Venture capitalists (VCs) identify emerging industries in the early stages and invest in their potential. As such, the sharp decrease in investments for FinTech this year is a telling sign of the paradigm shift occurring within the industry. VCs invested $117 billion into the financial services sector between 2012-2016, but that trend is reversing, with many having recently begun to decrease their investments in the industry. Meanwhile, established players are ready to invest in the market. Last month, Morgan Stanley analysts sent out a letter entitled “Fintech: A Gauntlet to Riches,” to its clients, announcing that this shift, which will lead to an environment where legacy firms, or incumbents, “take the reigns” of financial innovation.
As Spanish Bank BBVA Group Executive Chairman Francisco González Rodríguez pointed out at the 2017 Davos conference, his vision for the company is one that will operate throughout the banking value chain in a fully digital world. Achieving this vision will require trust from customers, and he proposes to generate that trust by removing conflicts of interest between the bank and the customers. Thus, the bank will be replaced by a digital platform that will collect and offer the best services from around the world to create a unique and rewarding experience for BBVA’s customers. As he points out, however, creating this trust will cost players in the industry quite a bit and will decrease margins, so that only the largest players benefiting from economies of scale are left.
While BBVA has an enormous advantage over most banks in this space (they have been working on digitization for over a decade), they are not the only ones seeking to dominate the market. Many banks have begun investing in digital and next generation technologies like biometrics, blockchain, and deep learning.
In emerging markets, increasing digitization and changing demographics worldwide open up new opportunities to create a banking infrastructure from the ground up. In parts of the world where access to modern banking practices is almost non-existent, there exists a large opportunity for those that can provide simple, trusted, low-cost payments between individuals and organizations. Chinese digital giant AliBaba has created its own financial ecosystem with Alipay, by forming partnerships with leading digital providers in much the same way that BBVA envisions its future. The success has been resounding: Alipay handles more than 50% of all of China’s online transactions. Today, Alipay can be used to pay utility bills, buy train tickets or check the balance of a connected bank account. Alipay allows for payments with many small businesses and at an increasing number of offline shops. Alipay also works with large players, having most recently struck deals with Wal-Mart and Carrefour.
The future of banking is exciting for the consumer, and the set of services we now refer to when we discuss banking will be increasingly available as separate services from different providers on large digital platforms available from trusted players. The industry will also evolve alongside the integration of social platforms and will most likely become integrated (imagine paying for your coffee and getting a discount by snapchatting the transaction!).
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