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.
I was at an event recently where alternative finance companies introduced their services. There were many new finance solutions for lending, real estate, investing and short-term finance. These companies explained how they have built their own platforms, have handled some finance (millions or dozens of millions), and are now looking for more investors. After witnessing all this activity, it seems the bottleneck of finance is not really the number of services and platforms available, but somehow getting the whole ecosystem to work.
Traditionally banks and other lenders have been able to use capital from deposits for loans, and use securitization to get additional capital for loans. Lending has been part of a huge finance system. It guaranteed money for lending and investing, but also created many complex finance instruments that have also combined more and less risky products – sometimes very risky, as seen in 2008.
Now we’re seeing new FinTech-based finance services whose technically excellent premise could be integrated to the whole finance ecosystem. But the technology as such is not enough to get the ecosystem to work. Many of these services have focused on building their own platforms and collecting their own investor user bases. Maybe they haven’t totally figured out yet in which business they really want to operate.
Some leading p2p lending platforms, like Lending Club, have institutional partners to lend and invest in their platforms. It is a starting point to use these platforms as a distribution channel for traditional finance services, such as banks. I earlier wrote that the invisible impact of FinTech is probably greater than the impact on visible services. This means that there are a lot of opportunities to really integrate these new solutions to the ecosystem, but also many challenges.
New digital finance services can help create much better finance products than the old models. The services can collect much more data, analyze and monitor the data in many ways, and monitor real-time information. This enables much better financial decision-making, better syndication, better pricing and better secondary markets. But to achieve this situation, the services much talk to each other, understand each other’s data, and there must be a market for them.
We are still in a situation where people and companies must fill out a lot of old-fashioned forms on paper to apply for a loan in a bank – even when much more data would be available in digital formats to make this simpler. Online finance services collect more data automatically from other systems, like using digital KYC and importing data from other finance tools, but they still do securitization in quite traditional ways, or hold roadshows to find investors. These simple examples show that many new services are still sub-optimized and don’t even have smooth digital processes, much less an ecosystem.
I have sometimes compared FinTech-based ecosystems to mobile and digital advertising ecosystems. It is not enough just to show some ads on screens. Digital advertising needs a lot of data from publications and users, targeting tools, systems to sell inventory, planning tools for advertisers, and many other components. This ecosystem includes thousands of companies and systems that must be able to talk to one other. A similar scenario could play out for the alternative finance ecosystem, but it’s still early days, and the critical mass needed to get the market to really work is missing.
We have, at least, three issues getting in the way of that critical mass:
This post originally appeared on Disruptive Asia.
Private transactions, both private equity and debt, have been inefficient and littered with information asymmetry due to the way the transactions have been made. The emergence of public distribution of information on private transactions seeks to change that and the quickly arriving secondary markets for private transactions can bring liquidity and efficiency to typically cumbersome asset classes.
The definition of an efficient market requires efficient access to information, no transaction costs and standardization. By definition most private deals do not correspond to these criteria. However, with more private information becoming public through new securities law changes around the world, we are beginning to establish process trust in asset classes that can become vibrant with further rigor.
Recently Seedrs announced the establishment of a secondary market for equity crowdfunding transactions in the UK. Private companies are among the most inefficient as an asset class, given the apparent lack of information, information asymmetry and long lock in periods. The situation in the US is no different, where private companies are even more private compared to the UK with publicly reported information even on private companies. The promise of liquidity in crowdfunded securities could be a fantastic development for an asset class which is difficult to manage. The Financial Conduct Authority (FCA) in the UK has been a pioneer in this regard as well in digital finance and set various standards worldwide, including the rollout of a regulatory sandbox.
At its core, a secondary market is an option for liquidity. Holders of securities can post a request to sell their positions, and those looking to acquire shares can bid for these. Depending on how the system is set up, matches can be made automatically or the marketplace operator can have a facilitator role. Automatic matches can follow procedures such as auctions, reverse auctions or Dutch actions. We work a lot with secondary transactions and markets through our digital back office, not only with smaller transactions but also with institutional grade assets.
