How is FinTech revolutionizing the financial sector?

Is the fintech revolution over yet?

Is the fintech revolution over? Lately there have been some posts with different answers to this question. The question was discussed quite closely linked to B2C fintech startups, which once started with the claim to replace the banks at the customer interface.
Indeed, the revolution seems to have been called off here, at least at first glance.

Hardly any fintech has managed to even begin to become a bank killer. The comparatively large fintechs, such as N26, Deposit Solutions or Smava, have developed into medium-sized banking competitors, but have so far not turned the financial sector inside out. Most “front-end fintechs” have entered into collaborations with banks or are in the process of doing so.

The fintech revolution is not decided at the front end

However, fintech should not only be viewed from the front-end, but overall as a technology-driven development that is revolutionizing the financial sector. Seen in this way, fintech remains extremely lively. Very likely, five years from now, the financial industry will look and feel different than it does today. From the customer's point of view, investing, saving, and building up assets as a whole will be easier, more efficient and more cost-effective, and payment will become a background process. Much more people will get loans more easily, and financial processes will be embedded more deeply in life and business contexts. Or as Christian Nagel from the venture capitalist Earlybird recently put it at a conference: "The real fintech revolution is yet to come."

In order to make a valid forecast of where the fintech revolution will lead and who will benefit from it, the bearers and drivers of the change should be identified.

Revolution drivers: companies, technologies, regulation, customers

We see four entrepreneurial drivers at work: the banks and fintechs as the well-known protagonists, digital companies and, as their special case, the four GAFAs. Google, Amazon, Facebook and Apple have already shown that they can revolutionize industries or create new ones in order to then monopolize them. Their unique position in terms of customer reach, capital resources and technological know-how enables them to target almost any industry if it appears strategically opportune to them.

In addition to digitization in general, the technological drivers in the financial sector are blockchain technology, AI and the ongoing progress of computer technology; in the future, it will be mainly supported by quantum computing (currently not well illuminated).

In the highly regulated financial sector, this regulation is one of the main drivers or even brakes of the fintech revolution. Innovation regulations such as PSD2 open up and normalize business opportunities, "braking regulations" such as Mifid2 increase complexity, eat up resources and raise entry barriers for new players (which is not completely correct, because the growing complexity creates for the players that they can overcome digitally, again, new business opportunities).

And ultimately the customer decides whether there will be a fintech revolution or not. However, customer behavior itself is not a driver in the true sense of the word. The customer is, so to speak, the arbiter who accepts the revolutionary innovations or not, but they do not come from him.

Banks from drivers to driven and back

Banks were historically early pioneers of digitization. You were the first to use IT intensively; online banking existed before e-commerce. Banks are very used to using new technologies to manage regulated processes. You are currently dedicating the largest research budget to harnessing the future technologies of AI and blockchain. This regulatory-technical competence, combined with the trust and the non-shrinking, enormous customer base, will allow them to play a driving, not a braking role in the fintech revolution.

However, this does not mean that banks that lack regulatory and technological know-how or that fail to digitally adapt their business models will disappear from the market and, conversely, large new players with banking licenses will emerge.

Fintechs, in the end or not?

With regard to fintechs, the initial question should actually be: For which fintechs is the fintech revolution over? It is over for pure front-end startups that have no or only a minimal license, for example classic 34f robo-advisors that have little more to offer than a nice customer interface without having a proprietary technology that allows it to offer unique customer benefits.

Revolutionary, driving and successful fintechs will be those who can really understand and implement platform business models (e.g. N26), who understand the major change technologies blockchain, AI or quantum computing and who are able to use them to develop proprietary technology solutions that can change financial customer behavior.

Digital companies contextualize the fintech revolution

The drivers of the fintech revolution that have received the least attention to date, but are perhaps the most invisibly strongest drivers, will be digital or digitized companies that can integrate financial processes into their business contexts. Like banks, they already have many customers and enjoy their trust. B. physical points of sales by implementing payment processes as background processes (retail, gastronomy), they offer real-time loans exactly when they are needed to buy a trip, a car or furniture and, conversely, attractive savings and investment opportunities Buy the higher value goods or services later. With these offers, they actually act as a front-end between the banks and the customers, which the original fintechs have not yet achieved across the board.

GAFAs as partial fintechs

The roles of GAFAs in the fintech revolution are still potential ones; even if everyone has already started offering finance functions.
What is clear is that all four could open a bank if they wanted to. To gauge what role they will actually play in the fintech revolution, one should look at which finance functions are close to their primary business model.

For Apple and Google, the topic of mobile and also numbers as a background process is very close due to their presence in the smartphone market. It can be assumed that they will play a major role here. In any case, other banking functions are not related to the business model.

Facebook will certainly offer more and more peer-to-peer payment functions, this is in the nature of social networks. Since Facebook and WhatsApp are also being expanded as a communication channel between companies and customers, it makes sense to also integrate payment functions for business relationships.

