In many industries – such as airlines, retail, and media – disruption has been linked to new low-cost, almost commodity-type services. Southwest Airlines and Ryanair paved the way for low-cost flights, online news has become a commodity, and retail chains like Walmart, Aldi and Lidl have created a new cheap-prices-always category. The common theme is: cheap basic things, with a better experience available for a premium. FinTech disruption is changing finance in the same way, and when basic finance services become a commodity, they will be integrated to other services.
Some finance services have, of course, been in this category for a long time already. For example, payments are a crucial part of all e-commerce services and brick-and-mortar check out processes. It has become natural that services use third-party payment solutions rather than develop their own. We will see the same development for many other traditional finance and banking services.
Online lending, p2p lending and quick loans have been a fast-growing market. Those new lending services offer many benefits – sometimes a better price, but typically a much better customer experience. Sometimes they offer loans for people who cannot get a bank loan, and they might have more flexibility in terms and conditions. For many loan categories, bank loans are not a very attractive option anymore, especially when you factor in the customer experience, paperwork and time needed to get a loan.
Ford Motor Company just announced that they are going to adjust their car finance process (read more on WSJ). They decided that the traditional credit-scoring model is not very effective or optimal nowadays, and that they could get more customers and sell more with new finance models. Basically, they plan to use more data from new sources to get a more accurate profile of customers and optimize their financing better. It’s worth noting they were forced to do this because alternative lending services are already doing it, and competitive finance is an important component in car sales.
Car sales finance is just one example illustrating that companies outside the traditional finance sector need to develop better new finance solutions. FinTech makes it easier. The real estate sector has adopted a lot of new finance and investment models during the last five years, especially in the UK and the US – but now new real estate finance services are emerging globally. This means there are many new models available to invest in real estate – e.g. in development projects, rented apartments and commercial buildings, and new models to lend and borrow in real estate. Typically, this includes new finance instruments that are then offered through online finance services. These services are offered by some finance companies, real estate development companies and several startups.
At the same time, more inexpensive technology – or even technology-as-a-service – is available to build finance services. You don’t need a $100-million-plus IT back office to set up an investment or lending service – you can get it as a service from cloud, and they can offer access to relevant data sources (including credit ratings and richer data). It is quite easy to develop the actual application and your own investing and lending models.
We will see more:
All this is a part of the overall development towards an API and platform economy. Finance is becoming an integrated component for many other services. It means more competition for banks. But it also means significant new competition for credit card companies that have had an important role in smaller online purchases, and their money has typically been expensive.
When we think about FinTech and its impact, it is easy to focus only on the traditional finance sector. Certainly there will be significant impact on the whole finance value chain, as I have written earlier. At the same time, however, finance is shifting to a platform economy, and it is fundamental to adapt to the requirements of that business model by building the business network, offering APIs and utilizing data. After a few years, we will think about the old-fashioned bank loan process, with all these paper forms, and laugh as we do now at the thought of sending a fax or buying printed flight tickets.
This post originally appeared on Disruptive.Asia.
Artificial intelligence (AI) and machine learning (ML) are becoming an infallible part of the development of present-day technology. Yet the public discussion often centers around a notion of a ‘human-like’ robot and my concern is that the impact gets downplayed. How then should we look at the future with AI? One way which may be helpful is examining the aspect of morality and consciousness, or rather, the lack of both in decision-making in a new paradigm.
Humans have evolved based on a complex process of long-term trial and error. Our biological machinery has been honed over thousands of years to optimize (mainly) for survival and procreation and for these tasks, the human mind is highly advanced. However, we have to realize that the subjective aims of the human mind are the primary reason and motivation for all decisions made. Morality is a key element in the support of sustaining these two goals of the human species, and has successfully introduced a human-wide consensus to better our chance to achieve our goals.
As we look at crafting AI for better data-driven decision making in critical processes – such as optimizing far-reaching and complex value chains, making real-time decisions in applications such as self-driving cars and many more – we should recognize that without coded in morality, AI will actually act without the concept of morality or human subjectivity. In short, it will optimize any and all decisions based on the rational best outcome for the desired parameters rather than what ‘a good person would do.’
A Future with Less Morality May Be One Humans Find Uncomfortable
Looking at the grinding, long process of trial & error humans have undergone to evolve, we could expect AI to dwarf this process and undergo a rather rapid process of trial & error. Especially with the concept of connected machines and the vast availability of real-time data, we can expect the process to be fundamentally fast and unlike anything that has ever been seen before.
The entire human species has used a moral compass in guiding development and uniting humanity behind a broader direction. For the first time in history, we may have a future chapter of innovation written and executed by a new kind of decision-making and at that, entirely non-human.
However, we should not be blind in assuming this future is far off. As authors in Moral Decision Making Frameworks for Artificial Intelligence point out, AI is already used in highly complex ethical fields of decision making such as organ transplants and waiting lists, deciding effectively who lives a little longer and who does not.
Yet one does not even have to go to medical fields to find life-altering decisions made by non-humans, where AI is already far-used in determining eligibility for receiving and underwriting credit decisions including loans, which will determine who has an opportunity to access finances for a specific reason and again, who does not. This too has far-reaching consequences.
We’re already far along in introducing an objective decision maker into situations that truly matter, yet humans make a vast number of decisions each day with limited information and most importantly, limited objectivity. We shouldn’t write off the human brain however – it is truly a cognitive miracle that derives information from all senses in real time and through conscious and unconscious steering, shapes our thoughts & actions. Yet a lot of human morality centers around the concept of self-protection in complex decision making and a lot of the information accessible to humans, is a fraction of what AI will be able to tap into and process.
Well Then – Can We Introduce Human Morality Into Technology?
It’s certainly a possibility and one that several leading researchers and authors of our future are pursuing. For example, Future of Life Institute and Duke University have been active in the foray of introducing ethical engines into artificial intelligence and decision making by interesting applications of game theory. Researchers often look at the now-infamous examples such as the self-driving car and an unavoidable pedestrian accident and attempt to find very tangible ways of introducing intended morality in a way that is actionable and clear.
