Over the past decade, something extraordinary has happened in banking and financial services, particularly in the City of London, but also all around the world.
Thousands of scrappy, scruffy fintech startups have launched, seeking to upend centuries-old institutions via a heady mix of tech prowess, grit, friendly regulation and not forgetting, of course, billions and billions of pounds of venture capital.
Yes, there have always been new entrants in financial services. New players, with new ideas and technology, but this period has been unique in both the volume of fresh-faced upstart founders as well as the scale of their ambitions. Fintech, once a niche of financial services is now firmly established. Estimates suggest about $500bn of private market capitalisation is now tied up in fintech companies.
Many of the barriers to starting a new bank, insurance company or wealth manager have been largely eroded thanks to this digital age and the trend is set for further acceleration.
Yes, we still have bank accounts, money, loans, mortgages and insurance as we have had for centuries, perhaps even since biblical times. But how these look and feel - as well as their risks and opportunities is changing rapidly.
In this article, we take a look at what these financial products might look like and how they may operate in the new digital fintech age.
App-tastic
It wouldn’t be controversial to assume you have used an iPhone - or another smartphone - and a few apps already today, even if you’ve just started the day. Perhaps you’re holding one right now as you read these words.
We are now more than 15 years on since the launch of the iPhone, and crucially, an open-source app store. It was this paradigm shift that helped created much of the modern fintech world. App-only financial products from stockbroking to bank accounts have become commonplace.
For over 100 years there were no new retail banks in the UK. In the past decade, there have been nearly 50 launches, mostly these are entirely digital.
While there may be understandable questions about much to ‘value’ neobanks such as Monzo, Revolut and Starling there is no question that between them they have tens of millions of customers, including SMEs. They have also just reached a sustainable footing, with two out of three reporting to have reached profitability.
There is every reason to expect the trend to continue with many new app-based challengers coming along. What is less obvious, is what is happening ‘under the bonnet’ of these new fintech apps.
One key change is the ability for one company to offer their products through the technology and regulatory permissions of another via Application Programming interfaces (APIs), a ‘middle man’ that enables different programmes to talk to each other.. This is often to referred to as Banking-as-a-Service or Embedded Finance.
This might mean for example loans or insurance being offered directly to customers from non-financial companies such as airlines or online retailers. While the customer journey is uninterrupted at checkout, a separate bank provides a loan from underwriting to origination and Know Your Customer (KYC)/anti-money laundering (AML) checks.
This idea is not new. Companies such as supermarkets have offered financial services such as credit cards for decades via third parties. But the use of APIs through initiatives such as Open Banking has transformed the potential.
Open Banking is the ability for the sharing of financial data between third parties and an increasingly used new type of ‘payment rails’, an alternative to the typical card-based payment system.
Pat Phelan is the UK managing director and chief customer officer at GoCardless, a company offering open banking payments through a variety of platforms such as Xero, Sage and Quickbooks.
"For those that aren't familiar with them, open banking payments pull money directly from your customers' bank account, just like Direct Debit, but you receive instant confirmation -- which means they're great for both one-off and recurring payments,” he said.
“This is definitely tech to keep on your radar for now and the near future,” he added.
Open banking payments are increasingly being used by individuals, companies and governments.
This is because, Phelan says, they offer a good alternative to bank transfers because you don't need to do any manual reconciliation, which saves time while cutting down on human errors. As well as being cheaper than card payments.
One way to think of all of this is an ‘unbundling’ of financial services both from the point of the end provider as well as the technology that underpins it. Even who has the license to provide it.
An analogy might be online shopping instead of visiting a supermarket for your weekly shopping.
Matt Davies, head of UK market development at Nova Credit, a fintech company that acts as a global credit bureau, says easier sharing of financial data will fundamentally change credit markets.
“The next five years will see huge fintech innovation emerge in the way we talk about and handle individual people's access and relationship to their financial data across international borders,” he said.
“There's momentum generating now right across the globe that will effectively stitch together the world’s credit reporting systems making consumer lending work better and harder for consumers and lenders,” he added.
This will help Nova’s core customers, newly arrived immigrants in places such as London and Dubai access credit but it could also usher in a much greater change by creating a more globalised market for financial services.
The AI Future
While smartphones are now widely used another era-defining technology platform has started to catch people’s attention too in much the same manner as the iPhone did in 2007: generative artificial intelligence. Examples include Open AI’s ChatGPT which you have probably heard about and perhaps even used.
Charles Delingpole is a financial entrepreneur who has founded two successful fintech companies: a B2B payments and credit provider Kriya (formerly MarketFinance) as well as ComplyAdvantage, where he is executive chairman.
ComplyAdvantage uses natural language processing to extract relevant data from unstructured sources, such as news articles and social media, and integrate it into its risk database which is used by banks and fintechs alike for AML and KYC.
He says the future of financial products in the fintech age will be characterised by greater innovation, and increased use of digital technology in particular artificial intelligence. This will focus the delivery of more personalised services.
“I believe that the future of bank accounts, loans, insurance, and other financial products will be heavily influenced by Generative AI and other new technologies,” he said.
“In a world where digital currencies, contracts, and assets are widely accepted, financial products will need to adapt to meet the needs of consumers who are increasingly tech-savvy and demand greater flexibility and convenience,” he added
One potential application of AI in financial products will be advice-dispensing chatbots and virtual assistants that both customer service and other support inquiries.
“This would enable banks and other financial institutions to provide more personalised and efficient service to customers while reducing costs and streamlining their operations,” Delingpole said.
Another area where AI could have a major impact is in the underwriting and risk assessment process for loans and insurance products.
“By analysing vast amounts of data, AI algorithms could be used to identify patterns and predict outcomes, making it easier for lenders and insurers to make informed decisions and offer more tailored products,” he added.
Richard Prime, co-founder & co-CEO of alternative lender Sonovate, says in the years to come, through initiatives such as Open banking, fintechs will keep on embracing artificial intelligence to enhance and consolidate their offerings, with embedded payments becoming ever more pervasive.
“Fintech will continue to reshape and redefine how financial services are delivered. Interest from businesses is at an all-time high. More and more organisations are looking towards alternative funders as partners to help them grow their business and particularly to keep cash flow/working capital going during harder times,” Prime said.
“Flexible financing and industry-specific solutions will only gain in importance as people turn towards finance as a competitive tool in the current climate,” he added.
A New Age
While the fast-moving nature of the fintech world makes it hard to predict over the longer term, some of the fundamental changes offer clues.
There are now more fintech founders and innovators than ever. Huge barriers to entry have been removed by friendly regulations and technology. Financial services will become less siloed thanks to easier sharing of customer data between companies and geographies.
Lastly, new paradigms such as AI will mean much greater automation and personalisation.
We tend to overestimate the effect of a technology in the short run and underestimate its effect in the long run.
This maxim, attribute to the futurist Roy Amara, is often cited along with the writer William Gibson‘s own axiom that “the future is already here – it’s just not very evenly distributed” by Silicon Valley enthusiasts of technology ‘disruption’.
The two quotes have become something of a tech cliche . But both are extremely accurate when describing the world of banking, insurance and the broad financial services industry today. And, most likely, tomorrow.