The word on the lips of everyone these days is FinTech, short for financial technology. The question is, what exactly does that mean? Part of the reason for the conundrum is that financial technology encompasses a huge swath of industry sectors. Safe to say, financial technology concerns itself with any aspect of making a financial transaction.
And chief among these aspects are two major categories (with a lot of overlap, to be sure). The first has to do with security and trust. People just want to know that, at the end of the day, if they paid $15.25 for something, they got $15.25 worth of whatever they paid for, and vendor has that $15.25.
The second category concerns the new catchphrase, "reducing friction". Reducing friction is the euphemistically nice way of saying, "removing middlemen". That $15.25 a person paid is received by the vendor, but the vendor has to pay the credit card company for processing: 3% plus a possible fixed fee. Then that money has to be sent to the vendor within 30 days from the processor in a single chunk, combined with many other transactions. If not, the processor loses money due to its own friction of transferring money. Thus, the vendor has added friction of a 30-day A/R. Reducing friction in this scenario would mean the person can pay the vendor money directly and by-pass the credit card processor company.
Many start-ups I've seen are working one or the other, or both, problem categories. Which one will come out on top will depend on a whole host of things not related to the actual solution, probably. Can the start-up scale quickly to capture the market against competing ideas? Is the timing right? Are other technologies there to make it work? Will people accept the concept?
A well-known anecdote about how other regions create their own "financial technology" is the story of how farmers and indigent workers from Pakistan and Bangladesh use mobile phone minutes as currency. So a Bangladeshi worker in Qatar gets paid in Qatari Riyals, but can't easily send that money to folks back home. So he buys mobile phone minutes and transfers those minutes to his family in Bangladesh. They can then use it for actual phone usage, or trade for other goods and services in their home country, or convert it back to the native currency of Taka. What happened here is organically grown financial technology (cell phones repurposed as ATMs) that meets the acceptance of the users (people trust the system) and reduced friction (there's still a lot of friction in order to make the transfer, but much less so that putting money in an envelop and expect that mail to arrive in a few weeks).
The reason I point out this anecdote is to demonstrate that solutions within financial technology can come from anywhere. A major player trying to build the perfect system may not achieve market adoption, or might not be able to earn money because the "friction" it reduced was itself. I know that big banks are really shaking in their boots. They may be too big to fail, but they are never too big to be irrelevant. Somewhere, some time in the future, some entity will create a financial system just slightly more sophisticated than the mobile phone money transfer system, and traditional banks will become irrelevant.
If you're like me, we know what we want from a bank: we want the assurance that if it says, "$12,341.65" is in the account, then that's how much is in the account and we should be able to withdraw exactly that without trouble. Really, that's about it. We've already given up on earning interest on that money. And, we don't even need to know that that amount is always there. (Indeed, in traditional banks, that amount is just a number on a statement. There isn't really $12,341.65 in cash assigned to me. The monies from all account holders are commingled and some of it has been moved to some other financial instruments. If all account holders went to a bank, especially to a smaller branch office, and demanded their money, that bank can most definitely not be able to hand out all that money in cash.) We just want to know, when push comes to shove, that the number stated on our account can be retrieved and isn't lost into the void without someone (the bank!) being responsible to make good on any deficit.
This puts banks and banking right in the middle of the line of fire for disruption. Banks are still beholden to various regulations: very, very strict regulations (and deservedly so). What if some other entity comes in to offer some, but not all, features of a bank. Someone that can ensure that every cent or fraction of a cent can be tracked, so it's impossible for the money to disappear into the void (I can hear people crying out, "BitCoin! Block chain!"). What if some other entity allows us to do the very basic of what we need: a place to hold our virtual funds? That's really what we need.