It is a complex task which involves classifying actions as morally right or wrong in a universal and generally accepted way. The establishment of a pre-written ‘moral compass’ would allow an element of human decision-making to be codified and carried on into applications that will learn on their own at some point.
We can generally think of the concept in different phases:
We can argue that we currently find ourselves in the first phase with the question of whether we’ll ever reach the third phase at all.
Morality as a Lens for Future Outlook
The future of technology and AI will likely be a series of events, some controlled and pre-planned, and others the result of unintended consequences. Morality will be a key component in determining how the future looks and the exercise of considering the absence of morality may be useful in understanding why the field’s importance is so profound. If we indeed never come to the third phase, we will also be looking at a future derived largely by a presence lacking consciousness. These elements may be impossible to imagine ahead of time, yet their implications are likely to be paramount.
Written by Markus Lampinen, CEO of Crowd Valley, Inc.
This post originally appeared on Let's Talk Payments.
Photo: MIT Moral Machine.
"We need new solutions for collecting and using data that strikes the right balance between consumer benefits and control over their own data."
I was looking for the opening hours of a local supermarket in San Francisco from Google Maps. When I found them, Google also told me an interesting additional detail: “You visited this place 17 hours ago.”
In fact, yes, I did. It reminded me that my Android phone indeed collects my every movement and location. (You can check your history at https://www.google.com/maps/timeline, when logged into your Google account.)
Here’s another example of the same thing: an insurance technology (“insurtech”) company recently demonstrated its app to me, and it had a full history of drivers’ driving data, including each acceleration, braking and speeding, on the map. The insurance company collects all that data, which it can then use to try to influence driving habits, and adjust premium prices.
Yet another example: new credit rating agencies that not only collect your income and loan payment history, but also try to utilize all data about you available on the Internet –including location, social network and payments – to evaluate the risk in lending you money.
We are really starting to live a new type of public life, although we don’t always know it. It is not breaking news anymore that mobile, Internet services and social media collect a lot of data from us. It has been used for marketing and advertising for years. But now there are more and more ways to use it – for example, recommendations, financial services, political marketing, and personalized customer experiences.
Many parties and people are very worried about this. They see that companies can now know perhaps too much about individuals, sensitive data can leak into the wrong hands, and we cannot know how the data is used in the future if ‘bad forces’ take over. That’s why governments are developing new laws and regulation for collecting, storing, processing and utilizing data – perhaps the most well-known example right now being the EU’s General Data Protection Regulation (GDPR), which takes effect in May next year.
Naturally, we also hear many horror stories how this all can get worse in the future. When your phone, TV and digital assistant are listening to you speak, they can collect everything that is said in your home. Services could analyze all your communications, including emails, calls, and chat messages. There are totally new opportunities here to create intelligence gathering services much more effective than the East German Stasi ever were. And we know many government intelligence services already collect this data, or are trying to.
But the flip side is the potential benefits of all this data collection. Big data analytics can make many services better. Isn’t it fair and good that your driving habits have a positive impact on your motor insurance premiums (provided you’re a good driver, of course)? Or that your life habits can determine the cost of your health and life insurance? Or your money management behaviour and spending habits can be used to evaluate the risk and price for your loan? Or services can personalize your experiences and tailor them especially for your needs and behaviors?
People usually find data collection stories scary because they have no control over who gets to collect data and where and how it’s used – therefore, the simple answer is to give them control, to include the ability to forbid use of data and even to have the data deleted.
In practice, of course, this is far from simple. According to different studies, the majority of people believe they had lost the control of their data. So many services collect and use data, and users are not always able to follow or control this. Companies also sell and buy data. This is a new complex area for authorities to monitor and control, although we have also seen that some Internet companies are more interested in protecting privacy and use of data than some governments.
We can conclude, then, that while there are threats and risks to collecting and utilizing user data, at the same time this data is fundamental to making many services better for users, as well as more affordable.
There is definitely a need for new solutions where people can manage their own data and ensure it is used to suit their needs. For example, if a person has all his or her own verified data, it would not be necessary to reveal all data for a loan application, motor insurance application or location-based service – only profile-level data that is relevant for the service in question. Today, companies are the ones collecting all the user data they can – in the future. each person should be able to collect and use their own data. At least, people should have their own copies of their data to verify that it is true.
It is clear we have a need for totally new solutions to utilize data so that privacy and user control can live together. Governmental and legal control alone is not enough to handle the fundamental problems involved in data collection. (Governments can even be part of the problem of data misuse.) Instead, we will soon see a new era of data analytics that is based on fundamentals to combine personal data management, profiling and targeted utilization of profiles.
The article was first published on Disruptive Asia.
Check Prifina - a new way to manage your finance data.
The adoption of open APIs by banks and financial institutions has been steadily growing, as has the ecosystem delivering these services. Companies providing KYC products rank among the most well established services to help financial institutions cut cost, increase scalability and help comply in a more scrupulous regulatory environment. A Thomson Reuters global survey reveals that banks are taking as long as 48 days to onboard a new customer. Also, the banks are spending in excess of $60 million per annum on KYC and client onboarding.
Although newer more dynamic platforms process KYC in an automated fashion, most financial institutions still handle KYC verifications manually. Manual verification is cumbersome and error prone. This is more true as institutions scale, adding further compliance officers compounding the problem at hand. Outside of basic requirements, Booz Allen Hamilton estimated compliance failure costing firms $13.4 billion in 2014.
When taking a practical approach to deploying automated KYC workflows using open APIs into financial institutions, they need to support both technical and operation members.
Technical teams are burdened with ancient core banking systems that are costly to service and as time passes, more difficult to do so. The cooperation between Fintech and financial institutions allow these technical teams to leverage cost effective solutions when compared to building and managing new infrastructure. They also vastly increase time to implement systems from an average of more than 36 months down to a period of 8 to 12 months. Making systems future proof, scalable and cost effective is a core concern being addressed by open APIs.
