Fintech disrupted, transformed, and revolutionized the broad financial services industry. Long dominated by legacy dinosaurs like Visa, Mastercard, and American Express (who, to be fair, are still dominant incumbents in their own right), PayPal led the way for a revolution of fintech firms providing new solutions to emerging digital problems.
Cross-border transactions, increased online transaction frequency, and even the emergence of cryptocurrencies led to a pressing need for transformation, and these firms stepped up to fill a deep void. But history marches on, and post-pandemic, new problems emerge in need of a change of their own.
This means that the disruptors themselves are due for disruption, and we already see the nascent bubbling-up of that revolution. Artificial intelligence, machine learning, automation, and increased reliance on data-driven analytic processes are poised to digitally transform financial services in a cycle eerily similar to the first that turned legacy processors on their heads.
Some industry diehards may deny the digital revolution poised to disrupt their fintech firm. To those, we present the following statistics and details:
- A KPMG survey showed 47% of financial service providers expect a radical transformation in the next three years, with a staggering 57% expecting 10% or greater automation in their workplace in five.
- That same study found 58% of fintech firms reporting a YoY net increase in IT expenditure, acting as a leading indicator as firms slowly absorb and digest digital realities.
- An EY survey found that 92% of global finance leaders and executives started introducing digital intervention in previously-manned tasks, flagging a more significant move towards automation.
These statistics offer reassurance, and, even if it is not yet explicit, the opening moves by these and other firms signify that this revolution is on the horizon and is just waiting for a tipping point as more significant expenditure into IT and increased automation tip the scales in favor of full-scale transformation.
Aside from broad descriptors, what trends may overtake the industry so we can best position ourselves to be ready? These are some that expert analysts identify as the most likely to lead digital transformation in finance:
- Artificial Intelligence and Machine Learning
AI and ML are perennial buzzwords. The sheer glut of data and analytics that result from everyday operations and customer interactions is increasingly impossible for humans to sort, categorize, segment, process, and act upon.
Concurrently, Moore’s Law and advances in both, AI and ML, mean that computers can increasingly assume that burden for us while we free up our human capital for projects that need a personal touch.
Consider the basest example – chatbots and automated customer service. While already in existence, improvements in ML mean that a poorly designed customer service bot can learn from each interaction until it can effectively manage nearly every situation it is confronted with through a series of algorithmic scenario processing factors and response trees.
This alone will revolutionize just one industry sector, customer service – imagine what it can do for the already-data-driven back end of finance. For example, according to a recent survey of small business owners, 60% of respondents reported that they did not feel confident in their financial or accounting abilities.
Imagine the possibilities for a comprehensive AI or ML solution to these problems that could put the big accounting firms out of business if they fail to adapt.
Blockchain, too, has become a buzzword that many use but few understand. But whether or not the managerial masses understand it conceptually or its implications, blockchain will undoubtedly revolutionize financial services.
Blockchain can and will run the gamut of replacing legacy financial service systems and legal structures. Trusts, estate management, contractual agreements, supply management, trading and investing systems, and more – all will be impacted by blockchain and ultimately overhaul how we do business.
Research firm CB Insights developed a comprehensive list of blockchain applications most likely to revolutionize finance, but here are some highlights:
Payments can be completed securely and instantly, enabling greater cross-border coordination and globalization of essential financial services that have been denied up to this point. According to the CB Insights report, 90% of the European Payment Council believes that the technology will fundamentally change finance and banking. As one of the most intermingled border oversight structures, they are in the best position to assess the landscape.
Clearance and Settlement
Many customers do not see behind the curtain. Still, finance professionals know that the 3-5 business day banking period for transfers is to allow cash to clear and settle, and current infrastructure takes that long.
Again, blockchain is nigh-instantaneous and means instant clearance and settlement as the transaction is logged and unequivocal. Much of the current delay is due to non-interactive systems between firms, even with ACH and SWIFT. Still, blockchain will smooth these bumps to a seamless process across all adoptees, regardless of their geolocation or core business function.
Investment funds, insurance companies, commercial banks, pension funds, and broker-dealers: all will be able to interact, clear, and settle cash through blockchain globally.
Much like cash clearance, much power is behind tracking and managing ownership and exchange of stock, bonds, debt, and commodities – basically all tradable or exchangeable securities.
That power and complexity led to a veritable cottage industry of middlemen and custodial firms to oversee and facilitate the process, including exchanges, brokers, clearinghouses, depositories, and custodial banks. All of these were developed when paper stock was the norm but found ways to insinuate themselves into the current transitory structure.
With blockchain, though, execution is logged, and the backend transfer is legitimized by the agreement rather than being forced to rely upon (and pay) a trusted third-party clearinghouse. With trillions in AUM and highly liquid, this is likely the move to be most fought against by giants like BNY Mellon and JP Morgan – but the revolution is coming, and smaller firms able to nimbly adapt now will be better positioned for an inevitable future.
Currently, personal loans are often limited to large-scale lending, and small loans are relegated to the predatory check cashing and title loan industry. This is because small loans are not cost-efficient to execute for large firms as the computing and manpower costs overwhelm the little interest and fees accrued.
With blockchain, though, much of the backend costs are negated, so lower-income families in need of quick cash will not be forced to go into essentially indentured servitude to make ends meet for a few weeks. This will also present an opportunity for small, reputable firms to fill a growing gap between massive lenders and check cashing on the corner as blockchain enables new lending practices. With Americans saving less than half of what they did pre-pandemic, this may become more important than ever.
Today, managers and executives must acknowledge the industry’s imminent changes and begin positioning themselves and their organizations accordingly.
History is not kind to those unwilling or unable to adapt to change, and finance is no different – even if they still feel the fintech rebel drive inside, they are the incumbents now. They must be ready to face a new wave of entrants armed with digitized financial acumen.