How Fintech Startups Are Disrupting the Payments Industry
They're forcing a large, entrenched ecosystem to adapt.
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Long in the past, transfers of value took place between royalty, merchants and commoners who all used gold, silver, cattle and other physical commodities to thrive and survive. That ended in 1971 when the U.S.. dollar and other world fiat systems fully detached from the gold standard and embraced floating exchange rates.
Over the past 50 years, financial institutions built payment systems that are partially obsolescing in the wake of fintech disruptions like virtual currencies, distributed ledgers and decentralized protocols. Fintech entrepreneurs are more attuned with the high expectations of a younger, digital crowd who buy goods from around the world with a tap of a phone screen, and which can be delivered by Amazon in a few hours.
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Frictionless systems like distributed ledgers eliminate barriers to cross-border payments, remittances and data transfers by being near-instant, cheap and secure. These efficient transactions unlock greater economic activity and promote prosperity. Modern consumers can thus transfer value with efficacy and bypass unnecessary red tape.
Entrepreneurs are designing new processes and building innovative solutions in the payments industry that let banks and consumers transact anytime, anywhere.
Unlike other industries, global payment companies must move at the speed of now: Recipients want their money immediately, and senders want to settle affairs quickly. It's all about being frictionless, which means moving digital monies (or data) domestically or across borders at low cost, in real-time and with no hassles.
Millennials have a different mindset than previous generations. The modern culture embraces instant gratification and immediacy. Many think, it can't be that complicated to send digits from a sender's electronic screen to a recipient's.
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Last year, Japan-based Soramitsu rolled out a next-generation payment network that enables real-time payments online and via smartphones. The venture's blockchain platform is faster, cheaper and addresses development issues such as when people are "unbanked." In Cambodia, for example, 78 percent of the population over 15 years old do not have access to banking services. In six months, the platform enrolled thousands of real users.
Soramitsu's Project Bakong lets participating banks and customers transact directly and more efficiently through a platform that is monitored by Cambodia's central bank. It's the ultimate stamp of approval. The company is also rolling out mobile solutions that give Cambodia's unbanked population access to payment services via smartphone.
Inoperability with other systems
Banks have invested huge sums to build legacy payment systems. However, financial institutions must now not only design processes and systems that incorporate cutting-edge innovations but also meet higher customer expectations. Legacy infrastructure is incompatible with those of other banks or payment processors. That leads to high fees, long delays and frustration for customers when sending and receiving payments.
Tokenization solves the issue of interoperability by leveraging a standard token that participants use to transfer value (or data) quickly and efficiently. In the case of Soramitsu's Project Bakong, its platform allows participants (i.e. banks) to transact directly using token transfers. This method drastically speeds up settlements by eliminating traditional business processes such as transfer instructions, liquidation and payment confirmations at a later date.
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Cambodia, Malaysia and Thailand are also experimenting with QR scan codes to improve remittances between these countries. The QR codes are EMVCo compatible and may be used to send and receive payments that are denominated in local currencies.
In a financial ecosystem, there are many companies, banks, payment processors and remittance firms. But having many powerful participants creates divergent and incompatible protocols, terms and practices. Confusion and red tape arise. And when each establishment charges a fee, the total cost for the consumer can be crippling.
Boston, Mass.-based Algorand recently introduced an ASA solution (Algorand Standard Assets) that digitizes any type of financial asset, including securities, regulatory certificates, fungible and non-fungible assets. Aside from better interoperability, the firm's founders believe that digitization will help with regulatory compliance.
Fintech entrepreneurs are eliminating barriers to payments, and they're resulting in greater economic activity and new wealth. Digital-savvy consumers are looking to innovations like Bitcoin, blockchain, tokenization and peer-to-peer networks. These are disruptive tech that are forcing a large, entrenched ecosystem to adapt.
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