Operational teams are focused on workflow efficiencies and the bottom line. KYC APIs allow the compliance officers to be more productive while decreasing headcount. Officers are able to monitor rather than process, needing a light touch on most onboarding workflows. Better reporting, record-keeping and the near complete reduction of manual paper work can reduce compliance failure. Decoupling the rise in deal flow with the increase of headcount allow financial institutions to scale more efficiently while mitigating compliance failure.
We at Crowd Valley support both technical and operation teams migrate legacy systems into an open API environment. Technical teams can leverage our Bank grade Cloud Back Office connected to global KYC providers to efficiently launch compliance workflows into their core systems. Operational teams leverage our global reach where we have helped more than 130 institutions navigate the use of open APIs and industry best practise. If you are looking to capitalise on KYC efficiencies within the Fintech space and would like to discuss this further, please do not hesitate to get in touch with us.
This post originally appeared on Crowd Valley Blog.
Fintech is growing at an astronomical rate. According to Bloomberg, more than $8 Billion has been raised in Fintech so far in 2017. Also, 5 companies have already joined the “Unicorn” status with values over $1 Billion. We have compiled a list of best Fintech reports for 2017, from some of the leading names in the industry.
1. Capgemini - The World Fintech Report 2017
Traditional Financial Services firms acknowledge the impact of Fintech on the shifting industry landscape and are confident of their innovation strategy, but they are struggling in successfully applying innovative Fintech-like capabilities to achieve tangible results. Capgemini explores some of these key issues in its World Fintech Report.
2. PwC - Global Fintech Report 2017
According to PwC, Fintech and Financial Services are competing less and coming together. PwC explores the Fintech’s growing influence on Financial Services in its Global Fintech report.
3. EY - Fintech Adoption Index
EY states that Fintech has reached a tipping point.In its report, EY surveys more than 22,000 digitally active consumers which highlight the impressive and rapid growth in adoption and the variations among 20 different mature and developing markets.
4. KPMG - The Pulse of Fintech Q1 2017 | The Pulse of Fintech Q2 2017
In these reports, KPMG explores global trends and deal activity within Fintech industry including how the recent adoption of the Payment Services Directive (PSD2) is driving the Fintech activity in Europe.
5. CBInsights - Global Fintech Report Q1 2017 | Global Fintech Report Q2 2017
A comprehensive Fintech report by CBInsights which includes data-driven look at global financial technology investment trends, top deals, active investors, and corporate activity that took place in 2017.
6. Deloitte - Digital transformation in financial services
Deloitte’s new study reveals that to become fully digital enterprises, many Financial Services firms may need to shift the focus inward and innovate the employee experience.
7. StartupBootcamp - The State of Fintech in 2017
This report draws out parallels seen between general technology trends on a macro scale and correlates them to the impact on Fintech.
1. PwC - Global Insurtech Report 2017
This report is based on the responses of 189 senior Insurance Sector executives from 40 countries who participated in PwC’s Global FinTech Survey 2017.
2. Capgemini - Top Ten Trends in Insurance 2017
This report explores the two driving forces behind the insurance industry; Connected technologies and data analysis.
3. Accenture - The Rise of Insurtech
A wave of startup-driven innovation is putting insurers’ approaches to innovation and technology under the spotlight, highlighting the challenges these traditional companies often face.
4. EY - Global Insurance M&A themes 2017
The increase in large deal activity could be interpreted as a sign that insurers have decided to get on with addressing their strategic priorities, despite ongoing global uncertainty. EY explores the shift in the insurance industry and adoption of Insurtech.
1. Capgemini - Top Ten Trends in Banking 2017
This report aims to understand and analyze the trends in the banking industry that are expected to drive the dynamics of the banking ecosystem in the near future.
2. Accenture - Banking Technology Vision 2017
This report highlights the five trends identified in the Accenture 2017 Technology Vision that underscore the importance of focusing on “Technology for People” to achieve digital success.
1. Capgemini - World Payments Report 2017
Get a preview into the Global Payments Landscape in 2017.
2. Nordea - Future of Payments
Get insights from customers, partners and experts from Nordea, PwC, SWIFT, SAP and FIS.
Artificial Intelligence and Blockchain Reports:
1. CoinDesk - The State of Blockchain (Q1 2017)
This report includes the activities, speculations and trends in cryptocurrencies like Bitcoin, Ethereum, etc. and the Initial Coin Offering (ICO) ‘Gold rush’.
2. McKinsey - Artificial Intelligence, The Next Digital Frontier
In this independent discussion paper, McKinsey experts examine the investment in artificial intelligence (AI), describe how it is being deployed by companies that have started to use these technologies across sectors, and aim to explore its potential to become a major business disrupter.
This is certainly not an exhaustive list in itself, so feel free to suggest any Fintech reports, which are easily accessible, that you feel should be included above. You can also check out our post on the Top 20 Fintech Blogs to follow in 2017 and some of the Best Fintech Events and Conferences in 2017.
This post originally appeared on Crowd Valley Blog.
"A decade ago we had the first big leap, and that was web to mobile,[…] Now the next one is mobile to conversational” said Edrizio de la Cruz, co-founder and CEO of Regalii, a startup whose application programming interfaces are used by dozens of financial services providers to build their chatbots.
The pressure today to innovate and embrace new technology and practices is significant across a range of industries with financial services at the epicenter of the pressure but research by Econsultancy and Adobe shows that 9% of FS businesses claim to be digital first, compared to 11% across all sectors.
Alongside the drive to embrace digital, there is additional pressure from the market to:
Chatbots are essentially pieces of software that simulate human, natural language conversations and can respond to and act upon queries and commands from users. The advantage these systems have over a real conversation with a human is that they are able to extract and analyse a user’s needs and intent and ultimately return the information a user has requested or perform actions for them faster, at any time of day or night and at significantly lower cost than a human counterpart.
The benefits of this type of technology are clear with many people choosing to apply and research investments or loans through these types of systems rather than spending the extra time and potentially cash on a human broker that may not necessarily have the best deals available. These systems could potentially pave the way to a fully automated digital process, further removing the potential for human error and bias from financial services.
