Brett King (Amazon best-selling author, well-known industry commentator, speaker, the host of the ‘Breaking Bank$’ radio show on Voice America and founder of the revolutionary mobile-based banking service Moven) firmly believes that in 50 years time the banking industry will look back and say that the smartphone was the most disruptive and influential factor in the way banking, finance and payments are carried out.
Who would even challenge that view in light of what we have experienced from smartphone apps in the last few years, not just in his arena but across almost every industry that has or is becoming digital?
But it’s not just the impact of smartphones on banking, even greater than that of the internet according to King, it’s the way the industry has had to adapt and change the very premise of the way it has done business for years. Like the telecoms industry, there a lot of over-the-top (OTT) players, many with no past finance experience, trying to get a piece of the action.
These disruptors are given the broad title of FinTech players, short for ‘financial technology,’ because technology is the key to their attack. Their business model is based purely on using software to provide financial services, or as Wikipedia puts it: FinTech companies are generally startups founded with the purpose of disrupting incumbent financial systems and corporations that rely less on software. Are you starting to see a pattern?
Just like the disruptive OTT players in the telco space and Uber in the taxi arena, FinTechs often come up against regulators and regulations that are totally unprepared for the way they operate. They not only disrupt, they also challenge and they seem to have incredible investment support to launcg ongoing legal challenges.
Everybody now wants to be a payment provider and they can be if customers are happy to let them. Credit card companies and store card issuers, slow to develop and agree on their own industry-wide, ultra-secure mobile payments methodologies are being overrun and outwitted by the likes of ApplePay, Samsung Pay and Google Wallet.
Make no mistake, these are software companies that happen to produce hardware as well, but it is their use of software on those devices that makes payments a pleasant and speedy process for people sick of carrying plastic cards and having their accounts compromised. It is only this year that the USA has agreed to move from signature verification to ‘Chip and PIN,’ something Europe adopted years ago to combat fraud. Apple adapted token technology developed by the finance industry to their device security and got a head start others are finding it hard to catch.
However, the biggest challenge for all the financial players (just like telcos) is falling revenues and, worse still, falling margins. Banks have traditionally flourished on the difference between interest rates on money they had on deposit or borrowed against what they lent out. When interest rates were high, those margins were high. Now that interest rates are low to almost non-existent, their revenues and margins are impacted. For credit card companies merchant fees and a share of the interest earned on slow repayments was a gold mine, but now FinTechs are offering to manage the processing and provide the devices to merchants that handle the transactions at a fraction if their cost. Square is a good example.
Banks looked closely at their own business models and figured out that they could make good money based on usage just like telcos have been for years. They have always charged account keeping and transaction fees but these were often not based on a cost-to-provide basis. The proactive players now charge for every service they provide, in some way, no matter how small, and the prices to customers vary according to the worth of the customer, how much is on deposit, the value of the business they bring to the bank, etc.
Customers are being profiled, rates are being tailored and every transaction is being tracked and charged in real-time so the customer cans see immediately what has transpired. Sound familiar?
And it is not just the banks. The card companies may be pressed to lower rates and share some of their margins with the FinTechs and Apples that are supplanting them, but they too are learning to work on lower margins but with very numbers of transactions, otherwise known as a ‘clip of the ticket.’
With the new systems to track and price transactions also comes the drive for heightened security, assurance and fraud prevention systems. As the core of the financial systems they are not likely to disappear any time soon, but their viability will be extended by working out how best to work with disruption, even take advantage of it, to remain in business.
If you look at Google today, it’s core business is being a search engine but its revenue stream comes from advertising. Banks seen primarily as a place to keep money, a utility almost, are now suggesting ways for their customers to spend money because they make margin on the transactions and the services they might sell. Seems like telcos and banks may, at last, have a lot in common.