There has been a lot of talk, in the press and within the financial industry, about the “fintech revolution”. Back in May 2015, The Economist suggested such a revolution was already underway, and that it would result in better financial-services offerings for consumers. In January 2016, The Daily Telegraph wrote of “a whole host of technologies…that promise a genuine alternative to traditional banking and payments systems”.
In both cases, the writers of these articles were quick to point out the extent to which the odds are stacked against new entrants in the financial-services sector, in part due to the form of regulatory conditions that tend to protect existing providers from aggressively competitive new entrants. But these writers and many other observers have also highlighted the potential for “disruptive” technologies to impact the financial-services sector, just as they already have in other industries.
In financial services, it is suggested, innovative fintech companies will develop new ways to use digital and mobile technologies to deliver new types of services—while using advanced data-analytics methods to develop more effective credit-risk assessment and customer-management systems and processes. The improved services and the efficiencies they achieve will then force existing financial providers to become more competitive and innovative.
It is certainly true that some fintech technologies, businesses and concepts have huge potential in the financial sector. The distributed-ledger technology blockchain, for example, could drive profound change in finance over the next decade. It is significant that the Bank of England has announced that it is investigating how blockchain could be used to improve the payment systems that underpin the UK financial system. When announcing this news, in June 2016, the bank’s governor, Mark Carney, could not resist speaking of “a whiff of revolution in the air”. He also appears to be a strong believer in the potential of fintech, suggesting that: “Fintech may deliver a more inclusive financial system, domestically and globally; with people better connected, more informed and increasingly empowered”.
But it is important to note that the governor used the word “may”. Fintech has, so far, yet to fully revolutionise the experience for consumers using retail-financial services. There is no equivalent to Amazon, iTunes or Uber turning their industries upside down. A few of today’s over-hyped fintech companies surely will achieve great things in the future, but many actually offer nothing more than a new twist on existing ideas. The most impressive of these companies may yet have a role to play in transforming financial services, but not without developing genuinely sustainable business models. If they fail to do so they may instead meet the same fate as some of the companies that appeared around the turn of the millennium, which had great ambitions to change financial services but either failed or were absorbed by the incumbent players.
It is true that the world has changed a great deal in the first decade and a half of the 21st century. Society is now far more digitally literate, and we have seen an explosion in the use of mobile technologies by consumers—and the creation of a whole new digital world, encompassing social media and new ways of interacting with businesses and other organisations online. Yet while those changes have had a dramatic effect on some industries, the fundamental shape of the financial-services sector is still much the same as it was 20 years ago. Financial-services companies have used technology to improve services in various ways, and some businesses have been launched in recent years that are using digital technologies to deliver true innovation in this sector (including, I would suggest, the company for which I work); but, overall, we cannot yet describe the industry as being in a state of revolution.
However, even if most of the newest fintech companies are not destined to transform retail-financial services, there are some developments underway that could have a significant impact on the industry. Arguably the most important are those related to Open Bank’s application program interface (API), a government-led initiative that will make it easier for consumers to ask banks and other financial-services providers to share customer data. This should help to encourage financial-services firms to provide customers with more competitive services, including new services to help customers optimise the way they borrow, save or invest.
In February 2016, the industry-led Open Banking Working Group (OBWG), which was set up by the UK government in November 2015, published a framework to support the use of open APIs in banking, based on customers giving the banks “informed consent” to use and share their data for this purpose. The OBWG proposed that implementation of the Open Banking Standard could enable a fully functioning open data market to be operational in the UK banking sector by the end of March 2019. The government has indicated that work on the project should begin this year, with the initial focus to be on personal-finance accounts and SME (small and medium-sized enterprise) banking markets.
“In our digitally enabled world, the need to seamlessly and efficiently connect different economic agents who are buying and selling goods and services is critical,” said Matt Hammerstein, co-chair of the OBWG, in February. “The Open Banking Standard is a framework for making banking data work better: for customers, for businesses and for the economy as a whole.”
He is absolutely right: this is an initiative that could provide a huge boost for creativity and innovation within the financial-services sector. It would make it far easier for financial-services providers—and fintech companies—to develop truly innovative services, including account aggregation. That would mean we really could begin a revolution in the financial-services industry, by removing the barriers that currently limit the ability of new entrants to challenge incumbent institutions.
The chances of any of the newest fintech companies influencing the future course of the financial-services industry to the same degree that Amazon has affected the retail sector, or iTunes the music industry, may be slim. But we may now be at the start of a process that will create a financial sector in which we see more open data sharing and the development of regulatory and operational infrastructures that enable a greater degree of competition and innovation.
If that process continues, then fintech companies, along with existing banks and other financial-services providers, really could make a significant contribution to reshaping the industry, helping to build a new financial system that delivers real benefits to consumers, businesses and the whole of our economy.