An apt example would be Capital One’s Eno. Eno is able to interpret text based conversational queries and commands alongside emojis. This includes the ability to check balances and pay off credit cards, while cash transfers are also in the works. Additionally for customers with Amazon Echo, Capital One has also built out a skill that allows for voice commands. At the business side, Capital One stand to make significant savings in terms of time and manpower as users transition from face-to-face and telephone queries to simply asking Eno.
This is only one form that chatbots have taken on so far with the sky being the limit on the functions a chatbot might serve. Other options include:
Furthermore, chatbots do allow for a smoother digital experience overall with the ability to sync with popular applications such as Whatsapp and Facebook messenger, removing the need for an additional download that may alter existing mobile usage patterns. This interface could be instrumental in data analytics as well in improving operational efficiency, promoting innovative practices and improving the customer experience. Banks usually have a mountain of customer data at their fingertips, but often struggle to understand and get value out of it. Customer data is the key to establishing meaningful, personal relationships with banking customers and offering customized products and experiences. Banks need to effectively analyze this data to better know and serve their customers. Conversational banking enables banks to acquire more nuanced customer data. By engaging customers in small talk through conversational interfaces, banks get insight into customer intents, desires, and concerns that are not apparent in banking app and website interactions.
Conversational AI can also help banks better understand this data. Through deep data analytics, pattern recognition, and predictive algorithms, chatbots can communicate intelligent insights about banking customers’ present and future banking needs. These insights can be used to offer more personalized banking products and services to build lifelong customers.
There may be concern that chatbots and other AI supported technology will put significant pressure on a number of customer facing services across a range of industries due to the attractive operating margins and this is certainly true but this is analogous to the widespread worry at the time when motorized options replaced horses, a slew of new roles develop and grew out of the adoption of a new technology.
An August 2016 report by Forrester suggested that banks should focus on developing the AI technology to build better bots in the future, rather than launch bots on messaging platforms now and provide poor experience to their users. The main criticism against chatbots is that they lack the empathy and the emotional response that a human can provide, which makes them less capable of dealing with complex situations involving financial decisions. Generally speaking, humans working in customer services will know how to respond to frustrated customers and not aggravate the situation; they can listen, reason, empathise and read between the lines.
A lack of emotional intelligence is a serious limitation that existing bots have. There is definitely a whole new world out there to explore in considering chatbots as an investment for your own business or in a third party capacity through a promising Fintech firm but there is a degree of risk in this relatively nascent space with regards to meeting customer requirements and security. There is potential for significant secure data being shared with these interfaces as clients address their needs. In addition, Forrester (2016) found that although chatbots are developing rapidly, customer experience is not. Many fail to effectively meet users’ needs due to poor infrastructure and lack of fundamental understanding of AI. Hence it is imperative to work with institutions that have the infrastructure to support your venture effectively on the front end as well as on the back office.
This post originally appeared on Crowd Valley Blog.
In between pauses at the WWDC, Apple announced it will be expanding their financial services strategy by going beyond Apple Pay and issuing virtual payment cards to all iOS users. There are 1bn iOS users around the world. At the same time, this same week Amazon made headlines by having lent over $1bn to third party sellers on the Amazon marketplace. Amazon has also rolled out a highly aggressive credit card offer with Chase, which offers 5 per cent cash back for its Prime customers. Neither company is a traditional financial services company. So what is going on?
Due to complexity and benefits of scale, banking has historically been confined to incredibly large companies and their global operations. Sure, some are stronger in some segments or regions, but this is the broad definition of an incumbent sector. What technology has allowed over the past years is the specialization of software and therefore service providers. No longer do you have to have one stop shops for everything in finance, you can actually challenge high margin verticals, e.g. payments or foreign exchange, with a standalone business in just that market segment.
Policy changes such as PSD2 play directly into this trend, setting requirements on financial institutions to open up their infrastructure in order to allow third parties access to their core processes. With globally interconnected institutions, the race into API Markets is well underway, with organizations such as BBVA, DBS, US Bank already far along.
With these trends ongoing, we also find many new organizations entering finance, such as Facebook, Google and Amazon, as mentioned earlier, with a lot of personal data and connections to billions of people. It creates a perfect setting to offer a financial service, when the habits of the individual or merchant in question are known and the service, e.g. a loan can be offered at the point of the transaction in near real time. The $1bn loans issued by Amazon is a testament to this, but so too is the fact that you can send money via Facebook Messenger at the click of a button (at least in the US). Financial services are becoming increasingly embedded.
The digitalization of finance is a wide-ranging theme. In addition to the companies discussed above, established banks are also modernizing their products and services, or how these products and services are offered.
It seems there are two ongoing trends in different directions: 1) toward more integration of financial products in non-banks and 2) toward specialization within financial institutions. The latter may be less prominent, yet with PSD2 and pressure on margins, institutions will likely need to choose the businesses they want to invest and compete in.
What is a bank?
Is a bank where you place your money? Is it where your home mortgage comes from? Is it where your wealth advisor sits or who sends your payment remittance?
Through specialization and an embracing of the API economy, we can expect that the future consumer will have several parties that serve their ‘banking needs’. Some of these will be companies like Amazon through the increasing position and information they hold in the market and some will be traditional banks such as Wells Fargo.
Fast forward long enough, and it becomes an interesting thought experiment. Which grows in prominence, the higher margin specialized businesses or the one stop shop business that also faces the highest level of regulatory scrutiny?
One thing is however certain, our concept of a “bank” is quickly becoming outdated. The bank emerged during the industrialization and has had a central role in shaping societies. Are we at a different point in history where the next paradigm shift sees information technology giants as playing a further pivotal role in shaping the societal development and if so with what implications?
The “embedded bank” seems like the direction of the future. Embedded in points of interaction and specialized services, riding on the API economy and truly integrating into the customer’s life and habits, rather than serving as an interruption. How we get there is a true technological adoption across the sector over time, that places the consumer in control of their data and privacy and allows for real time decisions at the consumer’s fingertips.
This post originally appeared on AltFi.
As the senators in the United States Congress maneuver a health care bill of massive significance for the insurance industry, let’s a take a closer look at the wave of disruption that has firmly placed the insurance industry and Insurtech in the spotlight of the cross industry technological wave borne out of the great recession.