Private equity is however not the only sector that benefits from liquidity. From private loans in peer-to-peer markets, a liquidity offer through a secondary market offers shorter cycles in the market and more trust in the underlying asset class. Many peer-to-peer or marketplace lenders globally run internal secondary markets, as yet there is no overarching liquidity destination for the sector. Both Lending Club and Prosper have offered secondary markets in the US, but only Lending Club’s remains open for business. Last October Prosper announced the closing of its secondary market, which the company said was underutilized by investors.
Private transactions becoming more and more public also open access to information that has previously been unattainable. In order for true efficiency to be a possibility, standardization of information has to be achieved. By being able to make comparisons and establish standards in private transactions and on private assets, we open up new possibilities of use with the data that was historically locked away. We are now beginning to realize what uses there are for this data, including being able to provide more tailored financial products such as debt for private companies while placing the company in charge of its own data.
Private companies and peer-to-peer lending markets are both relatively new asset classes that are governed by new policies, however there are also more traditional asset classes that benefit from private or even open secondary markets. Real estate holdings for example are highly popular, both equity and debt, and some times holders of positions may wish to divest part of their portfolio. Similar is true in areas such as renewable projects, solar bonds, insurance or private equity in a broader sense.
More Data, More Options
What secondary markets bring is more optionality for the investors and maybe by inference underlying security. This can be seen as an important area in establishing process trust for the transaction infrastructure, and a value add for the investor base. Yet at the same time it’s another area of the private securities transaction which is moving toward greater efficiency as a whole market, offering a higher value service in typically cost intensive asset classes.
With more data becoming available, we can expect more financial products to be developed that are more tailor-made and utilize even real time data. For years we’ve talked about the convergence of the private and public market and this is a tangible development where these new quasi-public transactions and novel services are charging ahead.
This post originally appeared on AltFi.
In the EU banks must open APIs to their services, and banks plan these steps also outside the EU. Some see it as a threat and some as an opportunity for banks. But one question is whether this is so relevant anymore. Some years ago, telcos started to talk about telco 2.0 and open telco APIs, but they haven’t really become anything significant. Can it be the same situation for banking APIs?
Telcos have wanted to open APIs for many years and in that way, for example, enable third parties to offer communications services that are based on telco infrastructure. This never took off, but they have also tried to revise the concept and activate it again. There are probably a lot of reasons for this failure, for example:
Banking API requirements are coming especially from EU’s PSD2 directive that targets to open opportunities for third parties to offer payment, accounts and finance data services by utilizing banking infrastructure and regulated banking services. It is basically intended to increase competition within finance services. At the same time, several banks have seen it as a business opportunity offer open APIs to their services and infrastructure.
We can easily see that there are quite a lot of similarities between telcos and banks in terms of open API business. The question is then, if banks can do it better than telcos have done. Or is it actually the case that those old-world services and APIs are not the way to build any truly novel services?
It is important to remember that the open API business needs much more than open technology APIs. An open API is relevant only if another party sees it is the best way to implement a certain service. To achieve that it requires at least four things:
There have been speculation and rumors as to how some banks might want to make it intentionally difficult to use these services, and in this way, they can limit competition. We have seen similar things in the telco industry, when the telcos needed to offer capacity, facilities and number portability to other service providers. I have also personally seen that in the telco industry it was not enough that a telco and its management were committed to offer these services, but many lower level employees were not willing to really get them to work. They still felt it difficult to offer something to potential competitors, or they didn’t like that the business changed and required new things from them too. So, this is in many ways also a matter of the organization culture.
Considering all the points above, we can see the open APIs to banking services is not such an easy thing to work in practice. The question is especially if those APIs offer a really competitive and trusted way to implement services. Legacy banking IT infrastructure is quite old, it is complex and expensive to make any modifications to it, banks have no technology or business competence for open API business, there are constant new modern technology solutions to implement similar things, and new service providers might have problems in trusting banks so that they really would be dependent on them. At the same time, other alternatives like cloud based finance back offices, payment gateways and distributed ledger type solutions are emerging and might offer more competitive ways to build services.
