The FinServ industry does not look the same way it did five years ago. Gone are the days of industry behemoths solely competing with each other. Within the financial market, interest rates are extremely low, and while this may be good for people that want to buy a car or house, it is bad for the FinServ industry that relies on interest as a form of revenue. Along with low interest rates, market volatility in Asia and Latin America has thwarted merger plans and other business deals. There is a loss of brand loyalty in all industries, but especially in regards to banks and wealth management firms. Even though FinServ brand loyalty is down, financial awareness has increased, specifically among millennials. This, in part, is due to an increase in mobile phone usage.
Amid this overall landscape, five trends in FinServ have been identified that can create opportunities for organizations and their customers.
1. Fintech disruption
Fintech is technology that makes any type of financial service more efficient, but it typically exists in the form of a mobile app. FinServ companies used to be competitive with only big businesses (think Charles Schwab and JP Morgan) because the industry used to have a large barrier to entry – a company needed a lot of initial capital in order to become a key player. Now, other types of companies are entering the game.
These players typically fall into three sections of FinServ:
- Investing: Apps like Robinhood, Acorns, and Betterment use customer profile information to create an investment portfolio by using algorithms. Typical wealth management firms have people, not algorithms, managing the portfolios. The management fees are significantly lower with apps (around 0.5 percent with an app vs. 2-3 percent with a wealth management firm) since it’s an algorithm, and not a person, managing the account.
- Lending: Online-only lending is becoming a major threat to traditional banking, especially peer-to-peer lending services like SoFi and Lending Club. Peer-to-peer lending is when people apply for and acquire loans, and investors take on the risk of the loans instead of banks. This type of lending became much more popular after the 2008 Financial Crisis. SoFi underwrites about $1 billion per month in loans, making it the largest non-bank unsecured lender in the United States. The peer-to-peer lending industry had a revenue of $2.1 billion for the first two quarters of 2016.
- Payments: The peer-to-peer trend is showing up in payment Fintech as well. In an app like Venmo, people can pay their friend (or anyone, really) directly through their phone or laptop. PayPal and ApplePay also make payments faster and easier, but both of these apps are meant for people to link their credit and debit cards so all forms of payment are in one area, and you can pay an online store or trip to the supermarket instantaneously.
Companies can play within the Fintech game by building an app (Charles Schwab and Capital One have already done this) or update their mobile sites to mirror these new apps.
2. Single Customer View
A single customer view is a term used to describe the aggregate of multiple data sets into one unified database on each customer; this enables companies to derive the maximum value from existing customer relationships. Not only have FinServ competitors changed, but the recent economic climate has resulted in a tightening of banks’ lending criteria. Acquiring and retaining profitable customers is much more challenging now, and there is a heightened importance on gaining the maximum value from the current customers.
Mapping the customer journey is at the heart of a single customer view. Companies look at general profile information, services the customer is currently using, the length of time a customer is using these services, and on what platforms (mobile, computer, in-person). Companies can then use data analytics to sort and filter customer information, making it identical on all platforms, and use this organized data to determine additional services the customer may need.
A single customer view gives companies the opportunity for customer retention because companies can look at needs, wants, and grievances. It can help to determine additional services for the customer and also streamline business practices since information would be cohesive on all platforms.
3. Data Security, Specifically Blockchain Technology
Blockchain is a distributed public ledger where every person involved has a verified, secure identity. When information is added into the system, it is encrypted. Normal security technology would stop there, but blockchain breaks up the information into pieces, distributes, and stores the information on several different servers.
In order to change the information, a person must know what pieces of information are where, and he or she must have the account number. Blockchain technology is also safer because it’s a public database, so everyone can theoretically see the details of the transaction. Currently, most data is on a central server where one person can hack into and falsify the information.
If you’ve ever read or seen any of the Harry Potter series, think of Voldemort (excuse me, “He-who-must-not-be-named”) and the seven horcruxes. That’s essentially how a blockchain works.
4. Better Financial Transfers
“Banking now is like sending a letter; you send the transfer, and you don't know if it reached there. [A blockchain transfer] is more like sending an iMessage. You send it, and you immediately know it got there.” – Chris Larsen, CEO of Ripple
Blockchain technology is not only for customer security. It can also allow for easier and faster financial transfers.
Currently, the two most common ways to transfer money in the United States are through:
- A wire transfer: The name is self-explanatory, but a person can “wire” money to the intended party. It's the closest thing to an instantaneous transfer, but banks initiate transfers every 15 minutes, and the transfer can take up to 3 hours. There is usually a fee associated with this type of transfer, around $20 - $50. In order for the transfer to occur, a person must know the account number, routing number, the intended party’s name on the account, explanation of funds, and the monetary amount. If anything is left blank or mistyped, the transfer can be delayed or sent to the wrong person.
- Automated Clearing House transfer (ACH): This type of transfer is done through the Federal Reserve Bank (the Fed) and takes 72 hours to complete. The transactions are processed in batches on somewhat regular intervals rather than immediately as the transactions occur. This system dates back to the early days of the Fed. There is a new rule that will put ACH payments on a same-day delivery schedule, but the rule won’t be fully implemented until March 2018.
Both of these types of transfers are time-consuming and costly. Instead, banks like Santander, UBS, and CIBC are among others experimenting with Ripple, a start-up that uses blockchain technology for overseas transfers. Ripple specializes specifically in international transfers because most are of low monetary value, and banks can end up with a net loss because of the effort involved. Since Ripple is using blockchain technology, transfers can be instantaneous while still being secure, and Ripple claims that the transfers can be done at two-thirds of the cost of normal transfers.
As more FinServ companies experiment with blockchain-backed transfers, movement of money can become much safer, faster, and cheaper.
5. New Regulations
Current events have opened up discussion about stricter FinServ regulations.
The continuing prevalence of terrorist groups has brought up discussion about stricter Anti-Money Laundering laws (AML) laws. Money laundering is the process of making illegally-gained transfers (i.e. "dirty money") appear legal (i.e. "clean"). Terrorist groups are using offshore shell companies to launder money and fund violent attacks. The United States created stricter AML laws after 9/11, but countries are being pressured to come out with tighter restrictions for FinServ companies.
Along with AML Laws, the outcome of Brexit will affect the FinServ industry. Many FinServ institutions used to use London as a pathway into the European Union (EU). The outcome is still uncertain, but FinServ companies will most likely have to make individual trade deals with each country in the EU.
Although impending regulations can be burdensome, FinServ companies can use these laws to improve customer relationships. Underlying these regulations is the notion of improved accountability, transparency, and trust. Making these three values a priority can result in more faithful, happier customers.
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