If we take a look at the top topics in the FinTech area over the past years we can see that the focus has shifted from B2C to B2B and also that to a large part nothing revolutionary has happened at all – but the attempt was to make existing processes cheaper or more convenient. An indicator for that is the list of topics for the past years Finnovate Conferences, in which FinTech startups pitched their ideas to interested audiences. While in 2011 and 2012 the hot topics were ranging between Social Media integration, robo advice (for consumer investment products) and personal wealth management, this shifted to gamification (did not fly for banking, needless to say) and mobile solutions in 2013 and 2014, followed by more substantial topics like Bitcoin/crypto currencies, digital banking solutions and data mining in 2015 – and biometrics in 2016 [5]. Looking closer this shows that product enhancements in the digital field – solutions tailored to improve business processes that are sold to businesses rather than consumers – are leading the field now. B2C is much less attractive for FinTech these days, it seems, with many ePayment‐ and wallet‐companies such as Powa in the UK disappearing or even CurrentC or respectively MCX, the “Merchant Consumer Exchange” with which Wal‐Mart and many other merchants in the US meant to compete with PayPal. They de‐activated all consumer accounts in early 2016 and announced, according to the website “Consumerist.com”: “(We) will concentrate more heavily in the immediate term on other aspects of the business including working with financial institutions, like Chase, to enable and scale mobile payment solutions” [6]. This quite simply means: The merchants lost. The banks won. The same applies for Germany, where we as the authors of this chapter had some own experiences with the alternative payment scheme Yapital, which was driven as a merchant based solution – and now no longer exists. The German banks are trying to compete with PayPal with their co‐operation “PayDirekt”. This initiative again does not seem to be a very promising undertaking. PayDirekt, in its second year after launch, does not share any statistics about adoption or usage. They probably know why. There are many ways FinTech companies interact or interfere with traditional banks – which are nicely illustrated by José Antonio Gallego Vázquez: see Fig. 35.2.
Fig. 35.2A visualization impact of FinTech on traditional banks. (Source: José Antonio Gallego Vázquez)
To find out why this shift occurs and why this perhaps was bound to happen, it’s worth a summary of the Finch market form it’s beginning. Basically, it started when incumbents shifted some costly and labor‐intensive processes (mainly in terms of time savings and the savings in personnel costs) to their existing contractors (both retail and business customers). Offering new applications and the partial opening of their APIs did this. Long before the invention of the term FinTech, but using new technology. An example of this is the introduction of self‐service terminals and online banking to initiate transfer orders, retrieving account and deposit information, or to print and save account statements. This goes without saying for today’s banking customers but around the turn of the millennium, however, this was a revolution. In the field of business partners (for example with car dealers) banks shifted in the lending business the input of all data necessary for a credit contract to the merchants. The so‐called credit factories were born. The same was done in the area of securities trading. The banks not favored business with retail investors was left to the investment and contract intermediaries. However, only the time and cost intensive advisory business was shifted and in return they paid a little more commission. The deposits of course remained, partly because of regulatory requirements, in the hands of the banks.
Let’s check out the “real” Finch topics of recent years in more details in this context. Have the developing approaches been truly revolutionary? Can this really be the downfall of the banks? Has the gatekeeper issue been solved? What about the technical possibilities, the regulatory requirements and for sure the revenue side?
Robo advice (a class of financial adviser that provides financial advice or portfolio management online with minimal human intervention [7].) and personal wealth management seems to be revolutionary, but is it really? To understand the backbone of this kind of applications we need to take a look under the hood of the used models and theories. An example is the use of Harry Markowitz model (developed in 1952) [8], which concept of efficiency was undoubtedly one of the essentials to the development of the capital asset pricing models. It’s still used in many robo advisory tools to mitigate the risk of unwanted correlations and allocating given assets towards a portfolio that will give the highest expected return for its given level of risk. The fundamental problems of all different portfolio models and theories are not solved by robo advisory. The technical solutions can only process the amount of data provided. Everything is based on historical values (even when talking about swarm intelligence). They do not consider the transaction costs and do not consider sufficiently the automatic allocation shift by price changes in the market. The solutions offered suggest to retail investors that they are now in control of their investments themselves, but in the end all securities transactions are still carried out only through banks and stock exchanges. By the way, an old fashion stop‐loss order is still faster to perform as a push notification from an app that only informs you that a threshold has been reached. Robo advisory therefore is not really revolutionary but it offers specialized investment advisors the opportunity to remodel the portfolios of their clients, based on the data provided to the system, to maximize their inventory and transaction commission, all with the painting of modern technologies and scientific evidence.