The ultimate question is if banks really want to get the open API business to work. If they want, they must really consider all aspects of the business and technology. It might require fundamental changes for their competence, technology and culture. They must realize that they won’t be the gate keepers to many of these services in the future. They must offer a real competitive solution and value.
This article was first published on Telecom Asia.
Working with one its large retail bank customers, Crowd Valley (a Grow VC Group company) has successfully passed an enhanced, independent security audit undertaken by one of the world’s leading information security consulting firms.
This third party verification confirms the stability and security for sophisticated users of the company’s products and services, and sets the platform up for even more institutional applications around the world.
Nixu Corporation (www.nixu.com) is one of the world's leading security specialist companies and has been focused on information security since its foundation in 1988. Since then it has worked with numerous banks, telecommunications firms and governments around the world to help them address and improve their approach to cybersecurity.
Nixu carried out a project to assess the security of the Crowd Valley API and Back Office platforms, which was done by attacking the Crowd Valley API and the administrative applications from the point of view of a motivated attacker trying to obtain unauthorized access to Crowd Valley’s customers’ data and functionality.
The API was tested for general compliance with the OWASP Application Security Verification Standard requirement categories: Authentication, Session Management, Access Control, Malicious Input Handling, Error Handling and Logging, Data Protection, Communications Security, HTTP Security, Business Logic, and File and Resource Validation.
Following the process Crowd Valley customers can now benefit from the following functional updates that have been implemented and are already available on sandbox and live environments:
For more information on how you can make the most of these security features in your own applications please get in touch with your primary Crowd Valley contact.
ICO’s are a new form of project financing for distributed ledger technologies or cryptocurrencies. The process involves collecting funds in the form of fiat or crypto currencies in exchange for a “coin” or “token”. In order to fully understand why this financing model exists, we must first understand the fundamentals of distributed ledgers in relation to regular internet protocols, which you can read more about here.
While being seemingly similar to equity offerings, ICO’s typically serve a rather different purpose. An ICO can technically never be used as an exit method for the issuer, as the coins are technically issued during the ICO, meaning that it can be compared to a seed round of financing. In addition to this, an ICO’s don’t typically make use of underwriters, which is a primary characteristic of equity offerings
Investing in ICO’s
Investors may decide to participate in ICO’s for several different reasons, mainly as a pure investment strategy, but there may also be other sentiments at play. Examples or various sentiments may be access to a limited edition product, or even tokens which can be used in online games. If investing with a pure financial incentive, the investor must carefully analyse what drives the price or pay-offs of owning a certain coin or token. Many tokens are built on top of public ledgers such as ethereum, meaning that the value they create may be absorbed by the ethereum blockchain rather than the token itself, other tokens may be value driven by events completely outside of the blockchain space - tokens pegged to the price of USD for instance. In addition to carefully considering the price drivers, and investor must also consider code quality, expertise level of the development team, and any other factors which may impact the success of the DLT. Regardless of the brief history of ICO’s, there are examples of 6-digit returns as well as complete value destruction, indicating that this is a relatively early and volatile market.
ICO’s are used to fund the development and maintenance of DLT’s, so a portion of the funds raised will typically be retained by the development team behind the DLT. The coin offerings themselves may have different quirks depending on the issuers goals, but typically they will have several shared characteristics.
In addition to the aforementioned characteristics, the issuer will typically reserve an allocation of the “coins” or “tokens” for their development team and/or a foundation dedicated to the development of the DLT. The reservation may be made in the form of creating a certain percentage of tokens at inception, or allowing a “pre-mining” period where the issuer can generate tokens for themselves via the regular mining model. This is the “incentive” part of ICO’s, making it a significant determinant to the success or failure of the DLT. As mentioned earlier, each token has a market value based on supply and demand of the token, a successful network will increase the value of tokens since the “goods or services” provided by the token will be considered more valuable, while an unsuccessful network will deteriorate the value of all tokens in the network.
In a successful ICO, there should be a fairly strong alignment of interest between all parties involved, meaning that the issuer will see a value increase in their stake if the technology performs well, and investors will see their stakes increase as a result of good performance.
Are ICO’s legal?
