The Financial Industry of the Future
Fintechs are the stars in the global startup-scene and banks must react if they don’t want to be known as dinosaurs in future. But they can already be dinosaurs. And so they could face a game-changing moment: the end of the classic bank.
What we will or hopefully can see is a bank with fewer “salesman” and “loan officers”, but algorithms and customer control. New investment roles let John Doe easier invest into startups, influence who will get a loan or who not. This is the beginning of a merger of Wall St. and Main St. in a way only few expected decades ago.
In this article I will outline my visions for the wealth management and the banking of the future and will sometimes refer to my article “Crowd-Banking or the Concept of Democratic Lending” which I have published on LinkedIn and “The Uberization of Finance” which has been published by The Wall Street Journal’s Zachary Karabell from November 6th 2015.
Peer-to-Peer Lending and Money-Tranfers
Businesses like Facebook, Google or Apple, but also Stripe or Transferwise are creating their own payment services and are changing the way how people are transferring money to each other. While Paypal was the initialization for the post-Western Union time new services are able to offer you transfers for a fraction of the cost your bank charged you for a national or international transfers.
It got easier to send some Dollars to a friend or a shop. Future features in Facebook’s Messenger let you pay for a service or good you ordered via the messenger. Probably Gmail’s sister Inbox will help you to pay your bill when you receive the invoice. If you can’t pay you ask a friend for a quick and small loan. So it happens if you are a customer of German Fidor Bank.
Blockchains
If you are familiar with Bitcoin or paid (or traded) with it, you may know what a blockchain is. Blockchains are a technology under MIT license and used to make Bitcoin a secure currency. In simple words: the blockchain is a database of all transactions made with the currency/the block of a single Bitcoin. This transaction history is chained to the coin and makes it secure because you can’t fake it. Like your fingerprints every “ID” is unique and generated through a complex system of calculations.
Banks, stock traders and co. are fascinated on the technology so that they are trying to apply it to stock trades and more. Probably smart engineers will find a way to give every digital Dollar a unique ID. Criminals will have a problem to fund or launder their activities accordingly.
States like Sweden are interested to abolish coins and paper money. Instead they want you to pay with plastic (your credit or debit card) or virtual accounts (e.g. Paypal). Such a system can be abused by criminals who are, if they are skilled black hats (bad “hackers”), intruding a bank’s computer network (which seems to be not too complicated according to this Bloomberg article) and withdraw all the money. Sure, it will be difficult to spend the billions of Dollars, but even a small amount from the bank account of a janitor from North Carolina can be critical enough.
Blockchains can be the identity of your virtual money. Or in other words: in We believe in God, but in Blockchain we trust.
Fewer institutes will be “too big to fail”
The diversification of the banking market, for consumer banks, save and loans and all can shrink todays banks if they are not flexible and fast enough to hold the pace of fintechs and tech-giants like Google & Co. Bank licenses for those companies are the entry ticket to many new options and even though Europeans and especially Germans are wetting their pants while thinking about the “data abuse” this is opening the door to interesting new banking products.
Again algorithms will be the most valuable players here and assist you in managing your money or at least help you to organize your money with hints so that you are able to put some bucks to your virtual net egg. Algo’s will understand your patterns and you can let them assign cash to create a monthly or annual budget for bar visits, media consumption or transport, will automatically receive information about new, probably higher prices for your Netflix-premium account and tell you: “John, your Netflix budget will exceed after a rise from $9.99 to $11.99 per month by more than $20. Do you want me to rebalance your budget planning or would you like to unsubscribe from Netflix?” It will be possible. If you have seen past developments you won’t ask if, but when it will happen. Maybe within five years in North America, within seven years in many EU states and later in Germany (ever heard of German “Angst”?).
The virtual bank
Banks of tomorrow are different from today’s banks. A bank like Wells Fargo from San Francisco, CA with around 265 thsd. employees could reduce the number of employees if it adapts to changes like something what I am calling “Crowd-Banking” which is a virtual bank where customers influence the way a bank reacts, invests and treats creditors. Due diligence and ethics would play a different, more important role.
As written in my article on LinkedIn users could influence who would get a loan or not as long as it is following Basel III guidelines and rules from the SEC. So called “low- and moderate income” (LMI) neighborhoods, districts with a low income and a default-rate above the average, probably with a higher Afro-American or other minority population, could have higher chances to get a loan because account owners want to know who benefits from a loan that comes from her money. Do you want to fund a young man in Detroit, MI who wishes to enroll at a university or a tobacco corporation poisoning your friends? The LMI-problem, often symbolized through red-lining, was, together with the related Community Reinvestment Act of 1977 (Carter-administration) and the National Homeownership Strategy of 1994 (Clinton-administration) softened the standards for loans and mortgages which triggered the subprime-crisis of 2006/2007 and the financial crisis of 2008. The ideas behind both was fine, but the implementation was awful.
Sure, banks are lending a tenfold of your bank credit. But it would be an orientation for the 90% of the loans. Probably it would work as the ETF of loans if you can say how you want your money to work for you and influence the whole machine called a bank.
Risk management or “too intelligent to fail”
As mentioned above banks still have to follow the law and guidelines like Basel. Within the rules banks are able to manage their risk and invest in whatever they like. Risk management will be important, not only for the banks, but customers with good fortunes investing in the stock market and startups.
And again we are talking about algorithms. Intelligent software, working with all machine learning tools available — like neural networks — and maybe with quantum computers, can calculate the risk of an investment. Wall St. giant BlackRock is using its Aladdin system for information and risk management. More than 5000 machines are responsible for data analytics, not only on BlackRock’s sole service, but also for mutual funds, state funds and others.
Today’s computing capacities are larger and more powerful. Trading algorithms can make decisions in a less than a milisecond. How will intelligent traders and risk managers — if virtual — react? How will they handle sudden changes on the market? Sure, they can’t stop or avoid another financial crisis because crises are essential for an economy. But machines may help to make a crisis understandable and probably they can limit losses because they have managed the risk so well that they can’t fail.
Credit Scorings
The last section is about credit scorings. In many countries companies try to give you a reliable scoring for a (prospect) borrower based on your past entries and orders, but also on data like your neighborhood, gender, education, age and more. In future your friends on Facebook could influence if your bank grants you a loan or not. This, in my opinion, is critical like the idea of a company in Germany to let a font installed on your computer have an impact on your credit scoring because the font is used only by poker-websites and ignores that a poker-service could provide a free, money-less version of its game (because gambling is prohibited in the USA).
But scorings are offering opportunities. They could replace rating agencies like Standard & Poor’s or Moody’s, probably they find another income source than fees from the company requiring the rating.
Sure we all want transparency about ratings and scorings that influence our lives because they have an impact on the decision if we get a loan or not. But also do we have to be careful that nobody finds a loophole to exploit the technology and to damage the financial system.
Conclusion
Looking ahead means that we can imagine how the world will look alike in several years, that we understand how companies will act, how users will react and socities will change the way they are doing X or Y.
The usage of cellular phones is extending. Though few Americans are using smartphones for transactions the number will grow. Africa is a surprising role-model because people like in Kenya are using Mpesa on their mobile phone for money tranfers.
People who are depositing their money on a bank account want to influence the business model of the business they have to trust. So they will take the time and change the financial industries. Fintechs and large tech-companies will help. What I have written above is just a part of larger complex. We’ll have to talk about insurances, investment banking for mergers and acquisitions (M&A), initial public offerings (IPO) and more. But we can see: the future is almost here. Now it is time to guide it in a way that it will serve the customer.