Insurtech joined the party at a later stage than its related counterpart Fintech. Given the revenues volumes and investment flowing into both these sectors, in 2014 insurance premiums amounted to $3,8 trillion while banking revenues were $3,6 trillion, it does come off, initially, as a surprise but a closer look at consumer relationships and regulatory changes in both spaces do provide an answer.
In considering the early uptake of Fintech or Bankingtech; first, insurance is a very passive product. Ideally, consumers have limited contact with their insurance provider , because ideally nothing goes wrong. Around 70% of all insurance customers interact with their provider only once a year or less. In comparison, the study states, consumers interact with banks 200 times per year on average, compounding the level of dissatisfaction and frustration.
Furthermore, the wave of regulatory changes introduced after the 2008 financial crisis, forced the banks to put massive efforts into adapting to the new rules. Financial regulators, most notably the American Department of Financial Services (DFS), the Fed, and others, started investigating banks more closely and burdened them with heavy fines, as well as more compliance enforcements. This forced the banks to restrict their business and shift resources, opening up a tremendous opportunity for innovative startups in the banking industry, from non bank lending, because banks could no longer provide enough capital, to consumer friendly apps and efficient payment solutions. The dissatisfaction with the banking sector on issues of inclusion, transparency and consumer agency further prompted a significant exodus of talent from the banking sector and related financial services to pursue solutions to these issues. The insurance sector encounters the same issues but due to relatively limited exposure, focus and the passive nature of consumer engagement, did not experience the same forces of change that both the public and regulators demanded on financial services.
Fast forward a few years down the line, according to data from CB Insights, global Insurtech investment totaled $1.7 billion, across 173 deals, in 2016. Both those numbers are roughly double what they were in 2014. In terms of total investment, 2015 was actually the bumper year to date, at $2.7 billion, although $1.4 billion of that was due to two mammoth investments, the financing of Zenefits and Zhong An.
In January 2017, investors from around the world were asked what the hottest area for investment in Fintech and the same sector kept coming up again and again: insurance. At the Economist Finance Disrupted conference in London in January, three out of the four VCs on the panel "Unicorns vs. Unicorpses" named insurance specifically when asked what was of most interest to them as an area for investment.
The sector was name checked by Yann Ranchere, a Geneva based partner at Fintech VC Anthemis, Reshma Sohoni, the CEO and cofounder of early stage UK fund Seedcamp, and Timo Dreger, a managing director at Berlin based Apeiron Investment Group. All the panelists offered up other areas of interest, such as optimising banking backends and artificial intelligence, but somehow the conversation kept returning to insurance.
Dreger summed up it up well, telling the audience:
"Right now we are looking at Insurtech. It's for sure the hottest thing in 2016 and for sure the hottest thing this year too. The answer is pretty easy why. In the whole insurance industry, there's a lack of innovation and the user experience is pretty horrible."
Rachel Botsman, a recognized expert on digital technologies and visiting academic at the University of Oxford, says, “the insurance industry is ripe for disruption”. Botsman has made this statement on the basis of her theory of collaborative consumption that identifies four root causes that are putting the insurance industry at high risk for disruption.
Our first cause is the complexity of the experiences people have in engaging with insurance providers, with the processes consumers have to go through are usually far from user friendly, entail a lot of paperwork and are cumbersome. Compared to earlier, this is of more significance as the Fintech space is significantly more saturated with startups addressing pain points as well as institutional funding backing these ventures. Hence, both increasing inefficiencies and opportunity for investors to get in at an early stage in an unsaturated environment have placed Insurtech in the spotlight.
The second cause is the lack or the low level of institutional trust in the entire system. The global financial crisis is often pointed out as a reason for this lack of trust, but there are two other major drivers. First, there is a lack of transparency in the insurance industry which creates uncertainty and dissatisfaction for consumers in accepting policies that protect their assets and lives. Second, peer trust is preferred above institutional trust.
The third stated cause is the concentration of inefficient intermediaries which hinders the ability to operate and react in a lean and agile way due to the longevity of the relationships existing with these middlemen. Customers experience these layers of intermediaries as something that ultimately does not add real value to the product, although they account for an estimated 15 to 20% of the average P&C insurance premium. This is tough obstacle to overcome for the traditional insurance industry, which has focused on distribution through brokers, financial advisors and more recently comparison sites, and typically lags behind other industries in its ability to provide seamless, multi channel customer experiences.
Botsman’s fourth cause is the limited access to insurance. Exclusivity echoes as a core issue for scores of individuals as insurers change policy conditions and premiums at their discretion, pricing out thousands of the ability to get coverage in both a partial or comprehensive manner.
As a result, in the last few years, Insurtech has started to steal revenues and increase market share, by addressing these pain points with technology, pushing overall costs lower and thus premiums lower as well as introducing new models that promote trust and transparency such as Peer to peer insurance models and blockchain based infrastructure. These new avenues are making insurance companies uncomfortable in holding onto their legacy systems, principles and models.
So, what kind of technologies do these challengers invest into? McKinsey’s 2017 global digital insurance report sheds more light on this matter. It shows that 85% of insurtech firms are focusing their innovation efforts on one of the following six domains:
1) Software as a Service (SaaS) & Cloud Computing - 21%
2) Big Data & Machine Learning - 20%
3) Usage based insurance - 13%
4) Internet of Things (IoT) - 12%
5) Digital insurance & Robo-advisory - 10%
6) Gamification - 9%
Other top ten innovation domains include more complicated and comprehensive themes such as the usage of blockchain technology, peer to peer insurance, and the improvement of micro insurance through the use of technology.
A slew of smart startups have sprung up and are attracting heavyweight financial support. They include US companies like Zenefits, Oscar Health, Clover, Collective Health and Gusto (formerly ZenPayroll) as well as Chinese innovator Zhong An. Agile companies are using digital technology to leap frog competitors by delivering highly personalized online customer services and creating new, lucrative markets that are bringing more consumers into the space via the digital medium. To develop our understanding of the energy and interest in the Insurtech space, it is worthwhile to review the reports PWC’s collaboration with Startupbootcamp through their Insurtech programme and fast track events.