The legality of ICO’s was widely disputed at Consensus 2017. The general opinion within Blockchain circles appears to be that ICO’s should be legal, but also regulated in order to provide investors with a certain level of security and fraud protection. There are examples of ICO’s which have failed due to natural causes, but also cases of outright fraud, which harms the trustworthiness of DLT’s on a general level. As of today, no bespoke regulation has been set when it comes to ICO’s in particular, regulators also have trouble classifying the underlying asset - leading to even more complication.
How to participate
Investors will can typically participate in ICO’s via the issuers own website, simply by signing up and making a commitment towards the funding goal. KYC is seemingly quite light, meaning that investors can participate with as little as an email address, one of the reasons behind a light KYC may be the lack of regulation. Several media outlets such as Smith + Crown maintain curated lists of historical, current, and future ICO’s.
The ICO model is an innovative form of financing which allows both issuers and investors to have “skin in the game” when it comes to the performance and adoption of a distributed ledger. The model itself is not very different from an equity offering when it comes to execution and incentives, but the asset class doesn’t fit into the categories of equity/debt/commodities, as it’s more of an economic system rather than an traditional asset. Regardless of the inherent risks and volatility, I remain cautiously optimistic concerning the future of ICO’s.
This article was first published on Crowd Valley blog.
Telcos and banks struggle with delivering a good customer experience despite being competitive markets. Michael Porter’s competition analysis model could explain why.
I was in Italy and needed mobile data, as I was without a broadband connection. I bought three SIM cards, never got exactly what was promised and one sales person even refused to sell to me because his shift had just ended.
Meanwhile, we have a legal entity in a country where we probably don’t need to have it anymore. I talked with our accountant about it, and she said it probably makes sense to keep it, because it has a bank account, and nowadays it is so hard to open a bank account.
The common thread in these anecdotes is a poor customer experience with businesses that are not monopolies. Think about that: mobile carriers and banks have plenty of competition, so how it is possible that these kinds of customer experiences are typical?
Michael Porter has developed the “five forces” analysis to evaluate competition in an industry. The forces are:
In both banking and telecoms, the threat of new entrants has been quite low. Both industries are regulated, which makes it impossible (especially in mobile business where you need frequencies) or very expensive to enter the market. The needed infrastructure investments are significant, which means very high capital requirements. Customers have also been quite lazy to change their service providers, partly because the customer experiences are often so bad that customers hesitate to do anything once they get something to work.
The threat of substitutes has also been low. There is some substitution, but normally you still need a bank account or a mobile subscription – in fact, just to be included in society, you will likely need a phone number and a bank account. There are additional or related services (such as which messaging services to use, or how to invest money) that have more competition, but the basic services are dominated by the carriers or banks.
The bargaining power of customers has been also been quite low in these industries. Customers need these services, and most services providers offer similar pricing and terms. Regulation also creates limits in terms of how much service differentiation exists. It has also been difficult for customers to compare offerings. Both banks and carriers often have a complex pricing structure, and quite often customers feel they have experienced surprises when they have started to use a service.
Both telecoms and banking have had very big suppliers, especially in technology. Of course, carriers and banks have power when they are big customers for these suppliers, but typically they depend on a few suppliers, and it is complex and expensive to make any significant changes for operations and services. And when investments are really significant, they tend to keep utilizing old systems, which results in the infrastructure becoming very complex, which imposes further limits to change anything.
Industry rivalry is more difficult to evaluate in the telco and banking business. In principle, it exists and companies spend a lot of money on marketing. At the same time, there’s a question of how much they really want to compete, e.g. by having a unique strategy or investment in innovations. At the very least, it often looks like different companies have quite similar strategies and basic products.
Based on this quick high level Porter analysis, it is not so difficult to understand why the customer experiences in telecoms and banking are not great. But could we expect that this will change soon? Or are we doomed to endure this ecosystem and market for a long time?
Perhaps we should draw differences between mobile services and banking services, since they are in separate phases. In mobile services, it is hard to see substantial changes coming soon. Maybe totally new kinds of network infrastructures that significantly decrease market entry costs, and more flexible use of frequency, could change the game. But we have already seen a notable change in the value chain and service structure as a whole. A significant part of money goes to mobile apps, content and other services, while carriers are becoming bit pipes. Customers buy from operators only the minimum they really need, while those other higher value services play in a totally different competitive environment.
