The global events that occurred in the mid 2000’s provided the perfect storm for this emerging industry. The GFC meant that experienced people lost their jobs, there was declining costs involved for startups and an increasing number of new graduates with no industries to enter, meant the talent that usually advanced the banks’ dominance were encouraged to build their own businesses. The enormous success of early entrants such as PayPal and Square has had a profound effect on the industry with smart people the world over making products that focus on the user not the “middleman” (bank/incumbent).
As more and more people are discovering FinTech they are realising the benefits this industry can offer. From saving you money to providing you investment advice, the industry is removing inefficiencies that have existed for decades. With access to more in-depth information and end-to-end solutions, the digital disruption that has improved so many industries is now helping people deal with their finances.
Many of the new technologies provide a vast array of benefits so we will outline them in the category they have the greatest influence.
With so many new companies offering new technologies it is often difficult to understand how they can help YOU personally. By exploring this site we hope that we can help you better understand the products available and how you can benefit from them. To get started, the following is an explanation of the most frequently used terms – and terms you will see throughout this site.
Peer-to-Peer is perhaps the biggest driving force behind FinTech. By using technology to directly link peers you can increase efficiency and reduce the points of contact in any transaction. As each point of contact requires some form of payment for their facilitating role, this simply adds additional costs and complexity.
Consider a loan from a bank as an example in simple terms:
I deposit my money in the bank for which I expect to receive a return for letting them use it to make loans rather than holding it outside the banking environment. You borrow money from the bank so that you have access to funds that you would otherwise have to save before you could make a purchase you want to make today. The bank for their role in finding a suitable borrower, facilitating the loan and taking the risk on this one loan then charges you far more for the loan than they give me as interest. While this seems like a fair process when you add a significant number of staff, a network of branches, the subsidies of losses across other investments and almost unimaginable profits. Not to mention that personal loans such as in this example are one of the highest profit centres for a bank’s bottom line and the fair price seems to change.
Now if you remove the bank from this example and you can lend the money directly to the person that needs the funds, you receive all of the return. Of course you still need to find interested borrowers and eliminate the risks associated with lending to strangers, but that’s where new lightweight peer-to-peer lenders come into the picture. Now if you meet their stringent borrowing criteria they can offer you a better rate at which to borrow while still providing me a better return than the bank. It really is a win-win for every party that’s involved.
Now expand this concept to business loans, currency conversions, and even every day payments and you can start to see the value in this new model. Bitcoin is perhaps the most famous peer to peer product you have heard of but you will find products that operate within this framework on this site amongst the borrowing, investing, business and currency products.
Investment in FinTech takes two directions. Firstly you can invest your funds into companies such as peer to peer lenders for them to distribute as loans. This takes the form of either direct investment for the wholesale investor or investment into managed investment schemes that administer the funds for a fixed return. Obviously as the level of management increases the returns will decrease but so too will the risk.
The second approach that is starting to gain a foothold is to invest directly into the companies themselves through new ‘crowd funding’ platforms that provide you with equity for your investment. These equity raising platforms are great for anyone looking to invest in the early stage of exciting new companies. They even assist in helping a startup organise their existing investors by providing an appropriate structure for the friends and family that traditionally help a company get off the ground. This means as the companies grow and start to look for venture capital they have an appropriate structure to ensure the interest of the investor is not distracted by the need to deal with so many investors.
The alternative to investing – in the true sense of the word – is to fund the development of a product and therefore a business through crowd funding platforms that focus on products. Over the last few years there have been more and more of these platforms being developed. The most famous and the catalyst for the industry was Kickstarter. Here a company develops a pitch for a product they would like to develop and you pre-purchase the product or an alternative product or service to help them raise the funds they need. If they are able to reach their entire fund-raising goal then your funds are directed to the company in question and they begin to develop their product. This process has led to the development of some amazing new innovations.
The thought of having just one currency for the world has always seemed quite unlikely however as the internet has brought so many aspects of our global society together it’s starting to seem more plausible. While there are advances in the development of global currencies such as Bitcoin there are countless other Fintech solutions to make the way we transact with our current currency more efficient. These use Peer-to-Peer models for many of the advances and include new ways to address Foreign Exchange, Digital Wallets and security of online payments.
This is one area that as a consumer you can almost feel the banks taking advantage of you. Whether it’s the currency conversion fees that are added to the ‘pedestrian’ exchange rate they give you or the additional fees a bank charges for you to access your own cash. The introduction of digital wallets, cryptocurrency and new approaches to foreign exchange and payments all form part of the FinTech currency movement. By introducing the ability for you to trade currency with a traveller looking to come to Australia when you’re looking to travel to the USA and again the middleman role is greatly reduced. Even companies can benefit from working with other companies looking to swap foreign currency at the same time using a matching website. Other ways the foreign exchange market is advancing with technology is by using real time information to increase the efficiencies of transactions. Foreign exchange is changing and on this site you will find an increasing number of businesses out to save you time and money.
