How Fintech Innovations are Eroding Banking's Dominance
Cryptocurrency and peer-to-peer lending are helping upend norms in consumer finance.
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It's an old adage: Dinosaurs don't move fast enough, which gives agile creatures (or companies) an ability to survive and even thrive. Banks's dominance over money is eroding. That may surprise traditionalists, given that financial services is the largest sector in the world and that big banks have powerful allies in politicians. However, technology and evolving paradigms are giving fintech ventures an edge when it comes to offering new financial products, services and practices that improve the customer experience.
There's also the issue of trust. Just 41 percent of Americans trust banks, while 27 percent are angry about the economy, according to a 2018 joint survey by University of Chicago and Northwestern University. That's creating a culture in Main Street that's suspicious of Wall Street.
Aside from mistrust, technological trends are giving consumers more ways to store wealth, send payments and protect data. These include decentralized finance (DeFi), tokenization of assets, artificial intelligence, regulation technology (RegTech) and cryptocurrencies, to name a few.
Here are ways that depositors, borrowers and creditors can do business that were traditionally reserved for financial institutions.Related: What the Future of Fintech Looks Like
Personalized goods and services is being embraced across industries. Eight of 10 executives say personalization is important to their organization's strategy, according to a 2018 survey by Harvard Business Review. And nine of 10 customers expect organizations to know their interests and anticipate needs.
Peer-to-peer (P2P) lending does both by removing brokers from loan transactions and by directly matching borrowers and lenders via shared platform. In Constant's case, the platform acts as a trading hub where borrowers and creditors pick the best deal. Moreover, the Redlands, Calif.-based venture allows users to set their own interest rates and terms -- a feature that doesn't exist anywhere else.
Because of distrust in banks, P2P firms have a receptive audience in Millennials and Generation Z. By cutting out the middleman, Constant lowers borrowing costs while increasing returns for debt investors. Risk is also managed by over-collateralized loans.
For believers of Bitcoin, cryptocurrencies are a promising way to send and receive frictionless payments worldwide. However, adoption has stalled since last year's crash in prices. Volatility makes cryptos challenging to use for payments, and regulators are making reporting requirements burdensome.
"[Fintech] disruptors are fast-moving companies, often start-ups, focused on a particular innovative technology or process in everything from mobile payments to insurance," writes the authors of PWC's report, "Financial Services Technology 2020 and Beyond: Embracing Disruption." The authors continue, "[Disruptors] have been attacking some of the most profitable elements of the financial-services value chain."
One promising area is the industry's introduction of income-earning tokens that allow holders to receive interest or dividends. Crypto exchanges including Poloniex, Binance and others have all introduced staking programs that offer such rewards. As fintech ventures allow investors to earn interest from deposits, staking or lending, the ecosystem will grow. That's because users can get compensated for their cost of capital.
Kyle Samani, managing partner of Multicoin Capital, wrote in an Oct. 29 blog post: "Once the exchanges offer interest-bearing accounts at large, they'll start to think of themselves as banks. And if they think of themselves as banks, they'll start to offer credit." The blockchain industry is maturing because it's beginning to offer traditional financial products and services.
The industry is also rolling out fiat-pegged stablecoins that address fears of inflation. Eterbase, an EU-compliant exchange, is rolling out Eurbase. Stablecoins are tokenized money, which are pegged 1:1 with a major sovereign currency like the U.S. dollar, Euro and British pound.
Eurbase is anti-inflationary, because unlike other fiat-denominated stablecoins, it's collateralized by a basket of assets: Euro deposits, cash guarantees, Bitcoin and other cryptocurrencies. Though an early entrant in the space, it's seeing interest from investors who are in risky economic environments.
"We are experiencing an inflow of new users from EU member countries, Turkey, Southeast Asia and Africa," says Robert Auxt, co-founder and CEO of Eterbase, who adds that it's crucial to be compliant with KYC (know your customer) and AML (anti-money laundering) laws and guidelines in Europe's regulatory environment.Related: Rethinking Banking (With Fintech)
Bank customers are frustrated with practices like unethical behavior, overdraft fees and excessive ATM charges. These sentiments give startups an advantage, particularly if they can offer better and cheaper services. Hence, fintech ventures are creating features designed to attract consumers and outperform banks.
For example, Algorand is building a high-throughout blockchain that can process as many transactions as large-payment processors. However, blockchain allows senders and recipients to transact 24/7, unlike banks, which are closed after business hours and weekends.
Secondly, blockchain-powered payment systems are typically frictionless and less expensive because they remove the need for intermediaries. These systems are also viewed as more secure, since multiple nodes validate a transaction.
While a depositor needs to go to a bank to fill out a wire transfer form, PayPal, Venmo and other online payment systems allow users to simply swipe their phone. A 2018 McKinsey study observes that "Fintechs ... are investing significantly in technology to improve performance, respond to competitive threats and capture investment and partnership opportunities."
Personalization, along with better products and services, are key themes in the financial sector. The winning game plan leverages agility, not too-big-to-fail size.