Aligning with the sentiments echoed within Botsman’s statements, the largest volume of applications to the Startupbootcamp programme came from startups aiming to enhance the quality and frequency of insurers’ interactions with customers and, as a result, to build more trusted relationships with them. (Botman’s second cause). It reflects the evolution of the broader digital economy, where customer expectations are constantly increasing in a cross industrial manner set off in a domino style fashion by rapid Fintech growth. Consumers want the same levels of service and engagement from other businesses, including insurers. They want to use their smartphones and digital devices to secure insurance that is customized, priced right and employs easy to use payment solutions.
The latest annual survey conducted by Engine, the service design consultancy, ranked insurance as the worst of all industries for customer experience. Startups recognise this issue and are well placed to exploit it. Unburdened by complicated legacy processes and technologies, innovators do something quite powerful in going beyond just digitizing existing interactions; they combine digital with the human touch, often using technologies such as artificial intelligence (AI), machine learning and robotics, utilizing more and more data to understand their consumer base on an individual level allowing for a personalized solution versus a general broad spectrum approach promoted through intermediaries in a scripted manner. The need of the hour seems to be adaptation and customization and this bespoke approach is where a lot of institutional investment is flowing.
But this raises an interesting question about the fundamental nature of the insurance industry and the principles on which its models function. The fundamental age old purpose of insurance is to allow people or companies to pool their risk, thereby obtaining relative safety (from unfortunate or unforeseeable events) in numbers. But personalisation is gradually allowing us to de-pool that risk. Insurers are starting to understand, at an increasingly personal and forensic level, which policyholders might be more prone to unfortunate or unforeseeable events and to price accordingly, or to refuse cover altogether. Hence, through Insurtech, we may be embarking on a path that espouses a fundamentally different approach to insurance overall that may result in a model that is more punishing to those who, for example, are bad drivers or those of us who don’t make sufficiently regular use of our gym memberships and thus more rewarding to those who are considered lower risk. This dilemma will increasingly feature as avenues such as the Internet of Things gathers greater traction connecting more devices in our lives in a constant flow of personalized data with a prediction of 20.8 billion connected devices in use worldwide by 2020. Large companies, both from within insurance and beyond, are already investing in Internet of Things technologies such as Generali, Aviva and Allianz, as well as Google.
Using a variety of approaches such as online aggregation and comparison, self service, new distribution channels, education and engagement of customers and omnichannel offers, startups can enable ongoing engagement that leads to trusted relationships. In embracing new paths, while AI has previously been seen as most useful to underwriting, its application in distribution is helping insurers increase conversion results. AI and robotics help insert a human characteristic into what might otherwise be an impersonal digital experience. Robo advice, including applications of AI, is now starting to gain traction in insurance. Robo advisers provide customers with 24 hour access to information that empowers them to take financial decisions at a much lower cost.
Meanwhile, some 7% of applications to Startupbootcamp also came from peer to peer insurance startups. And reflecting on the earlier mentioned statement that consumers are now placing greater trust in peer ventures versus institutional set ups, these ventures have the potential to both disrupt the status quo and improve the image of insurance. Built to deliver trust and transparency, they address these key concerns of many customers today. Peer to peer insurance businesses are now beginning to take off. Examples include Lemonade, which recently raised a $13 million seed round, Guevara and Friendsurance, which is growing at 20% a month and has plans to expand globally. The model is tough, however, as it is much more capital intensive than other types of Insurtech startup. It may take time for customers to get to grips with the concept of peer to peer in insurance, and for startups to prosper.
At the ground level, P2P insurance refers to a set of practices and models which, through technology and community, allow individuals and companies to get together in order to diversify and mutualize common risks. In a way, Due to long value chains prone to friction, high overhead costs, and a lack of transparency for the end customer, these market failures and frictions result in higher premiums being borne by insured parties, while displaying a lack of transparency and agency by the consumer. By redefining the traditional insurance structure, P2P insurance aims to eliminate some of these frictions, and to remove the inherent conflict of interest (between the insurer and the insured) that arises during a claim.
P2P insurance is now growing quickly. 2015 was the real ‘lift off’ year, which saw 16 launch announcements from P2P startups. That’s more than during the previous five years combined. As the momentum has built up, so the P2P models have also evolved: from broker or distribution only models (where the P2P firms simply group people together based on their insurance needs, and then arrange for a traditional insurer to cover the group) to carrier models (where the P2P firm looks to cover some or all of the risk themselves, and not necessarily as formally underwritten insurance).
Moving Forward on Insurtech
In moving forward, efficiency and skill specialization becomes of increasing importance. By increasing the efficiency of insurers' back office processes and systems, these startups have the potential to enable insurers to operate more profitably at greater scale. Such efficiency can be most easily achieved through collaboration with API based infrastructure that allows existing system to supplement their current infrastructure with new plug in systems that can act as a concierge of sorts for boosting data aggregation, analytics, fund transfers and even creating peer to peer marketplaces or incorporating blockchain technology. There are a number of firms in this space that are establishing themselves. Crowd Valley is an industry agnostic pioneer in this regard that is able to offer a very robust set up for its clients across the globe. In contrast, the cost of developing and implementing proprietary new systems is quite prohibitive.
As we move forward, newer technologies such as AI, Internet of Things, the sharing economy and blockchain technology will push the boundaries of modeling effective value chains and revenue streams across the board, highlighting an accelerated form of the natural process of disruption in a sector that is very due for change. Information proliferation and education play an even greater major role in these times. Almost a third of insurers in PwC’s research said that they are not familiar with blockchain at all. The Insurtech firms, by contrast, are eyeing this opportunity. But it also presents much more exciting opportunities for insurers to leverage their deep industry knowledge to not only assess the viability of these emerging use cases but also to identify other opportunities where it may be possible to measurably improve efficiency and transparency, particularly in back office operations.
There’s growing recognition across the financial services sector that, whereas banking and capital markets may have started their Fintech journeys earlier (and built up a considerable weight advantage), it will ultimately be the insurance industry that sees the most benefit, and the greatest levels of disruption, from this global upsurge of innovation.
