The future of financial technology – part 4: The risks and opportunities of reduced intermediation

 In Fintech

future-of-financial-technology-4Submitted by Paul Sullivan via ModedaWeb

Over the course of the last few weeks we have looked at how financial technology is evolving to change the wider payments industry. Streamlined infrastructure, improved Big Data analysis and adjusting operations based on strategic use of data are all rapidly changing the finance sector – and incumbent banks and lenders will need to adjust quickly, or risk becoming redundant.

Over the course of the last few weeks we have looked at how financial technology is evolving to change the wider payments industry. Streamlined infrastructure, improved Big Data analysis and adjusting operations based on strategic use of data are all rapidly changing the finance sector – and incumbent banks and lenders will need to adjust quickly, or risk becoming redundant.

Over the course of the last few weeks we have looked at how financial technology is evolving to change the wider payments industry. Streamlined infrastructure, improved Big Data analysis and adjusting operations based on strategic use of data are all rapidly changing the finance sector – and incumbent banks and lenders will need to adjust quickly, or risk becoming redundant.

Over the course of the last few weeks we have looked at how financial technology is evolving to change the wider payments industry. Streamlined infrastructure, improved Big Data analysis and adjusting operations based on strategic use of data are all rapidly changing the finance sector – and incumbent banks and lenders will need to adjust quickly, or risk becoming redundant.

Merchants are using financial technology to help streamline their payment operations, and in many cases, to cut out the middle-man, the traditional processing channels.

Emerging payment rails

Increasingly vendors and merchants are encouraging customers to link bank accounts to their online accounts, so that payments can be debited directly without having to go through the credit/debit card framework. By linking banks accounts directly in this way, FinTech developers can create completely new payment rails that disrupt the existing industry.

Crypto currency is stealing all the headlines at the moment, with Bitcoin continuing to force business and governments to consider the future of sovereign currencies. Whether Bitcoin becomes a serious contender in the currency markets remains debateable, but the technology in which it is built will become more mainstream. Distributed blockchain databases seem to have solved the problem of circulating transaction data and protecting against tampering and fraud for instance.

The new peer to peer funding model is also allowing FinTech companies to act as data/currency brokers and reduce their reliance on incumbent financial firms. The new P2P foreign exchange model is helping customers trade currency direct, avoiding the usual conversion fees levied by banks. Instead the FinTech platform takes a small cut from each transaction in return for facilitating the swap.

Crowdfunding

The continuing fall out from the global financial crisis of 2008 led to a huge shortfall in finances for loans, providing space for the FinTech industry to develop solutions. Crowdfunding platforms have helped connect entrepreneurs and micro-businesses with small investors, offering a way to secure finances direct from the people most likely to benefit from the product or service being developed.

Again, much of the focus of crowdfunding technology has been to circumvent traditional banking structures, and the associated intermediary services that either complicate transactions, or add to the cost of doing business.

The flipside of these moves is the need to develop new ways to carry out due diligence on the companies represented. At present much of the burden involved in understanding viable business models and product offering lies with the end user themselves, even if the crowdfunding platform provides some small measure of protection. FinTech providers will need to tackle this challenge, using automation of otherwise, to take crowdfunding to the next level.

Alternative lending

Sitting between crowdfunding and p2p foreign exchange, alternative lending schemes connect investors and borrowers direct. Lenders receive an above-inflation interest rate for the money they pay into the system, whilst borrowers benefit from competitive rates and greater flexibility in their loans than could be afforded to them by a traditional bank.

Again, financial technology is crucial in identifying and connecting individuals to meet each other’s needs. By reducing the layers of bureaucracy involved in lending, the process is made cheaper, easier and quicker. Over time Big Data analysis will further refine operations, by automating the application, approval and adjudication process, using historical data and trends to accurately assess future outcomes.

Into the future

Ultimately FinTech solutions are, as stated above, designed to strip out unnecessary layers in the payment process, reducing intermediation. In many respects, it appears that an alternative economy is on the rise, one created and fulfilled by individuals that exists outside the constraints of traditional banking. And as is clear from the rest of this series, FinTech is the major facilitator for change, as you’ll see in the next instalment – Empowering customers.

Disclosure:

Paul is DOM at Modedaweb a finance andfintechspecialist inbound marketing agency and a keynote speaker on marketing automation.

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Sergey Sanko
Sergey had started an IncomeClub after years of being an investment advisor for high affluent investors and managing fixed income securities. He is the lead investment advisor representative and holds a Series 65 license. Sergey earned his Executive MBA degree from Antwerp Management School.
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