For Amazon, the direct attack on banks is closest to the business model. The range of payment functions, checking accounts, loans and even savings plans, i.e. the entire range of retail banks' products, is plausible for a large e-commerce and platform company. The checking account saves credit card costs and provides valuable data, payment functions are one of the basic functions of e-commerce anyway, Amazon retailers can use credit to finance their goods, and savings plans allow customers to save the money for larger purchases at Amazon, possibly with particularly attractive interest rates. All of this against the background that Amazon already has exactly these offers at the start.

Technology as the core driver of the fintech revolution

AI and blockchain technologies will be the strongest drivers of the fintech revolution. You will fundamentally change the way customers communicate with financial service providers, how financial service providers produce value for their customers, and how financial service providers manage their processes. They will paraphrase the role of organizations and people in what we call banking today. AI and blockchain will change the financial sector more than mobility and APIs have so far. Mobile devices and APIs have relocated the customer and banking interface and ensured that banking has shifted from the banks to the digital and analogue life and business contexts. But they have not changed the role of the actors and the basic processes of banking. Blockchain and AI will do this. To give just two examples: AI will be able to communicate with customers in natural language and provide extensive financial and asset advice. Bank employees are then only a convenience factor for customers who prefer to talk to a person rather than a machine. Initial Coin Offers (ICO) or similar smart contract procedures on the blockchain will change the way companies get money. Banks or stock exchanges can only be re-designed into the processes through regulation. And ICOs are currently only the most prominent application for the decentralized, certified exchange of values ​​that the blockchain makes possible. Almost every value-transferring banking or finance process can be "blockchainized" and thus in principle de-institutionalized because the role of the institution is taken over by the decentralized technology.

Technology will also be the strongest driver because development there is currently exponential. AI now has capabilities that were believed to be decades away from computerization. With a fundamentally new computer technology, quantum computing, which is already on the horizon, it can be assumed that the development will continue to run exponentially.

Regulation as a brake or accelerator for innovation

Regulation can slow down or accelerate the fintech revolution, to put it less buzzwordly, it can promote or prevent innovation. Whether the potential of AI and blockchain unfolds and who is allowed to revolutionize the financial industry with which license with these technologies depends crucially on the regulator. At least the European regulators seem to be innovation-friendly, as long as they see customer protection. The PSD2 was clearly a regulation that promoted innovation and forced banks to cooperate with non-banks. How the use of AI and blockchain will be regulated remains to be seen (when it comes to ICOs, for example, the US regulator is currently intervening much more violently than the European ones).

Customer behavior is not a driver of the fintech revolution

As already mentioned, it is ultimately the customer who decides whether or not there will be a fintech revolution. Paradoxically, he is not a driver of the fintech revolution himself. He can promote innovation by using it, curb it by not using it (for example, European customers curb innovations in mobile payments, robo-advice or peer-to-peer loans by not using them).

In the discussion about the drivers of the fintech revolution, customer behavior is often overestimated. Technology changes customer behavior at least as much as customer behavior promotes new technology. As a rule, there is technology first, which then looks for applications that no customer had thought of beforehand. In this sense, customer behavior and technology are “dialectical” antagonists that drive each other forward. The famous Henry Ford quote always applies here: "If I had asked people what they wanted, they would have named faster horses". Eddy Cue Senior Vice President Internet Software & Service at Apple recently reformulated this at the SXSW: "If we want to look around the corner, we can't ask the customer."

Incidentally, this does not mean that further development of technology, once it is there, does not have to be further developed in a customer-centered manner in order for it to be accepted. Apple is a master at it, German companies tend not (that is the deeper reason why Germany has a technologically leading B2B medium-sized company and the USA has the world's leading B2C tech giants).

The fintech revolution is in full swing

To conclude that it is over altogether from the fact that the fintech revolution is over for a certain subspecies of fintech companies is too short-sighted. The decisive technological drivers of the revolution are only just beginning to change the industry permanently. And the entrepreneurial drivers have not all fully gotten into the action either.

It is not yet possible to predict which companies will ultimately emerge victorious from the revolution. But it is foreseeable which factors are decisive for success in the upheaval phase. The companies that win will win
- Really understand and implement platform business models,
- change customer behavior with proprietary, deep technology (and not just chase after it),
- Understand and apply the major change technologies blockchain and AI.

Ultimately, these are the same factors as listed above in the fintech company section, but they apply to all players in the fintech revolution. Companies that already have many customers are currently at an advantage: banks, digital companies and the GAFAs. Young fintech companies have to make up for this gap through customer-centric use or development of technology. Then large, surprising global fintechs can also emerge. Perhaps one of the well-financed Challenger banks N26, Revolut or Monzo is already on the way there, at least they understood platform business models very early on and solved the chicken-and-egg problem for platforms with massive customer acquisition (many critics who do not have any have seen a viable business model, have not understood this point).

Hartmut Giesen Business development & digital business models

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