Little has changed in terms of actual banking practices in the last 300 years, but everything has changed in the world of computing since the introduction of the differential calculation machine in 1947. Introducing technology into traditional banking processes has seen the resurgence of financial technology (FinTech).
As you would expect with a revolution, it is hard to see exactly what the outcomes will be. But there are definitely signs of what to expect. Here are some of our favorites.
The first retail banks were set up as a way to facilitate the transfer of value without passing heavy lumps of gold between buyers and sellers. Banks were set up by royal charter, allowing for transactions to be made using paper, in the form of bank notes and checks.
Paying with paper was not only simpler, but more efficient. A $100 bill, or €50 note was easier and quicker to verify than measuring and weighing the equivalent weight of gold. This simple change suddenly accelerated the speed of processing transactions.
Fast forward three hundred years and people are no longer satisfied to wait three days for a check to clear. If goods and services can be purchased instantly over the internet, why should the merchant have to wait an extended period of time to receive payment?
As the rapid adoption of FinTech solutions demonstrates, no one has to wait at all – hence its popularity with consumers and merchants alike.
From more efficient cloud-based platforms, to advances in network connectivity and hardware processing power, everything will get faster. If the technological developments aren’t enough, customers’ demand for instant gratification will provide further impetus to improve.
The complexity of traditional payment processing, particularly across international borders, is slow and expensive. Banks typically charge fees twice on foreign transactions, first for handling the international transfer, and again to convert the currency. Merchants can expect to wait between 7 and 28 days for the transactions to be fully processed.
FinTech platforms have completely transformed the existing paradigm. The integration of a cloud-based payment platform provides a smooth, connected experience between the buyer and merchant’s accounts. Automation of the end-to-end payment process through one platform significantly reduces the friction of dealing in multiple currencies, and having to log in and out of various systems.
The future of FinTech lies in handling payments of any size. Traditional banks prefer to deal with low volume, high value transactions that allow them to levy a significant handling fee. FinTech systems, focused on simplifying the payment process, can handle payments of any size at a low flat rate, and facilitate multiple payment runs in a day, getting the money to where it needs to go quicker.
Leveraging the power and flexibility of the cloud, FinTech providers are able to scale their capabilities to meet demand at a negligible added cost to their clients. As the technology matures, processing costs will rapidly reduce – making such platforms affordable for all, and helping to drive uptake with even more merchants.
Traditional banks, at a risk of losing margins as customers adopt to newer, agile solutions, face two likely outcomes. First, incumbent banks face an uncertain future with those who are slow to innovate falling behind or disappearing completely. The second is an increase in partnerships between established financial institutions and FinTech providers, sharing technology, customers and know-how.
How banks respond to the FinTech revolution will be crucial. Technologies like blockchain will quickly establish themselves as the de facto standard for managing and verifying digital identities. And if FinTech providers are able to corner this section of the market early, banks will struggle to remain relevant in the digital age.
Perhaps the most striking development lies in the way that Fintech could change global society. The traditional banking structures are irrelevant, unaffordable and inaccessible to large sections of society, particularly those in developing nations. But the smartphone revolution is the first step towards helping these people join the global economy.
A low cost smartphone is also a mobile point-of-sale, allowing anyone to make and receive digital payments – even without a traditional bank account. The digital wallet approach, where account holders store their funds online, is already growing in popularity in Africa where the vast majority of residents have no access to retail banks.
By simplifying the process of making and receiving payments, digital wallet-backed Fintech affords the poorest of society access to the economy. And because the cloud extends operations everywhere, these same people can trade across borders, further improving their potential customer base and financial prospects. We will see FinTech helping to lift people out of poverty and empowering them to boost their own local economies.
The 2007-2008 global financial crisis did serious damage to the reputation of banks across the world, but the FinTech revolution could play some part in restoring it. As well benefiting customers and merchants in established economies, FinTech will be instrumental in helping build a more ethical, fair global economy that everyone can be a productive part of.