Strategy•Feb 12, 2019
Fintech Disruption & Innovation: How Two Companies Are Changing the Way We Do Business and Manage Our Finances
Disruptors, by definition, upend an industry by introducing innovative technologies and business models that reframe our expectations of that industry’s norms. But there is so much more to disruptors in today’s world. According to the Harvard Business Review, “The topic of industry disruption—a process whereby a smaller company with fewer resources is able to successfully challenge established incumbent businesses—is rife with misconceptions. One of the biggest is that it is a mysterious, random, and unpredictable event.” In truth, many of these disruptions are sensed way in advance, not dissimilar from the way we know heavy winds and dark gray clouds will precede a large summer storm. To understand what the “storm” of disruptors looks like in the financial services industry, we need to first understand the role of fintech, the union of finance and technology, in today’s world.
history of fintech
Fintech as a term is fairly new, but financial technology and innovation is quite old. Any invention that has increased market access is truly an innovation. For example, take the use of electronic wire transfers, credit cards, and, eventually, ATMs, which became common throughout the mid-20th century and increased transaction speed and consumer access. Throughout the 1990s, fintech grew rapidly. The first online banking account opened in 1995, and banks that exist purely online formed throughout the early 2000s. Today, due to the increase in startups specializing in fintech products, fintech is everywhere.
Whether it’s mobile banking, splitting a check with friends at a restaurant, online shopping, or planning for retirement, fintech is unavoidable, and companies have more incentive than ever to embrace it. These innovations have completely changed consumer behaviors. By integrating technology into the user experience, these companies have a chance to improve customer experience and remain competitive with convenience and ease of access. Even if an industry is not susceptible to fintech disruption, today’s consumer expects some kind of digital experience during the exchange for goods or services.
disruptors in fintech
Diving more deeply into these fintech disruptors, we looked at two companies that are moving into the financial services industry in unorthodox ways: Pefin and Amazon. While the two companies are different from one another in many aspects, both offer products centered on financial technology and have made financial services more accessible to everyday consumers.
Pefin, an online financial planning tool and investment broker powered by artificial intelligence (AI) and machine learning, started in 2011 with the mission to “look after the financial best interests of each of our customers in a way that embraces the unique individuality of their lives.” The formula to Pefin’s AI success is its ability to turn a massive amount of information on individual consumers and investors into personalized investment advice. On their website, for example, they feature a large data map with hundreds of data points to consider when customizing financial advice. These data points include everything from the amount you spend on home maintenance to the age your child begins the fourth grade. This is intimidating, especially when you consider every single transaction you make in three months is a data point that will improve Pefin’s financial advice. The longer you provide that data, the more refined your financial advice becomes over time. According to a CNBC article quoting Dror Oren, co-founder of Kasisto, another AI financial services tool, financial advisors already use AI in their own practices to improve accuracy and productivity. Pefin goes one step further and puts the technology in the hands of the consumers themselves.
Pefin is giving traditional, in-person financial advisors a run for their money because of the way it offers accessible, personalized advice to everyday consumers. Pefin compares their services to a human advisor on their website, and the two standout differences to us are the affordability of Pefin (usually $10 per month) and the ability to analyze unique spending patterns and life changes. Pefin’s emphasis on contextualizing their advice and comparing it to more traditional outlets helps assuage potential fears of leveraging technology in your personal financial management.
In the long term, it is likely that traditional financial advisors will be forced to adapt to competition like Pefin or risk quickly becoming obsolete.
Historically, one of the most difficult steps while starting a small business is securing financing to fuel early stage growth. However, fintech disruption has led to an increase in the number of loan originators and lenders that focus on ease of access. Many of these lenders focus on smaller loans that can be handled digitally end-to-end, an area where traditional business lenders continue to struggle. According to the Harvard Business Review, currently only 7% of bank credit products can be handled digitally end-to-end. This hurdle for small business owners created an opening for fintech disruption; it allowed technology companies to shorten the timeline for small business owners. In 2011, Amazon started offering loans to small businesses. More recently, they announced financial backing from Bank of America to expand the small business lending operation to allow for higher credit limits. Currently, Amazon provides loans ranging from $1,000 to $750,000 to targeted sellers who meet their internally determined lending criteria. These loans tend to be focused on sellers who can repay loans directly from Amazon accounts but may not be able to acquire financing via traditional methods. While these loans are limited to increasing inventory within an Amazon seller’s account, the practice has the potential to be extremely disruptive due to convenience, ease of access, and the potential to expand to a wider range of users.
