The emergence and growth of financial technology have developed particularly in the past ten years.
So what is in store for the next decade if we look ahead? I think we're starting to see the first signs: Fintech will become portable and ubiquitous over the next ten years if it takes a back seat and becomes centralized in a place where our money is managed for us.
When I started at Fintech in 2012, I had problems tracking competitive search terms because nobody knew what our industry was called. The best known companies in this area were Paypal and Mint.
Fintech has become a term that has seen huge investment growth: from $ 2 billion in 2010 to over $ 50 billion in venture capital in 2018 (and more than $ 30 billion this year).
On the way there, predictions with mixed results were made – banks will cease to operate, banks will catch up again. Big tech will go into consumer finance. Narrow service providers will unbundle all consumer finance. Banks and large fintechs will devour startups and consolidate the industry. Startups each become their own banks. The fintech bubble will burst.
Here's what happened: Fintechs were (and still are) vertically vertical and have re-created the offline financial services branches by going online and introducing efficiency improvements. The next decade will be very different. Signs are beginning to emerge in the overlooked areas, suggesting that financial services over the next decade:
- Be mobile and interoperable: As with mobile phones, customers can easily switch between providers.
- Become more pervasive and accessible: Fundamental financial products become commodities and bring participants online without bank details.
- Move into the background: The users of financial instruments do not have to build a 1: 1 relationship with the providers of these instruments.
- Centralize in some places and steer to "autopilot",
Prediction 1: The open data layer
Thesis: Data will be openly portable and will no longer be a competitive moat for fintechs.
Personal data has never been in the spotlight as it did in 2019. The Cambridge Analytica scandal and data breach that jeopardized 145 million Equifax Accounts have raised awareness of the importance of data security in today's public. Last month, the House Fintech Task Force met to evaluate financial data standards, and the Senate introduced the law on online data protection rights for consumers.
A tired technological cliché today is that "data is the new oil". If other things are the same, you'd expect banks to take advantage of their data-rich advantage to build the best fintech. Although this is required, data alone is not a sufficient competitive advantage: large technology companies have to interpret, understand and develop customer-oriented products that use their data.
Why will this change in the next decade? Because the walls around sealed customer data fall into financial services. This gives inexperienced fintech innovators the prerequisites to compete with billion dollar banks, and that's happening today.
Much of this is thanks to relatively opaque legislation in Europe, the PSD2. Think of it as a GDPR for payment data. The UK was the first country to implement the PSD2 directive in 2018 as part of its open banking system. According to this directive, all large banks must make consumer data available to all fintech companies to which consumers have the appropriate authorization. So when I have my savings in the bank However, A would like to use it to take out a Fintech B mortgage. As a consumer, I can now use my own data to access other products.
Consortia like FDATA are radically changing attitudes towards open banking and gaining global support. In the United States, five federal financial regulators recently made a rare joint statement on the benefits of alternative data, most of which are only accessible through open banking technology.
The data layer, if it becomes open and ubiquitous, will destroy the competitive advantage of data-rich financial institutions. This will democratize the bottom of the fintech stack and open up competition to anyone who can develop the best products based on this publicly available data. However, developing the best products is still no small matter, which is why Prediction 2 is so important:
Prediction 2: The open protocol layer
Thesis: Fundamental financial services become simple open source protocols, reducing the barrier for any company to offer financial products to its customers.
Imagine an investment, wealth management, trading, merchant banking, or lending system. In order to enter the market, these systems have to rigorously test their core functions to avoid legal and regulatory risks. Then they need to eliminate edge cases, build a compliance infrastructure, contract with third parties to provide most of the underlying functionality (think: Fintech Toolkit), and make sure that these systems all work together.
The bottom line is that every financial service provider builds similar systems that companies keep replicating and separating. Or worse, they build on old core bank providers with monolith systems in outdated languages (Hello, COBOL). These services do not work together, and each bank and fintech is forced to become its own financial protocol experts who are among its core services.
However, three trends show how this is changing today:
First, the infrastructure and service layer that is going to be built, thanks to platforms like Stripe, Marqeta, Apex and plaid. These finance as a service providers make it easier to set up basic finance functions. Infrastructure is currently a hot investment category and will continue to exist as long as more companies offer financial services – and as long as the market leaders in infrastructure can maintain price control and avoid marketing.
Second, industry groups like FINOS are driving the search for open source financial solutions. Consider a github repository for all of the basic functions underlying fintech tools. Developers could continuously improve the underlying code. Software could be standardized across the industry. The solutions offered by different service providers could become more interoperable if they share their underlying infrastructure.
And third, banks and investment managers who recognize the value of their own technology are beginning to license that technology. Examples are BlackRocks Aladdin risk management system or Goldman's Alloy data modeling program. By distributing or selling these programs to customers, the banks open up additional sources of income, make it easier for the financial services industry to work together (imagine that they are unifying the language they all use) and develop a customer base that offers helpful feedback and errors find and request new useful product features.
