. Obviously, banks are extremely keen to wrap their heads around the technology, which may well evolve into the new operating system for finance in years to come.
As we are witnessing all this disintermediation, financial regulators may need to rethink their role, which many say traditionally revolved around balancing the interests between institutions and end users of financial services. This function may actually become less necessary in the near future, as the successful fintech startups of today forcing established finance players to rethink their core offerings to become more customer-centric and remain relevant.
If global financial systems assume a transparent and decentralised nature, regulators may witness market effectively self-regulating – just like trusted communities do. In one of my previous articles, I mentioned that a large chunk of today’s most valuable startups build trusted intermediaries and largely self-regulating communities (such as LYFT) play an important role.
Customers of today seek fully digital, transparent services, and will go with whichever trusted intermediary serves them best. If institutions are of the impression that they are not competing with fintech (or that they will simply be able to go on a venture shopping spree some years from now and buy out all the most promising startups in their space), I urge to think again.
As we are aware, the magnitude of financial services is immense, and the cake is growing daily. Billions of unbanked are awaiting their inclusion into the financial system, and many players are focused (let me guess) on opening all sorts of innovation labs and designing less dreadful online banking experiences. These are fantastic efforts, except they are hardly enough to dominate the industry transformation of which we are still only witnessing the very cusp.
My point is that financial institutions will likely be dwarfed. If I were to make a prediction, we will soon see a fintech company possibly scratching the elusive trillion-dollar market cap that today remote even to the likes of Apple and Alphabet.
Imagine, thus, a company with market capitalisation exceeding 80 per cent of national GDP – if it turns out to be true, the face of financial services will undergo tremendous change. This is actually not too unlikely.
Finance powers global trade, which makes it so influential in the first place, and operates at a scale that impacts a growing majority of our planet. It may also be relatively easy for fintech to create effective monopolies, because there is so much white space to fill.
Unlike, say, fast moving consumer or luxury goods, there are very few emotional choices to be made. If you are selling handbags or chocolate milkshakes, some people may not like your product. If you are selling easy, affordable cross-border money transfers, the only hurdle you really need to overcome is – well – trust.
In my book, I aptly define trust as the value we place in our relationship with a person or entity. Since banks are offering little perceived value to Millenials, it is unsurprising that our generation does not trust them all that much. This opens up the floodgates for startups to become the financial partner of choice offering trusted financial advice – and financial services – to Millenials.
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