How FinTech is changing banking and financial services (making our life easier).

Roboadvisor, Challenger Banks and AI are radically changing our interaction with financial services, allowing us to maximize our finances at the lowest cost and maximum efficiency.

The story below is a translation of my news article published on NinjaMarketing.it back in April 2019.

Some parts of it have been adapted to English language from the original Italian — the article focuses on the Italian Fintech Ecosystem. (AMC)

In recent years, the global landscape has seen the advent of apps and startups that offer innovative solutions (almost in every sector) to meet the needs of the new generations.

One of the most affected industries is Financial Services, where emerging startups aim to fill the gaps that financial institutions have not been able to fill.

Like any innovation wave, everything changes quickly making it difficult to keep up with new technologies and products. We hear every day, almost everyone talking about “Fin-Tech” or an application of it, and we have probably used at least once one of the new products created by these companies.

However, do we really understand what we’re talking about?

And more importantly, did we understand how to get the maximum return on these new products?

The crisis as a blessing for progress

One step back: 2008, the financial ecosystem collapses.

Among the major causes, the scarce technological innovation and the lack of automation that, as a consequence, generates very high costs and inefficiencies. In addition, a lack of transparency and information asymmetry spills over to the final consumer with catastrophic economic and social consequences.

This chain of events opened Pandora’s box, highlighting a market failure. Despite this, animated by the entrepreneurial spirit, favoured by rapid innovation and the spread of emerging technologies, the industry experienced a series of innovative waves, up to 2019.

The global financial system follows the wake of a continuous change that sees the flourishing of new startups and products focused on the end consumer, excluding the intermediary, increasing the financial efficiency of all of us.

The force awakens

Hence “Fin-Tech” was born, an acronym for Financial Technology, whose ecosystem focuses on solving two fundamental problems: re-imagining financial products and reaching the consumer through new technological channels.

On the demand side, this change in consumer ‘s mindset has generated the need for new institutions that offer better and more efficient services.

On the supply side, the crisis itself has prompted many financial industry professionals, including Ex Lehman Brothers, to follow the entrepreneurial path that has revived an industry from its own ashes.

Fin-Tech by the numbers.

Deloitte reports that globally, at the end of 2018, we have 645 Fin-tech companies in Payment Services, 410 in Asset Management and 332 Insurance Companies.

If we go back to 2008, we all can remember even opening a simple bank account in Italy (and most of souther Europe) was an arduous undertaking that required a never ending amount of documents and the deposit of a considerable sum.

The most innovative startup in the FintTech space, at the time, was PayPal with the classic banks providing few hard-to-access services. Huge entry barriers and the inability to access services or opportunities due to the obsolescence of the financial services ecosystem.

Apparently, however, things are changing and, for once, also Italy!

According to the Italian Companies Register, there are 235 Fin-tech startups in Italy with 11 million citizens (25% of the Italian population between 18 and 74) who have used at least one Fin-tech service. Among the most popular services: mobile payment, personal budget management and money transfers between private individuals.

More than half of Italian SMEs already interact with financial institutions through a smartphone app; 92% do it via PC, but on average only 5% of small and medium-sized enterprises have already used alternative financing methods such as mini-bonds, loans and Peer-2-Peer loans, crowd-funding or supply chain finance solutions.

The Focus: Challenger Banks

One of the most evident phenomena derived from the Fin-tech wave, are the Challenger Banks: emerging banks that use new technologies to offer solutions to the inefficiencies of the banking system.

Among the most famous we have Monzo, N26, Revolut and Starling Bank but there are many more. These focus on what millennials like most: smartphone access, ease of use, excellent Customer Service but above all, free base services with the possibility of accessing a more advanced offer only for those who consider it necessary by paying a (small) premium price.

In short, the same business model as low-cost airlines, if you think about it.

One could therefore think of an inglorious end for old-school banks, but, this is not the case — yet. As Henri Arslanian explains during a TEDx conference in 2016: these new entrants have the possibility to choose which part of the banking services they want to focus on and obviously opt for the most profitable part.

It is therefore unlikely that these startups aim to act as deposit institution, rather, they prefer to control the front-end — that is, the part facing the end consumer — and leave the boring back-end, or the boring administrative operations, the regulation, post-trade operations, reconciliation and regulatory reporting, to traditional banks.

We are therefore facing a new banking model, where traditional banks manage the back-end, becoming service providers to these technology companies that control the front end and the customer experience.

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Any opinions expressed within the blog are those of the author and not and/or necessarily held by Bloomberg LP itself. Any Opinion is my Own.