In the tech industry, “disrupt” is the most powerful word that can appear in any headline. It’s the perfect definition of how many startups aspire to do business. They find a process that’s heavily integrated into our society, design a better way to do it, and collapse the foundation supporting an entire market.
Economist Joseph Schumpeter described the process as “creative destruction.” In this example, it’s not just about innovation, but the pace of innovation that forces a quick shift of income from the losers to the winners.
This method of doing business colored the fintech industry with David versus Goliath overtones. Journalists position them as the young, agile innovators up against the financial giants. For one to win, the other has to fail.
From an editorial perspective, the reader appeal is obvious. Economically, it’s a dangerous way to do business. It’s one thing for Uber to disrupt the cab industry, or for Airbnb to take on hospitality. The finance industry is the foundation of our economy, and stability is crucial.
This year, the market is looking very different. With institutions like JP Morgan Chase and Bank of America partnering with up and coming fintech companies, dynamics have changed. When an agile new company unveils a game changing innovation, there is a pretty good chance that you could see it adopted by your own bank.
This makes 2017 one of the most exciting years for the banking industry in a long time. Here’s what you can look forward to:
Educational Investment Accounts
We’re always told how important it is to invest when you’re young. Given the nature of compound interest, this is very true. The problem is that investing properly requires a little savvy. You need to understand the basics in order to make good choices, and this is overwhelming for many users.
The investment app Stash is the first to help you bridge the knowledge gap. As it is today, users deposit a small amount of money and follow a course targeted towards beginners. After a successful round of funding, Stash is looking to expand its offerings later this year. The next step? Investing applications that study your behavior, and make recommendations tailored specifically to you.
Users provide data such as how much risk you are willing to take, your financial objectives, and your current level of financial knowledge. As you move through the training, the app will track your location and make recommendations that are tailored to your specific needs and skill level.
Historically speaking, banks have always acted as middlemen between loans and investors. With careful systems in place for determining risk, they could ensure that all investors were compensated at a market rate while making a tidy profit. Peer to peer lending service gained popularity over their promise to cut rates and improve access to finance. But for those with adequate credit, one of the biggest benefits to the service was simplicity. To stay competitive, many lenders have partnered with or launched their own online loan services.
In Canada, the CIBC partnered with Borrowell and Thinking Capital, two major online lenders. Following suit, HSBC signed contracts with Tradeshift, offering working capital to corporate users all over the world.
These trends are similar to changes we’ve seen across the insurance industry. Previously, you’d have to rely on a broker who would have partnerships with a few specific companies. Today, online services allow you to compare quotes industry wide. As banks work to maintain market share, it stands to reason that all of your financing need will be handled online. Not only will you be able to borrow more easily, but you’ll be able to find the best rate across a variety of lenders.
Universal Payment Systems
There are a lot of different ways to transfer money from one place to another. Debit, Visa, MasterCard, and likely your bank’s own in-house payment system. Thanks to technology developed by R3, an instant, universal payment system is coming to a bank near you.
R3 developed technology based on Bitcoin’s Blockchain. Essentially, this is a universal protocol for conducting transactions. Although the system provides the level of anonymity necessary for your private banking, this means that information can be shared from one bank to another instantly.
Sending a little cash to your family? Depositing your paycheck? Transferring money abroad? Once the R2s technology is in place, they hope for all of these transactions to take place across a single, centralized platform. What’s unique about this approach is that it doesn’t favor any one company. Mastercard wants you to use their service so they get the fees. The same can be said for Paypal, Western Union, and every individual bank own service. With R3, your existing payment systems can be tacked onto their system, allowing service providers to keep your business.
For consumers, the end result is a choice. You can use whatever payment method is most convenient for you, and your recipient can do the same.
R3 has already struck deals with Barclays, J.P. Morgan, BBVA, Credit Suisse, USB, State Street, Royal Bank of Scotland and Commonwealth Bank of Australia. It’s expected that much more will follow.
One of the biggest hurdles to moving your banking into the digital space is the “Know Your Customer” regulations. For both the security of their clients and to avoid illegal activity, banks need you to prove who you are. Whether you’re going in for a loan, opening up a new account, or performing large transactions, you’re required to present legal identification.
There are several promising technologies that are looking to make biometrics the next big thing in banking. Vasco launched Smile & Sign, as mobile banking application that allows users to log in and verify transactions using the camera on their phone. Eyeprint ID offers the same service using your iris, offering one of the most advanced forms of biometrics ever to grace a mobile phone.
Perhaps the biggest game changer was Jumio’s latest addition to their NetVerify platform. Their facial biometric system is the first to meet “Know Your Customer” regulations, indicating that all of your traditional banking services can soon be moved online.
Better Rewards through Analytics
Carry an AirMiles card in your wallet? The idea that consumers can be rewarded simply for carrying a card is pretty enticing. Many banks offer rewards on their credit cards, providing an incentive to use them.
Data is the reason that Airmiles is in business. Through rewards, they’re buying your data. Retailers that collect air miles understand consumer trends. When you know what your customers are buying, you know what products you need to make available.
Cardlytics has partnered with several major US banks to provide research and trend tracking for consumers purchases. The first product officially launched is BankAmeriDeals. Unlike a standard reward where you earn points and cash them in years later, rewards here are targeted specifically towards the things you already buy.
Stop for coffee at the same place every morning? Cardylitics might offer you a discount voucher at a new place just around the corner. User your card for the cashback rewards? Cardylitics platform can help you earn up to 10% cash back on the things that you already buy.
Rewards cards have been around for a long time, but big data means that banks will be able to offer you more rewards for the types of things that you already want.
Controlled Spending Cards
Ever been surprised at the number on the bottom of your ATM receipt? Ondot systems is working with banks to bring card control to your mobile phone. What Ondot does is provide you with a comprehensive suite enabling you to control or limit your spending. Not only can you turn cards on or off, but you can set specific daily, weekly, or monthly thresholds.
It’s also possible to break spending down by category. You can enable groceries and personal care, but disable entertainment and mail-order.
Security is another advantage of digitally controlled cards. You can tie your card to the GPS coordinates of your phone. If anyone tries to use your card without you being nearby, the transaction can be blocked.
What This Means for Consumers
Overall, it’s clear that banking is following some pretty specific trends. Automation is taking complex tasks and streamlining them, making banking products more accessible for consumers. Big data is analyzing how you use your services, ensuring that your bank can offer you products that are customized for your own unique needs. But most importantly, everything is becoming connected.
Today, we look at banking products as these isolated, specific things. You choose from a list of credit cards, select a banking package, and sign up for a variety of service providers when necessary. Moving forward, things aren’t going to be so black and white. What we’re seeing is a transition towards a common banking platform. A system where your bank understands what you need to accomplish, and provides you with the resources necessary to do so. In 2017 and beyond, you can expect to see your bank start working for you.