Disruption of banking by fintech is showing no signs of slowing. Of the many innovations now appearing, online credit scoring, peer-to-peer lending, digital wallets and open banking are among those making the biggest impact. They have all emerged as key drivers of the digital transformation taking place across the financial services industry.
Earlier this month, a group of top executives from the Central Bank of Egypt came to Silicon Valley to explore each sub-sector in depth, as part of an executive immersion tour hosted by SVIC.
For state agencies everywhere, including central banks, now is a crucial time to get a grasp on fintech. With the sector evolving quickly, governments are under increasing pressure to keep pace. They are being called upon to set the rules for how and where the latest technologies can be used.
That comes amid reports that more investment is expected in fintech in 2018 than in any previous year. According to CB Insights, the first four months of this year have already set a quarterly record: VC-backed fintech companies globally raised more than $5 billion across 323 deals during the period.
It’s no easy task to pinpoint what’s causing this fast expansion. Predicting the consequences for traditional financial services companies is harder still.
What’s clear for now is that there are a number of prominent trends.
Online Credit Scoring
Getting access to loans is a challenge if you don’t have a credit history. In the U.S. this is a growing problem, with just one-third of millennials using a credit card. In China the numbers are even bigger: only 25% of the population of over 1 billion has built up a profile on past loan activity.
Enter fintech businesses, which are tackling this issue in a big way. Among the major names in the space is WeCash. The company, which featured on the Egyptian bankers’ SVIC tour, uses artificial intelligence and big data to assess applicants for loans in a process which is 100% automated.
WeCash states its mission is to provide financial services to those who are underserved by traditional banks. Apart from its home market of China, It focuses on emerging economies like Brazil and Indonesia. The monthly income of its typical user is between $300 and $2200 per month. According to company statistics, WeCash has 1 million active monthly users and holds credit profiles on 27 million people.
It’s no accident that Wecash was founded in Beijing. China is home to one of the world’s most developed fintech sectors. Using a smartphone to pay for everything from groceries to car insurance is widespread and not only among younger generations. One of the most popular mobile payment apps is Alipay, which launched its own credit-scoring platform in 2015 called Sesame Credit.
The online credit scoring industry is undoubtedly a hot one. Its supporters believe it has the power to create truly inclusive finance. Critics worry it will violate privacy laws as more and more user data is collected. Where both sides agree is on the fact that it will remain one of the most active fintech sub-sectors for some time to come.
The credit business has another Fintech rival to contend with: peer-to-peer lending. Once again seeking to circumvent the usual banks, peer-to-peer lenders often present themselves as platforms or marketplaces. They seek to connect borrowers with investors who want to hold consumer debt in their portfolios.
Lending Club is one such company. Based in San Francisco, it featured on the program for our group of Egyptian central bankers.
Through its app and website, Lending Club offers credit of up to $40,000. It uses machine learning to analyse thousands of attributes for each potential borrower and generate a nuanced risk profile. It says it needs just minutes to generate a loan offer for qualified applicants. According to data from the company, it currently serves more than 2 million customers and receives 10 million applications annually.
Peer-to-peer lending is undoubtedly a growing trend within fintech, with several IPOs expected this year from companies in the space. Among them is Funding Circle, which was last year valued at over $1 billion in a private fundraising. Other unicorns include the Atlanta-based Greensky and Lufax, which is headquartered in Shanghai. Both are currently valued in the billions of dollars and are likely candidates to go public in 2018.
It was as far back as 2007 that digital wallets first began to appear in the world. Every year since take up of the technology has grown. Yet e-wallets, as they are also known, are still relatively little used. A study commissioned last year by JP Morgan found that only 16% of American consumers have used a digital wallet. Many shoppers say security concerns are holding them back from trying one out. They still prefer debit cards, credit cards or simply cash.
But tech companies say such worries are unfounded. In fact, they argue digital wallets are more secure than traditional methods of payment. Google, where our group of Egyptian bankers met a top engineering director, says of its payment app:
“Google Pay protects your payment info with multiple layers of security, using one of the world’s most advanced security infrastructures to help keep your account safe.”
Apple Pay, a chief rival to Google Pay, makes similar claims.
It appears that most consumers are inclined to believe in the technology and will eventually leave their physical cards at home; the JP Morgan study found 69% of merchants believe that by 2022, the majority of payments made to them will be via digital wallets.
Described by consultancy Mckinsey as a “serious threat to current business models”, open banking promises a major shake-up of the financial services industry.
This new model forces banks to surrender their monopoly on customers’ account information. It also means third parties can build financial services on top of a bank’s data and infrastructure.
Open banking is currently partially operational in the UK, with full deployment expected in the coming years. In the European Union, the system is known as PSD2. How the model fares in both places is being closely watched, as countries the world over contemplate implementing it for themselves.
Silicon Valley-based startup Token is one business positioning itself to be at the centre of new opportunities created by open banking. A visit to the company featured on the program for our group from Egypt.
Token says its technology gives banks a “simple and quick” path to PSD2 compliance. It can also work for merchants, connecting them directly with their customers’ bank accounts for payments and information. The company says it is seeking to build “the payments ecosystem of the future.”
Collaboration as Disruption
Many legacy banks believe their business is threatened by fintech. But experts say established companies do not need to take an adversarial approach. Instead, they should look for areas of cooperation.
In fact, it appears the task for banks today is not to fight back against fintech. Rather, they need to develop a culture of innovation which will allow them to embrace new technologies and partners.
After a three-day executive immersion program, the wisdom of such an approach was clear to the group from Egypt’s central bank. As state regulators, the insight they gained into the fast-evolving tech world is sure to be invaluable as they plot their own course into the fintech-powered future.