As Andreessen Horowitz Partner Angela Strange notes: “This means that there are several different infrastructure companies that work with banks and put together the licensing process and some regulatory work as well as the various networks required for the payment method. So if you want to start a financial company instead of spending two years and millions of dollars building tons of partnerships, you can use all of this as a service and get started. "
Fintech develops in a similar way to computers: first software and hardware were bundled, then hardware became an operating system with limited availability, and then the Internet opened software with software-as-a-service. In this way, fintech will resemble the Internet of the past twenty years over the next ten years.
Prediction 3: embedded fintech
Thesis: Fintech becomes part of the basic functionality of non-financial products.
The concept of embedded fintech is that financial services are not offered as a standalone product, but become part of the native user interface of other products and are embedded.
This prediction has found followers in the past few months, and it's easy to understand why. Banking partnerships and infrastructure software providers have inspired companies whose core competencies are not consumer finance to say "Why not?" And to dip their toes in the waters of fintech.
Apple debuted the Apple Card. Amazon offers its Amazon Payment and Amazon Cash products. Facebook introduced its Libra project and started Facebook Pay shortly thereafter. As companies from Shopify to Target try to purchase their payment and purchase finance packages, Fintech will conquer the world.
If these signals are indicative, financial services will a feature the platforms with which consumers already have a direct relationship and not one of the products for which consumers need to relate to a new provider in order to gain access.
Matt Harris of Bain Capital Ventures summarizes in a recently published series of essays (one, two) what it means for fintech to be embedded. His argument is that financial services will be the next layer of the “stack” based on the internet, cloud and mobile. We now have powerful tools that are constantly connected and immediately available to us through this stack. With embedded services such as payments, transactions and credits, we can add more value without having to manage our finances separately.
Fintech futurist Brett King sums it up even more succinctly: technology companies and large consumer brands are becoming gatekeepers for financial products that themselves move into the background of the user experience. Many of these companies have valuable data from the provision of sticky, high-affinity consumer goods in other areas. This data can give them a proprietary advantage in reducing costs or underwriting (e.g. payment plans for new iPhones). By combining first-order services (e.g. manufacturing iPhones) with embedded second-order financial services (e.g. microcredit), you can use one of the two as a loss-maker to subsidize the other, e.g. B. Lowering and increasing the price of iPhones at the same time Apple takes over transactions in the App Store.
This is exciting for Fintech consumers who no longer have to look for new ways to pay, invest, save and spend. There will be a shift for all direct-to-consumer brands that are forced to compete on non-brand dimensions and may lose their customer relationships with aggregators.
Nevertheless, older fintechs can benefit from using the audience of large technology companies to expand their reach and expand the contextual data of large technology platforms. Think Uber Trips that come from Google Maps: Uber made a calculated decision to list its offer in an aggregator in order to reach more customers directly when looking for directions.
Prediction 4: Bring everything together
Thesis: Consumers access financial services from a central hub.
In line with the shift from the front-end consumer brand to the back-end financial industry, most financial services are grouped into hubs and displayed in one place.
For a consumer, the hub could be a smartphone. For a small business within Quickbooks or Gmail or the cash register.
As a company like Facebook, Apple and Amazon have split their operating systems across platforms (e.g. Alexa + Amazon Prime + Amazon Credit Card). This benefits users who are fully committed to an ecosystem so that they can manage their finances through any platform – but these providers also make their platforms interoperable so that Alexa (e.g.) can still win Android User.
As a fintech nerd, I like to play with various financial products. But most people are not fintech nerds and prefer to interact with as little service as possible. Having to address several fintechs separately is ultimately a subtractive and not an additive value. And good products are designed for customer-oriented intuition. In her article, Google Maps for Money, Strange calls this "autonomous financing": Your financial services products should know your own financial situation better than you, so that they do not have to make the best choice with your money and can execute them in the background.
And so we now see the bundling of services. But are these the natural endpoints for fintech? As consumers become more accustomed to financial services as a natural feature of other products, they are likely to interact more and more with services in the hubs from which they manage their lives. Tech companies have the natural advantage of designing the product surfaces we love – Feel free to spend more time on your bank's website or on your Instagram feed? Today, these hubs are smartphones and laptops. Could there be others in the future, such as emails, cars, phones or search engines?
As the development of fintech reflects the development of computers and the Internet, becomes interoperable and is embedded in everyday services, the question will change fundamentally where we manage our finances and how little we think about them. One thing is certain: if I write this article in 2029, fintech will hardly look like it does today.
Which financial technology companies will be monitored over the next ten years? Based on these trends, we have selected five that will be successful in this changing environment.