At one time, PayPal may have been that entity. But they came in too early, and it was difficult for people to adopt to it. Then, its friction was too high when technology made transactions and transferring money much more frictionless. Bitcoin itself is not going to work. I've suggested to others that Bitcoin is to finance as Esperanto is (was) to language. Man-made artifacts to something that is culturally adopted rarely works. It takes generations of people willingly wanting to use a new system before it gets adopted, even though most new technology are adopted quicker than older technology (the original telephone took 50 some years before 50% of households had one; there are now more mobile phones actively operating in the world than there are people living).
Where will adoption occur? Well, online transactions are becoming the norm, so the masses have adopted to online transactions. One sure-fire place to go to see whether a technology is being adopted is in the adult entertainment sector. Indeed, the online payment systems were first set up by all those online adult entertainment sites, and they worked out all the bugs and everyone else followed. But with porn so prevalent and free, the financial solutions in that sector is no longer technologically cutting edge.
The new sector where financial technology will gain adoption will be from the sharing economy sector. Companies like Uber and Airbnb will be the financial titans of the future. They've already have adoption. They handle transactions and people are happy with it. They are mobile. They can absorb the friction because their primary revenue stream doesn't come from charging commissions on transferring money or transactions.
And in the case of Airbnb, where there are many more international transactions, it might be possible for them to provide currency exchange arbitrage. For example, suppose I plan to travel to Europe in December. Suppose the US dollar is dropping versus the Euro for the moment. If that trend continues, My $1,000 I plan to use in December will be worth, say, €800, whereas it's currently worth €900. Perhaps, when I book through Airbnb, I can throw in $1,000 and have them transfer that into euros at €900 now. When I get to Europe in December, I can withdraw from my Airbnb account my €900 instead of what could be only €800 had I made the exchange when I arrived. Of course, if the exchange rate goes the other way, I can decide to just leave the money in my Airbnb account and make currency exchange when I get there. At some future date, I can request Airbnb to return my money.
Now, is Airbnb a bank? Well, it's not clear. It all depends on what it does with the money I sent to them. But you get the picture, any entity that holds your money, even for a moment's time, can be considered, effectively, as a bank. As far as you or I care, however, as long as we can get back our money, and any difference can be accounted for, it's all good. Now that would be disruption.
And chief among these aspects are two major categories (with a lot of overlap, to be sure). The first has to do with security and trust. People just want to know that, at the end of the day, if they paid $15.25 for something, they got $15.25 worth of whatever they paid for, and vendor has that $15.25.
The second category concerns the new catchphrase, "reducing friction". Reducing friction is the euphemistically nice way of saying, "removing middlemen". That $15.25 a person paid is received by the vendor, but the vendor has to pay the credit card company for processing: 3% plus a possible fixed fee. Then that money has to be sent to the vendor within 30 days from the processor in a single chunk, combined with many other transactions. If not, the processor loses money due to its own friction of transferring money. Thus, the vendor has added friction of a 30-day A/R. Reducing friction in this scenario would mean the person can pay the vendor money directly and by-pass the credit card processor company.
Many start-ups I've seen are working one or the other, or both, problem categories. Which one will come out on top will depend on a whole host of things not related to the actual solution, probably. Can the start-up scale quickly to capture the market against competing ideas? Is the timing right? Are other technologies there to make it work? Will people accept the concept?
A well-known anecdote about how other regions create their own "financial technology" is the story of how farmers and indigent workers from Pakistan and Bangladesh use mobile phone minutes as currency. So a Bangladeshi worker in Qatar gets paid in Qatari Riyals, but can't easily send that money to folks back home. So he buys mobile phone minutes and transfers those minutes to his family in Bangladesh. They can then use it for actual phone usage, or trade for other goods and services in their home country, or convert it back to the native currency of Taka. What happened here is organically grown financial technology (cell phones repurposed as ATMs) that meets the acceptance of the users (people trust the system) and reduced friction (there's still a lot of friction in order to make the transfer, but much less so that putting money in an envelop and expect that mail to arrive in a few weeks).