Is there anything revolutionary in the payment area? Technically, none of a single FinTech Company has managed to disengage from the payment systems of the banks or the other current players (credit card schemes, payment service providers, network operators or terminal operators). The margin of a single payment transaction in this area are very low, because the competition between the existing players is very high and in some cases (e. g. Europe’s regulation on interchange fees) are additionally fueled by the local legislation. Add to that the necessity to cooperate with the existing gatekeepers to use their existing infrastructure and carrier technology for the processing of transactions. It logically runs down to that it is only worth to be active in the payment area, when you can scale very quickly. Claiming that the required mass in transactions as well as the access to end customers may success without the goodwill of the banks is illusory. The disposable income of customers is still in the banks and not in blockchain systems or the like. Salaries are still paid in fiat currencies and not in crypto currencies like bitcoin. As stated by Jean‐Pierre Buntinx on his article “Lack of innovation could turn FinTech into another buzzword”: Not even popular solutions such as Apple Pay are innovative or revolutionary, but simply the old hiding under the cloak of the new, as it is essentially only the same credit card payment people have been making for years. The only difference is a fancy user interface accessible from a mobile device [9]. Who will pay the additional costs of the transactions, if it is not to make the customer? The merchants? Probably not, because they are experienced n negotiating their transaction costs with new vendors or with their existing payment service providers. In the final result, FinTech investors need to bear the cost of such experiments and therefore change the business model to B2B to get paid by the existing players for new fancy interfaces rather than taking up the fight with Goliath for B2C.
The only successful example, using the open interfaces and support technology of banks without paying the banks for it, is Klarna with its direct payment solution via online banking (part of Klarna’s portfolio by acquiring Sofort AG). But this is more a European phenomenon rather than replicable to other markets such as North America or Asia. Real development potential therefore only is in under banked areas and countrie
s where there is no such sophisticated regulation, as in Europe or North America.
The area of data mining and biometrics should also be evaluated in particular from a cost perspective. For sure banks have been forced and will be forced in the future to open up their interfaces for third party but that this is sufficient enough that new FinTech companies can offer their services to end customers cost‐covering is more than a daring theory. Free service does not exist. Only the equivalent does not always exist in real money. Nowadays, the user pays rather with his transaction data for a fancy interface and slightly more convenience. Therefore, in the future the question will arise as to how much data security and sovereignty a consumer is willing to give up to obtain a few improved interfaces without real value. Is that something revolutionary? Of course not. Not even the area of social media and advertising needs to be used for this evidence. All established market players, such as MasterCard, Visa and Amex practice data mining and evaluation of transaction data or several decades continuously and highly professional. The results of their studies they then sell to their principal members, partners and whoever is willing to pay the asked price. Big data or data mining on the basis of transactions is therefore also no innovation but only somewhat pimped with some other data sources. Needless to say, using a B2B rather than a B2C business model in this area is more appropriate.
The winners in FinTech seem to be the traditional players – which is probably because of their customer reach and financial power, but also because they offer more than a product enhancement or an easier way to close a loan with a mobile app. They offer stability, reliability, and scale. They are partners which consumers may not like so much – but they trust them. They do it like the Pharmaceutical companies and wait for the start‐ups to fail or succeed; picking the cherries that fit their overall strategy instead of taking the risk to develop solutions in‐house. That in itself is a chance for the FinTech start‐ups, but it also means that the hype we see is more a bubble than substance.
Yes, the industry needs more simplicity, especially for how consumers interact with their banks or lenders or other financial vendors. But it is still a numbers game and cost cannot and should not be ignored, nor can the cost of business easily be earned back with low user adoption instead of having one of their own.
Let’s assume banks and traditional players in the financial sector are not the natural innovators and will probably never be – the most interesting aspect of starting up a business in this industry therefore seems to be one that fills a gap and provides additional value for the relationship between the traditional players and their end customers.
This assumption would also speak against the theory that FinTech means the death of personal service provided to consumers. In fact, it could mean that after a long time of suffering service could again become more personalized and individual, based on smart tools allowing exactly that. Markus Hill, an independent financial services consultant, writes about FinTech in funds‐investment that “FinTech work with passive, low budget funds solutions. The standard topic active versus passive gets a constructive boost” because traditional players “need to find better arguments and explain better what the benefits of active funds management are” [10]. So in essence: competition helps the business – and the consumers.
