Exclusive: ‘The dawn of ‘Fintech 3.0’? ‘ – David Brear, 11:FS and Alex Reddish, Tribe Payments in “The Paytech Magazine”
David Brear of 11:FS and Tribe Payment’s Alex Reddish debate a future where ‘fintech’ no longer exists.
The financial crash in 2008 split the banking atom – it started a chain reaction, releasing a new type of financial services provider like so many neutrons.
And, just as the law of physics dictates, they have gone on to split other atoms, influencing the way we live our lives, be it shouting payment instructions to Alexa or selecting Klarna at the online checkout with not so much as second thought about the lift and shift of data going on behind the scenes.
In other words, the crash created a steady generation of innovation energy that resulted in the explosion of choice we’re experiencing today. As a result, traditional banks are now operating in a fundamentally different way.
“When none of them needed to change, nobody changed, and [then], three years ago, we had every bank come out and say it was a technology company,” says David Brear, co-founder of fintech consultancy 11:FS. “I think they now realise that they’re not. They want to be good at technology but, fundamentally, they are financial services organisations.
“The change I’ve seen, in the last couple of years, is people realising what they’re good at and what they’re not good at. So, when you look at the things they’re now doing – Deutsche Bank partnering with Google to come in and sort out its technology, for example – that’s where we need to be. It’s about banks being realistic about what they’re good at, and bringing people in who are really good at the things they’re bad at. That’s just common sense.”
This fusion is predicted to intensify over the next decade, so that, by 2030, many insiders wonder if there will be any clear water between legacy banks and fintechs at all. If the last decade posited the idea that anybody can be a bank; in the next, maybe everybody can be a bank – be it a tech company, a ride hailing firm, an ecommerce marketplace or any number of niche players focussed on a specific financial life hack.
A recent report by Tribe Payments, Fintech 2030: The Industry View, took the pulse of 15 leading businesses from across the fintech community, to get a view of the future from those who are creating it, and it surveyed more than 100 executives in the European fintech sector to gather insights into the landscape in a decade’s time. On one thing there was broad agreement: by 2030 there may not be a fintech sector at all.
Fintechs were not predicting their own demise, Tribe said, but many saw a future ‘where financial services will be so embedded into other technologies – and therefore our lives – that the term fintech becomes essentially meaningless’.
“Fintechs, perhaps surprisingly, don’t see a future where they have won and incumbent players have lost,” it said. “There’s division over how exactly this will work – some see banks curating services, while others think banks will simply be a conduit between customers and other, better service providers. But, however they saw the details, fintechs envisaged a future where collaboration was essential, if not inevitable. A key theme for many was the idea of payments, lending and trading being invisible, seamless, and integrated – and finance in general doing the same.”
Alex Reddish, chief commercial officer at Tribe Payments, which has just launched its own open banking application programming interface (API) allowing banks and fintechs to connect across its platform, points to a step-change in the attitudes of regulators of the world: to one of ‘promoting innovation, as opposed to restricting it’.
“We’re very quick to say that the regulators are hindering our progress, but actually we’re probably quite lucky to have some forward-thinking regulators in different markets,” he says.
These enabling regulations were the midwives for fintechs born into a digital space – specifically, the Open Banking framework in the UK and the revised Payment Services Directive (PSD2) in Europe, which were married with a specific technology, namely (APIs), that really took off around the same time. The first allows the permitted sharing of personal financial data; the second makes that happen and brings other technologies to bear in order to make sense of it, using, for instance, artificial intelligence, and turn it into something actionable for the customer. The ‘what’ that we, as consumers, are all interested in, while the ‘how’ that makes it happen goes on in behind the scenes.
EaSE IS EVERYTHING
The evolutionary shift in finance, that started in 2008, has echoes in today’s pandemic, where ease of executing payments has trumped other concerns.
“People increasingly just want convenience,” says Brear. “The thing with the least amount of friction, that makes it easy enough for them to do the thing that they want to do.”
Reddish agrees. “I have my underlying bank account, I have my PayPal, I have my phone; my trust is almost secondary to the convenience of getting the job done.”
There is another reason to eliminate friction and make embedded payments the new normal – because of its impact on revenue. Tribe Payment’s report stated that a 23-click delay in using the checkout feature online, results in $236billion in lost sales revenue annually.
“What we’re seeing is ecommerce moving up and down the value chain,” says Brear. “I don’t really know which one of the three credit cards I have is linked to Amazon. But I know, when I press that Amazon button, all of the fulfilment is done really well. Amazon is moving down that stack into the financial services space, and giving me three-to-four per cent cashback. Why would I not do that?
“Universal banking as a principle was predicated on cross- and upselling, where banks were relying on the primacy of their customer relationship, and selling them 2.3 or 2.4 products, on average, to make the system work, from a profitability perspective. But, we’re now seeing that customer ‘ownership’ being unbundled and shared between other providers, whether Amazon or players like Snoop. They’re provoking customers into moving, and making it really easy for them to do so.
“That’s the really scary thing. We’ve seen this play out in other industries – mobile network operators are a great example, because the consumer doesn’t care what that logo in the corner of the iPhone is now, they just care that it’s an iPhone. The networks have commoditised themselves into providing them with data and coverage, which every one of them does, so it doesn’t really matter [who they go with].
“The challenge for financial services is when firms are expecting high margins, expecting to expand their horizons, and they’re both only getting smaller. They’re getting squeezed on efficiencies, in terms of their cost to serve, they’re getting squeezed on the margins that they can charge people, because, essentially, there are more competitors in the market.
“The regulator made it so much easier to create competition, and now there is more competition than ever. If you fast forward,10 or15 years into the future, we’ll be in a situation where providers that are challenger banks now have become just banks. People will be picking between exactly the same things.”
But in the shorter term, at least, Reddish believes that the levelling up of financial services, as a whole, ‘is something we should be grateful for’.
“Challenger banks are focussing on how they can deliver their core product better. Their disintermediation is perceived as a threat, but if the banks understand it, and use it wisely, it doesn’t have to be. Because there’s still a trust discussion to be had in financial services, and I don’t actually think we’ll ever shy away from that. As long as there are people putting their money somewhere, they want to know that it’s safe.”
“I’m not so sure that we’re going to move away from core banking infrastructure and products overnight. I just think we’re lucky that we’ve had those niches within the different subsets of banking exposed and grown on, so it’s not just now one provider, providing 30 products; it’s 30 providers, providing one really good product.”
So, while it is now possible for anyone to be a bank, perhaps it’s better for both parties – legacy providers and fintechs – for everyone to be a bank.
“As David says, everyone will eventually focus on what they’re good at,” Reddish adds. “I think we will see some fall by the wayside, as there’s more focus on unit economics, and what we’ll end up with is that rebundling, a fintech 3.0, where we start to see the aggregation of key market players, providing a best-in-class product, rather being masters of none.”