Fintech Is Eating the Banking World

by Diane Francis

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The bank of the future will be in our pockets or on our wrists, not on street corners or housed in high-rise towers.

Mobile banking is going viral and the first adopters are the “millennials” (those born after 1981) and the “unbanked” poor of all ages around the world. They are leaping into this brave new banking world first, but the rest of us are going to follow.

I was part of a team in Silicon Valley that hosted a conference into the bank of the future in New York this week. And it was interesting to note that there are a number of factors contributing to this transformation: the 2008 financial meltdown has tarnished the banking sector’s image, as has banking’s proclivity to charge high fees. This has swollen their coffers at the expense of consumers and taxpayers and makes them vulnerable to the online world that aims to dis-intermediate them pronto.

And there will be cheering from the sidelines. A recent Viacom Media survey showed that 4 of the 10 least-loved brands in the U.S. are banks and 71 percent said they would rather go to the dentist than listen to what any bank says.

Enter “fintech”: a burgeoning industry that includes Apple, Facebook and 8,000 start-ups in the U.S. that are targeting the financial sector’s various profit centers by offering online real-time services at a fraction of the fees currently charged. Within five years, we will swipe our smart phones or watches to pay for most goods and services, use phones as digital wallets, use them to borrow money, invest it and transfer it to other countries. Insurance is also on the hit list.

“Billions are going into these start ups,” said Victoria Vysotina, a mathematician and CEO of VV Strategic Group in New York City. “The LendingClub and other peer to peer lenders are expected to get 30 percent of the loans business in the United States in a few years.”
Besides lending, she believes all financial intermediaries will be attacked. Credit cards will be replaced with phone payment schemes such as Apple Pay, just being rolled out. Another, called Kash, designed to circumvent the credit card network and its high fees has been launched recently and is, ironically, financed by a company run by Joe Saunders, former chairman of global credit card giant Visa Inc. It will charge vendors .25 percent per transaction instead of the current 3 to 4 percent.

Further down the road, asset management, and hedge funds, will be replaced by online cheap or free ETFs, exchange traded funds. Wealth management will be done online by robo-advisors and investment banking will be disrupted dramatically by crowdfunding when U.S. regulators give the green light shortly to the sale of equities. “And there’s nothing the banks can do about it,” she said.

Necessity has been, as usual, the mother of invention and is why Kenya became the world’s pioneer in the repurposing of tech to replace traditional banks. Its banking system is so badly broken and inadequate that telecoms giant Vodafone started a cellphone network called M-Pesa (Swahili for Mobile and Money) and 60% of the country’s adults have joined, some 17 million. Users can deposit, withdraw, transfer money and pay for goods and services with their mobile device. Deposits and withdrawals are made at cell phone retails outlets or with phone sales personnel, acting as banking agents. It’s now in Afghanistan, South Africa, India and Eastern Europe.

Another multi-billion dollar market is “remittances” or money sent home by workers abroad. Western Union dominates this $583 billion a year transfer of funds and collects transaction fees of 9 percent. Facebook is getting into this market and believes it can make money charging only a fraction of 9 percent per transaction.

In May, another Silicon Valley giant weighed into the banking space. PayPal and Yelp founder, and Yahoo director, Max Levchin successfully raised US$245 million to finance a lending system to replace credit cards. Some 82 million in the U.S. are “unbanked” because they have no credit rating or are immigrants, new citizens, students or inexperienced.

His bank, called Affirm, can be “joined” by simply submitting a name, mobile phone number, birthday, and last four digits of a social security number. Affirm has devised technology that can establish reliable creditworthiness, and customize loan limits, by using analytics that evaluate the borrower’s online and social network behavior.

Approved shoppers will be able to borrow money at the point of sale to buy goods and services, and will be told upfront how much and how many monthly instalments they must make. “There’s no compounding interest, hidden fees, or debt calculators here. This is a simple, fixed-term loan, and the approval is in real time, so you know how much you’re borrowing, and what your payments will be each month, before you make your buying decision. We think of it as the future of honest finance.”

“I wanted to make a bank that didn’t suck,” said Levchin in an interview. And so apparently do millions more consumers. That’s what the technology sector has identified and that’s why the world’s biggest “banks” will be technology companies.

Published June 5 in National Post

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