This post originally appeared in Crowd Valley Blog.
Working in Fintech since 2008, I’ve seen many models emerge and be reimagined. Standardization and cost efficiency have been led by technological improvements. Stages around the world from Toronto to Paris to Singapore have showcased how finance is changing and evolving through the embrace of Fintech. This has been a global phenomenon since the very start, yet its development is not linear and the spearhead varies from region to region.
I recently had the opportunity to host and sit down with a leading Fintech pioneer in Singapore and exchange views on these spearheads. Singapore has adopted a strong position in establishing itself as the Fintech hub for Asia and make significant investments in the sector, such as setting up a regulatory sandbox and strong incentives for companies in Fintech.
It’s apparent there are differences with adoption in different parts of Asia versus North America and Europe. However, there are many universal realities that resonate irrespective of location.
Applications – Wealth Over Private Equity
Through our conversation with our Singaporean partners, the difference in Fintech applications in market segments became clear. There is a prevalent focus on wealth management in established financial hubs in Asia, such as Singapore, and applications of Fintech such as robo-advisors and wealth chatbots have really taken off. With a significant segment of the market embedded in wealth management, it’s a clear sector to embrace the benefits of Fintech (which we will explore shortly in the universalities).
With vastly different regions and economies in Asia, there are also different corresponding strengths and opportunities. Strong established finance hubs may have a more traditional outlook on Fintech, leveraging roots in for example comprehensive wealth management practices, wherein emerging markets in Fintech such as Indonesia, Malaysia, Vietnam may present broader opportunities to change the entire fabric of financial models utilized.
A different reality is true especially in the US, where private equity models, including venture capital applications, are the norm. Certainly, there are robo-advisors as well, even launched by prominent firms such as Vanguard, yet private equity applications and private debt, even retail models are multiple in the US. Just look at how far Goldman Sachs has come with personal online lender Marcus, reversing over a century of policy and entering the retail market and even with Marcus Goldman’s name at the helm.
Wealth management is also characterized by heavy pressure and a true paradigm shift after the financial crash. The market is clamoring for transparency, there is an increased pressure on margins and no one quite knows what to do with millennials that soon will have money to manage. Innovate too fast and you alienate a lucrative client segment, innovate too slowly and you go down in history as a firm that failed to keep up.
Reducing Costs by a Magnitude of 100
With the high pressure on margins, wealth management is a logical sector to embrace Fintech and standardize processes. Through standardization of cumbersome and cost-intensive processes, such as new client onboarding, KYC, and diligence, these can be structured and even automated. This brings about a clear reduction of cost and by changing cost structure, operators can expand and provide further client value.
Despite the applications varying around the world, an increased competitiveness found in the standardization of processes and requirements and their automation is clear. By being able to dramatically decrease cost, opportunities for serving new client segments, for different private equity models are within reach.
This can be as simple as a bank now being able to lend to a small business that it has been unable to lend to since the financial crash, all due to the fact that they now operate on a standardized technology stack that uses AI to power mundane tasks and harnesses the data for data driven decision making in underwriting. This is a universality that transcends location, where we will see Fintech not only be a growth platform but a reality across all business lines. Where functions can be standardized, they can be made more competitive.
Regions around the world are setting themselves up as Fintech hubs, embracing the fabric they already have. We are excited to see the opportunities and possibilities as the transformation continues.
This post originally appeared in Let's Talk Payments.
Borderless Finance is quickly changing the landscape for international financial flows asking more of the competitive players in this market while pushing for a reduction of the costs. Amidst this disruption, the consumer and entrepreneur continue to emerge as the beneficiaries.
Institutions emerging in this space are representative of a large wave of technological advancement that is sweeping across a range of different institutions and asset classes, introducing new models and ways to monetize assets in a more efficient, accessible and inclusive manner for the entrepreneur, consumer and average investor accompanied by the complementary rise of infrastructure provider pushing the bounds for innovation.
German Fintech startup, N26 has brought borderless banking to mainstream consumers with a focus on a comprehensive mobile experience. Customers can open a bank account – linked to a MasterCard – from their smartphone, and complete the process within eight to ten minutes. The MasterCard can be used worldwide without any fees at all.
Valentin Stalf, Founder and CEO of N26, stated:
“Our vision from the start has been to build Europe’s first bank account for the smartphone. We see traditional banks as having failed to adapt to the demands of the digital generation. The response to Number26 has been fantastic and we’re thrilled to expand to further markets.”
N26 account holders can make transactions and withdraw cash anywhere around the world without ever being charged for the service. Your entire banking needs are catered for through the app, even setting up of your account, something which is a painful process in any regular bank around the world. Your account is setup via a video call from your phone during which you will be asked to present identification for scanning.
In terms of a business model, N26 offers free ATM withdrawals globally by taking on the withdrawal fee that their customers would conventionally bear. Considering the above listed revenue model, N26 is able to cover the fees that would be traditionally covered by customer from the earned revenues. Digital Finance/borderless institutions such as N26 are able to do so as result of there being a relatively low overhead operating cost.
This did, however, lead to complications when a number of customers would use their free account exclusively for a large number of monthly withdrawals. This is because N26 utilizes a “attract customers with one thing, then sell them another” whereby customers are monetized via extra products and services around the base account such as international transfers or overdraft and in the future savings or investment products, etc.
N26 is not alone in pursuing this model with Fidor, Revolut and Tandem utilizing similar models or set to incorporate it in the near future. As to how this business model addresses market demand and consumer sentiment, there does seem to be some discrepancy with regards to the assumptions employed in the novel business models, especially with regards to consumer behavior. While initially offering a free service for the offerings other than for a credit card and USD debit/credit card, Revolut introduced a "fair usage" clause that charge some fees above certain thresholds , such as a 2% levy on ATM withdrawals above £500 a month. This seems analogous to the response N26 had when their consumer base took undue advantage of their free cash withdrawal feature resulting in N26 bearing too high of a cost in covering the withdrawal fees. N26 had originally decided to cover this fee with the assumption that most customers would use their accounts and this benefit, reasonably. Hence now, they charge a fee for monthly withdrawals over 500 Euro. Sound familiar?