Amazon’s technology-focused small-business lending platform allows it to be highly selective in extending credit, which maximizes interest revenue while minimizing risk. The lending service functions by invitation only, utilizing insights from internal data and past Amazon sales history to determine an appropriate amount of credit to extend. In 2017 alone, Amazon extended one billion dollars in credit to merchants who sell on its site. This much exposure typically would come with significant risk. However, Amazon’s access to real time data on its sellers who may be offered a loan provides valuable insights that help it reduce potential risk.
The greatest benefit of Amazon’s homegrown fintech lending is the organic sales growth at a low cost for its sellers and the earned revenue from interest for Amazon. Amazon has historically targeted sellers who meet major criteria for receiving offers, including growing sales, and more importantly, consistent high-level customer service. With such refined criteria, Amazon is able to promote and encourage increased sales of high potential sellers who help Amazon grow the existing customer base and increase sales across the site as a whole.
While it is unlikely that Amazon will outperform the biggest banks and other lenders any time soon, the fintech movement has opened the door to tech companies and other non-traditional players to begin encroaching on markets traditionally owned by firms focused exclusively on financial services.
fintech & gafa
In the 2017 study, “Beyond Global: How Can Banks Meet Customer Demands?” researchers found that 31% of consumers would consider banking with a large, non-traditional company like Google, Apple, Facebook, and Amazon, all of which make up the group referred to as GAFA. With gen Z respondents, this increased to 41%. Though there is still a ways to go for the GAFA companies, the attraction likely lies in the customized experience and personalized service offerings these companies currently provide to their consumers. Consumers rightly believe the same would be true of banking services, like investing.
While disruption in the financial services industry is increasing, it is not the only industry affected. In the Harvard Business Review article, “How Likely Is Your Industry to Be Disrupted?” both diversified banks and investment banking and brokerage are listed in the volatility quadrant of the following disruption matrix. The disruption matrix displays industries based on how viable, volatile, durable, and vulnerable they are to industry disruptors.
“Diversified banks” and “Investment banking and brokerage” fall into the volatility state in this matrix. This quadrant is described as one in which industries are susceptible to frequent and short-term disruption. We couldn’t agree more. Industries that were previously highly regulated and highly barriered are exposed to technologies more than ever before. To understand this further, we spoke with Preston Ash, Industry Outreach Advisor at the Federal Reserve Bank of Dallas. Ash speaks regularly on the impact tech startups are having on financial institutions. Oddly enough, Ash has found that many organizations are attempting to integrate financial technology organically instead of by acquisition or partnership; a phenomenon he calls befuddling due to the high cost of entry and lengthy development timeline associated with organic fintech products.
strategy & team focused on technology
Whether by outside acquisition or internal development, organizations in the world of tomorrow must be technology-focused. Organizations with this mentality, coupled with a non-stop focus on customer experience, are poised to weather the changes ahead.
So, what does the future hold for fintech disruptors and their incumbent counterparts? In short, fintech is nothing new and the future of innovation is largely unknown. What we do know is this: successful companies in the coming years must have a technology strategy and tech-focused team in place or risk becoming obsolete in the age of disruption.
working with credera
Interested in learning more about how to use technology to stay ahead of the competition? Credera’s ability to serve as a strategic partner with deep technical expertise makes us the perfect partner to help you face your toughest business and technology challenges. For examples of the work we’ve done in this space and our unique perspective, check out our Client Stories and Insights pages. If you have questions about our services and how we can help, contact us here.