The battles for the future of fintech

Whilst in New Zealand, I had an interview with the country's most respected business paper: National Business Review. The subsequent article is behind a paywall but, as they sent it across to me, I feel it's worth sharing here.

The battles for the future of fintech

The future of financial services will be decided in the back office and between major companies of the East and West.

Digital technology has already ripped up and taped back together many industries but, until recently, the payments industry and financial markets dodged the major blows. Now these industries are racing to stay ahead as giant technology companies such as Amazon, Google, Alibaba and TenCent breathe down their necks, says independent financial commentator and author Chris Skinner.

Mr Skinner was in New Zealand to speak to The Point 2018 payments conference.

He told NBR while the financial system is built on institutions invented before the industrial revolution to move physical paper among humans and buildings, today everything is being taken over by the “platform revolution.

“The industrial-era entities are disappearing because we are digitalising everything. This platform revolution is creating a banking battlefield on which banks are being challenged to keep up with technology.

“Today, it’s all about the digital distribution of data through software and service on a global network. The big difference in this new open system is that anyone can launch a simple plug-and-play software into this map of functionality and become a billionaire,” he says.

He says in years past, a financial company’s back office was typically focused on products, its middle office was focused on platforms and the front office took care of customer experiences. The new digital model begins with connecting the customer with what they need through a platform.

But they’re not doing this in a vacuum. The new services companies couldn’t exist without APIs (application programming interface). For instance, Uber can only work because Google Maps connects all of Uber’s services with its software and data.

“Ten years ago, I predicted the invention of banking-as-a-service and plug-and-play software to build my own bank. Today this is possible because different parts of the financial system are being dropped into new software by thousands of companies, each focusing on doing one thing well,” Mr Skinner says.

"Where’s the vision among banks? Where’s the 'digital' in banks? The problem is, most bank leaders have never had any professional experience of technology in their entire life. How can they introduce a digital vision and cultural change?"

Back office battle
Unsurprisingly, in a world with phrases such as “data is the new oil,” the main battle for the future of finance will pivot on who owns the data.

Although people will continue to maintain a personal bank account, they are increasingly not using banking software to move their money around. A startup bank in the UK called Monzo has attracted more than 500,000 customers to its platform because it enriches every transaction by linking to Google Maps and other APIs so people can know exactly what their financial life looks like.

“I use a Monzo card for transactions, and now my actual bank has no idea what I’m doing. My bank has lost my data and all they know is that Monzo has my business. That’s the battlefield, and the two technologies central to this conflict are blockchain and artificial intelligence.

“You cannot leverage data in artificial intelligence if you have dumb and fragmented systems stuck in heritage structures. This is the biggest challenge for financial institutions. They are struggling to reinvent themselves for a new digital age when they were built for a slow, older age,” Mr Skinner says.

To compete, financial institutions have decided to play the role of “asset manager” – not just of financial assets but also of digital assets. Their customers own plenty of digital assets they want to protect, such as intellectual property, contracts, memories and all their online activity.

“People have decades of digital photographs online and, if a website decides to delete those, it should be possible to have them backed up. But who is storing my memories? Can I trust the company to do this? How much of my data is valuable? And how much would you pay to protect your slice?” he asks.

The older institutions are also acting as “life-events managers.” For instance, the Royal Bank of Canada recently announced it would connect with its customers' “life events” – such as births, marriage or mortgages – and build a completely integrated marketplace around them.

“So, if you’re buying a house, the bank won’t just give you a mortgage, it will supply the removal van, the insurance and the painters. Everything you need for the entire homemaking experience. And in the event of a car crash, a person’s phone and car will connect with the tow truck, the taxi ride home and the insurance,” Mr Skinner says.

Banks of the future will also act as a curator of the “thousand single things those thousands of companies each do well.”

“I don’t want to go to a thousand companies to a thousand things. I want my financial institutions to find those companies and bring them to me after having done due diligence,” he says.

East vs West
Mr Skinner says banks are now technology companies that “happen to have a banking licence.”

But at the same time, the world’s largest technology companies are already bursting into finance and payments scene. Amazon isn’t building digital payments platforms because it wants to get into finance and payments, it simply wants more sales and commerce on its other platforms.

Digging a bit deeper, Mr Skinner says while the various European and North American financial institutions are still based on centuries-old legacy systems, something completely different is happening in China.

And they are racing ahead. For instance, the average employee of AliBaba’s AliPay (a third-party mobile and online payments platform) generates $US16 million per year of revenue. Compare this with an average Barclays employee who generates only $400,000 a year.

Mr Skinner says this is the difference between a tech company getting into finance, and a financial company getting into technology. Chinese platforms made $US15 trillion of mobile money payments last year, 55% of which was made through AliPay and 38% through WeChat Pay.

“The aim of AliPay is to have two billion users by 2025. There are only 1.2 billion people in China, so the rest will come from all over the world. AliPay is already on its fifth-generation architecture. That means every three or four years it throws away its system and starts again from scratch.

“The present system is built to handle an average of 125,000 transactions per second (Visa performs an average 2,000 transactions per second), each one with anti-fraud and risk analytics built in by artificial intelligence systems. AliPay’s next generation hopes to handle an average of one million transactions per second,” he says.

As an example of the capacity, in the first two minutes of “Singles Day” last year in China, AliPay processed over $US1 billion of payments. In the first five minutes, it was handling 256,000 transactions per second and managed $US10 billion in the first hour.

“Add to this the fact that 60 terabytes of data are uploaded to the internet every second. Sure, a lot of that is useless Snapchats or Facebook updates, but if just 1% is of value, that's a lot of data and digital companies are becoming incredibly powerful,” Mr Skinner says.

“Banks and financial institutions do some things well but they also do many things averagely and some things badly. The entities we should really worry about are those large tech giants. What are they going to do in financial services?”