How are demographics and technological advances changing financial services?
It used to be that people stuffed money under their mattresses because they were not able to—or chose not to—have a bank oversee their savings. Today’s youth share this mindset as some of them have never stepped foot inside a bank—and have no intention of doing so. Thanks to the prevalence of online transactions and the use of mobile phone technology, these people have a whole new set of options for how to conduct their finances.
Technology is already playing an outsized role in the evolution of traditional financial services as enterprises attempt to adapt to evolving consumer expectations, reduce costs, prevent competitive losses from nimbler startups and find novel ways to grow revenues in the digital age.
Overall investment in fintech leapt ahead in 2018, reaching US$55 billion worldwide, or roughly double the year before.1 We expect that trend to continue as demographic and technological trends converge and the value proposition differential between winning, technology-enabled companies (versus those who've been left behind) becomes evident.
In this article, we explore the new consumer mindset and needs initiated by millennials and how certain technology trends are driving new offerings. We explore the areas we see for the biggest disruption over the long term and summarize the impacts we are seeing across a variety of financial services companies.
This is the optional paragraph field.
The Global Financial Crisis (GFC) and subsequent "Great Recession" influenced the younger generation of millennials—those born between 1982 and 2004—almost as much as the Great Depression changed their great-grandparents’ habits. Not only did those events lead many millennials to develop a negative view of the job market just as many of them were entering the workplace in their early 20s, but the GFC also highlighted the failures and shortcomings of some of the world's largest and most venerated banks and financial institutions.
And they haven’t gained ground since then. According to various surveys, banks and insurance companies have generally retained their negative connotation with millennials since the global stock market crashed more than a decade ago, a generational perception that is likely to last a lifetime.
That lingering skepticism has fed into other considerations that have helped millennial sensibilities drive the development of fintech and will continue to help shape the financial services landscape of the future. Fintech companies are aiming to provide them with a clear alternative to the old-line, business-as-usual institutions.
Source: Capgemini, Evolution of the Automated Advisors, 2016.
As those imperatives intensify, we believe the future of finance will be shaped by three main megatrends.
Our research tells us that with deeper, data-driven insights, financial institutions should be able to better identify what customers need and want in their financial engagements, prioritize investments into customer experience enhancements, redesign outdated processes and create innovative, intuitive digital experiences.
“The ability to deduce actionable insights from data is driving the financial industry to an inflection point in terms of its ability to create frictionless and personalized consumer experiences that are predictive, personally relevant and useful.”
In China, Ant Financial (part of the giant Alibaba conglomerate) and Tencent are thoroughly integrated into many individuals’ financial lives, offering banking, insurance and payment services. We can see why that might be appealing for other global technology giants.
Source: Kleiner Perkins, Franklin Research.
But we’re conscious that from a regulatory standpoint, Chinese fintech has emerged from a very different breeding ground. It does, however, offer a glimpse of how fintech can reach into people’s everyday lives.
For example, many of the technologies that we think could come to dominate in a fintech world are already being widely used in Shenzhen, a Chinese city with 13 million people.
Cash is largely a thing of the past in Shenzhen. So are credit cards. Purchases are made by scanning QR (quick response) codes with a smartphone. This extends to groceries, bike rentals and even making payments to street performers and buskers.
These transactions occur over two dominant payment systems—Alipay and WeChat—which the Chinese government can access. The government uses the data from these payment systems to track behavior.
While we don’t necessarily see the dominance of Ant Financial and Tencent as a sign of things to come globally, so-called “Big Tech” companies clearly have an interest in having a presence in financial services.
The area we are seeing this the most is in payments. Google, Apple, Amazon, Samsung and Facebook all have bespoke e-payment initiatives as this is an area that drives high consumer engagement and generates massive amounts of data.
These companies already have data that can indicate who our friends are, what our exact location is, and what we search for on the internet. We believe they are after payments data, because it lets them know how we spend our money.
By acquiring an established fintech player in the payments arena, a Big Tech company could instantly establish a platform with millions of users that it could leverage to make a disruptive push into financial services.
Startups will likely take different approaches to enter financial services, but we expect the lines between financial services and Big Tech to continue to blur.
"By acquiring an established player in the payment arena, a Big Tech company could instantly establish a platform with millions of users that it could leverage to make a disruptive push into financial services."
The need to invest in technology to improve the customer experience, reduce costs and grow revenues is as strong as it has ever been. Our conversations with executives and IT professionals at other large and small banks suggest that banks’ investment in technology will continue to be healthy.
That said, traditional financial service firms are not sitting idly by as new entrants eat their lunch. Mobile apps such as PayPal and Venmo have fueled the explosion of person-to-person payments, replacing cash and checks. Banks are now making a run at taking significant market share from those apps driven by significant spending on advertising campaigns to showcase their peer-to-peer payment services.
Chase Bank, Bank of America and other large US banks have integrated the payment tool Zelle into their mobile banking applications. Similarly, traditional names are at the forefront of intellectual property developments around virtual currencies using blockchain and DLT.
Protocols are being developed not only to handle the complexity and volume of these groundbreaking transactions, but also to comply with existing and future regulatory constraints placed on banks and securities exchanges.
Patent holdings in these areas may help drive technology adoption, distinguish proprietary platform features or ward off lawsuits. Bank of America is a leader in terms of seeking blockchain patents.
Other companies with blockchain patents include Amazon, IBM, VISA, Goldman Sachs Group, eBay, American Express and Western Union. 2
We believe there are substantial opportunities for fintech companies to capture larger portions of the global financial services revenue pool. Fintech’s influence is already apparent throughout the sector by the following examples.
Source: PwC Global FinTech Survey 2016.
Our belief is that the financial services sector is going to need to go on a digital transformation journey, and ultimately each business will need to build relationships with their customers that are service-oriented, subscription-oriented and recurring and ultimately to have data at their core. And then, they need to operationalize that data to extract more value out of their customers.
If businesses don’t do that, they are at the risk of being disrupted by either a digital native entering their market or an incumbent who makes the technology investments deemed crucial to becoming digitally relevant.
Fintech encompasses many verticals and segments, such as AI, machine learning, data sciences, digital wealth management, personal finance, robo-advisory, portfolio and risk analytics, blockchain, financial research and others.
Technology disruption can be both a challenge and opportunity, so it’s important to have both the agility and speed to make thoughtful tech investments, while navigating highly regulated industries.
All investments involve risks, including possible loss of principal. Investing in fast-growing industries, including the technology sector (which has historically been volatile) could result in increased price fluctuation, especially over the short term, due to short product cycles, falling prices and profits, competition from new market entrants and development and changes in government regulation of companies emphasizing scientific or technological advancement as well as general economic conditions. Growth stock prices reflect projections of future earnings or revenues, and can, therefore, fall dramatically if the company fails to meet those projections. Buying and using a blockchain-enabled cryptocurrency, such as bitcoin, carries risks. Speculative trading in cryptocurrencies, many of which have exhibited extreme price volatility, carries significant risks. Among other risks, interactions with companies claiming to offer cryptocurrency payment platforms and other related products and services may expose users to fraud. Blockchain technology is a new and relatively untested technology and may never be implemented to a scale that provides identifiable benefits. Investing in cryptocurrencies and ICOs is highly speculative, and an investor can lose the entire amount of their investment. If a cryptocurrency is deemed a security, it may be deemed to violate federal securities laws. There may be a limited or no secondary market for cryptocurrencies.