In essence we can state that the trends in FinTech are not much different than the trends in general for the start‐up industry. FinTech to a large degree provide solutions to fill gaps in the offering of traditional players – which could mean gaps in the sense of actual products or gaps in service and convenience. But, as Jens Munch of Hottopics.ht is writing, “FinTech has only just got started. The rise of FinTech has opened up a world of possibilities. Businesses can offer more services than ever and for a fraction of the price of what it would have cost before” [11]. While one might weigh in the necessity to consolidate to get to a relevant scale (in case there are too many FinTech companies doing the same thing there might be too little business for each) and question the cost, based on what scaling IT costs in a regulated environment, the direction is clear.
Of course, and for the sake of completeness, there are ground‐breaking new things which are clearly FinTech and make such a difference – and at the forefront of that I would like to mention crowd funding, with vendors such as Kickstarter or Indiegogo enabling founders to attract money from a large number of individual contributors, who pretty much buy pre‐production products and “back” the start‐ups they support – so it’s not a loan and it’s not an investment but it helps to speed up innovation by reducing the burden for start‐ups to get through the seed phase of their business. The phase that often takes a massive personal toll from the founders and is at the same time the phase in which they ideally focus on their products and inventions the most (and rather not spend time for investor road shows and venture capital pitches). So this is truly brilliant.
And then there is another big thing, crypto currencies like Bitcoin and the underlying new technology of a blockchain. Again: is this hype, a bubble or is there something to it? Being aware that there are more than 700 virtual currencies, divided into mineable and not mineable, closed and open systems. The ten most capital‐based currencies stand for a turnover of about $92 million per day … [12]
35.2 Blockchain, What Art Thou?
What is missing at times in the current discussion is a definition what we are actually talking about. It seems like blockchain technology is the perfect recipe for about everything and anything in IT and while “legacy technology” is outdated and cannot compete, blockchain is shining. I believe that a proper discussion, and more importantly business decisions should be based on a good understanding and reason. That is why the hype around blockchain raises concern for me, as reason and understanding do not seem to be a major ingredient to it.
So what is blockchain, the technology behind Bitcoins. Investopedia has a brief but abstract definition [13]. “A blockchain is a public ledger of all Bitcoin transactions that have ever been executed. It is constantly growing as ‘completed’ blocks are added to it with a new set of recordings. The blocks are added to the blockchain in a linear, chronological order. Each node (computer connected to the Bitcoin network using a client that performs the task of validating and relaying transactions) gets a copy of the blockchain, which gets downloaded automatically upon joining the Bitcoin network. The blockchain has complete information about the addresses and their balances right from the genesis block to the most recently completed block.”
So in essence, the blockchain is getting bigger (or rather longer) with each transaction. While in the traditional way, the structure is to have an account structure for an account holder in which then the transactions and the balance of each account holder are stored, in a crypto currency using blockchain technology snippets of this information are distributed across many computers as some sort of swarm intelligence and added to one big ledger instead of many. And the value of a block is attached to an address, so it is possible to identify who owns (or owned) what and when.
That means a blockchain is getting bigger with every transaction. Bitcoin has far fewer transactions as the traditional transaction banking back‐ends though. Currently it is only processing some 200K transactions a day according to blockchain. see Fig. 35.3.
Fig. 35.3The number of transactions executed in the BitCoin network is too low to be really relevant. (Source: www.blockchain.info)
Even though the transaction volume is low, the time to process has increased with time and volume and led to transaction delays, which fueled a new discussion about blockchain in early 2016. David Gilbert of Ibtimes.com writes: “Bitcoin is facing a major problem as the time it takes transactions to be processed has increased dramatically leading businesses to stop accepting the crypto currency and others to issue
warnings that the problems might be terminal” [14]. He continues that the issue is not something that came out of the blue, but that researchers had pointed “to this looming issue for some time”: “The problem relates to how transactions are processed in a blockchain, the decentralized, distributed ledger technology that underpins Bitcoin”.
Too bad, because there is a lot appealing with blockchain technology, mainly that it is very democratic. In a blockchain, no institution or individual controls it, instead whoever participates controls a part of it. The theory is that also it becomes more resistant to all kind of attacks with the growing number of participants, making it harder to get the full picture and an entry point for malicious activities. There has not been a democracy invented which not someone tried to undermine and so it is with blockchain too. That happens when people pool their computing power in the blockchain – giving control of their power to a central wallet.
So, wait a moment – a de‐centralized system that lives from no central control is being centralized somehow? Yes. And if the pools control more than 50% of the blockchain they control it completely. There is even a name for it, the “Greater than 50% attack”. According to Bitcoin.info, in May 2016 there were four major pools controlling 58% of all Bitcoin transactions [15]. If these individuals would work together, they could essentially take over and re‐write the whole blockchain.
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