Meanwhile, we can see that FinTech is potentially driving banking services in a similar direction – i.e. banks offer only the basic money pipe and money storage services, and all value added services such as lending, investing, wealth management, money transfers and even payments are provided by other competitive parties. But actually this is not yet guaranteed, because banks have still a chance to change, and new banks can also be game changers. Banks can still be significant in the future, if they innovate and play their cards smartly.
Regulation is one element that limits change, but regulators have become more and more open minded to allow innovations – regulatory sandboxes is one way to do it in practice. But another significant factor is IT and infrastructure costs. Really tremendous changes are happening in that area. Nowadays, for example, cloud-based finance back offices can deploy their entire IT infrastructure for 1/1000th of the total costs of legacy banking IT. It could be the single biggest game changer for the whole banking industry.
As we can see, mobile and banking services have a lot of similarities, and their capability to offer good customer experiences, innovations and changes have been poor. At the moment, we expect that finance services can actually change more than mobile services in the near future. FinTech is changing finance services, one way or the other – it can either help banks to reinvent themselves, or it can help other companies to kill them off. Innovative technologies (e.g. back offices and service applications) are among main drivers for these changes – only regulation remains the biggest question mark.
This article was first published on Disruptive.Asia.
Photo: Banking crisis, Wikipedia.
As the adoption of innovative technologies like Artificial Intelligence, Machine Learning, Blockchain, etc. increases, it impacts the rate at which the Fintech ecosystem evolves and affects different markets.
Following are some notable stats and trends within the Fintech industry:
In Q1 2017:
Artificial Intelligence (AI):
Cryptocurrency: (Source: Cambridge Cryptocurrency Report)
Insurance Technology (Insurtech):
Regulation Technology (Regtech):
Read the whole list of 22 trends and stats on Crowd Valley Blog.
Distributed Ledger Technologies (or Blockchains) have gained a tremendous amount of traction over the last couple of years or so, and they are due to serve a far larger purpose than anyone could have imagined in the early Bitcoin days. This article aims to explain how distributed ledgers are changing the modern internet as we know it, on a very fundamental level.
Communication protocols like TCP/IP and HTTP were created in the early days of the internet, which were considered (and still are) great technological advances. These early protocols were developed by scientists and researchers without much financing or economic incentive for outperformance or competitiveness. Distributed ledger technologies (DLT) are essentially new P2P versions of communication protocols, with embedded data and even processing capability between systems. These are being developed and used today for various reasons; store of monetary value (such as Bitcoin), processing power (Ethereum), or data storage (StorJ and Siacoin). New DLT’s are being developed continuously, a handful are raising funding at the time of writing this article.
The important thing to understand about DLT’s is that each have their own embedded economic models, creating incentives for different parties in the system to develop, secure, and run the network of peers (or nodes). For example, Bitcoin is considered a store of value, where the Bitcoin holder pays miners to secure the network in the form of inflation. Meanwhile in Ethereum, network users use Ethereum tokens (Ether) to pay for processing power. This means that each token in each DLT’s network has a monetary value, since it can be exchanged for goods or services.
Distributed ledgers provide a new way of storing, maintaining, and accessing data. Rather than storing data on centralized servers, the data is stored across all peers (nodes) in the network, meaning that there’s a correct copy of data stored in “n” amount of locations across the globe, but how does this add any value? Decentralizing data decreases the risk of data loss, as a failure in a single node will only have a marginal impact on the entire network. Perhaps the most important feature of DLT is correctness, making data alterations in a single node will not affect the general consensus across all other nodes.
Traditional internet companies, like Facebook, Google and Twitter, hoard massive amounts of data, and the vast majority of their revenues and market value is based on proprietary data. Now imagine a world where data and processing power is housed within the internet protocol (i.e. Ethereum Virtual Machine), and the internet application is simply a thin layer sitting on top. This means that most of the value lies within the “fat protocol”, while the internet companies themselves capture only a smaller proportion based on what type of user experience they can provide. In this environment, entry barriers to very capital and data intensive industries are far lower, and we can expect a much higher level of competitiveness, better user experience, and general social benefit. The scalability of distributed ledgers is often debated, but in case the underlying technology catches up, we may even see performance related scale advantages in using distributed ledgers.
