In part 1 we have discussed what underlying shift in mentality needs to happen for Finance 2.0 to really kick-off. To an extent a lot of these changes are already happening. Entrepreneurs starting new companies are adopting finance 2.0 mentality:
Risk Assessment will change
We are starting to look beyond traditional historic credit history to guide the future. Traditional credit scoring looks to the past and present as a guide to the future. But what would it be like if many data points, from psychometric testing to posts on Facebook or LinkedIn, could be used to build up a more accurate portrait of creditworthiness? What if instead of analysing past behaviour we could create an accurate persona of the customer that has predictable patterns. Hamburg-based start-up, Kreditech does just that.
Settlement and transaction time decline
Carrying out a payment is inefficient, it takes time and costs money. A typical international payment with ‘mainstream’ currencies takes anywhere between 2 and 5 days. It also costs a lot. Local payments are cheaper, and quicker. Some countries, like the UK already have instant payment systems in place, however this is more of an exception than the norm. Blockchain technology enables us to minimise transaction costs to bare minimum and makes settlement times near instantaneous, locally or internationally, creating a sound infrastructure for a layer of micro-transactions that were not viable before. This would change the way we pay for things, or even who pays for things. In Finance 2.0 people will only set up the logic for when the payment should occur (we run out of milk -> order new bottle) for the vast IoT network. Objects will do the micro payments, fridge in this case. Another immediate area that will change is the way we remunerate creators of their content. A network of microtransactions will enable us for pay for content as we consume it – pay for every page of the book you read or for every minute of the movie that you watch rather than the whole book or movie. A lot of business model will turn upside down as a result.
Data sharing and customer stickiness
Banks currenly enjoy very high customer stickiness, well above a decade. Until very recently, it was a pain to move a bank but it is no more. In the UK the banks will transfer all you schedule payments for you and reroute all the payment to your old bank account to the new bank account. However, this is only half of the job. What we lose is all the data we have generated with the banks over the years. With upcoming PSD2 regulation, this will also change. Customer will be in charge of his data, he will be the gatekeeper and give the keys to who and when he considers fit. This will change the balance of power significantly. Rather than using 1 provider (bank) for most of your needs customer will be able to have many providers and use them as specialist for their one best function. Data generated by all these providers will complement each other. The layer of aggregation will likely to appear, that will simply plug all the APIs into one and provide great user interface.
Banks will turn into platforms
A bank won’t be a closed garden but rather a bustling bazaar. A placemaker for creators and innovators to meet their clients – a platform. AirBnb is the biggest hotel chain but they don’t own a single hotel, Uber is the biggest Taxi company that doesn’t own a single taxi. Can bank be the biggest financial institution without any financial products? Can banks simply become the gatekeepers of the bazaar, ensuring product quality, security and taking money for opening the gates to new vendors? Pascal Bouvier and David Brear have discussed the pros and cons of such platforms and Chris Skinner has laid out the steps that these banks need to take. I won’t summarise this better than they already have so do read their articles.
Change in regulatory mindset and approach
Regulators are perceived slow, inefficient and reactive. This would be best visualised by 1000’s of pages long volumes of regulatory frameworks such as Dodd-Frank Act. However, the role of the regulator has changed significantly. The regulator is under a constant spotlight to make sure that financial crisis of 2007 does not repeat itself. Equally, it is pressured to foster innovation, which in turn fosters competition. Many small players competing with each other reduces system risk and is beneficial to the customer in terms of price and quality. The regulator is encouraged to become much more proactive to prevent the misconduct from happening in the first place. For this, the regulator needs to have a hand on the pulse of the market, lots of data and access to the innovators of tomorrow. Sandbox by the Financial Conduct Authority (FCA) is a great example of embracing forward-looking innovation.
Robots will transform finance business model
The corporate structure and headcounts will change drastically in finance over the coming years. Robots can already do many jobs better than humans can. Robo-advisors are better, and cheaper, at allocating assets. They can’t, and likely never will be, to provide behavioural coaching private banker can but this is only relevant for the ultra wealthy. Other parts such as compliance, accounting, modelling and other will be slowly transformed, or even outright replaced, by machines too. Machines don’t do mistakes. In the next term years banks will change from large employment hubs to lean operations. Many functions will be automated, many parts of the business will be lost to the marketplace. Banks will maintain their core functions and employees associated with that.
The dawn of new finance is upon us. As a crucial element of our society this changes will have a ripple effect across many functions and industries. A more efficient financial system will make our overall lives more efficient, more transparent and more fair.