Fintech changing the game for banks

Fintech is disruption in action, and how we think about finance and undertake transactions will never be the same.

We're in the middle of a small revolution; the way we perform financial transactions and deal with money is changing.

Within the startup community it’s know as ‘fintech’, short for financial technology. It’s very similar to the social media revolution that happened 10 years ago, and that has got us all on Facebook, Linkedin and Twitter.

I should insert the standard disclaimer here – I am employed by Pin Payments, a Perth-based fintech company. On the one hand that makes me clearly biased and untrustworthy. On the other it has given me an insight into what goes on behind the scenes. And what I see is disruption in action.

The global banking system is in turmoil. It has been an early adopter of technology from the start, and has undergone a lot of change already. I’m old enough to remember when you could only get cash from a specific bank branch, during banking hours (9:30am until 3pm), and only if you applied for drawing rights from that branch.

But we’ve had ATMs for more than 30 years now, cheques are no longer used (at least in Australia), financial institutions now use very little paper, and we routinely conduct our transactions over a mobile phone app.

This last change is the really significant enabler of the fintech revolution. We’ve become used to doing financial transactions over a smartphone, which has opened the way for other apps to become financially aware and enabled. A huge ecosystem of payment gateways and providers, card storage companies, compliance consultants and digital wallets has grown up to enable any app to take payment.

The row about Apple Pay is a symptom of this. The banks want access to the near-field communication features of iOS. Apple wants them all to use its digital wallet.

The argument is really over control of the vast streams of cash pouring through the platform. There’s a vision that everyone can see – that in a few years, actual credit cards will vanish, and the phone (with a thumbprint) will be the only payment authorisation required.

Retail banks know that their ancient, central and monopolistic place in the scheme of things is not assured in this new world.

Firstly, that’s because there’s no longer a requirement for a network of branches, there’s little barrier to entry from global competition. And foreign banks are way ahead on service provision.

Secondly, an app-based world allows them to be disintermediated. Another app provider could build a better interface to our financial information and remove the reliance on the bank, or in an extreme case, any knowledge of which bank the customer’s money was held at.

And lastly, that the regulatory environment is fragmenting, and the clear-cut, well-defined delineation between roles in the market is fading. New competition is small, fast and full of teeth.

This last point is vital. The Australian Securities and Investments Commission is reacting to the changes in the market, and making appropriate regulatory changes. A lot of the fintech space is covered by regulation that has a very clear definition of the various functions performed in the space. New startups have been forced to comply with multiple sets of regulation and obtain multiple licences in order to avoid penalties.

ASIC is now beginning to break up the regulations and allow partial compliance. And it is also implementing a ‘regulatory sandbox’ that will exempt new companies from regulation for a limited time while they test new business models.

The one thing the banks do have is the customer’s financial transaction history, but even that is not assured forever. Customers are happily giving third-party applications access to their account credentials in order to give that application access to the transactions. This weakens account security and ultimately harms everyone, but unless the banks open up the data to outside access by another route, it’s the only way.

Because of this, the UK is beginning to force banks to open access to the account data. The rest of the world will follow, in time, if only because enabling apps to access the transactions is something that customers want, so open banks get a competitive edge.

Our financial system will look as different in 30 years’ time as it did 30 years ago. The things we think are normal now will be as archaic as having an interview with a bank manager seems now. The companies dominating that future are startups now, small and fast and full of teeth amidst the lumbering giants around them.