Perhaps the biggest movement in currency is the introduction of cryptocurrencies. While Bitcoin is the most widely discussed there is a large number of viable cryptocurrencies that are fighting for dominance with Bitcoin seeming to lead the charge. We may even end up with a number of new currencies. However what all these currencies have in common is that they are global currencies that have very little costs associated with their use. Compare this to the fees your bank charges you for your transaction account, international transfer fees, point of sales costs and a myriad of other fees and the value of these digital alternatives starts to grow. They have been getting a bad reputation because it is much harder to track what they are being spent on than our existing online payments system. As such, they are being used by criminals to carry out illegal activities. The problem with this view is that it ignores the fact that cash has been used to achieve the same result for as long as we have been able to track any kind of payment process.
It must be pointed out that the number one concern of these new currencies is that everyone needs to believe they have a finite value if they are to succeed. If enough people stop believing in their worth then they quickly become worthless.
There are a number of new technologies in the market today and there are new wallets popping up every day. A digital wallet acts just like the one you carry in your pocket now, or the purse you have in your handbag. They are a place for you to hold all of your currency. Whether this currency is Australian dollars or Bitcoins you hold them electronically on your computer, tablet or mobile phone. One important thing to remember is that like you don’t carry all your money in your physical wallet nor should you have all your funds in just one digital wallet. Competition is very high in this field with the biggest names in payments and technology trying to dominate this space. Apple, Google, Paypal, Visa, Mastercard and others are all trying to be the provider you choose as your everyday digital wallet. There are also many smaller organisations looking to help save you money and add value to your wallet. While some may link to your existing payments accounts they still facilitate the payments and transfer of funds like you would achieve with the cash in your pocket. With such dominant players in this segment of the market the largest players are driving innovation through the acquisition of the best new technologies that hit the market. It may seem like dealing with these multinationals is against the FinTech movement but if it leads to greater efficiency and greater value for you then the outcome speaks for itself.
Advances in the way we carry out payments represents the birthplace of FinTech. From the first credit card transactions carried out by Diners in the 1950’s there has been progression in the way we make payments. This means that the landscape for payments is a varied mix of new and old as well as large incumbents and tiny startups. It is also a hotbed of acquisitions and mergers. New approaches to payments are wide spread and have been the focus of banks and credit card companies for a long time. We have come a long way from the carbon copy credit card ‘machines’ some might remember from the early days. Driven by reducing fraud, credit card companies have been leading the charge in new payment technology to make sure the efficiency of the payment is as high as it can be. The first real disruptor in this industry was PayPal. Established as a money transfer service it was quickly acquired by eBay and gained significant traction as a secure online payments gateway.
The increasing acceptance of making transactions online has led to an ever-increasing number of new ways for merchants to accept payments. The competition is fierce as each new entrant tries to balance the cost of creating a secure environment with ease of use, speed of transaction and number of features. With each new ‘Payment Gateway’ incarnation we move closer to a secure, feature filled, low cost, real time transaction. Many of these online ‘Payment Gateways’ have now branched out into providing the bricks and mortar merchant with a viable alternative to using a bank. Leading the charge is Square and PayPal. By adding a small card reader to your mobile phone you can accept card payments anywhere you can get phone reception. Add a ‘tablet’ and a cash register and you have a Point of Sale system at a fraction of the traditional cost.
New ways to identify the account holder for payment is another fast paced race that is being run. Whether we use our voice, our fingerprint, a mixture of biometric stages or simply how we look to the cashier are all potential winners in this space. Regardless of who wins out it is certain there is going to be a fractured market for many years to come. Whether you want to buy a coffee at the corner store or transfer funds to a friend it is certain you will all have to be on a cooperative system for some time yet and Visa, MasterCard and Amex are going to be a significant part of this market for the foreseeable future.
While loyalty may sit at the edges of the FinTech industry, its importance is fast being realised. As the technology to accurately track every dollar we spend improves, we are becoming better equipped to cash in on the loyalty offered by the companies we buy from. Add digital wallets to track purchases and designated shopping malls for earning cash-back and we are now equipped to make these loyalty programs work for us. It is important however that we don’t ‘kid’ ourselves – these programs are mutually beneficial. Whether it’s to help Woolworths recognise they need to offer cashmere if they want you to buy their clothes, or for Kmart to promote baby products to pregnant women long before they would like anyone else to know we are giving up some of our privacy or freedom of choice for the benefit of getting better value or alternative rewards.
There are a couple of approaches to Robo-Advice. The first is where a computer program will determine your individual circumstances and then offer advice on products and shares you should buy or insurances you should hold. The second is the slew of new budgeting apps that can analyse your spending and investments and provide you with the knowledge to make changes yourself.
While a relatively new entrant the Robo-Advisor is fast removing the inefficiencies in Financial Planning, Insurance and share-trading industries. Robo-Advice is essentially advice that is provided by a computer program that follows predetermined rules to ensure that you receive the most relevant advice based on your circumstances. Obviously the programs are written to provide their service to the majority of the population and there will be outliers for which this technology is not yet relevant but for most of us we can use them to get better advice at a far better price. Removing expensive broker networks from these services, the prices can be as much as half those with broker originated models.
These new programs are offered as programs as well as apps and are designed to help you understand exactly where your funds are being spent to ensure that you’re aware your coffee habit is costing you $45 a week or by covering the postage on your sales is costing you 15% of your profit margin. Armed with the relevant knowledge you are able to adjust your spending to make the most of the income you have. The expensive business analyst or financial planner can be swapped for a low cost app that provides greater insights you can see in real time. The banks are jumping on board with these new products so expect them to be become much more mainstream in the next year or so.