The future of finance: It’s free!
Wouldn’t it be ironic, if the science of money itself was free?
Well, that’s where we’re going, and fast. In the golden days, finance was an entrenched market. You didn’t just start a bank, or set up your own fund. Pfft. It was invitation only. You needed proper attire! Competition was mostly local or regional, so the system was stable. You could get away with things. Fees here, fees there, fees everywhere!
Fintech happened
Finance was one of the first industries to adopt technology at a wide scale, particularly information technology and computers. Finance is the science of money, meaning numbers, so it made sense to use technology to manage those numbers. Two things in Finance changed fundamentally with the emergence Financial Technology, or Fintech as it’s now known.
1. Costs went down
How much time does it take to maintain a bank’s ledger on paper? How much time and effort is spent keeping physical records? That’s where we started from. Today, paper is on it’s way out. In all meaningful senses the banks run on computers now. Computers create efficiencies by eliminating manual repetitive tasks and increasing the speed of transactions. Efficiency saves cost. There is now less of a reason to charge people menial fees for everyday tasks, as they are largely automated and instantaneous.
2. Competition went up
As technology created efficiencies, it also created opportunities. With technological efficiencies, you could undercut your competitor’s fees. With the onset of digital banking, initially in the form of online banking websites, banks could suddenly expand their footprint without bricks and mortar. No longer was setting up more branches and hiring feet on the ground the only solution to growing your business. You could serve customers virtually. Not just your customers, but other banks customers. Not just other banks customers, but other countries too!
The race ends at zero
Since the 1990’s when the first online banking services launched, fees have been slashed across the board. Technology has lowered costs, and competition lowered them further. Margins are harder and harder to come by now, with most banks settling to make money in a few key areas and settling for zero in others. It’s like a polar bear watching the ice patches melt away around their feet, trying to pick which one will float the longest. There’s not much left.
With the onset and explosion of Fintech startups, it’s not just other banks pushing fees down. Paypal came along in 1998 and made payments free* for consumers. Now startups like Robinhood are attacking the last bastion of banking fees: investing. Charging your customers $20 for placing stock trades? Robinhood does that for free* already. Charging rich guys %1.00 of assets for wealth advice? Guess what, Charles Schwab is doing that for free* now.
Wait! What’s with the asterisk?
Are you one of those people that actually reads fine print? C’mon. It’s free*. Trust me… Free* is free*, right?
“There’s no such thing as a free lunch”
There’s also no such thing as free in finance. Someone always pays. Someday, somehow. With Paypal, they stick the bill to the merchants, and it’s a hefty bill at that. With Robinhood, they make money off margin accounts and other creative ways. With Schwab, they force you to hold part of your portfolio in cash, and scrape the interest off that. Technology allows them to live off of lower margins, so better make the first punch and not wait for someone else to do it.
#machinelearning
The next stage of Free Finance is more complex. It involves a secondary business model, that runs on data. Say you provide your customers with a credit card. No fees at all. It’s free. They love it. Free for them of course, but you cover the costs. The reason you do that is to gather data. Data about your customers, data about their behaviour, data about demographics, data about usage patterns, data about correlations, data about trends.
It has been said data is the new oil, and some are starting to act on it. If you have data, you can either sell it or use it yourself. In the example above, you might sell behavioural data to retailers to show them how their customers make buying decisions. You might also use that same data to sell other products directly to your customers. Just bought winter boots in Singapore? Maybe you want a discount on this great winter coat too? Amazon.com thinking in an ecosystem context.
Conclusion
The future of Finance is indeed free. New technology will unleash new opportunities for efficiency and competition, leading to more creative solutions for removing cost while making profit. In the end, it’s consumers like you and I that win. We get better service for lower cost. I’m all for free*!