Another major player in this space is TransferWise, who originally launched the ability to make international cross border transactions at a fraction of the price offered by banks and other traditional financial institutional and service providers. It remains to be seen whether TransferWise has found a longer term sustainable model but considering that TransferWise doesn’t actually bear the costs on behalf of its users and that they have captured a large share of the cross border transaction market from the banks is perhaps indicative of the fundamental strength of their venture.
The company manages to offer its services so cheaply by matching up payments with those going the opposite direction using sophisticated software. So "your" money never actually leaves the country — it's rerouted to someone who's being sent a similar amount by someone overseas. Your foreign recipient, meanwhile, receives their funds from someone trying to send money out of their own country. So in actual execution, there is no cross border transaction taking place but the system is actually an efficient reallocation of funds within the ecosystem of fund transfers.
The new borderless bank accounts are built upon this fundamentally simple infrastructure. Transferwise has local banking partnerships and a global network of banking accounts which, when coupled with their cross border money transfer system, allow funds to be deposited into local bank accounts in the local currency utilizing the efficient reallocation that was their original product. Essentially, they’ve added end points or deposit points to their original system which is why they can continue to grow and offer their services at such a low cost. Where their money comes from is similar to the business model utilized by N26, wherein customers are monetized by the additional services and products to the base account. In TransferWise’ case, the only times you are charged are when you convert money between currencies in your Borderless Account, send money to a bank account in the same or a different currency. They can just as easily integrate third party services such as auto loans and mortgages to truly capture the banking space.
The fees charged are fairly low and the logic behind is very transparently conveyed to the customers. This facility is a true catalyst in facilitating international flow of skills, services and goods with firms placed anywhere in the world now able to easily acquire and remunerate their suppliers and employees locally, reducing the monetary and logistical speed-bumps that may prevent the most efficient utilization of skills or service providers across international borders.
if you move money from one TransferWise country account to another or any of the 15 internal currencies supported, or if you make an international money transfer, you will only ever be charged the standard TransferWise ‘mid-market’ exchange rate and commission, with no minimum fee, which works out much more competitive than incumbent banks. Initially the new service will only be available for small businesses, sole traders and freelancers in the UK, Europe and — from June — the US. But TransferWise plans to make it available to consumers in the three markets later in 2017.
Such innovation while advertised as a borderless account actually breaks down borders that exist between different business communities and allow for easier cooperation and synergy globally. When TransferWise does launch a card, however, it puts the Fintech unicorn squarely in ‘neobank’ territory and in competition with a slew of startups offering a banking experience, including Revolut, whose banking account is built on the promise of low exchange rates and targets consumers with a “global lifestyle”.
TransferWise’s main target here, however, is undoubtedly the incumbent banks, and initially the rather neglected SME or sole trader market, for which the need to receive and make payments in multiple currencies and to and from different countries is increasingly a requirement. The impact of borderless banking of this sort is significant in enhancing the purchasing power of the global consumer base in mitigating the obstacle of service and product provider not accepting an international bank.
TransferWise shares this borderless finance space with Revolut that launched in July 2015 allows conversion of currencies at the interbank exchange rate utilizing a prepaid MasterCard. Like TransferWise they also offer multi-currency business bank accounts and now international money transfers for free up to 5000 pounds.
Another example of such forces at work is, the partnership of the Estonian e-residency program with the Finnish Fintech company Holvi allowing a completely borderless digital banking experience for entrepreneurs in the EU. This means a EU company with complete EU business banking and payment card can be established entirely online. This provides the perfect catalyst for large scale business growth with low start-up costs for establishment of a potentially thriving business. Such environments break down bureaucratic costs that deter small business owners with ideas as well as allow individuals to navigate roadblocks such a reluctance to work within certain emerging markets.
While the response to institutions such as N26, Revolut and TransferWise has been fantastic, it is impossible to void the legacy banking system. Despite persistent issues around inefficiency, exclusivity and high fees, there continues to be a strong inclination for the brick and mortar institution which can be attributed to a preference for a more tangible and face-to-face human experience highlighting the value consumers see in human interaction. At the same time, the borderless finance institutions discussed in this piece are able to offer attractive fair alongside a range of base free services due to innovative technological models and minimal operating costs. However, taking into account statistics like the ones below it can be inferred that these institutions, at least in the immediate term, do lose out on elements and value of the conventional institution:
The borderless digital finance revolution changes the playing feeling with a dynamic approach to financial inclusion and consumer experience. N26 users can now get a credit line in under 5 minutes. As mentioned earlier, the Estonian e-residency program’s partnership with Holvi is a major catalyst for small business growth across the EU. The proliferation of services that continue to evolve with the consumers’ needs is reaching a point of disruption for the banking sector where the incumbent institutions are being forced to commit time and resources to change the way they interact with consumers and consumer data but are bogged down by their legacy systems and massive scale. But as borderless FIs continue to make moves to tackle consumer and business issues such as exclusive and outdated credit models, expensive cross border business transactions, for goods, services and labour, and obstacles for business growth and personal investment, the scales and statistics are sure to tip in favour of the new kids on the block, complemented by increasing global digital, Fintech and internet adoption. To top it off, the unpredictable innovation that has been borne out of the great recession has found answers to pain-points every step of the way so it is likely that the brick-and-mortar human element will be addressed soon enough down the line. And as iterated in the first paragraph of this piece, whether it’s the spread of the borderless finance revolution or the reformation of the traditional banking sector, it is the consumer and the business owner that wins.
Crowd Valley prides itself in its commitment to supporting both consumers, investors and institutions bridge the gap that exists between in the lending, borrowing and alternative finance space by optimizing tools that work at the fundamental level of financial services and would be more than happy to discuss how our infrastructure can support your ideas and entry in the digital finance space.
This article was first published on Crowd Valley Blog.
Est. 2009 Grow VC Group is the global leader of fintech innovations, digital and distributed finance services. Our mission is to make the finance services more effective, transparent and democratic. The Group includes leading fintech companies in their own areas.
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