The market for fintech is growing rapidly and is expected to be worth $46 billion in 2020. The big banks are working hard to not lose market share to the digital market, where they are exposed to very stiff competition by start-ups with high technical skills. At the same time, banks are losing customer satisfaction and they have difficulty in booking customers for physical meetings.
Today's customers expect high digital availability and high performance in digital financial services. Customers search for information online and choose the services that best suit them in their app store. With a Mobile BankID, the customer easily signs new agreements and eliminates the elaborate process of physical meetings and signing of agreements on paper, which is, at best, filed in a home-based storage. When credit assessment, customer knowledge and investigation of politically exposed persons can be managed online, there remains no need to meet their supplier physically.
The authorities establish regtech
The technology in fintech that involves the exercise of authority is under the concept of "regtech". The challenge for the authorities is to balance innovation with risk and control. Authorities must ensure that new technology takes into account regulatory requirements. International and national authorities have had difficulty in keeping up with the development of fintech. Countries with major international financial centres such as Great Britain, Singapore and the United States are about to establish centres for testing scenarios and how, among other things, blockchain technology can be used to solve market problems.
An important issue is to ensure that legislation to counter money laundering is complied with. In Sweden, the Finansinspektionen established an innovation centre for fintech, which will work to inform and maintain dialogue with companies working on innovation in fintech.
The aim is for innovation companies to increase their competence regarding rules, processes and principles in the finance industry to facilitate the innovation process. Companies that consider applying for a permit need readily available information about the existing licenses and how the application processes apply.
Companies considering a licensed business experience find it difficult to understand what requirements are imposed on them. Even licensed companies hesitate to establish new business areas as it is unclear how it affects existing licenses. FI has particular interest in technology that facilitates supervision of the financial market. It may be technology that facilitates reporting to authorities, transaction control or other compliance.
Technologies that include security solutions for storing information, control of access to information, and innovative technologies for detecting discrepancies in the information are covered by rights. Regtech can also lead to new innovations, where technology can help the authorities carry out controls. For example, Finansinspektionen could receive data flows directly in the format they are created instead of requiring data to be delivered in older formats that cannot be used for further analysis.
The big banks are investing heavily in fintech
The big banks have realized that they have to offer digital services not to be overthrown by tech companies that specialize in performance and user experience. With the EU's new PSD2 Payment Services Directive, the game will change further. The directive means that financial companies no longer have a monopoly on customer data. An API link allows customers to allow third parties to access financial data, such as mortgage rates or bank statements. This opens doors for all companies that want to provide financial services to customers and divide the industry into two different segments: payment initiation services and account information services.
In the future, customers will be able to pay bills or make purchases through, for example, Facebook, while keeping the money at the bank. At the same time, customers can connect services that compare interest rates on mortgages or analyse consumption patterns and provide tips on savings. The next major digitization is expected to occur in mortgage lending, where banks have high margins.
Through a third party link, customers will be able to compare their interest rates to other consumers in the same residential area and other banks. Mortgage companies will be able to offer quick and easy relocation of mortgage loans by signing with BankID. The financial companies that have a digitized and user-friendly process for receiving new customers win major competitive advantages in the market.
Blockchain increases the speed of the transactions
Blockchain technology enables transfer of assets without the intervention of a central intermediary. This applies not only to currencies, where BitCoin's trading has reached record levels in 2017. The same technology can be used for trading in securities, vehicles or even real estate. Blockchain also provides significantly more efficient transactions. A central intermediary handles a multi-step transfer, which takes at least two days to complete. A transfer through Blockchain takes place in one step, which is executed immediately and is ready in a couple of minutes. The transactions are verified through a distributed database where the information is duplicated on each version of the database.
Because the verification chain's main book is public, it is easy to prove that a transaction has been completed. Thus, there are many financial service providers who can use blockchain to increase the speed of transactions.
International finance companies are now investing in technology to develop their own applications based on blockchain technology. An example is UBS, which is attempting to register bonds in BitCoin's blockchain, which is expected to provide significantly more efficient administration. Nasdaq already launched its blockchain-based service Nasdaq Link in 2015, where trading in private unlisted shares takes place.
Here too, the driving force is to achieve efficiency and transparency in administration. An example of a service that gives a similar user experience is Swish, which now has six million users in Sweden. However, Swish does not build on blockchain technology but has the Riksbank's RIX payment system as an intermediary.
New actors in payments and lending
As telecom companies' margins decrease, telecom companies are looking for new revenue streams. The companies are based on large amounts of data that, without compromising on customer integrity, can be used to offer products such as loans and payment services. With high fees for payment and credit cards for both sellers and buyers, there is great market potential in retail and e-commerce payment solutions that meet customer needs for simplicity and efficiency.
As new players offer simple and responsive payments with digital solutions, payment and credit cards will face very fierce competition in markets with high penetration of digital services. Analysts predict that card payments will disappear completely in the European and US markets in the foreseeable future.
Services like Apple Pay and Google Pay are likely to change so that the credit card issuer disappear as intermediaries and the payment is made directly from the customer's bank, or that the credit is given by a supplier that does not charge the seller for the purchase. However, in line with increased digitization, it is anticipated that lending in consumer credits by instalment and "buy now pay later" will increase, which creates new business opportunities for innovators in fintech.
Artificial intelligence - big impact within fintech
The big financial companies have begun to use artificial intelligence to increase the efficiency and profitability of their products. For example, Nicknamed has developed machine learning to recognize customer behaviours and encourage customers to use products that add value based on customer behaviour. In addition, AI is increasingly used in robotic securities trading to increase the efficiency of trade and the accuracy of the forecasts.
It may be used for shortcuts for transferring accounts or to suggest products that the customer benefits from. Conversational User Interface is a new trend in Artificial Intelligence, where Amazon's Alexa and Apple's Siri gives users high added value. In fintech, CUI will initially be used for customer service, resulting in significant cost savings.
As AI is applied to existing products, a CUI will be able to propose securities that meet the client's interests and risk profile and carry out the transactions, as well as provide financial advice provided that legal barriers are overcome. If the transition from graphical user interface to CUI is implemented correctly, customers will get a significantly better user experience and companies will get increased customer loyalty.
Partnership is the way forward
The market for digital financial services is expected to be worth $20 billion in 2020. In a heavily regulated market, the risks are high in going all in with an innovation that has not been tested and approved by authorities. So what can you do? Start-ups within fintech are not subject to regulatory requirements similar to those companies that already carry out licensed operations. At the same time, it may be difficult to get a single market dominated by large financial companies.
Partnerships and alliances are trends in fintech that can help innovations reach a wider clientele and implementation in the financial industry.
A partnership between a large finance company and an innovative start-up can also solve problems with implementation and regulatory requirements. Co-operation between industry actors also facilitates the creation of solutions that strengthen the customer relationship and customer experience, and give technology more maturity.
All market players must solve technical challenges, implement solutions and meet customer demands for ease of access and user experience. Real progress in the industry is easiest achieved through increased cooperation between market players. Nicknamed is one of the few players in the market who has the ability to develop ground-breaking innovations with high performance and user experience, meeting regulatory requirements. Read more about our skills and our work here.