There is no doubt that the pace of change in today’s business is both dramatic and disruptive. In some cases, coronavirus has played a role in accelerating it. In others, the business landscape has been rapidly reforming since long before COVID – the lockdowns have only kicked up the speed of change. One such sector is “fintech”, a term that combines the words “financial’ and ‘technology”. Drawing on the Bank of England’s definition, it is technology-enabled financial innovation, which in turn alters the way financial institutions provide – and consumers and businesses use – financial services.1 If you have sent money to a friend or split a restaurant bill, you have seen fintech in action. According to KPMG, in the UK alone, investment in the sector soared to some $37 billion in 2021, representing a sevenfold increase from 2020.2 It is, however, necessary to note that most fintech applications build on existing technologies to simply make money matters easier and faster. Therefore, fintech is, contrary to the common belief, not only confined to start-ups; traditional financial services incumbents can also take on fintech. Given how rapidly evolving this sector is, in this article, we would like to share some of the latest developments observed.
The use of AI is mostly for back-end improvements
Artificial intelligence (AI) has been lauded as the most natural technology to be deployed in the fintech space. Why? It is because, in theory, financial services is inherently a data-driven industry, and algorithms are best suited to processing data quickly and cheaply. The media often highlight the exemplary use of AI to interact with customers. Nevertheless, from our client experience, the use of AI in financial services seems to be more geared towards improving back-office operations. It is true that some companies, such as the US “insurtech” (fintech focused on the insurance sector) Lemonade, use AI to handle customer purchases and claims. Yet, in the past, many more customer-facing technologies, such as robo-advisors, have failed to live up to their promises. So the advantages conferred by AI have so far mostly been derived from cost-cutting initiatives such as streamlining labour-intensive and costly onboarding processes and compliance procedures. Naturally, this may change very swiftly. With advances that can make machines much better able to mimic human conversations and interact with humans, we may soon be witnessing a boom in the use of customer-facing algorithms.
Decentralised finance, not blockchain, is moving ahead
It is easy to confuse blockchain with cryptocurrencies. As if we were not confused enough, “decentralised finance” is now thrown into the mix. Decentralised finance, or “defi”, can be defined as “non-custodial finance which enables all types of financial transactions currently existing in traditional financial systems but which is done on a peer-to-peer basis, without the use of intermediaries but enabled instead by smart contracts. Transactions facilitated by decentralised finance include borrowing and lending, savings, investments, derivatives and insurance”.3
Technologically speaking, smart contracts and defi need both the blockchain and a specific type of cryptocurrency called Ethereum to power them. But, in our view, these technologies by themselves are not as interesting as the new business models and the new development pathways that they can bring. Take, for instance, one of the fundamentals of financial markets: liquidity. In order to run any exchange or market efficiently, you need to have a lot of buyers and sellers to ensure price stability and transaction possibilities. But how can a liquidity pool be created in an automated exchange? Defi organisations such as Uniswap have managed to create a liquidity pool by sharing profit with the liquidity providers, essentially with cryptocurrency owners lending their cryptocurrencies for trades in exchange for a fee.
The emergence of governance tokens overcomes another challenge. These are tokens (notice, they’re not coins) that give specific privileges, such as voting rights, to the holders. These tokens, in turn, enable the decentralised smart-contract based system to execute the voted decisions automatically. We view these developments as being just the very start of creating a new form of financial service industry that is at least going to exist in parallel, if not cannibalise, the conventional financial services.
Rebundle, rebundle and rebundle
One sector of fintech that has seen more action than any others is probably retail banking. This is unsurprising, as retail customers have long been offered poor and costly services. This opened up many opportunities for newcomers to be laser-focused on creating new propositions in one single area of financial services, including lending, foreign exchange and investment. The result: as a collective force, they have been able to take apart – and away – the different products and services that traditional banks offer. In fintech speak, this is called “unbundling”.
But that was then. Now, it is clear that many of these “old” newcomers are scrambling to add revenue streams. Ultimately, we have started to see investment companies offering banking services, retail banking challenger banks offering cryptocurrency trading, and remittance-focused fintechs offering current accounts. Granted, in a market in which all companies must expand to stay competitive, getting a greater share of customers’ wallets is key. The problem with such “rebundling” is that the offerings of companies are becoming ever more similar. As in all business sectors, where there are winners, there are also losers. With fintechs competing on the basis of fairly identical products and services, some of them will most likely fail. The struggle to gain differentiated products and services is only going to become more intense. And we are going to see more casualties.
Buy now, pay (back even) later
One area that is currently enjoying stellar growth is so-called “point-of-sale” lending, better known now as “buy now, pay later” or simply BNPL. The fact that the younger generations are shunning credit cards (in favour of debit cards) makes it more difficult for companies to lend, arguably the bread and butter of financial services. Hence, making lending available at the point of purchase, including the possibility of a loan on a single purchase transaction, has made borrowing more palatable. Indeed, one of the BNPL leaders, Klarna, has recently taken a step further by launching a physical card, making borrowing even easier. In this way, the company is no longer confined to offering loans through their partnered e-commerce retailers; it can now extend lending on a transaction basis with non-partners. Yet, even while BNPL is still at the nascent phase of development, it has already raised consumer debt concerns. A report has shown that a third of the millennials who have used BNPL services have been charged late-payment fees.4 In fact, companies like Klarna are making changes, as they are expecting upcoming regulatory crackdowns. How the future of this fintech space will unfold remains to be seen.
It’s easy to see that fintech is about integrating the latest technologies. In fact, as can be seen above, most successful fintech cases today aren’t the result of cutting-edge technology. Instead, it is about how to leverage and amplify the advantages of existing technologies. This means that both large financial services companies and start-ups can have a chance of succeeding. The view of the industry has grown more nuanced. While challenger fintech players will continue to seek new ways to chip away market share from traditional incumbents, the latter are sitting ducks waiting to be shot. For certain, neither side will stop there, as they are both striving for economic survival. Interesting developments are set to take place in this space. Stay tuned for more epic battles ahead.
About the Author
Terence Tse is professor of finance at Hult International Business School. He is also a co-founder and Executive Director of Nexus FrontierTech, an AI scale up. Terence has appeared on television, radio shows and periodicals. He has given seminars, workshops and speeches for and to some 50 organisations. Terence has written three books with the next to be published by MIT Press next year. He is on the board of various entities including Nexus FrontierTech, Thyreality, Tolar HashNET and Circular Economy Alliance. Previously, he was in investment banking and consulting. Terence has a PhD from University of Cambridge, UK.
Mark Esposito is a professor of business and economics at Hult International Business School and a clinical professor at ASU. He is an entrepreneur who co-founded Nexus FrontierTech; a bestselling author, and a senior advisor to governments. In 2016 he was listed as one of the 30 prominent business thinkers by Thinkers50 Radar. Mark has written hundreds of articles between peer and non-peer review magazines, 11 books, including 2 bestsellers and his next books on the Great Reset Ahead Of Us are due in 2022 with MIT University Press and Cambridge University Press. Since 2011 he taught courses in business, government and society, and economic strategy and competitiveness, at Harvard University’s Division of Continuing Education. Mark holds a doctoral degree in Business and Economics and works across Phoenix, Boston, and Dubai.
Danny Goh is the Founder and CEO of Nexus FrontierTech, an AI research firm that accelerates enterprise workflows to enable effective use of data and sustainable value creation. He is an Entrepreneurship Expert at the Said Business School and an advisor to several start-ups and accelerators. He lectures at various universities in Europe, and speaks at multiple conferences including TEDx and World Economic Forum. He co-author The AI Republic.