For years Banks have been the center of financial activity. With the rise of FinTech, we are now seeing a process where the power is being shifted in different directions, which at first glance seems as a definite move in the right direction. BUT - What if the power is shifting to another centralized entity?
Banks and Financial organizations have been, for quite a while, one of the stronger systems, playing the part of "Middle-Man" for many financial transactions. Some would call the financial eco-system centralized, and would even point out the implications and dangers of such strong centralized systems, for example – the Sub-Prime Crisis.
But this crisis brought a change: Laid off financial employees decided that they can create better alternatives to the existing financial services, with their knowledge of the pain points inside traditional financial organizations, and created financial technology startups, FinTechs.
Today there are over 12,000 estimated FinTech startups, 400 in Israel, and banks throughout the world are dealing with competition for most services they provide.
In the d10e conference for decentralization, one question that was discussed was "Is all this competition leading to the decentralization of the financial eco-system?"
Checking the various sectors of the financial eco-system could shed light on this question:
1. The Payments sector –
If originally almost any financial transaction went through banks or financial institutions, be it Checks, Payments, Money Transfers etc., now users can pay & transfer money through Facebook messenger, Apple, Amazon go, Paypal and WeChat (Which is the Chinese version of WhatsApp that allows transferring money to friends, paying at shops and restaurants, and even taking loans from WeChat – Which btw raises the question whether WeChat has actually become a bank).
2. Lending and financing –
If a customer wants to lend money, traditionally he would need to ask the bank for a loan. Now people and companies can raise money through crowdfunding, P2P loans or even ICOs.
3. Retail banking –
If you want to know where the governments stand throughout this process, the PSD2 (revised payments service directive) can give a hint. This directive decided that starting from the beginning of 2018, European Banks will need to open their APIs, which means that customers will be able to choose which app they want to use for banking, and financial tools. Customers could, for instance, choose to use the Google Banking App that might be developed by that time, or even use a voice interface, Alexa for instance, to "talk" to their bank account and place orders.
4. Wealth Management and Trading –
If traditionally investors would get advice from the banks' investment advisor, they can now choose to use Robo-advisors, or just see which of the investors on the social trading platforms (like etoro) created the best revenue. They can also create trading algorithms easily, or use cheaper alternatives for placing trading orders (through Robin-Hood for instance).
The other financial sectors are going through quite the same processes, which could point to the direction of decentralization of the traditional financial eco-system.
BUT – there are few points that can change the picture:
1. Banks, like any other entity do not want to lose their customers and the major part they play, so if originally financial organizations had seen FinTech startups as an enemy, with Visa's CEOs famous threat about going after PayPal "in ways that people have never seen before", they later realized the benefits of cooperating with FinTechs. Today many banks are partnering and investing in Fintech Startups, which actually makes sense – because that way the banks can "fintegrate" innovation faster into their systems.
2. The opportunities for growth and innovation in the financial sector have not been missed by the Tech Giants, that keep offering glimpses of financial services, and seem to be waiting for some signal to head straight into this sector. Customers on their side are not only open, but actually awaiting this move, with 73% of Millennials interested in new financial services offering from the likes of Google, Amazon & Apple than from their own nationwide bank.
If, or rather, when, GAFA completely enter the financial eco-system, the vast data that banks have in their systems, but are not using, will also exist in the hands of the tech giants, which already have a lot of information about users.
Taking these points into consideration, quite changes the picture, and it would seem that the changes we are seeing in the centralization of the financial system, isn't necessarily leading to decentralization, but rather to Re-centralization of the power into the hands of a small amount of very powerful entities.
To learn more, book a lecture, or find ways to leverage your business with Fintech and digital, feel free to contact me at MHfintechs@gmail.com