Banks and insurers have used the same business model for decades and for one simple reason: it’s profitable. Innovators have always tried to challenge this model and have fallen short every time. They have lacked the size, public trust, and know-how of financial service companies. But the situation has changed greatly in the last few years.
Today, banks and insurers are facing stiff competition from emerging financial technology (Fintech) innovators. You now have crowd-funding, mobile payment systems, crypto-currencies, and peer-to-peer lending among other things. And more innovations are on the way. Here are three ways technology is completely transforming the world of finance as we know it.
1) Focusing on Products over Banking
In the past, Fintech companies tried to replicate banking models in their technology. And they failed. They learned the hard way that you cannot beat a bank at being a bank. But in the last decade, they have changed tactics. Today, Fintech companies tend to only provide specific banking products and services such as money transfers.
Their services are faster and they charge lower fees. One example is UK money transfer companyTransferwise. Its model of offering cheaper, user-friendly, and faster money transfers is paying off. The company is now transferring over £500 million every month.
2) Automating Processes
Fintech companies do not have the financial resources of established industry players. So, they are using their technical know-how to automate resource intensive processes. This not only cuts on costs, it also allows them to offer services that were once out of the reach of ordinary working class people. A good example is investment advice.
Automated advisers like FutureAdvisor and Wealthfront are now offering advice on wealth management. Better yet, their services are available to everyone via an online portal. And they are cheap too. Automation means that robo-advisors skip having the $100,000 in assets required by law.
3) Strategic Use of Data
Before a bank issues a loan, it will first use your credit score to test your creditworthiness. Insurers too need to see driving and health records before they price or issue a policy. But credit scores and health records are often not enough to base financial decisions on.
Fintech companies are using new streams of data to get an accurate picture your credit or policy worthiness.Take FriendlyScore for instance. It analyzes your social networking patterns in real-time to determine your real credit score. Your score improves if your business page gets many likes. If you do not respond to customer complaints in time it drops.
Oscar, an American health insurer, is also using new analytic models before issuing a policy. By giving its clients a wearable fitness tracker, it knows who prefers the treadmill to the couch. It even offers rebates designed to encourage couch potatoes to hit the gym.
The financial services sector no longer belongs to a few well established players. Not only do Fintech companies offer tons of great corporate finance positions, they are also eliminating tons of corporate finance jobs through automation.
Innovators have also staked their claim and are changing how the industry operates. They have managed to do so by focusing on products and services. They are also automating resource intensive processes and using data strategically.