There is no guarantee that data and processing will move to a distributed environment, but as more and more data is stored on distributed ledgers, the higher the value of utilizing that technology there will be, this “network effect” may lead to exponential growth in adoption of distributed ledgers.
Read the whole article on Crowd Valley Blog.
Image by Joel Monegro of Union Square Ventures: http://www.usv.com/blog/fat-protocols
It’s no co-incidence J.P. Morgan is referring to its “robo-advisor” as an “automated advisor” over the more common buzzword pair. Goldman Sachs has modeled its consumer loans platform “Marcus” as a helping hand for those in need and named it after founder Marcus Goldman, who ventured forth into banking over a century ago. Fintech is indeed getting to a more mature stage in the market and soon we’ll forget the buzzwords, and be used to transacting on new technologies that hide in plain sight.
If you take a look at ‘Marcus’, you’ll be struck by its simplicity. It’s customer centric, clear and straight-forward. Could it be that this is exactly what a retail borrower wants out of the experience, no hidden fees, no complexities and trip wires, just the service they are after? Who would have guessed, right? I’ve earlier stated we are entering a practical era of fintech where what matters is providing the best service for the end client and it truly seems the customers preferences are shining through.
Yet what’s fascinating is the fact that as we focus on customer experience and service, we also are less distracted by buzzwords and hype. I would argue that’s exactly where we should be and the ocean of buzzwords merely serves as a distraction. If we’re able to lower the cost of a transaction by a few basis points will that be the most important message, or the fact that the transaction happened on a blockchain?
We’re entering a time where technology adoption in finance is being hidden in plain sight. Creating a new account onboarding process that empowers the individual user, yet lowers the human capital on the organization side, will likely be well received by the user and encourage them to go the extra mile due to well thought out user experience. At the same time, this process could well boast a sophisticated series of automated anti-money laundering (AML) checks and know-your-customer (KYC) questionnaires, all powered by an artificial intelligence (AI) engine that takes user input based on which it then decides exactly what calls to make and which databases to crawl. The user would never see this, but the experience wouldn’t be possible without this invisible layer.
This follows how technological adoption works across markets. Automatic braking systems, ticket pricing for flights, Google searches all function with sophisticated uses of narrow artificial intelligence. Does the user actually realise this and further, do they need to?
Similarly when applying for an SME loan through a mobile app, granting access to financial and behavioral data, will the end user marvel at the underwriting process or at the competitive rate they’ve just been offered in minutes? If we’re able to use Artificial intelligence (AI) in order to empower the consumer to utilise their data on their terms for the best product, they are likely going to remember the mortgage and how they got their dream home.
What are we going to see going forward? My hope is much more data driven decision-making in design of services on an organizational level, where end users can truly have a voice in how they want to acquire their services. It will be interesting to see what direction J.P. Morgan takes with its automated financial advisor and I suspect it will be telling of their take on the current state of affairs at the intersection of finance and technology. Given their history in retail services it may offer an added depth in services to other solutions in the market.
Adopting a user-centric research and development process requires large organisations to be able to adopt a rapid prototyping process, in order to bring feedback loops close enough to the production line so they are able to stay current with their offerings. Whether this fits in the corporate hierarchy or at innovation labs that have more freedom, the pace of technology is increasing so fast that the process for innovation itself is becoming much more central. Today’s technology will be outdated in a few years. How can services keep re-inventing themselves in order to maximise end user value and user experience?
We’re at the cusp of a user experience revolution in finance, not just in retail services, but across the board. How can we truly convince the borrower landing on ‘Marcus’ by Goldman Sachs, that the bank, which has historically shied away from retail services, now truly cares about that particular individual’s credit card debt? It will come down to creating a unique experience and messaging, and powering it with the right underlying technologies that complement that experience. Maybe that’s where we will see the modern John Pierpont Morgan emerge.
This article was first published on altfi news.
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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