Since the financial crisis, the Fintech sector has grown from virtually nothing to be a significant part of the financial sector. Global investment in the sector grew by more than 200% in 2014 and today accounts for more than £20 billion in annual revenue. Most of the Peer-to-Peer platforms that lent over £1bn in 2014 didn’t even exist five years ago.
The growth of the Fintech sector has been accompanied by a lot of hyped claims that it will lead to greater competition benefiting customers, a more customer-centric service provision as well as lower barriers for customers to access and participate in the financial system. In this series of blogs, we will go beyond the technical jargon and the hyperbole to understand how Fintech is affecting the delivery of and access to finance. We’ll be especially interested in the claims that Fintech is democratising and making the financial system more inclusive. We’ll be answering questions like: What is Fintech? What drives it? How is it changing the face of financial services? What does it mean for financial exclusion?
In this first blog, I will be providing an overview of Fintech. Broadly speaking Fintech refers to the use of new technologies to transform the delivery of financial services. It encompasses collecting new data through everyday items such as fridges and cars (i.e. Internet of Things), making real-time payment for services such as energy (i.e. blockchain technology), transferring money without intermediaries like banks through electronic currencies (i.e. bitcoin) and many other things. The technology may be new but it can also involve old technologies that have become more affordable or effective to use. It does not necessarily lead to disruption as it can also be used by established players, such as the banks.
A number of factors have contributed to the expansion of Fintech over the last decade or so. The financial service sector is responding to the changing behaviour and preferences of a new generation of consumers, often called digital natives, who want financial products and interfaces to be integrated, seamless and instant (more about that in another blog post!). There have also been developments leading to cheaper and more effective technology. The financial crisis has also created a window of opportunity for alternative providers to occupy parts of the market vacated by banks. This is especially the case for crowdfunding and peer-to-peer lending.
Paradoxically, Fintech is not really about technology. Fintech is all about data and info, and technology is just a means to an end. Through the Internet of Things, Big Data, greater use of social media data and other breakthroughs, firms have access to and the ability to process and analyse data to a greater degree and at a lower cost than before. This has the potential of totally revolutionising the way financial service sectors operate (as illustrated below).
By having access to and make more effective use of data than ever before, financial service businesses can develop fine-grained and detailed customer profiles, including if they are likely to purchase certain products, if they are likely to purchase other products as well as more accurate risk/profitability profiles. In turn, they can use this to more accurately target customers, set prices that better reflect risk, make more effective use of marketing and develop new income generating business models. One example of this is the online lending platforms that use improved algorithms to lend to businesses and households exclusively online. Another is the trend for insurers to install cameras and other devices in cars to collect info on people’s driving habits and price policies accordingly.
Over the coming weeks and months, we will be exploring what all of this means for financial inclusion and some of the risks and opportunities for organisations working with financially excluded. In our next blog post, we will be exploring Big Data.