Often overlooked by the allure of technology, trust is fueling the growth of the fintech industry. In some ways, fintech companies are delivering 1-to-1 experiences like banking and insurance companies did in the past. Historically, financial services companies delivered products and services face-to-face through branches. Trust was established between parties over generations in this way. As a teenager, I can remember setting up my first bank account with my local bank manager. He knew my parents, teachers and neighbours. When the internet became popular as a distribution technology it gave financial services companies scale at the expense of developing personal relationships between parties. Today however, fintech companies are reconnecting with the customer with much improved mobile, social and cloud technology to deliver, deeper more meaningful experiences to customers like days gone by. Apps have replaced branches. The iPhone has become a digital high street for the consumer.
Changes in the dynamic of the financial services market mean banks and insurance companies are no longer competing with one another, but with a wider technology market from new fintech start-ups to technology blue chips. According to a recent survey by the Millennial Disruption Index over 73% of millennials are more likely to do business with a bank founded by well-known technology brands likes Amazon or Facebook than a traditional bank. At the heart of all of this is a trust revolution that is channeling customers to alternative’s instead of traditional financial service providers. The change in the dynamic of the market is good! There are many examples of how fintech companies are bringing much needed trust back into the industry. Innovation in the provision of credit and regulation are good examples of how fintech is breathing trust back into the industry.
To understand the trust revolution, we must go back to the financial crisis. In September 2008, I was standing on the equities trading floor in Merrill Lynch Financial Centre when Lehman Brothers collapsed. I was an analyst on the stock loan desk at the time. When the news fed through, a stunned silence fell over the trading floor. The banking system had failed. A global investment bank had just gone bust. For bankers — this was unthinkable. In the following weeks and months, the global financial markets ground to a halt. Bloomberg terminals glowed red. People were losing their jobs on a daily basis. Trust, the grease that keeps the financial markets moving had evaporated. Banks across the world were loaded with CDOs, subprime loans and bad debt. The banks shut their doors and stopped transacting with one another. We all know what happened next — asset prices collapsed, deposits evaporated, and pensions plummeted.
The fintech movement rose out of the ashes of the financial crises. Successful fintech companies focus on developing unserved or new financial markets. The credit market was the big opportunity when the banks collapsed. With the credit markets frozen, it was the role of peer-to-peer lending companies to re-establish trust in the industry to get credit back into the economy — especially for small businesses. Fintech companies emerged as the new friendly face of banking. You were more likely to see a fintech CEO in a t-shirt than a pin stripe suit, more likely to see them drinking a flat white than a glass of vintage champagne. Innovative and technology led companies like Funding Circle and Lending Club emerged. P2P lending matches lenders with borrowers in a more transparent way by disintermediating the banks. Lenders can fund their local coffee shop, mechanic or tech start-up in a way that wasn’t possible before. Its technology that allows these emerging players to circumvent the banks. Its only possible to do this by creating deep transparency between the borrower and the lender. This fresh approach allows these new fintech companies to establish far greater trust and transparency than before. Next generation crowdfunding platforms like Flender enable people to fund initiatives using their social network. An initiative could be further education or a side project. People are able to borrow on the basis of their social equity rather than their credit history. Trust is at the centre of this type of lending and works on the basis that you are unlikely to take a loan from a friend of a relative if you know you can’t repay it.
In recent weeks we have seen the $20 billion bailout of the world’s oldest bank Monte dei Paschi di Siena. This event shows the ghosts of the financial crises still haven’t gone away. Its unsurprising that Regtech (regulatory technology) has come to the fore as one of the most important streams of innovation in the fintech movement. Regtech companies are allowing banks to solve complex financial regulation challenges using technology. Market leaders like Fenergo allow banks to automate and comply with regulations using software. Regtech companies are in the trust business. Their actions are making the industry safer and more stable. The adoption of artificial intelligence in fintech is a key trend that emerged in 2016. This is no different for some Regtech, companies like Behaviosec and Behavox that are embedding AI in their technology. Regtech combined with AI allows financial services companies to take control of the vast sums of data they produce and at the same time overlay a regulatory framework to try and keep them stable.
There are examples of the re-establishment of trust across virtually every sub-vertical in financial services, whether its debt, equities, asset management, payments or regulation. Fintech companies are effectively unbundling the entire industry, making each category better and more transparent than before. Its unsurprising that platforms like Bud have emerged. Bud is a cross between a digital wallet and a financial services marketplace. Bud allows you to bring all of your financial accounts together into one digital wallet and makes it easier to switch from one service provider to another.
There are interesting times ahead for the fintech industry as it matures and fragments. The customer will be the ultimate beneficiary of the trust revolution.