Hand to hand old school cash transactions are becoming obsolete as technology advances. Traditional banks and basic transactions are transforming from physical to digital channels. 2016 was the first year in The Netherlands where there were more debit card transactions than cash transaction. Just like the case of Britannica encyclopedia as depicted by Shapiro and Varian (1998), old school payments have transferred towards online alternatives. Digital platforms are now offer new forms of payments, decoupling financial services from the traditional financial services player (Newgen Software, 2017) Although the banking industry is only just undergoing its transition, the pace in which the industry is transforming is rapid. It is estimated that in five major retail banking businesses 40% of revenues and 60% of profits will be at risk by 2025, with consumer finance being the most vulnerable. (Currency Cloud Whitepapers, 2017)
Allowing the rapid pace of this transformation are millennial consumers who easily adapt to new payment forms, as they often see no difference between their banks and others. In a research conducted by Scratch it appears that 1 in 3 people are open to switching banks within the next 90-days, depicting how little people are attached to old-school banking (Newgen Software, 2017).
As described by Shapiro and Varian (1998), information is costly to produce, but cheap to reproduce. With recent IT advances the cost of distributing information goods has fallen tremendously. For online financial payments the main cost reduction, as opposed to traditional banks, has been the removal of the middle man and the back office where employees were often doing simple, repetitive tasks.
At the center of this transformation are FinTechs, financial technology companies. FinTechs are taking advantage of cloud computing, mobile communications, digital currency, and blockchain to bring new businesses to market. (Walton, 2017) These FinTech companies have differentiated themselves from large-scale banks by offering personalized niche services and data-driven solutions through maintaining an innovative culture and an agile organization. (Lee, 2016) Just as the Internet took over Britannica’s role, FinTechs are taking over traditional banking roles, offering faster and more personalized alternatives.
But why are FinTechs able to experience such success? One of the many models which can be used to depict the reasoning behind FinTechs’ success is Porters Five Forces.
To begin, the low switching cost for consumers leads to a higher bargaining power of buyers. Furthermore, the threat substitutes is high because the barriers to entry are relatively low, allowing for FinTech’s not only to grow, but also to compete in a fiercely competitive FinTech environment. Next, the supplier bargaining power is also relatively high as companies are facing fierce competition. Lastly, the threat of new entrants is rather low as the fixed costs associated with the initial investment are relatively high compares to the low reproduction costs. From a revenue perspective, the initial investment is extremely high compared to the reproduction costs.
So aside from being faster and more personalized, what are other advantages of this new information good?
Not only is the growth of Fintechs disrupting the banking sector, but it is also helping grow the e-commerce industry. Online fintech banking providers are helping drive e-commerce growth by simplifying the online payment process. (Currency Cloud Whitepapers, 2017)
FinTech solutions for payments are much cheaper than that of traditional banks. As previously mentioned, FinTechs remove the middle man and back office. Moreover, the fixed costs for FinTechs are the dominating sunk costs which are dedicated to the development and marketing of new payment systems, however the variable cost of producing an additional payment does not increase. Therefore, costs will remain minimum or even free for consumers.
FinTechs are several steps ahead of large-scale banks, which is resulting in that an increasing number of traditional banks are starting to invest in FinTechs to learn, collaborate and partner with them. Barclays, ABN-Amro, Rabobank have all created startup programs to incubate FinTech companies as a way to learn how they should adjust their business models. (Currency Cloud Whitepapers, 2017)
So how will the financial industry further be revolutionized in the coming years? The new currency across the industry is speed. So online payment systems need to be quick to set up, easy to use, real-time and fully mobile. Traditional bank branches will be immensely cut-down and bank employees will be retrained to be advisors.
FinTechs are the future of banking, but FinTechs are merely the tool, we as consumers are truly the ones who must help transform the industry. What do you think will be the next step for FinTechs? How do you see yourself managing your finances and financial payments in 2025?
References
Currency Cloud Whitepapers. (2017). Banks and the FinTech Challenge: How disruption has been a catalyst for collaboration and innovation. [online] Available at: https://www.currencycloud.com/files/2016-Banks.and.the.Fintech.Challenge.pdf [Accessed 27 Sep. 2017].
Lee, I. (2016). Fintech: Ecosystem and Business Models. Advanced Science and Technology Letters. [online] pp.Vol.142 (UNESST 2016), pp.57-62. Available at: http://onlinepresent.org/proceedings/vol142_2016/10.pdf [Accessed 27 Sep. 2017].
Newgen Software. (2017). Banking 2020 – Technology Disruption in Banking. [online] Available at: https://www.youtube.com/watch?v=i35xfEGAu-I [Accessed 27 Sep. 2017].
Shapiro, C., and Varian, H. 1998. Pricing Information. In Information Rules: A Strategic Guide to the Network Economy. Cambridge, MA: Harvard Business School Press.
Walton, D. (2017). Technology is disrupting the way people earn, save and spend. How should banks respond?. [online] World Economic Forum. Available at: https://www.weforum.org/agenda/2017/01/technology-is-disrupting-finance-how-should-leaders-respond/ [Accessed 27 Sep. 2017].