The reason I point out this anecdote is to demonstrate that solutions within financial technology can come from anywhere. A major player trying to build the perfect system may not achieve market adoption, or might not be able to earn money because the "friction" it reduced was itself. I know that big banks are really shaking in their boots. They may be too big to fail, but they are never too big to be irrelevant. Somewhere, some time in the future, some entity will create a financial system just slightly more sophisticated than the mobile phone money transfer system, and traditional banks will become irrelevant.
If you're like me, we know what we want from a bank: we want the assurance that if it says, "$12,341.65" is in the account, then that's how much is in the account and we should be able to withdraw exactly that without trouble. Really, that's about it. We've already given up on earning interest on that money. And, we don't even need to know that that amount is always there. (Indeed, in traditional banks, that amount is just a number on a statement. There isn't really $12,341.65 in cash assigned to me. The monies from all account holders are commingled and some of it has been moved to some other financial instruments. If all account holders went to a bank, especially to a smaller branch office, and demanded their money, that bank can most definitely not be able to hand out all that money in cash.) We just want to know, when push comes to shove, that the number stated on our account can be retrieved and isn't lost into the void without someone (the bank!) being responsible to make good on any deficit.
This puts banks and banking right in the middle of the line of fire for disruption. Banks are still beholden to various regulations: very, very strict regulations (and deservedly so). What if some other entity comes in to offer some, but not all, features of a bank. Someone that can ensure that every cent or fraction of a cent can be tracked, so it's impossible for the money to disappear into the void (I can hear people crying out, "BitCoin! Block chain!"). What if some other entity allows us to do the very basic of what we need: a place to hold our virtual funds? That's really what we need.
At one time, PayPal may have been that entity. But they came in too early, and it was difficult for people to adopt to it. Then, its friction was too high when technology made transactions and transferring money much more frictionless. Bitcoin itself is not going to work. I've suggested to others that Bitcoin is to finance as Esperanto is (was) to language. Man-made artifacts to something that is culturally adopted rarely works. It takes generations of people willingly wanting to use a new system before it gets adopted, even though most new technology are adopted quicker than older technology (the original telephone took 50 some years before 50% of households had one; there are now more mobile phones actively operating in the world than there are people living).
Where will adoption occur? Well, online transactions are becoming the norm, so the masses have adopted to online transactions. One sure-fire place to go to see whether a technology is being adopted is in the adult entertainment sector. Indeed, the online payment systems were first set up by all those online adult entertainment sites, and they worked out all the bugs and everyone else followed. But with porn so prevalent and free, the financial solutions in that sector is no longer technologically cutting edge.
The new sector where financial technology will gain adoption will be from the sharing economy sector. Companies like Uber and Airbnb will be the financial titans of the future. They've already have adoption. They handle transactions and people are happy with it. They are mobile. They can absorb the friction because their primary revenue stream doesn't come from charging commissions on transferring money or transactions.
And in the case of Airbnb, where there are many more international transactions, it might be possible for them to provide currency exchange arbitrage. For example, suppose I plan to travel to Europe in December. Suppose the US dollar is dropping versus the Euro for the moment. If that trend continues, My $1,000 I plan to use in December will be worth, say, €800, whereas it's currently worth €900. Perhaps, when I book through Airbnb, I can throw in $1,000 and have them transfer that into euros at €900 now. When I get to Europe in December, I can withdraw from my Airbnb account my €900 instead of what could be only €800 had I made the exchange when I arrived. Of course, if the exchange rate goes the other way, I can decide to just leave the money in my Airbnb account and make currency exchange when I get there. At some future date, I can request Airbnb to return my money.
Now, is Airbnb a bank? Well, it's not clear. It all depends on what it does with the money I sent to them. But you get the picture, any entity that holds your money, even for a moment's time, can be considered, effectively, as a bank. As far as you or I care, however, as long as we can get back our money, and any difference can be accounted for, it's all good. Now that would be disruption.
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